[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



 
                   ELECTRICITY COMPETITION--Volume 1

=======================================================================

                                HEARINGS

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

            MARCH 18, 1999--EVOLVING FEDERAL AND STATE ROLES
APRIL 22, 1999--RELIABILITY AND TRANSMISSION IN COMPETITIVE ELECTRICITY 
                                MARKETS
             MAY 6, 1999--MARKET POWER, MERGERS, AND PUHCA

                               __________

                           Serial No. 106-63

                               __________

            Printed for the use of the Committee on Commerce



                      U.S. GOVERNMENT PRINTING OFFICE
55-641 CC                     WASHINGTON : 1999





                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
                                     BILL LUTHER, Minnesota
                                     LOIS CAPPS, California

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                    Subcommittee on Energy and Power

                      JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RALPH M. HALL, Texas
CLIFF STEARNS, Florida               KAREN McCARTHY, Missouri
  Vice Chairman                      THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma              EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina         RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma              BART GORDON, Tennessee
JAMES E. ROGAN, California           BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING,       RON KLINK, Pennsylvania
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)
                    ------------------------------  



                            C O N T E N T S

                               __________
                                                                   Page

Hearings held:
    March 18, 1999...............................................     1
    April 22, 1999...............................................   149
    May 6, 1999..................................................   239
Testimony of:
    Clark, Susan F., Commissioner, Florida Public Service 
      Commission.................................................    99
    Cordaro, Matthew, President and Ceo, Nashville Electric 
      Service....................................................   217
    Glazer, Craig A., Chairman, Ohio Public Utility Commission...    94
    Gordon, Kenneth, Senior Vice President, National Economic 
      Research Associates........................................   355
    Hoecker, Hon. James J., Chairman, Federal Energy Regulatory 
      Commission.................................................   160
    Hunt, Hon. Isaac C., Jr., Commissioner, Securities and 
      Exchange Commission........................................   270
    Iannucci, Joseph, Distributed Utility Associates.............   212
    Kahn, Joshua A., Kahn Mechanical Contractors.................   342
    Kanner, Marty, Coalition Coordinator, Consumers for Fair 
      Competition................................................   335
    King, Chris, Chief Executive Officer, Utility.com............   312
    Kurtz, Michael L., General Manager, Gainesville Regional 
      Utilities..................................................   320
    McCoy, Paul D., Senior Vice President, Commonwealth Edison...   187
    Melamed, A. Douglas, Principal Deputy Attorney General, 
      Antitrust Division, Department of Justice..................   254
    Moler, Elizabeth Anne, Vinson & Elkins.......................    18
    Naeve, Clifford M., Skadden, Arps, Slate, Meagher and Flom...    37
    Nevius, David R., Vice President, North American Electric 
      Reliability Council, Princeton Forrestal Village...........   200
    Persico, Vincent A., Co-Chair, Special Committee on Electric 
      Utility Deregulation, Illinois General Assembly............    81
    Quain, John M., Chairman, Pennsylvania Public Utility 
      Commission.................................................    90
    Rogers, James E., Vice Chairman, President and Chief 
      Executive Officer, Cinergy Corporation.....................   306
    Rose, Kenneth, Senior Institute Economist, National 
      Regulatory Institute.......................................   347
    Schmidt, Fred, Chief of Bureau of Consumer Protection, Office 
      of Attorney General, State of Nevada.......................   182
    Smith, Douglas W., General Counsel, Federal Energy Regulatory 
      Commission.................................................   276
    Smith, Marsha H., Commissioner, Idaho Public Utility 
      Commission.................................................   105
    Stalon, Charles G., Cape Girardeau, Missouri.................    31
    Stuntz, Linda G., Stuntz, Davis & Staffier...................    24
    Szwed, Stanley F., Vice President, Transmission, First Energy   190
    Thompson, Hon. Mozelle W., Commissioner, Federal Trade 
      Commission.................................................   261
    Tighe, Mary Elizabeth, Vice President, Statoil Energy, Inc...   329
    Utter, Trudy, Vice President and General Manager, Tenaska 
      Power Services Company.....................................   196
    Yurek, Gregory J., President and CEO, American Superconductor 
      Corporation................................................   205
Material submitted for the record by:
    American Public Power Association, prepared statement of.....   147
    Edwards, T. Graham, Chairman, Large Public Power Council, 
      letter dated November 23, 1999, enclosing response for the 
      record.....................................................   499
    Farmer, Richard M., prepared statement on behalf of the SEC 
      Roundtable Group...........................................   393
    Hoecker, Hon. James J., Chairman, Federal Energy Regulatory 
      Commission, letter dated June 11, 1999, to Hon. John D. 
      Dingell, enclosing response for the record.................   231
    Nevius, David R., Vice President, North American Electric 
      Reliability Council, Princeton Forrestal Village:
        Letter dated September 2, 1999, enclosing response for 
          the record.............................................   422
        Response to questions of Hon. John D. Dingell............   490
    Repeal PUHCA Now! Coalition, prepared statement of...........   385
    Szwed, Stanley F., Vice President, Transmission, First 
      Energy, letter dated September 3, 1999, enclosing response 
      for the record.............................................   493

                                 (iii)

  


                    EVOLVING FEDERAL AND STATE ROLES

                              ----------                              


                        THURSDAY, MARCH 18, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 11:06 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Tauzin, Bilirakis, 
Stearns, Largent, Burr, Whitfield, Norwood, Rogan, Shimkus, 
Wilson, Shadegg, Pickering, Fossella, Bryant, Ehrlich, Bliley 
(ex officio), Hall, McCarthy, Sawyer, Pallone, Wynn, and 
Strickland.
    Also Present: Representative Barrett.
    Staff present: Catherine Van Way, majority counsel; Joe 
Kelliher, majority counsel; Donn Salvosa, legislative clerk; 
Sue D. Sheridan, minority counsel; Rick S. Kessler, minority 
professional staff member
    Mr. Barton. The Subcommittee of Energy and Power of the 
Energy and Commerce Committee will come to order.
    We know that there are still individuals who are trying to 
get into the room, and we would hope that that process would 
continue in an orderly fashion. We are about 7 minutes past the 
scheduled start time. A quorum is present. We wish to begin.
    Today's hearing is entitled Electricity Competition: The 
Evolving Role Between the Federal and State Governments. Today, 
the Subcommittee on Energy and Power is holding the first of a 
series of hearings on electricity restructuring. It is very 
important that the subcommittee hear from the witnesses that we 
are going to hear from today. I personally believe that market 
competition is coming, and I personally believe that that is a 
good thing.
    Today's hearing will focus on the Federal and States 
regulatory role. It will review whether the dramatic changes 
that have been occurring in the States and within the industry 
require changes to Federal law, and if so, it will consider 
what elements perhaps should be included in any Federal 
legislative changes.
    Dramatic changes have occurred since the subcommittee first 
began considering electricity deregulation legislation in 1995. 
Since that time, 18 Statesn, with 45 percent of the country's 
population, have decided to open their retail markets. Another 
12 States, with 23 percent of the population, including my home 
State of Texas, are going down that road. Just yesterday, the 
Texas Senate passed, in a bipartisan and overwhelming fashion, 
a comprehensive bill to deregulate the electricity markets in 
the great State of Texas.
    If all 12 of the States that are considering legislation 
open their markets this year, 68 percent of the national retail 
market will be opened. Given the competition among States for 
economic development and jobs, that figure can only grow. I 
personally believe that this activity is due, in large part, to 
the hard work in the past of full committee Chairman Bliley and 
former subcommittee Chairman Dan Schaeffer of Colorado along 
with ranking member Ralph Hall. They set the ball in motion 4 
years ago, and I doubt that anyone in this room had any idea so 
much change could occur so rapidly in such a short amount of 
time.
    We hope to examine the effects of those changes between the 
States and the Federal Government today. There is substantial 
consensus on how to approach some of the core Federal issues. I 
hope consensus can be reached on other issues in the hearings 
in the coming weeks ahead. I plan to work closely with my good 
friend Ralph Hall and all other subcommittee members to forge a 
bipartisan agreement on the elements of electricity 
legislation. I intend to draft, at the conclusion of these 
hearings, if there is consensus, a comprehensive bill to open 
the United States' electrical generation and transmission 
system to true open market competition.
    Today, we have two distinguished panels of witnesses. Our 
first panel is composed of experts who were Federal electric 
policymakers earlier in their professional careers. We will 
hear from a former FERC chairman; a former Department of Energy 
deputy secretary; another Department of Energy deputy 
secretary; and two other former FERC commissioners. One of our 
witnesses led the Bush Administration's National Energy 
Strategy, which resulted in the Energy Policy Act of 1992. 
Another developed the FERC's open access policy and led the 
Clinton Administration's development of comprehensive 
electricity legislation.
    These witnesses have decades of experience in electricity 
policy matters. Their testimony will help the subcommittee 
focus on the core Federal issues that can only be addressed by 
the U.S. Congress.
    Our second panel is composed of prominent State regulators 
and legislators, who represent a wide range of views on 
electricity restructuring. Some of the witnesses come from 
States that have opened their markets; one comes from a State 
that is grappling with the question of whether or not to open 
its retail market, and still others come from States who want 
to continue to rely on regulation rather than on competition.
    This panel, the second panel, will help the subcommittee 
learn how the States have been changing their emphasis, and 
they will help us to determine which issues the States are in 
the best position to address. Today's hearing is the start of a 
serious evaluation of the prospects for enacting comprehensive 
legislation opening our power generation and transmission to 
real market competition. The witnesses' testimony and their 
answers to the numerous questions of the subcommittee members 
will determine if the time is right for Federal legislation in 
this area.
    I am hopeful--and yes, I am optimistic--that the answer is 
yes. I look forward to hearing the testimony of the witnesses. 
With that, I would welcome an opening statement from my 
distinguished ranking member, Mr. Hall.
    Mr. Hall. Mr. Chairman, I thank you for convening the 
hearing here today and for the very cooperative effort and 
thrust that you have extended. I think this is our first 
hearing in about 18 months. I know you and I have had other 
hearings and private hearings and discussions, and we have even 
been out of State to visit with groups. You have been very kind 
and generous with your time, and I think you are a great 
chairman. We have nine other new members of the subcommittee 
who were not exposed to the education that we received during 
the hearings in the last Congress, so profound changes in 
utility regulation are continuing to take place in the States 
and at the Federal level since this subcommittee last met on 
this issue. We need to update ourselves, I think, on all that 
has happened since then, and that means that it is going to 
have to be a working committee, and you have certainly 
indicated your willingness to give us that leadership.
    Let me give you an example from the table of contents of 
one of the major trade publications out last week. The headings 
read, and I quote, Texas bill modified with new stranded cost 
provisions; Arkansas lawmakers schedule vote on reform 
legislation; deregulation bill passes New Mexico Senate, may 
raise environmental concerns; Maryland legislators and counties 
at odds over deregulated tax provisions; and finally, Virginia 
Legislature passes reform plan; Governor expected to sign. Mr. 
Chairman, you have relayed the actions of the Texas Senate as 
of yesterday, and I liked the way you put it. Mr. Pallone 
questioned the way you put it. You entitled it the great State 
of Texas, and he wondered why we always put the great State of 
Texas, and I must take a half a minute to tell him about one of 
the real Texas heroes, Ensign Gay of Torpedo Squadron 8, who 
was the sole survivor of the Battle of Midway. The Battle of 
Midway won the war in the Pacific.
    Ensign Gay was from Texas, but he always said do not ever 
ask anybody if they are from Texas, because if they are, they 
will tell you.
    And if they are not, there is not any reason to embarrass 
them.
    But Mr. Pallone is a good member of this committee and 
would make a good Texan, and we certainly would take him 
anytime.
    Mr. Barton. He is an honorary Texan just by being here 
today.
    Mr. Hall. Right.
    With nearly half the States having already gone forward on 
restructuring and others, obviously, in the pipeline, I think 
it is clear that the States are willing and able to move 
forward. A lot of credit should go to our former Chairman, Dan 
Schaeffer, for building the fire that set these State 
activities in motion, and it seems to me that we should now 
shift our focus away from the States and concentrate maybe more 
on what needs to be done within our current jurisdiction over 
electricity at the Federal level to facilitate rather than to 
interfere with whatever decisions the States are going to make.
    In our early discussions, I think you set the right 
approach for these hearings by posing this question: is there a 
need for Federal electric restructuring legislation, and if so, 
what should it contain? I do not know how you could cover it 
any better than that. I heartily agree that these hearings 
should go forward and with that premise, as we gather the 
facts, and by conducting thorough and objective hearings, we 
will determine whether there is member sentiment now to move 
the legislation and the direction we move it and how we move 
it.
    I agree with another of your earlier statements to the 
effect that if there is to be legislation, we want it to be a 
member-driven bill. I must also say, though, that other than 
being a member-driven bill, we need the input of these good 
people who are testifying before us here today and both of the 
groups that will be testifying. We need the input of the men 
and women of industry, whom we are going to have to make this 
go once we put it onto the books of this country.
    We want a business decision--I do, and I think the chairman 
does and most of us do--rather than a Congressional decision, 
and we will get that by having these hearings, having this 
testimony, having you all work together to bring us some 
decisions that we can put into the act and pass.
    To your goals and objectives, I would add that in all of 
our deliberations, it is kind of silly almost to say this, but 
we need to be fair. You know, fairness needs to enter into it. 
I never saw anything that I did not really believe could be 
deregulated. I am sorry for what happened to the airlines, and 
I think greed caused a lot of that not to go exactly the way we 
wanted it to, but I believe in deregulating. If we are fair to 
the customers of investor-owned cooperative and public power 
systems, fair to the utility stockholders and citizens of 
public power systems in their capacity as owners and the owner-
members of the rural electric cooperatives and fair to all of 
their employees, fairness is something that as a chairman, I 
know that has been your goal and the golden rule that you have 
followed since you have been chairman and since you have been 
on the committee.
    We just need to be fair to the new entrants in the utility 
business, the non-utility generators; the marketers of electric 
power and those who are promoting the new technologies. It is 
these new entrants who create the promise of more efficient 
markets and lower electric costs to our constituents; that must 
be our goal. Fundamental fairness will require a delicate 
balancing of interests and ensure a good outcome. If we adhere 
to these goals and objectives, Mr. Chairman, I believe that if 
we choose to do a bill, it will be one we can all be proud of.
    So today, we embark on an effort to find the answers to 
those questions with a slate of witnesses who know more about 
the intricacies of these issues than any of us will ever know 
or probably will want to know or be able to know. The first 
panel consists of men and women who have had distinguished 
careers in public service and have learned and dealt with the 
public policy issues of electricity from inside the government 
and are now in the private sector. So that gives them two views 
of it.
    The second panel, with one exception, is made up of State 
regulators, people who are on the front lines in this ongoing 
debate of whether to restructure the electric utilities. These 
two panels will give us different perspectives of utility 
restructuring. For those of us who have participated in the 
hearings of the last Congress, we will be listening carefully 
to understand better the changes that have occurred since this 
subcommittee last dealt with this issue. For those members new 
to the committee, I hope the witnesses will help you to 
understand better the tough and difficult questions that are 
raised in utility restructuring at the Federal level.
    Before I close, let me say a word to the first panel. In 
asking you to share your expertise, we are kind of putting you 
in an awkward position in some ways. You have client interests, 
many who have strongly held opinions about the content of 
restructuring legislation. It is extraordinarily difficult to 
find individuals of your character who are not already employed 
or retained by someone with an issue in this case to come and 
share your opinions with us today. We invited you here--the 
chairman invited you here--not as advocates but to help the 
committee learn. You are men and women of the highest 
integrity, and I know that you will do your best job you can, 
and for that, you have my deepest appreciation.
    Mr. Chairman, with that, let me yield back the balance of 
my time and thank you for this beginning today on a rough and 
rocky road but a very important road that can lead to lower 
rates for all the people all across this country.
    I yield back my time.
    Mr. Barton. Thank you.
    Some of you may know that Congressman Hall has been a 
little under the weather lately, but I can tell that he is 
getting back on his feet. That is the longest opening statement 
he has made in about a month.
    Mr. Hall. I yielded back my time.
    Mr. Barton. He is feeling better.
    The Chair would recognize the distinguished full committee 
chairman, the Honorable Tom Bliley of Virginia for an opening 
statement.
    Chairman Bliley. Thank you, Mr. Chairman, and thank you for 
holding this timely hearing on electric utility restructuring. 
I believe this is the Congress when we will pass a customer 
choice bill, so it is important that we begin examining this 
issue early. Make sure there is no doubt about where I am 
coming from. I will state up front that I believe retail 
competition in electricity markets is good.
    Through competition, consumers see lower prices, better 
service and greater investment and innovation in technology. I 
further believe all consumers should be given the ability to 
choose their own power companies, regardless of the size of the 
consumer or who they are served by today. I also believe that 
they should be given that choice sooner rather than later. The 
energy marketplace has evolved a great deal since the Energy 
Policy Act of 1992, and consumers have benefited from those 
changes. However, it will not be able to continue to evolve, 
and consumers will continue to be denied benefits, as long as 
Federal and State laws are standing in the way.
    Since the Commerce Committee first began its consideration 
of electric utility restructuring in 1995, those who are 
fearful of competition have worked hard to try to stop it or 
slow it down. These forces have argued that there are no 
benefits from retail competition and that we are moving too 
fast. Well, since we have been working on this for 5 years now, 
we can hardly be accused of moving too fast, and the fact that 
retail competition benefits consumers and lowers prices has 
been shown over and over again.
    The Department of Energy said last year competition would 
save consumers $20 billion per year; others have estimated 
more. More importantly, this is not merely theory but reality. 
Consumers who have choice, in States like Pennsylvania and 
California, are already saving money with even greater savings 
likely when each of those States is through the transition 
period. However, there are still those who oppose Federal 
action, and I am sure they will come up with lots of new 
reasons why we should not move this year. To them, I say what 
are you waiting for? Retail competition is inevitable. Rather 
than continuing to fight, it is time for everyone to end the 
rhetoric, roll up their sleeves and get to work on passing a 
plan which will benefit all Americans.
    I want to hear people's concerns and make sure we get it 
right, but I do not think there is any concern so great or 
difficult that it should keep us from moving forward. Now is 
the time to act; I look forward to hearing the testimony of the 
witnesses, and I thank you, Mr. Chairman, for yielding me the 
time.
    Mr. Barton. We thank the distinguished chairman. We would 
recognize the distinguished gentleman from New Jersey, Mr. 
Pallone, for an opening statement.
    Mr. Pallone. Thank you, Mr. Chairman.
    Since my good friend Mr. Hall started talking about the 
great State of Texas, I have to tell a little story. It has 
taken me awhile, Ralph, to get to the point where I understand 
this Texas phenomenon, but I was thinking when you mentioned 
that about when I was first elected or a couple years after I 
was elected. Greg Laughlin was here then, and he had just had a 
child, or his wife had just had a child, and I was just having 
my first child, and he was horrified because I told him that my 
daughter was going to be born in Washington, at Columbia 
Hospital, and he, like, looked at me horrified, and he said you 
cannot do that; you cannot do that. You have to put your wife 
on a plane and bring her back to the State of New Jersey, 
because, you know, I could never have a child who was not born 
in the State of Texas; it is absolutely necessary that you get 
her on this plane.
    And I tried to explain to him that it did not matter.
    Mr. Barton. What is funny about that?
    Mr. Pallone. I think I will stop there, Mr. Chairman.
    I am beginning to understand this phenomenon. It takes 
awhile.
    Anyway, I just wanted to thank the chairman and the ranking 
member for holding this hearing, and I was pleased to see the 
chairman mention that this was the first in a series of 
hearings on this topic, because I think it is important to have 
several hearings this Congress on the issue of electricity 
restructuring.
    And let me also say, to emphasize, if I could, the care 
with which we need to consider the issues before us. Americans 
spend about $220 billion each year on electricity. Thus, 
decisions Congress makes with respect to electric industry 
restructuring will affect the lives of all Americans and must 
be made with attention to potential impacts on industry and 
consumers alike.
    Electric industry restructuring has the potential to 
deliver real benefits to our economy and to our citizens in the 
form of lower costs, better technologies, more choice and new 
products and services, and we also can help our basic 
industries better compete in global markets. There are, 
however, Mr. Chairman, some difficult public policy issues 
involved in how this potential is realized, and the basic 
tenets that I feel that I bring to the restructuring debate 
focus on environmental and consumer protection. We must ensure 
that any and all decisions we make with respect to 
restructuring at the Federal level do not require consumers to 
choose between cheaper energy and a degraded environment, and 
no consumer, whether a resident of an inner city or a rural 
township, should be disenfranchised.
    Along those same lines, all utility workers and share 
owners should be treated equitably; further, all consumers 
deserve full disclosure from energy providers about the price, 
source and environmental content of the energy products and 
services that they are purchasing.
    I wanted to talk a little bit about my home State of New 
Jersey, which recently enacted legislation that will deregulate 
the electric market. All residents in New Jersey will be able 
to choose their electricity suppliers by August 1 of this year, 
and the New Jersey legislation requires the State utilities to 
cut rates by 10 percent over a 3-year transition period and 
directs the State Board of Public Utilities to set shopping 
credits that are designed to encourage competition and allow 
for greater consumer savings.
    I hope that our witnesses will provide their perspective on 
the effectiveness of mandating price cuts and whether the 
anticipated benefits outweigh the associated costs. The New 
Jersey plan also provides for stranded cost recovery; maintains 
a social safety net through a societal benefits charge; and 
recognizes the nexus between the electric power industry and 
the environment through a renewable energy mandate and 
environmental disclosure rules for energy providers. But I have 
to say that, in my opinion, New Jersey's law does not go far 
enough to protect the environment and consumers and, for these 
reasons, as long as the Federal Government continues to attempt 
to address restructuring, it must, as part of its 
consideration, provide some national measures to protect the 
health, welfare and environment of the entire Nation.
    We also must determine the most effective and appropriate 
methods for ensuring national reliability as well as equitable 
transmission provisions and, at the same time, we must, of 
course, ensure that we do not undo the progress that States 
have made. In the last Congress, I introduced legislation aimed 
at implementing uniform environmental standards that would 
apply to all electric generators, regardless of where they are 
located, and I was very pleased that every member of the New 
Jersey House delegation, both the Democrats and Republicans, 
cosponsored this bill, H.R. 2909, and that the bill attracted 
more cosponsors and bipartisan support than any other electric 
industry restructuring legislation.
    And I think this support reflects the concerns of 
constituents and electric consumers everywhere. Consumers want 
to realize the economic benefits of electric industry 
competition but not at the expense of being exposed to dirtier 
air or living with a system that translates weak, unfair 
environmental standards and the ability to pollute into a 
competitive advantage.
    Now, I am going to be reintroducing an updated version of 
this legislation during this Congress. In addition to uniform 
environmental standards for all utilities nationwide, the bill 
will include tough, meaningful and enforceable disclosure 
provisions, a kind of truth-in-labelling law for electric 
energy, among other provisions.
    We will hear today from representatives of the States from 
different regions of the country who have different priorities. 
Individual States clearly have the right and responsibility to 
establish their own game plans for introducing energy 
competition, and I want to hear from States that believe they 
need our help as to what kind of assistance they would need 
from the Federal Government and which, if any, of the 
legislative proposals that have been introduced might serve as 
a vehicle for addressing their concerns.
    And finally, if I could say, as more and more States move 
toward competition, it seems to me that the Federal Government 
should examine whether and work to ensure that competition is 
fair; reliability is maintained; and the rules include 
environmental standards. I am looking forward to the witnesses 
today, and I hope that they will clarify the capacity in which 
they are speaking before our subcommittee and the perspectives 
they bring.
    I strongly believe that we have a responsibility to 
adequately represent the public interest, and I certainly hope 
my concerns will be heeded in determining appropriate witnesses 
for future hearings. I think you know, Mr. Chairman, that there 
was some concern today that the environmental and consumer 
protection interests were not represented on the panel, and I 
do not want to dwell on that, but I hope that in future 
hearings that we will make sure that we do include them.
    Mr. Barton. Well, I thank the gentleman from New Jersey, 
and we will certainly guarantee that this is not the only 
hearing, and we will let you suggest witnesses, and I am almost 
certain we will put them before the subcommittee. So we want a 
comprehensive set of hearings, and that means all interests 
must be heard from.
    The Chair wants to gently remind members who have not yet 
made an opening statement that technically, they are supposed 
to be 3 minutes or less. We are not going to hold you to that 
today, because this is a very serious hearing issue that we are 
undertaking, so we want to give every member an opportunity to 
have their full views, but it would be nice if they could 
generally come within the 3 to 4 minute period.
    With that, we want to hear from the gentleman from the 
gorgeous State of Georgia. It will take him 3 minutes to say 
hello probably. Mr. Norwood.
    Mr. Norwood. You are right, Mr. Chairman, but thank you, 
however, for giving me some time. I am honored to be on your 
subcommittee, and I am pleased that you are having these 
hearings. It is going to be a pleasure to serve with you as we 
try to solve these problems. I guess I would like to associate 
myself with your opening remarks, where you said I personally 
think market competition is coming; and then, you went on to 
say I personally think that is a good thing, and I certainly do 
agree with you, other than to say that competition is here; it 
is not just coming, and that is one of the reasons that the 
great State of Georgia has a 21 percent rate less than the 
national average, because we are already dealing with 
competition.
    And then, I would like to associate myself with the remarks 
of my friend Mr. Hall. He pointed out numerous times that any 
final bill that we had had to be fair, and I want to just say 
up front any final bill where we use a one-size-fits-all 
situation that tends to lower the electric rates in New Jersey 
at the expense of raising the electric rates in Georgia will 
not fall under the heading of fair, and it will tend to make me 
real pillish on this subject, and I hope we do not get into a 
situation like that.
    Last, I want to associate my remarks with the chairman of 
the full committee, Mr. Bliley. Mr. Bliley said that he thought 
every American should be able to choose his own power company, 
and I agree with him, and I believe he wants to do that because 
it promotes competition, and I am glad to hear him come out 
with that. That actually promotes what the whole Commerce 
Committee is about. We are promoting choice in the Energy and 
Power Subcommittee, Mr. Chairman, but over in the Health and 
Environment Subcommittee, we are promoting choice there, saying 
that actually, every American ought to be able to choose his 
own doctor, and I am sure that if they want to choose their 
power companies, he is going to agree with me that they would 
probably want to be able to at least choose their own doctors 
as well.
    So the Commerce Committee is moving in the right direction, 
Mr. Chairman. Let me thank the panel witnesses for being here 
and taking their time. I know they are busy, and their input, 
clearly, on electricity deregulation is going to be appreciated 
by all of us. They are experts in the area, and we need to hear 
from them.
    Now, what is expected to be a series of hearings, I am sort 
of pleased that we are hearing the States' perspective first. 
In my view, that is the most important perspective. Like on so 
many issues of national concerns, the States have already taken 
the lead on electricity deregulation, and that is certainly, in 
my view, how it ought to be. Whenever we, in Congress, try to 
fix something from up here, whether it is educating our 
children or policing the streets or deregulating the electric 
utility industry, we tend to drift, and we drift always, it 
seems to me, toward a one-size-fits-all solution, and I fear 
greatly that that is not going to work real well for 
electricity restructuring.
    Certainly, the approach that California wishes to pursue is 
not necessarily the best approach for Georgia, where, again, I 
repeat that our rates are 21 percent below the national 
average. The point is that at least 18 States are now in the 
process of opening up their electricity markets to competition 
at their own pace. The consequences of that, both good and bad, 
are now becoming evident, and States are able to make judgments 
as they see fit. With Federal mandates on timelines and other 
restrictions, this experimentation would not at all be 
possible. I also strongly believe that a date certain on 
implementation amounts to a Federal mandate on the States.
    When it comes to retail competition, the best thing that we 
can do at the Federal level, generally, is to stay out of the 
States' way. Of course, there are things that we can and should 
do at the Federal level. Even the Securities and Exchange 
Commission agrees that PUHCA should be repealed, and PURPA is a 
Jimmy Carter-era liberal nightmare that, frankly, never should 
have been put into place the first time.
    We also need to find a way to help the utilities to recover 
stranded costs, and we need to clarify exactly what is Federal 
and what is State jurisdiction, but the Federal involvement 
should be focused and should be limited.
    Now, Mr. Chairman, these are very important issues. They 
need to be addressed. I am excited about the possibility that 
we are going to do this under your leadership, and I thank you 
once again for having this hearing and the many others I know 
you will have in the future. Thank you, Mr. Chairman, for that 
extra minute.
    Mr. Barton. Thank you for that soft-spoken, moderate 
statement, Mr. Norwood.
    Mr. Hall. Mr. Chairman, if I have any time left, could I 
yield it to the gentleman from Georgia?
    Mr. Barton. I think the gentleman from California, Mr. 
Rogan, has an inquiry of the Chair.
    Mr. Rogan. Thank you, Mr. Chairman.
    In that I have another hearing that I must run off to, in 
the event that I am unable to return during the base of opening 
statements, may I have unanimous consent from this committee to 
allow my opening statement to be submitted for the record?
    Mr. Barton. Without objection, so ordered.
    Mr. Rogan. Thank you, Mr. Chairman.
    [The prepared statement of Hon. James E. Rogan follows:]
Prepared Statement of Hon. James E. Rogan, a Representative in Congress 
                      from the State of California
    I thank the Chairman for holding this hearing on electricity 
restructuring, which is one in a series of such hearings. I trust we 
will have a constructive dialogue today and throughout this process on 
how to protect and enhance a free market system in our nation's 
electricity industry.
    Mr. Chairman, I join you in your desire to see changes in our 
electricity industry makeup. The federal government should seek greater 
competition and increased opportunities for families and businesses to 
save on their electricity bills. Only by breaking the barriers 
established by our current system can our electricity industry keep up 
with the market and technological changes expected in the 21st century.
    For some time, I have worked to see this goal realized, and 
protected, in California. Just a few short years ago, California's 
electricity industry suffered with rates that were 50 percent higher 
than the national average. Entrepreneurs and businesses were fleeing 
the state. Further, efforts to protect our state's environment were 
suffering due to uncertainty about the timing and structure of 
competition in electricity markets.
    California is ahead of Washington on many issues, and our progress 
in creating a competitive electricity market is no exception. In 1996, 
as Majority Leader of the California State Assembly, I worked to pass 
AB 1890.
    This bill established a four-year changeover period in California's 
electricity industry. It was intended to protect the reliability of 
electric services and the interests of large and small consumers. 
Further, it was designed to enhance the ability of market participants 
to transition into the new market in a way that would keep rates 
consistent. I note for the record that AB 1890 passed both houses of 
the California Legislature with no dissenting votes.
    In two weeks, Mr. Chairman, we will celebrate the one-year 
anniversary of my state's shift from the monopolistic electricity 
industry of old to an open competitive market. And one year later, I am 
pleased to report that the shift is working well. Electricity customers 
have reliable and innovative options of service. We have taken steps to 
protect our environment, and we are moving into the competitive market 
phase.
    Businesses are returning to California to reap the benefits of a 
competitive electricity market. Large and small consumers have access 
to competitively-priced electricity rates. In addition, all consumers 
have the ability to monitor the price of power. Residential and small 
consumers are enjoying a ten percent decrease in rates, and even 
greater savings are projected when the transition is completed in the 
year 2002.
    In California, and in 17 other states, large investments have been 
made in an effort to create a new, competitive electricity market. As 
we have seen in California, the dividends from these investments are 
being realized by our families, businesses, and environment. I am sure 
my colleagues from other states can attest to similar results.
    Mr. Chairman, it is my hope that the success of California's 
electricity restructuring legislation serves as inspiration to those 
states who have not yet embraced this concept. The entire nation should 
be afforded the same benefits. However, as we work to craft federal 
legislation to this end, it is key that we not undo the progress made 
in California and other states. Let us not punish those progressive 
states who have seen the future and responded to it.
    Mr. Chairman, as we embark down the road of providing all Americans 
a competitive electricity market, I urge that we work together to 
protect the great strides California has made through state law.
    I thank the Chairman.

    Mr. Barton. The Chair would recognize the gentleman from 
Ohio, the Honorable Tom Sawyer, for a statement.
    Mr. Sawyer. Thank you, Mr. Chairman.
    I notice that a number of our membere s are feeling better 
this morning.
    Mr. Barton. That is true; very true.
    Mr. Sawyer. I am going to be brief. I just want to thank 
you for beginning this series of hearings. I absolutely agree 
with virtually all of my colleagues in recognizing the 
importance of those hearings and the work that we are 
undertaking here.
    In no small way, what we are really doing is to ask 
ourselves to deal with an enormously complex mix of policy and 
practice and law and regulation that has evolved in 50 
different States and nationally across this country for the 
entire century of the electric industry. That evolution that 
has brought us to the current juncture has yielded the most 
reliable, universal, accessible electric industry in the world, 
and it did not happen by accident, and I would submit that it 
did not happen through a series of bad business decisions that 
leave us, today, at an untenable juncture but, rather, that 
were brought to where we are today as much as anything because 
of the enormous change that has taken place within the electric 
industry and the change in technology that has made it possible 
for this to happen.
    In short, restructuring is happening today not because it 
must but, for the first time, because it can. I absolutely 
agree that this enormous diversity and mix of generating 
capacity and distribution and transmission across this country 
does not lend itself to one size fits all, but it all has to be 
done within a national framework that makes it possible, for 
the first time, for what used to be specific State 
jurisdictions and even specific service territories to operate 
together in a way that benefits industrial and residential and 
commercial consumers; but more than that, not just the 
consumers but the fabric of the economy of which electricity is 
such an important part: the communities and the regions that 
are the kind of economic beneficiaries that Mr. Norwood spoke 
of in his statement.
    In short, I think what it really comes down to is what the 
chairman of the full committee said, and that is our first 
obligation is not only to do it within a foreseeable period of 
time but to do it well and to take care to get it right. It is 
our first obligation.
    With that, Mr. Chairman, I thank you again for this hearing 
and yield back the balance of my time.
    Mr. Barton. We thank the gentleman from Ohio.
    We would now like to recognize the lady from the Land of 
Enchantment, the great State of New Mexico, the Honorable 
Heather Wilson, for an opening statement.
    Ms. Wilson. Thank you, Mr. Chairman.
    I am looking forward to this hearing and particularly the 
issue of the interrelationship between Federal legislation and 
what the States are already doing in leading the way with 
respect to State deregulation and how, in an environment of 
competition, this will change those State and Federal roles 
with respect to things like reliability; what are the standards 
for entering into the grid; reciprocity with respect to States 
that are deregulated or are not deregulated and may have 
companies who are selling power to other States, which is 
clearly an interstate commerce issue and also the question of 
access to reliable, low-cost power for all customers and 
consumers.
    We talk about the great benefits of competition, and I, 
too, believe there are tremendous benefits to competition. We 
also need to make sure that people have access to those 
benefits. It is great if we can get reliable, low-cost power to 
manufacturers, but if you cannot get power in Truth or 
Consequences, New Mexico at a low-cost rate or even a high cost 
rate, then we have not served the citizens that we were elected 
to serve. So all of these things require thought and balance, 
and I am looking forward to hearing the testimony today.
    Thank you.
    Mr. Barton. Thank you.
    We would now like to hear from the gentleman from the 
Volunteer State, Mr. Bryant of Tennessee.
    Did Mr. Bryant leave? He volunteered to leave, did he not?
    I think it is time to go to the Sooner State of Oklahoma, 
then, and hear from Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman.
    I will submit my entire statement for the record and just 
make a few brief remarks. This is a big issue. Close to $250 
billion a year is spent on electricity, and it is going to be 
hard; I do not think there is any question about that. The old 
saying, though, is that anything worth having is worth working 
for, and I think creating a competitive market in the retail 
electric industry is worth working for, and I can tell you that 
as a professional athlete, my foot speed was often referred to 
as glacial, and the electric deregulation bill has moved at 
glacial speed over the last Congress, but I sense that it is 
roiling to a slow boil in this Congress, and I look forward to 
working in a bipartisan manner on this issue.
    We have been in an effort to meet with all of the members 
on this subcommittee, Democrat and Republican alike, to develop 
a member-driven bill on electricity deregulation and have met 
with a very positive and favorable response from members on 
both sides of the aisle. You have heard a lot about competition 
already in the opening statements, and I think I know just a 
little bit about competition. We talk a lot about competition 
driving prices down and creating better service and more 
choice, more opportunities, more technological advances, and I 
believe all of that will happen in the electric industry.
    In fact, one of the things and buzzwords that you heard in 
telcom deregulation that you are now hearing in electricity is 
about creating the level playing field, and I know just a 
little bit about playing on a level playing field, because I, 
in fact, for 14 years, played on a perfectly level playing 
field, and there are tremendous benefits in doing that, and I 
think that that is a worthy goal as we talk about moving to a 
competitive field in the electric industry.
    This is an issue that is going to be great for all 
Americans, regardless of their party stripe or where they live, 
and I think that the effort has to be made at the Federal 
level. I think that it is great that the States are continuing 
to move forward. But what would have happened if we had moved 
forward in a piecemeal fashion on the airline deregulation or 
telcom deregulation, where we deregulated long distance calls 
or airline prices one State at a time? It is absolutely 
untenable and not defensible at all.
    And so I think it is important that here at this hearing, 
we have an opportunity to discuss what role the Federal 
Government plays in moving toward a restructured market. And 
with that, Mr. Chairman, I would just say, again, thanks for 
the opportunity to be here, and I look forward to this hearing.
    [The prepared statement of Hon. Steve Largent follows:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress 
                       from the State of Oklahoma
    Mr. Chairman, I want to thank you for holding the first in a number 
of hearings on electricity restructuring. Bringing retail competition 
to every American is one of the most exciting and substantial courses 
of action we can take to impact peoples lives for the better.
    I believe that kicking things off with a discussion of what the 
state's are already doing to bring competition to their customers is a 
good way to open the debate. However, it is just as important to 
recognize that a number of substantial issues exist over which states 
simply do not have jurisdiction. Inevitably, the debate will be 
centered around those issues in which both the federal government and 
the states share jurisdiction and how those issues are resolved. These 
broad questions of jurisdiction are among those I am sure our panelists 
will make clearer in their testimony today.
    As complex as the issue of restructuring can be, I am glad that in 
my discussions with all the members of the subcommittee I have found 
that partisanship does not appear to be among the challenges we will 
face. We may share different views on restructuring given where we are 
geographically, but not based on where we fall on the political 
spectrum. Any debate focused on resolving policy differences, and not 
exacting political pain, is a debate that can result in changes that 
make America a better place.
    While I am very excited about restructuring and optimistic about 
our chances for success this Congress, I understand that there are 
those who oppose allowing monopolies to compete and customers to choose 
who they buy their electricity from. We all remember making calls to 
Grandma on a black rotary phone for $1 a minute and paying 3 times more 
to fly to go see her over Christmas. Competition has given us cellular 
phones (with clearer connections) for 10 cents a minute and all kinds 
of supersaver airline rates for you to choose from. These are exactly 
the type of innovations and cost savings we have to look forward to 
from deregulating our electricity monopolies.
    Removing the federal restrictions and making other changes 
necessary to allow states to continue to move toward competition will 
not be easy. It can be like a Rubik's Cube sometimes with all the 
competing issues and constituencies, but there are not many things in 
this world worthwhile doing that come easy. I am committed to doing 
everything in my power to help the Chairman get this done, and get it 
done right. I look forward to hearing from our distinguished panelists 
as to how we may get it done and get it done right. Thank you, Mr. 
Chairman.

    Mr. Barton. Good; we certainly plan on the all-NFL Hall of 
Famer going deep numerous times as these hearings progress.
    We would like to hear from the all-star third baseman from 
the Congressional baseball team from the State of more Miss 
Americas than any other State in the Union, the great State of 
Mississippi, Mr. Pickering.
    Mr. Pickering. Mr. Chairman, after that introduction, I do 
not know if I should say anything else, but when Texas and 
Mississippi align together, we can do great things.
    I do want to commend the chairman for having this hearing 
but also for the approach that he is taking on this issue, an 
open process where everyone has a seat at the table, getting 
all of the industry representatives, consumers as well as, on a 
bipartisan basis, all members involved. I look forward to 
listening to all of the panels today and working through that 
open process to reach the consensus necessary to pass 
legislation to get to the eventual objective of competition and 
choice but to do it in a way that maximizes State flexibility 
and the role there as well as to address the issues that we 
must solve as we move forward, removing the barriers; 
conforming Federal policy where necessary; and getting to the 
end objective of competition and choice, lower price and 
eventual legislation.
    I thank the chairman again.
    Mr. Barton. We thank Mr. Pickering.
    We would like to hear from the last person in the 
Congressional All-Star Game to actually hit a home run, the 
catcher, from the fighting State of the Illini, Mr. Shimkus of 
Illinois.
    Mr. Shimkus. Thank you, Mr. Chairman.
    I, too, would like to submit my full text for the record 
and just want to say we have had numerous hearings on this in 
the last Congress, and, you know, I hope we have many hearings 
this Congress but not nearly as many as we had in the last 
Congress.
    And I really wanted to welcome State Representative Vince 
Persico, who is going to be on the second panel, and encourage 
my colleagues to hear his whole statement and stay around for 
questions. Illinois has moved, and it is a process that I think 
people will want to hear about how Illinois addressed this 
issue, and it may be a guideline from which to move State-by-
State and also, eventually, find the areas in which the Federal 
Government needs to move in that area.
    I will also question other panelists on the price spikes of 
last year in the Midwest and ask some questions on how, maybe, 
Federal regulation could avert another similar activity as what 
we saw last year.
    Again, I would like to thank Representative Persico for 
traveling all the way from Illinois, and I yield back the 
balance of my time.
    [The prepared statement of Hon. John Shimkus follows:]
 Prepared Statement of Hon. John Shimkus, a Representative in Congress 
                       from the State of Illinois
    Good morning Chairman Barton and to the two panels of witnesses. It 
is good to be here this morning. I am very interested in hearing the 
testimony today and learning what issues are to be governed by the 
States, the federal government and by both.
    Before I continue, however, I want to welcome one of the panel 
witnesses. State Representative Vince Persico. Representative Persico 
serves in the Illinois General Assembly and was a key player in 
Illinois' efforts to restructuring its industry. His role as Co-
Chairman of the Special Committee on Electric Utility Deregulation will 
provide our panel with much needed incite. On behalf of the Energy and 
Power Subcommittee, welcome Vince and thanks for flying out to DC this 
week.
    Mr. Chairman, as I mentioned earlier, I want to learn today exactly 
what role the States play in restructuring and what role the federal 
government will play. I also understand that some roles will be shared. 
I know these issues are complex, but we must begin to sort it all out. 
I also hope that today's hearing will answer some question I have on 
price-spikes. As most people in this room know, last summer the Midwest 
experienced power shortages and price spikes that cost our utilities 
millions and threatened the reliable flow of electric power. I plan to 
explore with our witnesses today whether or not federal electricity 
reforms will enhance or hinder the chances for price spikes and power 
shortages in the Midwest.
    Some key questions I have are: Are the states doing all they can to 
encourage new generation? Are the states promoting interstate 
transmission rules that develop competitive markets? And what is the 
role for the federal government in siting transmission, if any?
    Mr. Chairman, FERC studied the price spikes last year and released 
its report which stated that lack of generation capacity and 
transmission constraints were two key factors which likely caused our 
crisis. My theme today is to investigate how or if federal electric 
restructuring can help the Midwest avoid price spikes in the future. I 
yield back the balance of my time.

    Mr. Barton. We thank the gentleman.
    We would now like to hear from the distinguished vice-
chairman from the great State of Florida and the home of the 
prior national championship Florida Gators, although 
Congressman Stearns did not go to Florida, he represents them 
well.
    Mr. Stearns?
    Mr. Stearns. Well, thank you, Mr. Chairman.
    After listening to the introduction of the gentleman from 
Mississippi, I thought there was nowhere else to go but down.
    I think what is important to realize is we have had a big 
debate about energy deregulation now in the last Congress, but 
you know, and I say this to all of my colleagues on both sides, 
we have accomplished a lot in terms of developing a consensus 
with the distinguished gentleman from Colorado, Mr. Schaeffer; 
we had all of those hearings.
    But I think all of us have a better understanding now how 
to deal with PUHCA and PURPA, and I think there is almost 
unanimous opinion that these should be repealed. We now have a 
better feel with stranded costs, how to deal with that, and I 
think we are left with, perhaps, out of all of the issues, 
there are two issues that perhaps are paramount, and that is 
dealing with transmissions, ISOs, and the second thing is 
market power: what do you do with a company that has and owns 
and operates the transmission lines, and how do you continue to 
deregulate when you have market power in place?
    So I think if we have these discussions and these debates 
and these hearings, Mr. Chairman, we will be able to develop a 
consensus on these, and then, I think we will be ready to start 
deregulation, but I think, as many members have pointed out, we 
have 18 States with 45 percent of the country's population have 
already enacted laws or adopted final regulatory orders opening 
up their retail markets, so, in some many cases, we have the 
States moving forward, and the Federal Government, I think, can 
provide incentives to continue that deregulatory process, 
because States historically, historically, have had the 
principal responsibility to address all of these regulatory 
electrical issues, including consumer protection, public 
benefits, universal service; and so, frankly, my colleagues, I 
think we are poised to develop a bill, and I thank the chairman 
for the hearing.
    Mr. Barton. I thank the gentleman.
    We would like to hear from the distinguished gentleman from 
Maryland for an opening statement, Mr. Wynn.
    Mr. Wynn. Thank you, Mr. Chairman.
    I am very appreciative of this hearing, and I am anxious to 
hear from the witnesses, so I am going to forego an opening 
statement. I would like permission to submit at a later date.
    Mr. Barton. Without objection.
    We would like to hear from another gentleman from the 
Terrapin State, Mr. Ehrlich, for an opening statement.
    Mr. Ehrlich. Sweet 16.
    Mr. Barton. The Sweet 16; that is true.
    Mr. Ehrlich. Winner this evening, Mr. Chairman.
    I can take a hint from the chairman as well, and I will 
submit an opening statement for the record.
    Mr. Barton. I thank the gentleman.
    We now go to the great State of Arizona. Is Mr. Shadegg 
still here? He is missing in action. He was here.
    Then, Mr. Fossella? Mr. Fossella of New York.
    Mr. Fossella. I have nothing to add.
    Mr. Barton. That is the first time New York has had nothing 
to add; I can tell you that.
    All right; Mr. Burr of North Carolina, the Tarheel State.
    Mr. Burr. Mr. Chairman, in an effort not to give away where 
I am on this position, I think I will forego any opening 
statement.
    But I do thank the chairman for his willingness to start 
these hearings back up, and I hope that every member, on both 
sides of the aisle, will take this challenge in a serious way. 
This is not an easy issue. There are some very tough decisions, 
and hopefully, through these hearings, we can, for once, find 
the right solutions to them, and I yield back.
    Mr. Barton. We would now like to hear from the 
distinguished subcommittee chairman of Health and Environment, 
also from the great State of Florida, Mr. Bilirakis.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    Mr. Chairman, first, I would like to take a moment to 
welcome Susan Clark, a commissioner of the Florida Public 
Service Commission, to the subcommittee this morning and 
welcome Ms. Clark back to Washington.
    Mr. Chairman I, too, commend you for holding this hearing. 
Mr. Chairman, we sometimes overlook or forget the fact that we 
hold these hearings to learn. I know that we are all human 
beings, and quite often, we are predecided on issues. But 
hopefully, at least during the hearings, we are openminded 
enough to learn. Mr. Stearns has already shared with us that 18 
States have enacted laws. We all know that. Another 12 are 
considering similar actions. Some have made the statement that 
all States have to be a part of this deregulation; otherwise, 
it will not work. Well, I am just not sure that this is the 
case. I think that it is just very important that we go into it 
with an open mind. There are a lot of tough issues. Some issues 
affect some States more than they do others, and unless we do 
our job objectively and have an open mind, we are liable to run 
into another case of unintended consequences to something that 
might seem really good at this point in time.
    In any case, Mr. Chairman, thank you for holding the 
hearing. Again, I trust we will continue to learn on this 
subject. Thank you.
    Mr. Barton. And I believe our last opening statement of 
members present will be from the great State of Kentucky, Mr. 
Whitfield.
    Mr. Whitfield. Mr. Chairman, thank you very much. I had the 
opportunity to be involved in deregulation of the airline 
industry, the railroad industry and the trucking industry and 
was really an advocate for the deregulation of all of those 
industries, but I also recognize that certainly in the case of 
the airlines and railroads, some small communities did suffer 
as a result of deregulation.
    I am from a very rural State. We have, I guess, about the 
second lowest rates in the country, and many constituents ask 
the question, well, how can we really benefit from 
deregulation? And then, I noticed just recently the Department 
of Agriculture came out with a study indicating that in their 
analysis, energy prices would increase in about 12 or 13 
States: Alabama, Colorado, Idaho, Indiana, Kentucky, 
Mississippi, Montana and others. So I am delighted we are 
having these hearings, because I recognize there are strong 
arguments on each side, and I know that with the witnesses we 
have scheduled all of us will be able to make a better decision 
on whether or not deregulation is truly beneficial for the 
entire country.
    Mr. Barton. I thank the gentleman from Kentucky.
    All members not present will be given the requisite number 
of days to put an opening statement in the record. Seeing no 
other member present who has not been given the opportunity, we 
will conclude with the opening statements. At subsequent 
hearings, we do not plan to have opening statements except from 
the Chair and the ranking member and the full committee 
chairman and the full committee ranking member if they are 
present.
    [Additional statement submitted for the record follows:]
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress 
                       from the State of Missouri
    Thank you Mr. Chairman. I would like to commend our Chairman and 
Ranking Member for convening this hearing today. Elevating our 
awareness and increasing our knowledge of electric utility deregulation 
is critical. Having the opportunity to communicate with and learn more 
from our expert panelists today will be of great value as we proceed 
with the last major deregulation requiring Congressional action.
    Addressing the deregulation of the electrical industry in a manner 
which is fair to consumers, assures reliability, and promotes fair 
competition is a goal which we all share. In the process of 
accomplishing these objectives, it will be vital that we at the federal 
level not overtly intrude upon state jurisdictions which are the 
primary regulatory body for public utilities. Legislation from the 
federal level should complement state laws and regulatory efforts not 
stifle creativity and innovation. We must be sure that the date certain 
is realistic for state compliance.
    In many instances, the states have been the successful laboratories 
for change. Federal actions will need to incorporate the best model to 
effectively produce a national system based upon equity for all. The 
State of Missouri is a lower-cost State. We are below the national 
average in our rates, both commercial and residential. Missouri was one 
of the 23 Low Cost Electric State Coalition asking that their concerns 
be considered by Congress. I am interested in testimony that will 
demonstrate how we can best assure that these states maintain their 
lower-cost position.
    Through hearings such as this one, we are able to enhance the 
education of all parties involved as stakeholders in the deregulation 
of electricity. I am committed and know that my colleagues are 
committed to accomplishing deregulation in a manner that produces 
satisfactory results, not chaos. Deregulation of electricity must be 
done well, for the heat and lights necessary for comfort and commerce, 
and in emergency instances for survival.
    I look forward to the testimony of our expert panelists today and 
our committee's subsequent dialogue and debate regarding the critical 
issues associated with electric utility deregulation.
    Thank you, Mr. Chairman.

    Mr. Barton. We would like to welcome our first panel of 
witnesses to please come forward at this point in time. We have 
before us the Honorable Elizabeth Moler from Vinson & Elkins. 
We have the Honorable Linda Stuntz, who is representing Stuntz, 
Davis & Staffier. We have the Honorable Charles Stalon; we have 
the Honorable Mike Naeve. All of these individuals are former 
FERC Commissioners or Deputy Secretaries of Energy in various 
administrations.
    Ladies and gentlemen, we welcome you. Your entire 
statements are in the record in their entirety. We are going to 
start with Ms. Moler and give you 7 minutes to summarize your 
statement, and then, we will go right down the line.
    Ms. Moler?

 STATEMENTS OF ELIZABETH ANNE MOLER, VINSON & ELKINS; LINDA G. 
   STUNTZ, STUNTZ, DAVIS & STAFFIER; CHARLES G. STALON, CAPE 
  GIRARDEAU, MISSOURI; AND CLIFFORD M. NAEVE, SKADDEN, ARPS, 
                    SLATE, MEAGHER AND FLOM

    Ms. Moler. Thank you, Mr. Chairman and members of the 
subcommittee.
    It is an honor to appear before you today and to be asked 
to testify on my favorite subject. I have testified before this 
subcommittee many times. This is my first time as a private 
citizen. Though I do have clients who are engaged in the 
electricity business, the subcommittee asked me to appear 
before you to give my own views about the need for Federal 
electricity legislation.
    Mr. Barton. If you could make sure the microphone is on; 
flip that switch. Is it on?
    Ms. Moler. Now, it is.
    Mr. Barton. Okay; the power of electricity.
    Ms. Moler. It is good to keep mikes on as well as the 
lights on, yes, sir.
    The views I am presenting today are my own and do not 
necessarily reflect the views of my clients, nor have they paid 
me for my presentation. I have four basic points to make. I 
also identify 10 core elements of what I believe can and should 
be enacted as bipartisan consensus Federal restructuring 
legislation.
    First, there is a need to act. Congress last enacted 
electricity legislation in 1992. Since then, events in the 
marketplace and actions undertaken by both Federal and State 
regulators have partially reshaped this vital industry. Now, 
inaction by the Congress is frustrating further progress toward 
an even more reliable, efficient industry for our country.
    Second, this is not rocket science. Though the industry is 
an economic giant and produces the lifeblood of our modern 
economy, the issues pertaining to reform legislation are really 
quite basic, and they are ripe for action.
    Third, the industry needs your leadership. Something magic 
could happen if a bipartisan group of members makes a serious 
effort to write a consensus bill.
    Fourth, the elements of consensus legislation have broad 
support in the private sector.
    Ten core elements of Federal restructuring legislation are 
apparent if one looks at the array of restructuring proposals 
that have been introduced so far this Congress and during the 
last Congress. Enacting legislation composed of these core 
elements is a very worthy, achievable goal. These elements 
include mandating customer choice; ensuring reliability of the 
grid; repealing the Public Utility Holding Company Act; 
repealing the Public Utility Regulatory Policies Act, 
substituting instead a market-oriented approach to renewable 
power; updating the Federal Power Act; requiring all owners of 
interstate transmission lines to provide open access 
transmission under the Federal Power Act; providing the Federal 
Energy Regulatory Commission authority to address market power 
issues; providing consumers with reliable, user-friendly 
information about the sources of their power; supporting 
research and development funding; and finally, recognizing that 
electricity markets are now regional and facilitating regional 
solutions to problems.
    Let me elaborate briefly. It is not surprising that an 
electric industry structure that was appropriate for the 20th 
Century needs fine-tuning to best serve the public in the 21st 
Century. Federal laws governing this industry no longer promote 
the public interest; rather, they inhibit the development of a 
rational, competitive U.S. power industry.
    As several members of this subcommittee have observed, 18 
States have approved plans to give customers of some of their 
utilities customer choice. Other States are on the verge of 
acting. But even in those States that have acted, not all 
customers have the benefit of customer choice, because some 
utilities are not included in the program. While there has been 
considerable progress, the glass is, at best, half full. Those 
problems need to be solved.
    Progress in the States does not mean Congress should not 
act; rather, Congress must act, or there will be an increasing 
likelihood of volatile markets and even catastrophic 
transmission system failures.
    Let me turn to two of the elements that I addressed in my 
prepared statement; first, mandating customer choice. Congress 
should pass legislation providing all customers the ability to 
shop for their electricity supplier by a date certain. The date 
is negotiable; the principle is not. I personally would choose 
April 15, 2001. That is sufficient time for State regulatory 
authorities to act to establish an appropriate regulatory 
regime if they have not already done so. I like April 15 rather 
than January 1, because something good should happen on that 
date for a change.
    I congratulate the States that have enacted customer choice 
for their leadership and would grandfather those programs.
    Three years ago, I testified before the Senate Energy and 
Natural Resources Committee in favor of mandated customer 
choice that would give States the ability to opt out if they 
made a determination on the record that customer choice is 
contrary to the interests of their consumers. I still advocate 
that point of view. Last year's administration bill dubbed this 
the flexible mandate. I believe it is a reasonable middle 
ground upon which a consensus piece of legislation could be 
built as well. In order to opt out, State authorities would 
have to make a determination on the record that customer choice 
would be detrimental to their consumers.
    As part of any industry restructuring, utilities should 
have an opportunity to recover prudently incurred, legitimate, 
verifiable stranded costs that cannot be mitigated. Every State 
implementing customer choice, except one, has provided for full 
stranded cost recovery.
    While I personally regard stranded cost recovery as an 
essential element of a fair transition, I do not believe 
stranded cost recovery needs to be Federalized. The States have 
and should deal with this issue.
    Ensuring reliability of the grid: it would be easy to be an 
alarmist on the subject of the fragility of our Nation's 
transmission system. I do not want to be an alarmist, nor do I 
want to understate the serious nature of the situation. Rather, 
I want to stress the need to address the issue promptly and 
responsibly. Your former colleague and subcommittee chairman 
recently chaired a task force that stressed the need for 
reliability legislation. They came to a unanimous conclusion 
that reliability legislation is urgently needed. I would urge 
you to pay attention to that report and to act positively on 
their recommendations.
    Mr. Chairman, in my prepared statement, which I have 
submitted for the record, I have tried to outline a proposal 
that I believe could form the nucleus of much-needed 
legislation. In conclusion, I would urge you and your 
colleagues to roll up your sleeves; to talk to each other and 
commit yourselves to action. It is a vitally important public 
policy area that is worthy of your time and effort. This need 
not be a partisan issue; there is bipartisan support for 
legislation at the highest levels in the Congress and in the 
administration. We have had 4 years of oversight hearings and 
policy discussions. It is time to enact something.
    Thank you.
    [The prepared statement of Elizabeth Anne Moler follows:]
 Prepared Statement of Elizabeth Anne Moler, Partner, Vinson & Elkins, 
                                 L.L.P.
    Mr. Chairman and Members of the Subcommittee: It is an honor to 
appear before you today, and to be asked to testify on my favorite 
subject. I have testified before this Subcommittee many times; this is 
my first time as a private citizen. Though I do have clients who are 
engaged in the electricity business, the Subcommittee asked me to 
appear before you to give my own views about the need for Federal 
electricity restructuring legislation. Therefore, the views I am 
presenting today are my own, and do not necessarily reflect the views 
of my clients.
    I have four basic points to make. I also identify ten core elements 
of what I believe can and should be enacted as bipartisan, consensus 
Federal restructuring legislation.
    First, there is a need to act. Congress last enacted electricity 
legislation in 1992. Since then, events in the marketplace, and actions 
undertaken by both Federal and State regulators, have partially 
reshaped this vital industry. Now, inaction by the Congress is 
frustrating further progress toward an even more reliable, efficient 
industry for our Nation.
    Second, this is not rocket science. Though the industry is an 
economic giant and produces the lifeblood of our modern economy, the 
issues pertaining to reform legislation are really quite basic. And 
they are ripe for action.
    Third, the industry needs your leadership. Something magic COULD 
happen if a bipartisan group of Members makes a serious effort to write 
a consensus bill.
    Fourth, the elements of consensus legislation have broad support in 
the private sector. Ten core elements of Federal restructuring 
legislation are apparent if one looks at the array of restructuring 
proposals that have been introduced so far this Congress, and last 
Congress. Enacting legislation composed of these core elements is a 
very worthy, achievable goal. These core elements include:

 Mandating customer choice;
 Ensuring reliability of the grid;
 Repealing the Public Utility Holding Company Act;
 Repealing the Public Utility Regulatory Policies Act, 
        substituting instead a market-oriented approach to renewable 
        power;
 Updating the Federal Power Act;
 Requiring all owners of interstate transmission lines to 
        provide open access transmission under the Federal Power Act;
 Providing the Federal Energy Regulatory Commission authority 
        to address market power issues;
 Providing consumers with reliable, user friendly information 
        about the sources of their power;
 Supporting research and development funding; and
 Recognizing electricity markets are now regional and 
        facilitating regional solutions to problems.
    Let me elaborate, and in doing so I will address the issues you 
asked me to address in your letter of invitation.
    It is not surprising that an electric industry structure that was 
appropriate for the 20th Century needs fine-tuning to best serve the 
public in the 21st Century. Yet, the basic organic statutes governing 
the industry, the Federal Power Act (FPA) and the Public Utility 
Holding Company Act (PUHCA), have really not been comprehensively 
updated since the 1930's. They are now archaic and in need of reform. 
The Public Utility Regulatory Policies Act (PURPA), enacted in 1978, 
paved the way for new competitors to enter the electric generating 
business. The same statute also established the Federal policies that 
currently apply to renewable sources of power. PURPA's requirements 
have now outlived their usefulness. The Energy Policy Act of 1992 
(EPAct) recognized the changed circumstances in the industry, and paved 
the way for wholesale competition. But more needs to be done in order 
for the Federal laws to be compatible with State initiatives and to 
encourage a more efficient and competitive industry. Indeed, in today's 
evolving industry structure, this array of Federal statutes no longer 
promotes the public interest; rather, it inhibits the development of a 
rational and competitive U.S. power industry.
    As of today, authorities in eighteen states have approved plans to 
give customers of some of their public utilities ``customer choice''; 
that is, consumers will have the ability to choose their power 
supplier. Virginia is the most recent state to enact such a program. 
Other states, notably Maryland, Michigan, New Mexico, Ohio, and Texas 
are on the verge of acting. But even in those states that have acted, 
not all of the businesses and individual customers have the benefit of 
customer choice because some utilities are not included in the program. 
While there has been considerable progress, the glass is at best half 
full. Many, many customers are served by utilities that do not allow 
them to shop for power. In California, for example, the municipally-
owned utilities are not a part of the state's restructuring plan 
because of concerns about the loss of tax exempt financing if they 
provide open access. Those problems need to be solved.
    Electrons do not recognize state or corporate boundaries. 
Electricity is an industry that is fundamentally in interstate 
commerce. Congress needs to act to recognize this fact, and to provide 
a Federal regulatory scheme that will provide a much more seamless 
national power grid. Progress in the states does not mean the Congress 
should not act; rather, Congress must act or there will be an 
increasing likelihood of volatile markets and even catastrophic 
transmission system failures.
    Earlier I outlined the core elements of what I believe could be a 
solid, comprehensive, consensus based restructuring initiative. I would 
like to discuss each element in somewhat greater detail.
1. Mandating customer choice
    Congress should pass legislation providing all customers the 
ability to shop for their electricity supplier by a date certain. The 
date is negotiable; the principle is not. I personally would choose 
April 15, 2001. That is sufficient time for state regulatory 
authorities to act to establish an appropriate regulatory regime if 
they have not already done so. I like April 15, rather than January 1, 
because something good should happen on that day for a change.
    I congratulate the states that have enacted customer choice for 
their leadership, and would grandfather their programs. Three years ago 
I testified before the Senate Energy and Natural Resources Committee in 
favor of mandated customer choice that would give states the ability to 
``opt out'' if they made a determination that providing customer choice 
is contrary to their interest. I still advocate that point of view. 
Last year's Administration bill dubbed this the ``Flexible Mandate'' 
and I would urge you to give it serious consideration. I believe it is 
a reasonable middle ground upon which a consensus piece of legislation 
could be built. In order to ``opt out,'' state authorities would be 
required to undertake a regulatory proceeding and compile a record that 
customer choice would be detrimental to their customers. I personally 
do not believe that is likely, but states should have the flexibility 
to make such a finding.
    As part of any industry restructuring, utilities should have an 
opportunity to recover prudently incurred, legitimate, verifiable, 
stranded costs that cannot be mitigated. Every state implementing 
customer choice except one has provided for full stranded cost 
recovery. While I personally regard stranded cost recovery as an 
essential element of a fair transition, I do not believe stranded cost 
recovery needs to be ``federalized.'' The states have, and should, deal 
with the issue.
2. Ensuring reliability of the grid
    It would be easy to be an alarmist on the subject of the fragility 
of our Nation's transmission system. I do not want to be an alarmist; 
nor do I want to understate the serious nature of the situation. Rather 
I want to stress the need to address the issue promptly and 
responsibly.
    Your former colleague and Subcommittee Chairman, the Honorable 
Philip Sharp, recently chaired a Task Force reporting to the Secretary 
of Energy on Electric System Reliability. The Task Force was very 
broadly based; it had the widest possible range of industry 
participants and observers. They came to a unanimous conclusion that 
reliability legislation is urgently needed. Their final report stated:
          There is a sense of urgency throughout this report. Driven by 
        the expectation of billions of dollars in annual savings to the 
        Nation's economy, the electricity industry is in a transition 
        from a highly regulated industry dominated by monopoly 
        utilities to an industry that will rely, in large part, upon 
        competitive commercial markets at both the wholesale and retail 
        levels. The industry is unbundling, and the old institutions 
        for reliability are no longer sufficient. We are already in the 
        middle of our journey toward a restructured electricity 
        industry. However, the new policies and institutions needed to 
        assure electric reliability are not yet in place. Until such 
        policies and institutions are in place, substantial parts of 
        North America will be exposed to unacceptable risk.
          . . . The Congress, for example, urgently needs to clarify 
        the FERC's authority over an electric industry self-regulating 
        reliability organization and expand the FERC's jurisdiction for 
        reliability over the bulk-power system.
    They stressed:
          These steps must be taken soon. Indeed, the Task Force 
        believes that the primary challenges to bulk-power system 
        reliability are presented by the transition itself, rather than 
        by the end state of competition. Failure to act will leave 
        substantial parts of North America at unacceptable risk.
    The Administration has been working with the North American 
Electric Reliability Council and others on legislation to provide FERC 
with authority to oversee and enforce mandatory electric reliability 
standards. I cannot overstate its importance; if we are to keep the 
lights turned on it must be enacted. If it is not enacted, Congress 
will be considered part of the problem, rather than part of the 
solution.
3. Repealing the Public Utility Holding Company Act
    I do not believe PUHCA any longer serves a useful purpose. It 
should be repealed. In conjunction with its repeal, Congress should 
ensure that FERC and State regulators have access to the books and 
records to insure that captive customers are not subsidizing affiliated 
corporate business ventures. PUHCA repeal legislation should be part of 
a comprehensive restructuring bill.
4. Repealing the Public Utility Regulatory Policies Act and 
        substituting instead a market-oriented approach to renewable 
        power
    PURPA provided a much needed impetus for the development of an 
independent power industry. It is no longer useful and should be 
repealed. I would do so prospectively, honoring existing contracts. In 
its place, I would substitute a modest renewable portfolio standard, 
coupled with tax incentives for renewable resources.
5. Updating the Federal Power Act
    The Federal Power Act is replete with anachronisms. It should be 
updated. An essential element is to ensure that FERC has authority to 
provide interstate transmission for transactions that are ultimately 
retail sales.
6. Requiring all owners of interstate transmission lines to provide 
        open access transmission under the Federal Power Act
    There are many examples of power lines that are interstate in 
nature that are not subject to Federal Power Act jurisdiction and 
regulated by FERC. They should be. Transmission lines owned by 
municipalities, and the Federal Power Marketing Administrations 
(Bonneville, Southeastern, Southwestern, and Western), and the 
Tennessee Valley Authority should be regulated under the Federal Power 
Act just like those owned by other utilities. While I served at the 
Department of Energy, we established a special advisory committee to 
develop reform proposals for TVA, and worked with the Northwest 
Governors' Transition Board on reform proposals for BPA. Like you, I 
look forward to analyzing the conclusion of that process when the 
Administration's new restructuring package is forwarded to the 
Congress.
    In addition to the Federal Power Act jurisdiction, the Congress 
also needs to address the private use and tax exempt bond restrictions 
to enable municipal and cooperative utilities to provide open access 
and customer choice. While the subject area is not within this 
Subcommittee's jurisdiction, it is important to note that the fabric of 
open access transmission looks a lot like Swiss cheese--there are holes 
in the cloth. In particular, the tax writing committees need to address 
the private use restrictions that limit use of facilities constructed 
with tax exempt bonds. Use of existing generating capacity for sales 
outside a municipal utility traditional service territory and use of 
existing transmission lines to provide open access transmission should 
not upset existing tax exempt financing arrangements.
7. Providing the Federal Energy Regulatory Commission authority to 
        address market power issues
    Competitive markets work well only if you have lots of competitors. 
There need to be appropriate regulatory authorities in place that 
provide Federal regulators authority to address market power issues. I 
recognize that this is a particularly thorny area. Nonetheless, I 
believe that FERC should be given authority to address market power 
issues in order to ensure that competition flourishes.
    Five years ago, generation asset divestitures were unheard of in 
the utility business. Now, sales of generating assets are recognized as 
providing corporations and stockholders with very positive returns on 
their investments. They are also providing much needed financial 
restructuring tools so that utilities can develop a business strategy 
that is compatible with serving customers and positive balance sheets.
    I would also encourage the Subcommittee to provide FERC with 
additional authority to encourage a more rational structure for the 
interstate transmission grid. It needs to undertake reforms in 
transmission pricing so that the private sector will continue to invest 
the necessary resources in grid infrastructure. Increasingly utilities 
are looking at divesting assets and forming independent transmission 
companies, or ``transcos.'' I would provide FERC with authority to 
require integrated utilities that are not members of a regional 
transmission organization (either an Independent System Operator or a 
transco) to join one.
8. Providing consumers with reliable, user friendly information about 
        the sources of their power
    Customers who are interested in learning about the source of their 
power should be able to do so. Utilities should not be able to claim 
that they are selling ``green'' or renewable power unless they are. 
California, for example, has instituted a successful consumer 
information program. On the other hand, power marketers should not have 
to contend with different requirements in each state. A federal program 
designed to ensure truth in advertising if companies make claims about 
the source of their power should be enacted. The disclosure 
requirements need not be elaborate, nor expensive to comply with, in 
order to provide customers with reliable information.
9. Supporting research and development funding
    Support for research and development in the electric technology 
area has plummeted in the wake of restructuring. State regulators 
should have clear authority to impose a surcharge on distribution in 
order to support research and development. At the Federal level, I 
would focus on beefing up the DOE's electric R&D portfolio.
10. Recognizing electricity markets are now regional and facilitating 
        regional solutions to problems
    As I said earlier, electrons know no state or corporate boundaries. 
But the Federal-State system does not provide good regional solutions. 
Transmission planning and transmission siting are two excellent 
examples of things that need to be coordinated on a regional basis. 
Some have advocated Federal transmission siting legislation. Interstate 
pipelines are sited by the FERC under the Natural Gas Act; it should 
and could work for interstate transmission lines. I personally would 
favor such a move. If this Subcommittee cannot muster the support for 
Federal siting authority, at a minimum I would urge you to clarify that 
states can exercise authority on a regional basis and would encourage 
them to do so. For example, facility siting authorities should be able 
to get together and plan transmission facilities on a regional basis 
without running into concerns that their planning efforts will run into 
federal preemption. The Interstate Compact provisions in the 
Administration bill would clearly help.
Conclusion
    Mr. Chairman, I have tried to outline a proposal that I believe 
could form the nucleus of much-needed legislation. I would urge you and 
your colleagues to roll up your sleeves, talk to each other, and commit 
yourselves to action. It is a vitally important public policy area that 
is worthy of your time and effort. This need not be a partisan issue; 
there is bipartisan support for legislation at the highest levels in 
both the Congress and the Administration.
    We have had four years of oversight hearings and policy 
discussions. It's time to enact something.

    Mr. Barton. Thank you.
    I would like to welcome now the Honorable Linda Stuntz, 
who, in addition to being a former Deputy Secretary of Energy, 
I believe was a former counsel for the Republicans on this 
committee at one point in time. It was all downhill since then, 
right?

                  STATEMENT OF LINDA G. STUNTZ

    Ms. Stuntz. That is where I learned everything I ever knew 
about this subject, Mr. Chairman.
    Thank you so much for inviting me back. It is a great 
privilege, and it is one that I respect. I, too, have clients 
in many aspects of this industry, but you asked me to come here 
and give you my judgment myself as was my privilege to do on a 
more regular basis some time ago, and that is what I am here to 
do today.
    Mr. Barton. You really need to pull that microphone up to 
you, Ms. Stuntz.
    Ms. Stuntz. Okay; there is no switch on mine, so I do not 
know.
    My message today to you, I hope, is simple. You do need to 
legislate in the area of electricity, and second, I believe 
that you can legislate. I think all that work under Mr. 
Schaeffer's leadership that you all helped the effort in 
crafting the Paxon-Largent compromise of last year has really, 
although it may not have made it very far in terms of the 
legislative process schematic, it has enabled us now to 
identify, and hopefully you, issues on which there is 
sufficient consensus that legislation is possible.
    In my written testimony, and I would suggest to you today 
that there are five. I think you are going to hear some of them 
in common across most of us. First is the reliability issue. I 
think it is very important to empower a reliability 
organization that can set mandatory rules of the road. Right 
now, there are no such things. There is no entity or enterprise 
that can set a binding reliability rule. Now, that was okay 
when it was sort of a club, and people could take care of each 
other, because that is the way it worked in the previous 
scheme. It is not okay now. In fact, there are issues as to 
even whether funds can be collected. They are having difficulty 
doing that. So that needs to happen.
    Second, we need to clarify Federal and State jurisdiction. 
It is not clear that the States can, in fact, require access to 
their local distribution systems. There are lawyers' issues 
related to the scope of the Federal Power Act and the extent to 
which it may preempt the States. It would help the States move 
forward, empower them, if that clarification were provided. It 
has been done in Paxon-Largent; it is done in Mr. Burr's 
legislation, I believe, and there really should not be any 
dispute about that.
    Third, FERC's jurisdiction does need to be extended to all 
transmission. If we are going to have an interstate market for 
electricity that is backed up by a reliable, efficiently run 
grid, all transmission, regardless of who owns it, ought to be 
accessible on the same terms and conditions. And again, I do 
not really think that should be too controversial, although I 
do not minimize that for some for whom FERC regulation has not 
been fully applicable, this will require a change in business.
    Fourth, we need to repeal the Public Utility Holding 
Company Act. It is difficult to explain. That statute, as you 
know, is the province only of a few people, including my 
colleague here at the end of the table who can actually explain 
it out loud, but it affects everything that any utility company 
does: every business decision they make; the issuance of debt; 
how they are going to structure it; whether or not they can 
enter competition. It has outlived its usefulness; it is 
distorting competition, and it should be repealed.
    Finally, we need to prospectively repeal PURPA, preserving 
the existing contracts on which a lot of investment has been 
based, and there is a Federal responsibility, I believe, to 
provide for recovery of those costs, because it was a Federal 
obligation that was imposed on the utilities to enter into 
those contracts. Mr. Stearns has introduced legislation in the 
last Congress and, I believe, in this Congress to do that. I 
think it has bipartisan support, and I think that would be an 
easy module to put in your legislation.
    These are things that only Congress can do. If you do not 
do them, they will not be done. They are things that are 
necessary for you to do to remove barriers to State action; to 
allow the States to move forward with the competitive choice 
programs of their choice. I think it would be nice to have a 
date certain; I do not think it is essential, and I am quite 
persuaded that it is not legislatively possible. It is not in 
the Senate, and I do not think there is consensus on this 
committee. So, although, as I said, it may be useful, it also 
complicates the legislative effort, because you have to start 
worrying about grandfathering: what will we grandfather; what 
will we not grandfather.
    By not moving to a federally mandated date certain, we do 
not have to get into that issue, and I honestly do not think 
you have to go there to provide a lot of benefits for consumers 
and to get the Federal Government out of the way to improve the 
electricity market and allow the competition to move forward.
    I would conclude simply by saying that there are many of 
those--and you know them, I am sure--that have sought to hold 
electric restructuring legislation hostage until everything is 
done. There was a boss I had at one time who used to caution me 
against letting the perfect be the enemy of the good. I would 
encourage you in the same way. There may be things that turn 
out that need to be done later. I talked about a couple of them 
in my written testimony, one dealing with the issue of FERC's 
merger review approval; another dealing with transmission 
policy, about which I am greatly concerned. I do not think our 
current policies encourage anybody to invest in new 
transmission or to use it more efficiently. I think it is all 
based on the notion that we have to be concerned about 
allocating a scarcity, and that is no way to run transmission.
    It is also true that you can get in big trouble if you have 
a transmission outage. You do not get much benefit if you use 
transmission efficiently. That is encouraging transmission 
owners to always err on the side of perhaps maintaining more 
capacity reserves than they need. That is not a good way to go 
about moving to a competitive marketplace, but I do not think 
that there is a remedy that has clearly been proposed for that; 
I think we need to do some more homework on that and allow FERC 
and some of the agencies that are dealing with this every day 
to develop the solutions before we try to legislate in that 
area.
    With that, Mr. Chairman, I will cease and look forward to 
your questions.
    [The prepared statement of Linda G. Stuntz follows:]
 Prepared Statement of Linda G. Stuntz, Stuntz, Davis & Staffier, P. C.
    Thank you for the opportunity to testify before you at this 
critical time in the restructuring of this nation's electricity 
markets.1 There is no more complex, capital intensive or 
vital industry than the electric industry. Little wonder then, that 
despite some 30 days of House hearings, over one dozen Senate 
``workshops'' and the introduction of no less than 28 bills dealing 
with at least one aspect of this issue in the last Congress, only one 
bill (S. 621 repealing PUHCA) was reported from Committee and no bill 
reached the floor. The good news, I believe, is that all this work was 
not for naught. Although controversy remains over many issues, 
consensus is emerging on certain issues, and in one area in 
particular--reliability--it becomes clearer every day that the lack of 
federal legislation is posing real risks. Thus, my message to you today 
is simple.
---------------------------------------------------------------------------
    \1\ The views expressed herein are solely my own, and are not 
offered on behalf of, nor should they be attributed to, any other 
person or firm.
---------------------------------------------------------------------------
    1) There is a need for federal legislation.
    2) There is, or can be, sufficient consensus to allow you to enact 
the needed legislation this Congress.
                     the electricity industry today
    As illustrated by the chart below, in no industry is there a larger 
or more diverse number of suppliers.
[GRAPHIC] [TIFF OMITTED] T5641.001

    Fueled, in part, by passage of the Energy Policy Act of 1992, which 
effectively created a competitive wholesale generation market, the 
share of nationwide generating capacity from non-utility generators 
(NUGs) has more than doubled from 3.6 percent in 1987 to 8.5 percent in 
1997. In fact, since 1990, non-utility generators have contributed over 
half of all new investment in generating facilities.
    Utilities also are no longer the only sellers of electricity. As 
illustrated in Figure 2, sales growth by power marketers has increased 
dramatically in the last three years.
[GRAPHIC] [TIFF OMITTED] T5641.002

    In the first quarter of 1995, power marketers sold slightly less 
than three million megawatt hours, about the power required for one 
million homes. By the second quarter of 1998, that amount had grown to 
almost 501 million megawatt hours, enough to power almost 210 million 
homes. The Federal Energy Regulatory Commission (FERC) has approved 
nearly 500 power marketing entities. Of these, some 115 are posting and 
reporting sales.
                              state action
    As a result of the Energy Policy Act of 1992, and actions by the 
FERC implementing that Act, a wholesale purchaser of electricity (for 
example, a municipal utility) can obtain electricity from any supplier, 
and have that power transmitted to it over the transmission systems of 
any utility that is FERC jurisdictional. (The transmission systems of 
the PMAs, TVA, municipal utilities and co-ops are not FERC-
jurisdictional, although FERC has sought to apply reciprocity 
requirements and in some cases has some limited oversight). Retail 
sales and the distribution of electricity are matters of state 
jurisdiction. Thus, although wholesale customers can obtain power from 
any supplier, retail customers traditionally could purchase power only 
from their local utility, which, in exchange for undertaking the 
obligation to serve all consumers at a regulated rate, was given by 
most states an exclusive retail franchise.
    Starting in about 1994, the states began to consider in earnest 
whether the benefits of the emerging competitive wholesale market 
should be extended to retail consumers. As of today, 14 states have 
enacted legislation to provide retail customers with the option to 
choose any supplier they wish; four states are pursuing customer choice 
by means of state commission developed programs; legislation is pending 
in four additional states and virtually every state has considered 
whether and how it should adopt customer choice. 
[GRAPHIC] [TIFF OMITTED] T5641.003

    As a result of all this activity, more than 50 percent of the 
population of this country lives in states that have adopted firm 
customer choice plans. That being said, there is substantial variety 
among these state plans. As examples:

* Some require or strongly encourage divestiture of generation.
* Some ``unbundle'' distribution service and require competition in 
        such services as billing and metering.
* Some require utilities to turn over control of their transmission 
        systems to Independent System Operators (ISOs). One has created 
        a power exchange separate from an ISO. Others have combined 
        these functions.
* Some have established programs to support renewable energy.
* All, save one, have provided the opportunity for utilities to recover 
        fully the costs of investments made and costs incurred that 
        were approved under the prior regulatory regime.
* All have given municipal and cooperative utilities the opportunity, 
        but not the requirement, to participate in customer choice 
        programs.
                       what congress needs to do
    With this background, and with our evolving experience in wholesale 
and retail electricity competition, it is clear that Congress needs to 
do certain things.
1. Reliability
    No organization currently has the ability to set and enforce 
binding rules necessary to ensure continued reliability. This is a 
problem that Congress must remedy. Last year, a Department of Energy 
Task Force led by a former chairman of this Subcommittee, the Honorable 
Philip Sharp, completed a study on the matter of reliability in the 
restructured electricity industry. Mr. Sharp did not mince words in his 
preface to this report:
          Driven by the expectations of billions of dollars in annual 
        savings to the Nation's economy, the electricity industry is in 
        a transition from a highly regulated industry dominated by 
        monopoly utilities to an industry that will rely, in large 
        part, upon competitive commercial markets at both the wholesale 
        and retail levels. The industry is unbundling, and the old 
        institutions for reliability are no longer sufficient. We are 
        already in the middle of our journey toward a restructured 
        electricity industry. However, the new policies and 
        institutions needed to assure electric reliability are not yet 
        in place. Until such policies and institutions are in place, 
        substantial parts of North America will be exposed to 
        unacceptable risk.
    The good news is that many of the parties that contributed to this 
Task Force Report, including public and consumer-owned utility 
representatives, ELCON, Enron, DOE and state representatives, worked 
over a period of many months to develop consensus reliability 
legislation that would provide the new policies and institutions needed 
to assure electric reliability in the emerging restructured industry. 
This language was recently adopted by the North American Electric 
Reliability Council (NERC) by a near-unanimous vote. This then is 
module one of necessary federal legislation on electricity 
restructuring.
2. Clarify State/Federal Jurisdiction
    Currently, the dividing line between what is subject to federal 
regulation and what is subject to state regulation is unclear. Some 
argue, for example, that the states do not have the ability to order 
customer choice because states do not have authority over transmission 
in interstate commerce. FERC, however, is prohibited from ordering 
retail wheeling. Thus, there is, some contend, a ``gap'' in the current 
jurisdictional scheme.
    There are other confusions. In Order 888, FERC took the position 
that it has the authority to regulate the transmission component of 
``unbundled'' retail sales. Some states disagree. Moreover, some who 
agree with FERC believe that FERC also has jurisdiction over the 
transmission component of ``bundled'' retail sales and should be 
exercising this jurisdiction.
    Until and unless these ambiguities are resolved, there will be 
litigation, uncertainty and conflict between and among the states and 
FERC, and other elements of the electric industry. To resolve this 
uncertainty, legislation such as was set forth in the Paxon-Largent 
draft of last year and the Bingaman bill in the Senate (S. 1276) should 
be enacted. Among other things, states would be given secure 
jurisdiction over all retail customers through a more clearly-defined 
distribution jurisdiction, and FERC's authority over transmission in 
interstate commerce, including the transmission component of unbundled 
retail sales, would be confirmed.
3. Extend FERC's Jurisdiction to Encompass All Transmission Facilities, 
        Including Transmission owned by the PMAs, Munis, Co-ops and TVA
    We cannot have the efficient, reliable interstate transmission grid 
necessary to support a competitive electricity generation market and 
increased customer choice unless the entire grid is operating under the 
same rules and conditions. The great majority of co-ops and municipal 
utilities do not own substantial transmission, but those who do should 
provide access to those facilities on the same rates, terms and 
conditions as apply to transmission owned by investor-owned utilities. 
The same should be true for transmission owned by TVA, BPA and other 
Power Marketing Authorities.
    Again, the Paxon-Largent draft of last year contained provisions to 
accomplish this. These should be the third module of federal 
legislation.
4. Repeal PUHCA
    There is no reason whatsoever to retain this statute and many 
reasons to repeal it. Every day it remains on the books, it distorts 
competition and investment in the electric and natural gas industries. 
Its principal focus of encouraging ``integrated'' utilities (growth 
through contiguous expansion) actually is in conflict with antitrust 
objectives which seek to limit the presence of any one firm in a given 
geographic market. PUHCA repeal legislation as introduced last year in 
the House and the Senate, and included in the Paxon Largent draft 
should be the fourth module of federal legislation.
5. Prospectively Repeal PURPA Purchase Mandate, Preserve Existing 
        Contracts and Provide for Recovery of PURPA Costs
    There is no place in a competitive generation market for a federal 
statute that mandates that utilities (even utilities that have divested 
all their generation) purchase power from certain favored generators. A 
vestige of the Carter-era Energy Plan, PURPA inadvertently demonstrated 
that non-utilities could generate electricity and that generation could 
be competitive. PURPA, however, has largely failed in its stated 
purposes, which were to encourage energy conservation and more 
generation from non-fossil fuel resources. The substantial majority of 
PURPA projects are fossil-fuel powered. Moreover, because of a 
complicated government-dictated pricing scheme dependent on our ability 
to accurately predict energy prices (tried and failed more than once) 
PURPA is now costing consumers billions of dollars every year for over-
priced power. It is time to put this to an end. However, the 
investments made based upon PURPA should be honored, and the federal 
government, which imposed this purchase obligation on utilities, should 
ensure that these utilities are able to recover these costs
    Legislation to make these reforms to PURPA has been introduced in 
the House by Mr. Stearns and in the Senate by Messrs. Mack and Graham. 
Similar legislation was included in Paxon-Largent, and should be 
included in any federal legislation.
    That is it. Doing just these five things would remove critical 
federal barriers to customer choice, competition and innovation in the 
electric industry.
          issues for the future: what congress may need to do
    While I believe that there is at present insufficient consensus to 
enact legislation in areas other than the five that I have addressed 
above, growing concern in two areas, in particular, compels me to bring 
these to your attention and offer my views.
1. Mergers
    Section 203 of the Federal Power Act requires that FERC approve the 
disposition of any jurisdictional facilities in excess of $50,000. 
Thus, in addition to the traditional antitrust approvals required from 
the Department of Justice or the FTC, an entity disposing of 
jurisdictional electric facilities must obtain FERC approval. FERC has 
made valiant efforts to manage this responsibility in a manner 
compatible with the restructuring electric industry, but I, at least, 
have come to the conclusion that change is necessary. While an $80 
billion merger of two oil giants can be approved in a matter of months 
(or so it appears) mergers involving utilities one-tenth that size (or 
less) are taking years. In the natural gas pipeline industry, as to 
which FERC has no similar section 203 authority, substantial 
consolidation has taken place and continues to occur in the aftermath 
of wellhead deregulation and open access transportation in order to 
obtain economies of scale and scope. Consolidation in the electric 
industry, as it has in the natural gas pipeline industry, is being 
driven by deregulation, technology evolution and growing competition. 
Consumers will not obtain the full benefits of competitive generation 
markets unless the process of consolidation and industry 
rationalization is allowed to go forward.
    Mr. Burr has introduced legislation that would repeal section 203. 
Personally, I think this makes sense. I believe that section 203 FERC 
review is largely redundant to the reviews that are done by Justice and 
the FTC. However, I suspect that this is too big a step at this time. 
Instead, I would suggest a look at the referral process used in the 
United Kingdom. Borrowing from that process, section 203 could be 
amended to require that proposed merger proponents file information 
with the FERC, and that FERC be given a set time (perhaps four or five 
months) to analyze that information and make a recommendation to the 
antitrust authorities. In this way, the antitrust authorities would 
have the benefit of FERC's special expertise, but FERC would not be in 
the position of trying to recreate antitrust and market power expertise 
that resides already with the antitrust authorities. Most importantly, 
the industry realignment necessary and appropriate to provide more 
efficient, lower cost service to consumers in the new, restructured 
industry can go forward without undue delay and redundant reviews.
2. Transmission Policy
    With your permission, I would like to submit with this statement a 
paper entitled ``Transmission, Congestion, Pricing and Incentives,'' 
authored by Leonard S. Hyman, a senior Industry Advisor at Salomon 
Smith Barney. This paper was presented at a conference in New York on 
February 3, 1999. I would like to do this because I believe this little 
paper provides you with more and better information about what is right 
and wrong with our current transmission policies than anything else I 
have seen. Taking a step back from the current raging debates over ISO 
vs. Transcos, Mr. Hyman documents that transmission expansion has not 
kept up with growth in the market, and that current transmission policy 
provides little incentive to invest in new transmission or deploy new 
technologies to improve the capacity or efficiency of the system. 
Although Mr. Hyman comes down on the side of independent, for-profit, 
transmission companies as opposed to non-profit ISOs, this may be less 
important than getting the underlying regulatory structure right so 
that two things are known: 1) who is responsible for maintaining an 
adequate, efficient transmission system; and 2) those investing in 
increasing the capacity or performance of the transmission system will 
earn a reasonable return.
    If these two matters are not resolved, we will all be spending our 
time talking about how to manage the symptoms of inadequate 
transmission capacity rather than providing to all consumers the full 
benefits of a competitive generation market.
                               conclusion
    Thank you again for the opportunity to offer my views. I know it 
will not be easy, but I encourage this Committee to assemble and move 
the five-part legislation that I have outlined. As with most 
legislative efforts, it will not be all that everyone, or perhaps even 
anyone, wants. It may be too much for some. It would, however, remove 
critical federal barriers to the advance of competition in the electric 
industry, while providing the new reliability institutions and 
protocols necessary to maintain and enhance the reliability of electric 
service. Other issues will be raised, such as transmission policy and 
mergers, but seeking to address these issues at this time will doom the 
legislative effort to failure. These issues are simply too far from 
consensus or are insufficiently developed to determine whether the 
legislative prescription being sought is addressing the right problem.
    ``Doing the doable,'' and the necessary that only the Congress can 
do is an important next step to unleash competitive generation markets 
and deliver the benefits of those markets to all consumers. I welcome 
the opportunity to work with this Committee toward this end.

    Mr. Barton. We thank you.
    The Chair has a pending engagement with the Texas 
Congressional delegation lunch. I am going to excuse myself. I 
have read the two statements of our next two testifiers. I will 
be back for the question period. So I would recognize Mr. 
Stalon and then turn the Chair over to the vice-chairman, Mr. 
Stearns.

                 STATEMENT OF CHARLES G. STALON

    Mr. Stalon. Good morning, Mr. Chairman; thank you for the 
opportunity of making a statement. At the expense of some 
redundancy, I will repeat some of the arguments that have been 
made earlier but start from a slightly different perspective.
    The principal feature of the modern electric industry that 
allowed proponents of electric industry restructuring to make a 
persuasive case for that restructuring is the nature of the 
modern transmission grid. The growth of extensive 
interconnections among electric utilities of North America, and 
I emphasize it is a North American grid, not the U.S. grid 
only, but the growth of extensive interconnections among 
electric utilities of North America and the continent-wide 
standards for the use of that grid permitted substantial 
expansion of trade among utilities in the 1970's and the 
1980's.
    The success of that trading demonstrated to all but the 
most skeptical that the creation of competitive markets for 
generating services was feasible and that the inherited system 
of regulating the industry as an end to end monopoly was no 
longer necessary or desirable. In the Energy Policy Act of 
1992, the Congress took a crucially important first step in 
restructuring the industry. A second step is sorely needed.
    I want to mention very briefly three issues that I consider 
to be critical. First, the one that has already been mentioned 
twice and deserves a third and perhaps a fourth emphasis: In 
order to create efficient markets for electricity and preserve 
reliability in the system and to preserve certain key features 
of the current system for creating and enforcing rules 
necessary to make the system work well, three things have to be 
dealt with and dealt with fairly quickly. First, the industry 
needs an organization that can credibly promise to create and 
enforce reliability standards for the planning, construction 
and use of the North American grid. Congressional action is 
necessary to empower such an organization. The North American 
Electric Reliability Council on which we have depended in the 
past can no longer make such a credible promise.
    Second, transmission lines are not generally considered to 
be good neighbors. In fact, to everyone other than electrical 
engineers, they are just ugly. Their benefits, however, are 
great, and they are essential to the efficient and reliable 
operation of the electric industry, and the only plausible 
assumption on which to build public policy is that the Nation 
will need to build more of them.
    These facts focus attention on the need to reallocate 
regulatory responsibility for overseeing the planning, 
construction and use of the U.S. component of the North 
American grid. The Federal Power Act allocated regulatory 
responsibilities between the States and the Federal Government 
for a concentrated and intensely regulated electric utility 
industry, and it did so at a time when using the grid to buy 
and sell power was a limited activity practiced only among 
utilities and even in that role was severely limited by the 
incentives confronting the utilities.
    That allocation has remained essentially unchanged since 
the initial enactment of the Federal Power Act in 1935. It is 
not likely that the transmission assets needed for efficient 
and reliable industry performance can be constructed under the 
existing allocation of regulatory powers and responsibilities.
    Third, there exists an urgent need to impose unambiguous 
responsibility on the Federal Energy Regulatory Commission for 
creating and maintaining efficient and reliable bulk power 
systems in the U.S. and to encourage the continued integration 
of the U.S. regional systems and to integrate those systems 
with those of Canada and, increasingly, with Mexico.
    To permit the FERC to fulfill these responsibilities, the 
Congress must grant the agency significant new powers. Such 
powers should include regulatory oversight and empowerment of 
the North American Electric Reliability Organization, which is 
the proposed replacement for the North American Electric 
Reliability Council, and give the FERC also strengthened powers 
to oversee the market rules for the operation of interconnected 
areas.
    My testimony elaborates to some degree on this, and I would 
close merely with one observation: it is apparent to all 
careful observers that progress toward efficient electricity 
markets has slowed substantially in the last year; I would say 
the last year or two. Restructuring continues, but the process 
is increasingly reflecting the bargaining power of different 
parties in different parts of the Nation more than it reflects 
an attempt to create efficient and reliable markets. We need to 
remind ourselves that the objective is to replace the 
regulation of natural monopolies with efficient markets for 
generating services and not to replace the regulation of 
natural monopolies with the regulation of rivalrous 
oligopolies.
    Congressional action is needed to reenergize this process 
and to make clear the objectives for the regulators.
    I thank you.
    [The prepared statement of Charles G. Stalon follows:]
          Prepared Statement of Charles G. Stalon 1
---------------------------------------------------------------------------
    \1\ A Resume is attached at the end of the statement.
---------------------------------------------------------------------------
Introduction
    The principal feature of the modern electric industry that allowed 
proponents of electric industry restructuring to make a persuasive case 
is the modern transmission grid. The growth of extensive 
interconnections among electric utilities of North American and 
continent-wide standards for use of that grid permitted substantial 
expansions in trade among utilities in the 1970s and 1980s. The success 
of such trading demonstrated to all but the most skeptical that 
creation of a competitive marker for generation services was feasible, 
and that the inherited system of regulating the industry as an end-to-
end monopoly was no longer necessary or desirable. In the Energy Policy 
Act of 1992 (EPACT) the Congress took a crucially important first step 
in restructuring the industry. A second step is sorely needed.
Three Critical Issues
    In order to create efficient markets for electricity and to 
preserve key features of the current system for creating and enforcing 
rules necessary for electric industry reliability, three ``needs'' call 
for Congressional attention very soon. They are:
    One. The need for an organization that can credibly promise to 
create and enforce reliability standards for the planning, construction 
and use of the North American grid. Congressional action is needed to 
empower such an organization. The North American Electric Reliability 
Council (NERC) can no longer make such a promise.
    Two. Transmission lines are not generally considered to be good 
neighbors. In fact, to everyone other than an electric engineer they 
are ugly. Their benefits, however, are great. And they are essential to 
the efficient and reliable function of the electricity industry. The 
only plausible assumption on which to build public policy is that the 
nation will need to build more of them.
    These facts focus attention on the need to re-allocate regulatory 
responsibilities for overseeing the planning, construction, and use of 
the U. S. component of the North American grid. Transmission remains a 
natural monopoly and, consequently, extensive regulation remains a 
necessity. The Federal Power Act (FPA) allocated regulatory 
responsibilities between the states and the federal government for a 
concentrated and intensely regulated electric industry, and it did so 
at a time when using the grid to buy and sell electric power was a 
limited activity, practiced only among utilities, and even that role 
was severely limited by the incentives confronting utilities. That 
allocation has remained essentially unchanged since 1935 when the 
Federal Water Power Act of 1920 was made Part I of the Federal Power 
Act and Parts II and III were added to impose federal regulation on 
certain interstate activities of investor-owned utilities. It is not 
likely that the transmission assets needed for efficient and reliable 
industry performance can be constructed under the existing allocation 
of regulatory powers and responsibilities.
    Three. The need to impose unambiguous responsibility on the Federal 
Energy Regulatory Commission (FERC) for creating and maintaining an 
efficient and reliable the bulk power systems in the U.S. and to 
encourage the continued integration of the U.S. regional systems and 
the integration of these systems with those of Canada and Mexico. To 
permit the FERC to fulfill these responsibilities the Congress should 
grant to the agency significant new powers. Such FERC powers should 
include regulatory oversight of a new North American Electric 
Reliability Organization and strengthened oversight of market rules so 
that the rules in interconnected control area are complementary and 
will produce efficient outcomes.
    Permit me to discuss each issue in turn.
I. On the Need for Federal legislation to Empower a new North American 
        Electric Reliability Organization (NAERO).
    For a competitive generating industry to fulfill its theoretical 
promise, there must exist an organization that can credibly promise the 
beneficiaries of the system--and that includes almost every person, 
firm and government in North America--that it can create and enforce 
standards on all parties who build, operate, and/or use the North 
American grid that will provide, at a minimum, the level of electric 
industry reliability to which we have become accustomed. The North 
American Electric Reliability Council (NERC) is the organization to 
which we now look for the creation and enforcement of such standards. 
As I noted earlier, that organization cannot credibly make the needed 
promise in the new industry.
    In particular, the NERC relies on peer pressure as its principal 
enforcement tool; it has no ability to impose financial or other types 
of penalties on industry participants who dishonor the rules. That 
enforcement system worked tolerably well in the system in which 
regulated, large vertically-integrated utilities, government-owned and 
investor-owned, dominated the industry. But even in that environment 
failures occurred. Such a ``voluntary'' system cannot be expected to 
work when entrepreneurial, competitive generators dominate the 
generating sector.
    To its great credit the NERC has recognized that fact and has 
worked diligently for the last several years to develop a proposal for 
the Congress that can replace the NERC with a new organization (NAERO) 
with greater powers. That proposal should be before you soon, if it has 
not already arrived. That proposal deserves your serious and immediate 
consideration.
    When designing the powers of the NERC replacement and the powers of 
government regulators to oversee this new organization, it is important 
to keep in mind that reliability as we have come to know it in North 
America requires much more than the enforcement of a set of technical 
standards. Bulk power system reliability, on which reliability of 
service depends, is best seen as the cooperative production of a public 
good, to use the jargon of economists. Examples of public goods are 
national defense, light houses and medieval town clocks. The essence of 
a public good is that it cannot be withheld form one individual without 
withholding it from all. The public good called ``bulk power system 
reliability'' is produced by the control area operators, each of whom 
accepts a responsibility to buy certain inputs, commonly called 
ancillary services, that make it possible for all of them collectively 
to maintain a low probability of system failure. It is this 
``agreement'' among control area operators to share the cost of 
producing reliability that deters ``free riding.'' This ``agreement'' 
takes the form of mutual acceptance of the NERC reliability standards. 
Perpetuating this agreement is vital to the future of the industry, 
since each control area operator faces strong incentives to free ride, 
that is, minimize its expenditures for such services and let other 
control area operators bear the cost.2
---------------------------------------------------------------------------
    \2\ In California these ``inputs to reliability'' have been grouped 
under six heading, ``Regulation,'' ``Spinning reserves.'' Non spinning 
reserves,'' ``Replacement reserves,'' ``Voltage support/reactive 
power,'' and ``Black start capability.'' All six services are provided 
by generators. The first four are procured by the Independent System 
Operator (ISO), the control area operator for that portion of 
California served by competitive markets, in competitive bidding. The 
last two are acquired by the ISO by contract. Markets in other states 
are using different categorizations of such services and different 
models for producing reliability.
---------------------------------------------------------------------------
Background for reliability recommendation
    Power failures are one of the many inconveniences of modern life. 
Keeping the frequency of such failures relatively small is an important 
objective of managers and regulators of the electric industry. Power 
failures occur for many reasons, but it is convenient to group them 
into two types, failures of distribution systems and failures of bulk 
power systems.3 Failures of distribution systems are caused 
primarily by weather-related phenomena, such as ice storms, 
thunderstorms, hurricanes, and tornados that break distribution lines. 
Such power outages are usually localized, and planning and actions to 
minimize the frequency and duration of them are management 
responsibilities of individual utilities. In contrast, failures of a 
bulk power system can cause power outages for users on many 
distribution systems simultaneously, and there is little that managers 
of individual utilities can do to protect their customers from them. 
Consequently, the reliability of each utility's services depends 
critically on the reliability of the bulk power system from which the 
utility receives its power. In 1965 an equipment failure in Ontario 
caused a complete loss of power in New York and Boston within seven 
minutes. In 1996 a failure later ascribe to a transmission line in 
Northern California overheating and sagging into trees caused a loss of 
power in nine states.4 The Secretary of Energy's letter to 
the President of August 2, 1996 on this topic noted that an earlier 
failure on July 2, 1996 caused a loss of power to 2 million customers 
in 14 states.
---------------------------------------------------------------------------
    \3\ A bulk power system is defined as a set of generators and the 
transmission lines that interconnect them and, in turn, connect them to 
users and distribution companies. Such a system is commonly called an 
``interconnection,'' or ``grid,'' although the latter term is also used 
to describe the transmission network and connected generators of a 
single utility. The word ``interconnection'' has two common 
definitions: originally it meant a transmission line or set of 
transmission lines connecting one utility to another. The original 
meaning is still common. A second meaning is an alternating current 
transmission network in which all generators operate synchronously. The 
second definition encompasses the first.
    \4\ See, ``Blackout a Caution Sign on Road to Deregulation,'' New 
York Times, August 19, 1996, p. A.7 for a description of the August 
1996 blackout.
---------------------------------------------------------------------------
    The role of control area operators. Creating efficient, competitive 
power markets in an electric industry composed of interconnected 
control areas requires the existence of some agency with authority to 
define, impose and enforce rules for the operation of all control areas 
so interconnected. It has been noted that ``the pursuit of self-
interest, unrestrained by suitable institutions, carries no guarantee 
of anything except chaos.'' 5 In no part of the economy is 
this lesson more relevant than in the North American electric industry. 
As the industry evolves from one dominated by vertically-integrated 
utilities into one with competitive power markets and non-utility 
generators the system of coordinating institutions that has worked 
acceptably well to restrain and guide self-interested decision makers 
of intensely regulated firms must now be reconstructed to restrain and 
guide self-interested decision makers of competitive generating 
companies, competitive power merchants and competitive brokers.
---------------------------------------------------------------------------
    \5\ Lionel Robbins, The Theory of Economic Policy in English 
Classical Political Economy: (Macmillan & Co
---------------------------------------------------------------------------
    In an isolated system, such as one on a small island, one utility 
company may own the bulk power system and all distribution companies 
that take power from it. In that case, the task of reducing the 
frequency and duration of bulk power system failures is a management 
task. The more common case, whether on a large island or on a 
continent, is that generators and transmission lines of many companies 
are interconnected. In such a bulk power system, no single utility 
company has the capability of implementing rules to minimize the 
frequency and duration of bulk power system failures. Planning policies 
and operating rules must be imposed on decision makers in each control 
area for the benefit of all. Such plans and rules might be imposed by a 
government or by collective actions of the interconnected firms. In the 
North American electric industry the latter approach has been used. 
Collective actions by interconnected firms can continue to play a 
significant role in the new system, but adding financial penalties to 
the reliability agency's enforcement quiver will require the 
endorsement of the Federal government, as well as Canadian and Mexican 
governments when the penalty is to be levied on industry participants 
in those nations.
    Currently, the coordination of generators and transmission assets 
is done by 150 or so control area operators. In each control area, the 
control area operator is required to operate the area's generating 
plants and transmission lines in conformity with rules created to 
ensure that the systemic results of the individual actions of all 
interconnected control area operators provide reliable service to all 
users in the interconnection. In operating these assets the control 
area operators' are expected to balance two objectives, economic 
efficiency and reliability.
    This description of the reliability system makes clear that because 
generators and the transmission lines to which they are connected do 
work as a machine, any discussion of one without the other can be 
justified only as an expository convenience. Any proposal for creating 
competitive power markets in which entrepreneurs are free to build 
generators and sell power into competitive markets must include a plan 
for the construction and operation of transmission lines that make a 
competitive market possible. Furthermore, it must be recognized that 
operation of a transmission system means operation of the generators 
attached to the transmission lines.6 Still further, when 
large users connect directly to the grid, rather than to the lines of a 
distribution company, the control area operator will, for both 
reliability and efficiency reasons, want direct communications with 
such users.
---------------------------------------------------------------------------
    \6\ Existing technology does permit some direct controls that 
retard power flows over particular lines. Phase shifters, in 
particular, can be installed and operated to limit flows over 
particular lines. Technology on the horizon promises other control 
devices. However, a free flowing transmission system has desirable 
stability characteristics, so those who place a high value on 
reliability demand a heavy burden of proof from those who want to 
install such control devices. If the industry finds it difficult to 
build additional transmission lines, or to upgrade the old ones, it is 
likely the industry will expand the role of direct control devices.
---------------------------------------------------------------------------
II. On the Need for Re-allocating Regulatory Responsibilities
    State regulators and many other have often characterized the FPA 
(and the Public Utility Holding Company Act) as legislation designed to 
``fill the Attleboro gap.'' The ``Attleboro gap'' was the ``gap'' in 
the system of utility regulation opened by the Supreme Court in 1927 in 
Public Utility Commission v. Attleboro Steam & Electric Co. (273 U.S. 
83 (1927)) when the court determined that states could not regulate the 
terms of an interstate transaction of a utility. Since states could not 
regulate such transactions and the Federal government did not regulate 
them, users could not be protected from the monopoly power of a utility 
engaged in such transactions.
    While this description of the FPA oversimplified reality, the 
statement does convey some basic insights into the FPA. First, the 
intent of the legislation was, in part at least, to preserve the powers 
of the states to regulate utilities effectively by imposing federal 
regulation on those matters which the States could not regulate 
effectively. For example, the last phrase in Section 201(a) states, ``. 
. . such Federal regulation, however, to extend only to those matters 
which are not subject to regulation by the States.'' Second, the FPA 
explicitly limits the jurisdiction of the Federal regulator. In Section 
201(b) the Federal regulator is explicitly denied jurisdiction over 
``facilities used for the generation of electric energy,'' ``facilities 
used in local distribution'' and over ``the transmission of electric 
energy in intrastate commerce, or over the facilities for the 
transmission of electric energy consumed wholly by the transmitter.'' 
7
---------------------------------------------------------------------------
    \7\ The FPA allows the FERC to order a utility to connect its 
transmission facilities with those of ``one or more persons engaged in 
the transmission or sale of electric energy, to sell energy to or 
exchange energy with such persons.'' This authority is limited by 
requiring the Federal regulator to find that the utility subject to the 
order would not be ``unduly burdened'' and that the order would not 
``impair [the utility's] ability to render adequate service to its 
customers.'' (FPA Section 202(b))
---------------------------------------------------------------------------
    Of utmost importance to the current debate, the FPA does not permit 
the Federal regulator to order a utility to build transmission 
facilities (except for the very limited purpose of establishing an 
interconnection with another utilities (See footnote 7.) nor does it 
permit the Federal regulator to grant a utility eminent domain rights 
to build transmission facilities if the utility wants to build. These 
powers were left with states in the original FPA and the remain with 
the states.
    This assignment of regulatory responsibilities is almost certain to 
cause serious inefficiencies and probably reduced reliability. The FERC 
has plenary powers to price unbundled transmission services of 
investor-owned utilities, and in the competitive market all 
transmission services of such utilities will be unbundled. Furthermore, 
the modern grid often requires that a line be built in one state when 
the initial benefits accrue largely to persons in another state. 
Obviously, the state asked to approve such a transmission line will 
resist. There will always be an alternative to building a particular 
line. The consequences of inadequate transmission capacity is 
increasing transmission congestion and less efficient forms of 
competition.
    Gaining the benefits of an efficient transmission system in an 
environment of hostility to transmission lines, especially new ones, 
calls for constructive compromise in two senses: In one sense, Some 
responsible agency must make a defensible decision that there exist a 
need for the investment and then make a defensible decision on exactly 
where the line should be built, recognizing both the need and the 
environmental and social costs. This dimension of the problem is not 
new. Regulators have been making these difficult decision for decades. 
Shifting this decision process from the states to the federal regulator 
would merely change the locus of decision power. It is the essential 
second compromise that is new. Many states will vigorously oppose a 
shift of these decisions to the federal regulator. Some compromise 
between national and local interests needs to be developed.
    An attractive proposal surfaced in the 1980s. It was created by 
Commissioner Ashley Brown of the Ohio Public Utility Commission who was 
Chairman of the Committee on Electricity of the National Association of 
Regulatory Commissioners.8 His proposal recognized that the 
need determination might be made by the federal regulator and the 
actual routing of the line could be made by the state regulators. The 
federal regulator would be required to specify the beginning and ending 
point and perhaps some points in between. The task of the state 
regulators would be to determine the precise route of the facility.
---------------------------------------------------------------------------
    \8\ See Ashley Brown, ``The Balkans Revisited: a Modest Proposal 
for Transmission Reform,'' The Electricity Journal, vol. 2. 1989.
---------------------------------------------------------------------------
III. On the Need for Federal Action to Ensure That Regional Markets 
        Integrate to a Rational and Efficient North American Market.
    Substantial progress has been make in creating efficient markets in 
the former tight power pools of New England and PJM and in two large 
states, New York and California. Much work, however, remains to make 
those market as efficient as they ought to be. There remain two large 
states with a potential for creating reasonably efficient markets, 
Texas and possibly Florida. All other states are too small to create an 
efficient market within their state's boundaries. In my judgement, the 
California and PJM markets, the largest now in existence, are too 
small. The 150 control areas in North America need to be consolidated 
into less than 20 regional markets.
    Creating 20 or fewer markets, each of which can claim efficiency, 
is a necessary condition but not a sufficient condition to have an 
efficient electric industry. Those regional markets cannot be permitted 
to balkanize themselves by creating market rules and transmission 
pricing practices that deter efficient integration of the regional 
market into North American markets.
    The nation is not likely to get a truly efficient electricity 
market unless the Congress or the federal regulator has the power to 
insist on the development of large control area and on market rules 
that integrate the regional markets. Although the FERC is now testing 
the capability of FPA Section 202(a) to define the boundaries of 
regional markets, and the agency may find more power in that Section 
than I currently see, the ambiguity of that section persuades me under 
the best of circumstances it will take a several court rulings to 
establish its power. Congressional action could make it clear to all 
that the FERC is charged with and has the power to insist on large 
regional control areas and on market rules that harmonize markets in 
the different regions.
IV. Concluding Thoughts
    It is apparent to all careful observers that progress towards 
efficient electricity markets has slowed substantially in the last year 
or so. Restructuring continues, but the process reflects the bargaining 
power of the different parties in different parts of the nation more 
than it reflects an attempt to create efficient markets.
    We need to remind ourselves that the objective is to replace the 
regulation of natural monopolies with efficient markets for generating 
services, not to replace the regulation of natural monopolies with the 
regulation or rivalrous oligopolies.
    Congressional action is needed to re-energize the process and to 
make clear the objectives.

    Mr. Stearns [presiding]. I thank the gentleman.
    The Honorable Mike Naeve is next.

                 STATEMENT OF CLIFFORD M. NAEVE

    Mr. Naeve. Thank you, Mr. Chairman.
    First, in response to the story told by Mr. Hall, I wish 
you would pass on to him that I began my testimony by telling 
the committee that I am from Texas.
    I very much appreciate the opportunity to testify today. I 
would like to begin by discussing what is happening outside 
this committee room. The electric power industry is changing at 
a phenomenal rate. Even as we meet today, the pace of change is 
increasing. This change is being driven by competitive forces. 
These competitive forces have been unleashed by Congress 
through the enactment of PURPA, the Energy Policy Act; through 
FERC through Order 888 and a great many other individual cases; 
by responsible State regulators and State legislators; and even 
by neighboring jurisdictions, such as the Canadian provinces of 
Ontario and Alberta, who are restructuring their markets.
    These competitive forces have reached irresistible 
proportions. They are driving the industry to reshape itself to 
fit the new competitive model. By way of example, many 
vertically integrated utilities are today beginning to 
disaggregate their businesses into the wires business, 
generating business, marketing business and so forth. Just 
within the last 2 years, over 50,000 megawatts of generating 
capacity have been auctioned off by previously vertically 
integrated utilities.
    The competitive forces are encouraging the entry of new 
market participants into this industry. These new market 
participants bring both investment capital, but more 
importantly, they bring intellectual capital to this industry. 
The forces have caused a great many mergers and consolidations 
among a variety of participants in the industry. These mergers 
are driven by the need and the competitive pressures to lower 
costs and find economies of scale.
    And finally, these competitive forces are forcing the 
rationalization of the transmission system, through the 
formation of regional transmission organizations: ISOs and, 
hopefully, Transcos.
    Having set this process in motion, it cannot be reversed--
nor should it. But we must see the process through to the end, 
and we must do so in a way that enables us to capture the 
benefits of competition while protecting against decreases in 
the reliability of service during the transition.
    In my prepared testimony, I have recommended a number of 
legislative changes that Congress could make to facilitate this 
transition. I have divided my recommendations into two broad 
categories. The first category includes those steps that 
Congress can take to simply get the Federal Government out of 
the way of the process. It is ironic that it was Federal law 
and Federal regulators that kicked off the transition to a 
competitive market. And yet, other aspects of Federal law now 
preclude us from realizing the full benefits of competition. 
Therefore, I believe the most important thing that this 
committee can do is to clean up the Federal Government's own 
back yard. This includes repealing PUHCA, reforming PURPA, 
bringing TVA and PMAs under FERC's transmission jurisdiction 
and directing them to participate in RTOs, regional 
transmission organizations.
    My second category of recommended legislative changes 
consists of additional steps Congress can take to facilitate 
competition. These include giving FERC transmission siting and 
eminent domain authority and giving FERC transmission 
jurisdiction over public utilities. I recognize that these 
proposals and many of the proposals recommended by my 
colleagues on the committee are not without political 
controversy. If, in your judgment, it will take time to build a 
consensus to take these difficult steps, then you have no 
choice but to build that consensus and to take the time to do 
it.
    But I do have one suggestion, and that is do what you can 
now, while building the consensus needed on the remaining 
issues. The greater the competitive pressures that you unleash 
today, the easier it will be to finish the job tomorrow. In 
each of these steps I have described, any one of them will 
further increase the pressure on the industry, further change 
the industry, and as the industry changes, it becomes easier to 
enact the other steps.
    For the past 5 years, the search for a comprehensive bill 
has been a formula for inaction. Since there is much you can do 
right now, I would respectfully suggest that you just do it.
    Thank you; and Mr. Hall, I did begin my statement by saying 
I am from Texas.
    [The prepared statement of Clifford M. Naeve follows:]
             Prepared Statement of Clifford M. (Mike) Naeve
                              introduction
    I am pleased to testify today before this Subcommittee on electric 
utility restructuring issues. I served as a Commissioner of the Federal 
Energy Regulatory Commission (FERC) from 1985 to 1988, and I have 
represented a wide variety of clients in the electric utility industry 
in the 11 years since then.1 While at FERC I was actively 
involved in numerous FERC initiatives to make natural gas markets more 
competitive. I believe that consumers have reaped considerable benefits 
from the resulting competitive commodity market that has developed in 
the natural gas industry. I likewise believe that the expansion of 
competitive forces in electric markets will bring about tangible 
consumer benefits. I hope that my testimony will be helpful to this 
Subcommittee as it considers legislation to accelerate the pace of 
electric restructuring.
---------------------------------------------------------------------------
    \1\ Attached as Exhibit A to this testimony is a statement of my 
qualifications.
---------------------------------------------------------------------------
    I and my law firm represent a number of electric utilities, 
independent power producers, power marketers and other participants in 
the electric power industry. These clients have diverse views on the 
need for comprehensive federal legislation. My testimony today 
represents my own views, and cannot be ascribed to any other person or 
entity. My practice is not focused on legislative activity. Instead, my 
practice focuses almost exclusively on restructuring transactions in 
the electric industry, and on the regulatory and antitrust issues 
associated with those transactions. In the interest of full disclosure, 
attached as Exhibit B to this testimony is a list of the significant 
publicly disclosed transactions in which my firm currently is engaged.
                  traditional federal and state roles
    Since the passage of the Federal Power Act (FPA) and Public Utility 
Holding Company Act (PUHCA) in 1935, the division of regulatory 
authority in the electric utility industry between the federal and 
state levels has been relatively static. Certain responsibilities have 
been assigned exclusively to one level or the other, while other 
responsibilities have been shared between both levels. The primary 
allocation of responsibility has been as follows:
Exclusively State
 retail sales
 distribution of electricity
 generation of electricity
 resource planning
 transmission siting
Exclusively Federal
 wholesale sales (FERC)
 interstate transmission of electricity (FERC)
 limited authority over interconnections (FERC)
 corporate structure (SEC)
 nuclear operations and safety (NRC)
Shared State and Federal
 mergers (States, FERC, SEC, NRC, DOJ/FTC)
 disposition of assets (States, FERC, DOJ/FTC)
 issuance of securities
     SEC regulates issuance of securities by registered holding 
        companies and subsidiaries
     States regulate issuance of securities by all other 
        utilities
     FERC regulates issuance of securities if states do not
    The two major statutes affecting the industry that have been 
enacted since 1935--the Public Utility Regulatory Policies Act (PURPA) 
and the Energy Policy Act (EPAct)--have removed certain generation 
facilities from certain types of regulation, but have not disturbed the 
above allocation of jurisdiction.
                     traditional industry structure
    Investor-owned utilities range in size from a few very large, 
integrated holding companies spanning multiple states to a great many 
small companies operating in part of a single state. All investor-owned 
utilities are under FERC's jurisdiction for transmission and wholesale 
transactions. Until the last few years, investor-owned electric 
utilities for the most part were vertically integrated, franchised 
monopolies. Because the utilities had exclusive retail franchises, 
there was no competition for retail sales to speak of. And, because 
utilities controlled access to their transmission facilities, there was 
very little competition for wholesale sales either.
    Co-existing with investor-owned utilities are numerous publicly-
owned entities that were formed to provide utility services to various 
classes of customers. These include TVA, BPA and other federal Power 
Marketing Agencies (PMAs) that own and operate significant generation 
and transmission facilities. Also included are municipal and state-
owned utilities, as well as rural and other cooperatives created 
pursuant to the Rural Electrification Act. Many of these entities also 
own considerable transmission assets. Each type of publicly-owned 
entity is subject to a different regulatory scheme. No publicly-owned 
entity, however, is directly regulated by FERC.2
---------------------------------------------------------------------------
    \2\ These entities are subject, however, to FERC's authority to 
order transmission under Sections 211 and 212 of the Federal Power Act.
---------------------------------------------------------------------------
    As demand for electricity grew and utility systems expanded, these 
public and investor-owned utilities began to interconnect with one 
another, primarily for reliability purposes, i.e. to provide service in 
the event of emergencies and to purchase and sell power needed to serve 
load. These interconnected systems, in turn, formed the backbone of 
large regional transmission grids. Until recently, however, control of 
the regional grids has been balkanized among the diverse owners of 
transmission facilities that collectively made up the grids. Not only 
has the control been divided among the numerous entities but a number 
of regulatory schemes have been applied to the various owners of the 
grid, depending upon whether the owner is an investor-owned utility, a 
PMA or a publicly-owned utility.
                 the electric industry is in transition
    In the last few years, legislators and regulators have enacted 
programs that have given the electric industry strong incentives to 
rethink and restructure the way that they do business. The first step 
was the passage of PURPA in 1978, but most of the steps have been taken 
in this decade. These steps include:

 The passage of the EPAct in 1992. This Act (1) created the 
        Exempt Wholesale Generator (EWG) exemption from PUHCA; (2) 
        granted FERC more explicit authority to order access to 
        transmission facilities under Sections 211 and 212 of the 
        Federal Power Act; and (3) created the Foreign Utility (FUCO) 
        exemption from PUHCA.
 The issuance by FERC of Order No. 888, which requires 
        utilities to provide nondiscriminatory open access to their 
        transmission facilities. FERC has taken a number of other 
        procompetitive actions on a case-by-case basis, frequently 
        relying upon its conditioning authority in mergers.
 The efforts by the SEC to provide more flexibility under 
        PUHCA, which have been limited by the strict confines of this 
        antiquated statute.
 The enactment of restructuring legislation and regulations by 
        a number of states.
    In response to these important policy changes, the traditional 
vertically integrated structure of the industry has started to come 
undone. Regulators and industry participants are beginning to view the 
electric utility industry as consisting of at least five distinct lines 
of business: (1) generation; (2) wholesale sales; (3) retail sales; (4) 
transmission; and (5) distribution. Some of these business activities, 
such as transmission and distribution, must continue to be regulated in 
some fashion as natural monopolies, at least until technological 
advances permit greater competition. Under the right circumstances, 
however, other business lines, such as generation and wholesale and 
retail sales, can be carried out on a competitive basis. Indeed, the 
generation business already is very competitive, and the wholesale 
sales sector is not far behind. The retail sales market also is 
becoming increasingly competitive as the states implement 
restructuring.
    In response to the programs implemented by state and federal 
legislators and regulators to facilitate and encourage competition, the 
utility industry has changed rapidly. Four significant changes in the 
traditional industry structure have emerged:
Disaggregation
    First, as generation and sales markets have been opened up to 
competition, a number of utilities have begun the process of 
disaggregation and separation of their regulated wires businesses from 
the other businesses that can operate in competitive markets. This 
process, which is a natural consequence of the opening up of generation 
and sales to competition, also has been spurred by state and federal 
regulations to prevent owners of wires businesses from using their 
natural monopolies in those regulated businesses to benefit themselves 
unfairly in the competitive markets.
Entry of Non-Utility Participants
    Second, hundreds of new entities, such as independent power 
producers and power marketers, have entered the competitive generation 
and sales markets. While some of these entities are merely affiliates 
of utilities formed as part of the disaggregation process, many are 
completely new players with no previous connections to the electric 
utility industry.
Consolidation
    Third, in the last few years there have been a flurry of mergers of 
electric utilities, independent power producers, power marketers and 
other market participants. These mergers are a natural response to the 
onset of competition. In the old regulated cost of service regime, 
utilities had less incentive to be efficient, given that all prudently 
incurred costs could be recovered through rates charged to customers 
who had no alternative suppliers. As markets have become more 
competitive, utilities and other market participants have vastly 
increased incentives to explore all alternatives for reducing costs and 
improving services. Mergers frequently create the opportunity for scale 
economies that make suppliers more competitive in the new cut throat 
world. Even small savings, when applied to high sales volumes, can 
result in significant benefits both to shareholders and customers.
    Mergers also are a natural response to the disaggregation of 
vertically integrated utilities. Absent a merger, a smaller utility 
that divests its generating assets could become so small as to lose its 
ability to finance its remaining transmission and/or distribution 
business on reasonable terms and conditions. A merger between utilities 
that are divesting generation provides the combined entities with 
greater financial strength, as well as with scale economies.
Regional Control Over Transmission
    Finally, there has been a change in the operations and control of 
the regional transmission grids. Transmission systems are most 
efficiently and reliably operated on a regional basis. Several 
utilities have placed the operations of their transmission systems 
under the control of an independent system operator (ISO). Other 
utilities have begun the process of creating incentive-driven 
independent transmission companies (Transcos). FERC has actively 
encouraged the formation of both ISOs and Transcos, as well as other 
forms of regional transmission organizations (RTOs).
    The statistics tell the story of this dramatic evolution of the 
electric utility industry:

 Since 1997, 23 utilities have divested generation facilities 
        representing more than 50,000 MW of generation capacity, and 
        several other utilities have announced their intent to follow 
        suit.
 Through the end of 1998, FERC has issued 560 power marketers' 
        authorizations.
 Since 1997, 6 ISOs have been formed, covering the transmission 
        systems of California, Texas, the eastern United States from 
        Maryland north through New England, and a large part of the 
        Midwest. Several other ISOs and Transcos are in various stages 
        of development.
 Since 1995, almost 20 states have enacted statutes or 
        promulgated regulatory schemes requiring restructuring. 24 more 
        states currently are considering electric restructuring in 
        regulatory proceedings or proposed legislation.
 Since 1995, there have been 23 electric utility mergers 
        consummated, and over a dozen more have been announced and are 
        in the process of obtaining the necessary regulatory approvals. 
        There have been numerous other combinations involving 
        independent power producers, power marketers and other industry 
        participants.
 Since 1995, total wholesale sales by power marketers have 
        increased from 27 million MWh to 2.3 billion MWh in 1998.
                     implications of restructuring
    It may be too late to ask the question, but it is worth considering 
whether all the change that we are experiencing is a good thing. In my 
view, while the process has been somewhat uneven, on the whole we are 
on the right track. My experience has been that when competition is 
substituted for regulation, efficiency improves, innovation increases, 
and supply and demand become more closely balanced--all of which work 
to the benefit of both shareholders and consumers. Although vertically 
integrated companies do provide consumers with scope and scale 
economies, I believe the benefits of competition will more than offset 
the efficiencies that may be lost through disaggregation.
    I do not mean to say that there is no future role for regulation. 
When the circumstances do not permit effective competition to exist, 
regulation is necessary to ensure that market participants do not abuse 
their market power. Even in markets that are competitive, some type of 
oversight is necessary to ensure that markets continue to operate 
competitively. For example, to the extent that an entity that owns a 
regulated wires business also participates in a competitive generation 
or sales market, regulation of some type is necessary to ensure that 
the entity does not use its market power in the wires business to give 
it an unfair advantage in the competitive market.
    The current transition toward disaggregation allows the benefits of 
competition while retaining regulatory oversight where needed. By 
disaggregating the industry into separate sectors, those sectors that 
are competitive can operate with a minimum of regulation, while those 
sectors that are not competitive can continue to be regulated.
    Another issue that frequently is raised in connection with electric 
utility restructuring is the potential impact on reliability of 
service. There are two principal elements to reliability. The first is 
the reliable and secure operation of regional transmission grids, and 
the creation and implementation of rules to promote such reliable and 
secure operation. The second is the ability to construct new facilities 
to ensure that there is enough generation and transmission capacity 
available to satisfy customer demand.
    With respect to the first element, restructuring can only help. The 
trend towards centralizing control of the regional transmission grids 
under a single regional operator instead of under several owners with 
differing interests and incentives will allow better decisions 
regarding the operation and maintenance of the grid. This should result 
in more reliable operations.
    With respect to the construction of new facilities, it is too early 
to tell for sure how the competitive model will work in comparison with 
the command and control type regulation that has been used in the past. 
I do know, however, that under any model investments will not be made 
unless the investors believe that it will be profitable to do so. I 
also know that, under the old system, there have been relatively few 
investments in facilities by regulated electric utilities in recent 
years. This is illustrated by the supply shortage that occurred in the 
Midwest last year, which was a result of the failure of the old system 
to provide the proper incentives for investment in generation 
facilities. I believe that a competitive market is more likely to 
provide the correct incentives for investment. Again, this is 
illustrated by the example of the Midwest, where several new 
unregulated merchant plants have been announced in the wake of last 
year's supply shortage.
                      additional legislative steps
    The changes that have occurred over the last few years are 
phenomenal. I would not have expected at the beginning of the decade to 
see such rapid progress. The question that Congress now must face is 
whether the existing incentives that have driven the changes are 
adequate to complete the job, or are additional policy changes 
necessary to see the transition through to the end. Congress also must 
consider whether the pace of change has been or will be fast enough, or 
whether additional steps are necessary to accelerate the process.
    In my view, federal regulators are doing as about as good a job as 
they can under the current statutory framework, as are many state 
regulators. There are a number of additional legislative steps that 
only Congress can take, however, to facilitate the process and maximize 
the benefits of restructuring. These steps fit into two broad 
categories: (1) elimination of existing federal impediments to 
restructuring (i.e. getting the federal government out of the way); and 
(2) creation of additional regulatory tools to facilitate 
restructuring. I discuss below possible legislative action that could 
be taken in each of these categories.
Elimination of Barriers
    1. Repeal of PUHCA. In my view, the single greatest existing 
barrier to industry competition and restructuring is PUHCA. This Act 
was passed at a time when large holding companies were engaging in 
suspect securities transactions and taking advantage of the limited 
reach of state regulatory commissions over interstate transactions. 
PUHCA was decidedly successful in breaking up those holding companies 
and putting an end to their abuses. It is not needed today, however. As 
the SEC Staff found in 1995, securities laws have advanced considerably 
since 1935, and the Federal Power Act, which was passed in conjunction 
with PUHCA, has filled the regulatory gap. Furthermore, state public 
utility regulatory laws and agencies have improved significantly since 
1935.
    In proposing the repeal of PUHCA, I am arguing against my own self 
interest. A major part of my practice in the past several years has 
consisted of advising clients how to structure transactions in ways 
that will pass muster under PUHCA. All too often, however, I have seen 
PUHCA act as a barrier to efficient restructuring transactions, or else 
cause transactions to be structured in a suboptimal way.
    The manner in which PUHCA favors or disfavors transactions is 
almost completely random. PUHCA makes it easier for a domestic utility 
to acquire foreign utility assets than U.S. utility assets. It 
significantly restricts successful non-utility businesses from 
acquiring utility assets or offering utility services. It also 
restricts utilities from investing in the businesses they know best--
utility businesses--while, for the majority of companies, imposing no 
restrictions on investments in unrelated businesses. PUHCA also 
prevents EWGs from competing directly for retail electric sales.
    PUHCA frequently is mistakenly described as protecting against 
anticompetitive combinations. That description is mistaken. Very large 
utility transactions can be completed without any PUHCA review 
whatsoever, while small transactions may simply be impossible to 
complete under the Act's arcane standards. Further, in its 
administration of PUHCA, the SEC almost universally defers to other 
states and federal regulators to evaluate competitive issues.
    PUHCA also frequently is mischaracterized as a consumer protection 
statute. Again, this description misses the mark. While PUHCA requires 
the SEC to regulate certain transactions between utilities and their 
affiliates, the effect of SEC regulation frequently is to preempt FERC 
or the states--which have greater resources and expertise--from 
regulating the same transactions that effect rates charged to 
consumers. The relatively few consumer protection tools found in PUHCA 
are duplicative of, and inferior to, the consumer protection powers of 
FERC and the state regulators.
    Finally, repeal of PUHCA is not solely of interest to public 
utilities. While PUHCA repeal certainly would benefit traditional 
utilities, it also would benefit independent power producers and other 
entities that are interested in participating in the electric utility 
market. PUHCA has the effect of keeping out of the market all potential 
participants who cannot qualify for an exemption or who are unwilling 
to become registered holding companies--which in and of itself places 
severe restrictions on market participation. Repeal of PUHCA would 
permit efficient transactions to occur, would allow transactions to be 
structured in the most rational way and, most importantly, would allow 
a host of new competitors to own utility assets and compete to provide 
utility services.
    2. Amendment of PURPA. When PURPA was passed in 1978, it played a 
very important role in opening the generation market to competition, 
which was the first step in the transition away from the vertically 
integrated utility structure. Now that we are much further down the 
road, however, there are two aspects of PURPA that need to be 
reconsidered.
    First, PURPA obligates utilities to purchase electricity from 
qualifying facilities (QFs). This mandatory purchase obligation was 
crucial in 1978 to force utilities to purchase power from independent 
power producers. It no longer is needed in today's market for new 
generation, where most utilities have all but abandoned the field, and 
state regulators are skeptical of generation that is added without 
going through competitive procurement. The mandatory purchase 
obligation is the very antithesis of competition and is fundamentally 
inconsistent with the creation of competitive markets. This obligation 
should be eliminated on a prospective basis.3
---------------------------------------------------------------------------
    \3\ Elimination of the obligation to purchase should be prospective 
only. Large investments of capital already have been made based on 
existing contracts, and those contracts should not be abrogated.
---------------------------------------------------------------------------
    Second, PURPA limits the ability of electric utilities to invest in 
QFs. This too was an important feature of the Act in 1978, when the 
goal was to encourage independent ownership of generation. Again, 
conditions have changed enough today so as to nullify the concern 
underlying the ownership restriction. The generation market now is 
highly competitive, and there is no reason to restrict utility 
ownership of any type of generation facility. Indeed, in 1992 Congress 
saw no reason to restrict utility ownership of EWGs.
    The PURPA ownership restrictions have had another unintended 
consequence. PURPA not only limits utility investments in QFs, but it 
also limits QF owners' investments in utility assets. Once a QF owner 
purchases utility assets, it becomes either a utility or a utility 
holding company, both of which are restricted by the FERC regulations 
implementing PURPA from owning more than 50% of a QF. Thus, for 
example, Cal Energy has been forced to divest a portion of its 
ownership interests in its QFs as a consequence of its purchase of 
MidAmerican--an electric utility holding company.
    As a consequence, PURPA should be amended to revise the ownership 
restrictions. Utilities who have retail franchise monopolies probably 
still should be limited in their ability to own QFs from which they 
purchase power, but otherwise utilities should be permitted to own QFs.
    3. Amendment of Atomic Energy Act Foreign Ownership Prohibition. 
The Atomic Energy Act (AEA) currently includes a prohibition against 
foreign ownership of nuclear generation. This restriction has inhibited 
a number of transactions that have involved foreign companies. Again, 
the result has been a less-efficient transition toward a restructured 
industry.
    As many U.S. utilities are exploring ways to divest their interests 
in nuclear plants, there is much to be gained by permitting 
knowledgeable foreign companies to compete to acquire nuclear 
facilities. I am not suggesting that there are not important national 
security concerns associated with the foreign ownership of nuclear 
generation, nor am I recommending that these concerns not play a role 
in determining whether and how foreign ownership should be permitted. 
However, the prohibition contained in the current law makes no sense to 
me. There surely must some way to permit foreign ownership without 
jeopardizing national security. There are sophisticated nuclear power 
technologies employed by utilities in England, France, Japan and other 
Western allies. Our domestic nuclear industry could benefit from the 
knowledge and experience of these utility companies without endangering 
national security.
    4. Include TVA and PMAs in the Transition. Another stumbling block 
in the path to competition has been TVA, BPA and other PMAs. These 
entities, particularly BPA and TVA, dominate their regions. Yet they 
have lagged behind the private sector in restructuring, and have 
represented a significant impediment to the creation of regional 
transmission entities in their regions. It is not necessarily the case 
that these entities actively oppose a national transition to 
competition. Rather, their underlying statutory schemes are not easily 
adaptable to the new competitive model.
    Congress has two choices for dealing with this problem. First, 
these entities could be privatized. This automatically would cause them 
to fit under the same regulatory scheme as the rest of the industry and 
would permit them to follow the same transition to competition.
    I recognize that this may be a difficult step to take. At the very 
least, however, legislative changes should be implemented to ensure 
that TVA, BPA and the other PMAs join the path toward competition 
rather than act as impediments to the transition process.
    First, the provision of transmission by these entities should be 
brought under FERC's jurisdiction. It is important for competition that 
all interstate transmission fall under a common regulatory scheme. 
While the federal utilities have filed transmission tariffs that are 
similar to the open access tariff required by FERC, the fact that FERC 
does not have direct jurisdiction over them makes a big difference in 
how they are required to behave.
    Second, legislation should be written that makes clear that TVA, 
BPA and the other PMAs are required to join ISOs or other regional 
transmission organizations within a reasonable amount of time. As I 
previously discussed, lack of federal utility participation has made it 
difficult for regional transmission organizations to get started in 
regions where they are located.
Tools to Facilitate Restructuring
    The most important step for the federal government to take is to 
eliminate existing barriers to restructuring and get out of the way. 
The proposals that I have identified above are intended to achieve this 
objective. In addition, there are some affirmative steps that Congress 
could take to facilitate efficient restructuring. Included are the 
following:
    1. Federal Authority Over Transmission Construction and Siting. 
There is one significant mismatch in the allocation of authority 
between the federal government and the states. On the one hand, FERC 
has jurisdiction to regulate the rates and terms and conditions for 
transmission service. On the other hand, the states have the authority 
to approve the siting and construction of transmission facilities. The 
lack of FERC jurisdiction over transmission siting represents a major 
distinction between the two principal statutes that FERC 
administrates--the Federal Power Act and the Natural Gas Act. FERC is 
responsible for authorizing interstate natural gas pipeline 
construction under the Natural Gas Act.
    In the past, transmission was built largely to upgrade the 
reliability of service by vertically-integrated electric utilities to 
their retail franchise monopoly customers. In that circumstance it made 
some sense for state commissions, who were primarily responsible for 
regulating the provision of service to the retail franchise monopoly 
customers, to have jurisdiction over transmission additions. Today, 
however, the primary need for transmission is to permit or enhance 
interstate wholesale transactions and competition, and to enhance the 
reliability of the interstate grid. FERC more properly is the overseer 
of transmission additions for this purpose.
    Second, it increasingly is the case that the benefits of 
transmission construction may fall primarily outside of the state where 
most of the construction occurs. For example, if a utility located in 
one state constructs a transmission line in another state to connect it 
with a source of supply, it may be that the majority of the benefits go 
to one state while the majority of the construction occurs in another 
state. Under these circumstances it may be difficult to obtain the 
necessary permits from the adjoining state, which has no incentive to 
approve the construction.
    The effect of the different allocation of siting responsibility 
between the Natural Gas Act and the Federal Power Act can be seen in 
the amount of construction activity in the two industries. Both 
industries have been transformed in the last decade into competitive 
industries where the construction of new facilities is vital to 
increasing competition. Yet, while there has been substantial 
construction of new interstate pipeline facilities in that time, there 
has been comparatively little construction of transmission facilities.
    It no longer is appropriate for decisions over transmission 
construction and siting to be made on a state level. Instead, that 
authority should be moved to FERC, consistent with its authority under 
the Natural Gas Act. Similarly, FERC should be given the power of 
eminent domain for the construction of transmission facilities, 
consistent with the grant of eminent domain under the Natural Gas Act. 
This way decisions regarding new transmission facilities can be made 
with a view towards achieving the best results on a regional or 
national basis rather than on a parochial basis, and those decisions 
can be carried out effectively to enhance competition.
    2. Encouragement of RTOs. As I testified previously, control over 
the operation of transmission facilities is increasingly being shifted 
to regional entities, whether ISOs, Transcos or other forms of RTOs. In 
my view, this is a good trend. Competition in sales markets is enhanced 
when entities are able to transmit electricity on a regional basis at 
non-pancaked rates. More importantly, reliability is enhanced when 
transmission operators control flows over the entire regional grid 
rather than over fragmented segments, and when investment decisions are 
based on regional needs.
    Furthermore, for the same reason that I favor competition, I am 
inclined to believe that incentive driven Transcos should be preferable 
to ISOs. A Transco will have more incentives to operate and expand its 
facilities and consider all resource options in an efficient manner 
than an ISO that is not primarily motivated by operating the 
transmission system in a way that maximizes profits.
    I do recognize, however, that many believe that it is easier to 
form an ISO governing the transmission systems of several entities than 
it is to form Transcos, although there are Transco proposals currently 
under development. Given the benefits of regional transmission 
operation, I believe that ISOs at the very least can be useful 
transition vehicles for eliminating the balkanization of control over 
regional transmission grids.
    Given the rapidly evolving nature of regional transmission 
organizations, I am hesitant at this point to recommend that the 
Congress mandate any particular path. Our learning on the issue may not 
be advanced enough for any particular solution to be locked in today. 
Instead, we need to leave in the flexibility for paths not yet apparent 
to be pursued.
    There are, however, several impediments to the formation of 
regional transmission organizations that should be removed. I have 
discussed some of these previously, but I will address them again with 
particular emphasis on their relationship to the formation of regional 
transmission entities.

 PUHCA ownership restrictions. Among its numerous impediments 
        to competition is the impact of PUHCA on the formation of 
        regional transmission entities--particularly Transcos. Any 
        large regional Transco will cover a multistate area. Yet PUHCA, 
        which would apply to the ownership of a Transco, would place 
        restrictions on the private ownership of such an entity. The 
        solution is to repeal PUHCA.
 Transmission constraints. In some regions there are 
        transmission constraints that place significant limits on the 
        amount of power that can flow through certain facilities. The 
        result may be fragmented transmission systems that cannot 
        easily be integrated into a regional system. States may be 
        reluctant to act to relieve such constraints solely to improve 
        the interstate grid, and likely will become more reluctant in 
        response to a request by a regional transmission operator where 
        the apparent benefits to that state may be even more remote. 
        The solution is to give FERC siting and eminent domain 
        authority for the construction of transmission facilities.
 Nonjurisdictional transmission owners. Some regions are 
        dominated by transmission owners that are not subject to FERC's 
        jurisdiction, and who are either reluctant to participate in 
        regional entities or cannot so participate as a matter of law. 
        For example, it is difficult to form an ISO in a region where 
        there is a large federal utility, such as BPA in the Pacific 
        Northwest and TVA in the Southeast. Similarly, public power 
        systems are concerned that participation in an ISO might cause 
        the loss of their tax-exempt status. The solution is to bring 
        the federal utilities under FERC's jurisdiction and otherwise 
        require their participation in regional transmission entities, 
        as I previously have testified. FERC also should be given 
        jurisdiction over transmission services provided by the other 
        public power entities that currently are beyond FERC's reach. I 
        recognize that so extending FERC's reach probably requires 
        additional steps to eliminate barriers to participation by 
        these entities in RTOs, such as revisions in the tax code to 
        protect these entities existing financing.
  congress should not enact a comprehensive bill if that would delay 
               action on important individual components
    I feel compelled to make one final point, although I acknowledge 
that it is politically naive. There are a number of important actions 
that Congress can take to encourage competition that are completely 
unrelated to each other. In my view, Congress should enact as many of 
these as it can right away, even if that means that others have to be 
put off until later. Even if only one component can be enacted at this 
time, that component should be enacted. We now are in a crucial stage 
of the transition, and should do everything we can to move it along. If 
we wait until all parties can agree on all aspects of a comprehensive 
bill, it very well may be that the bill will be passed too late to have 
the intended effect.
    Whether it is repeal of PUHCA, amendment of PURPA, or any of my 
other proposals, Congress should act now on those issues that it can 
agree on even as it struggles with other more difficult issues. Any 
steps that it can take will benefit consumers and market participants, 
and Congress should do everything that it can to effect those benefits.

    Mr. Stearns. I thank the witnesses. Let me open up by just 
making an observation from listening to your testimony. First 
of all, it appears that all of you seem to agree that we need 
Federal electric legislation. I think that is trying to look 
where we all can agree, and also, all of you agree that the 
existing statutory authority that we have in place is 
inadequate to assure, I guess, perhaps, this deregulatory 
process and also the continued reliability of the transmission 
system. Do any of you disagree with that?
    No; okay. With those two premises in place, it seems to me 
in listening to the testimony, one of the areas of disagreement 
is the date certain. The Honorable Linda Stuntz has indicated 
that she thinks it is not mandatory, and the Honorable Moler 
has indicated she thinks it is. I would like to take off, just 
if you would, from that point of view and hear each of you, in 
a very short amount of time, say strongly why you think a date 
certain is very important and why it is not, and we will just 
go across the panel, because I think that has been one of the 
contentious issues among members, and so, to reiterate again, 
if you might start off, Ms. Moler, to describe why date certain 
is important.
    Ms. Moler. I believe a date certain is important because 
there are large sectors of the country where there is virtually 
nothing happening. I would respect, ultimately, a decision that 
any State regulatory commission made or any State legislature 
made if it were to determine that it did not want to have 
customer choice, but I believe that that determination should 
be made on a record where citizens have an opportunity to 
participate, and they would have to compile a record that would 
compellingly decide why competition is bad.
    Fundamentally, I believe that it would be very difficult to 
compile such a record, but if they make it, that is fine with 
me.
    Mr. Stearns. And FERC would have the environment?
    Ms. Moler. No, I would have a very simple certification to 
the Commission that we have looked at this, and we have decided 
that we do not want to do it, and then, any challenge to the 
State's determination would be done under State law.
    Mr. Stearns. Okay; Ms. Stuntz?
    Ms. Stuntz. Thank you, Mr. Stearns.
    I believe it is not a critical element of legislation, 
first, because nearly half the country is already in a State 
that has adopted choice, so we are already, depending on your 
statistics, 45 or 50 percent of the country is there; that does 
not include Texas or Ohio, which I know are looking hard at 
this. So I believe that number will go up before the end of the 
year.
    Second, of the States where nothing or less is happening, I 
believe many of those are low-cost States who legitimately view 
this as not necessarily in their interest to do, and I think it 
is hard for us to say from the Federal level that they are 
wrong and they should be preempted.
    And I guess third is I think if this market expands, and I 
think we are seeing signs of this already, brings to consumers 
the benefits that I expect that this is going to happen on its 
own, so that--and you see signs of that in the paper if you 
read about what is going on in Maryland or Virginia. They talk 
about, well, Pennsylvania has done this, and we need to get 
with this, because we might lose economic development 
opportunities.
    And, I guess, finally, as I said, I do believe it will be 
the poison pill in your legislative effort.
    Mr. Stearns. Okay.
    Ms. Stuntz. And I think the perfect will be the enemy of 
the good.
    Mr. Stearns. Do you think if you had two States that did 
not want to comply with a date certain that you could develop 
reciprocity incentives between them? What you are indicating, 
like in the State of Maryland, it is going to change because of 
survival, because the economics----
    Ms. Stuntz. Right.
    Mr. Stearns. [continuing] is going to other States.
    Okay; Charles Stalon?
    Mr. Stalon. I would draw a distinction between the role of 
very large players, large users, and creating efficient markets 
and very small users, and I would not insist that the States 
have a date certain for allowing smaller users to enter the 
competitive market. I would let them have substantial freedom, 
perhaps complete freedom, to make that decision.
    But large users are quite different. It is very difficult, 
almost impossible, to create an efficient competitive market 
unless you have sensitivity to prices among the buyers. As long 
as the buyers and the distribution companies who are required 
to sell to the users at an average price, the only demand curve 
they can bid into the market is a perfectly vertical one, which 
creates the terrible problem of price spikes. So I would 
mandate a date certain for large users, so we could get their 
buying skills into this market as a constraint on price spikes 
and as an intensifying pressure in a competitive market.
    Mr. Stearns. Mike Naeve?
    Mr. Naeve. Thank you.
    First, let me state that I believe in retail choice. I 
think it is good public policy. I have watched as Congress has 
attempted to build a consensus on retail choice. The concern 
that I have is that the longer it takes to build this 
consensus, the more difficult it becomes to enact legislation. 
While we are waiting to enact retail choice legislation, each 
State or a great many States are adopting their own programs. I 
believe those programs should be grandfathered.
    But as you build those programs, the complexity of the 
legislative process becomes more difficult, both because you 
tend to lose support for the process but also because it 
becomes very difficult to draft a bill that decides what is 
grandfathered; what is not; what are the parameters; which 
programs do you change or do you not change?
    I would also say I have been involved in the State retail 
choice programs in several States, and it is very complicated: 
questions about demand credits; questions about what do you do 
with load pockets; so forth. It is a more complicated issue 
than I previously thought. So I would say retail choice is a 
good thing, but my primary concern is waiting for a consensus 
for retail choice has caused us to lose the opportunity to do a 
great many other good things, and if we were to do those other 
good things, I think the forces of competition inevitably would 
cause retail choice to be a consensus in this country.
    Mr. Stearns. I thank the witnesses, and now, questioning 
from the ranking member, the gentleman from Texas, Mr. Hall.
    Mr. Hall. I thank you, and I guess, Ms. Moler, you have 
been a real leader on thinking through competition, and we are 
very happy to have you here today, as we were happy to have you 
in Texas when you were the----
    Ms. Moler. Thank you, sir.
    Mr. Hall. [continuing] speaker there for us.
    If I understand your testimony, on the one hand, it seems 
you seem to say on page 4 of your testimony that there are 
problems with some State plans, but since munis are not 
included, you also seem to call for a hard mandate requiring 
States to adopt retail competition by 2001, and I do not know 
which one of those to pursue, but I have read later where you 
seem to soften your testimony by saying opt out is a good idea 
and that you would grandfather existing retail competition 
laws.
    I do not really want to put you on too much of a spot, but 
I guess my question is whether or not you favor a real hard 
mandate or an opt out, and do you favor a clean grandfather for 
the State action or something else, and if it is something 
else, what would that be?
    Ms. Moler. I would favor a mandate, but I do not think it 
could fairly be called a hard mandate. I would grandfather 
generically those States that have acted. I would not try and 
figure out whether the fact that the California Legislature 
included some water projects in its legislation somehow made 
that an unworthy program. I would simply grandfather actions by 
States that have enacted customer choice, and I would, as I 
have said earlier, respect a determination made on the record 
by an appropriate State regulatory authority, presumably the 
PUC, that customer choice is detrimental to the citizens in 
that State.
    Mr. Hall. You would require that to be proved by the 
States?
    Ms. Moler. Pardon, sir?
    Mr. Hall. Was that the part where you were talking about 
competition and your proposal to have the States carry the 
burden of establishing, on the record----
    Ms. Moler. Yes, sir.
    Mr. Hall. [continuing] that competition would be harmful.
    I guess my problem with that is would that--and I ask you 
as an attorney--would that lead to a final decision that would 
make it appealable?
    Ms. Moler. Yes, it would; they would certify that to the 
FERC. I do not think it is necessary to have it appealable at 
the Federal level. I would just leave the normal State 
machinery in place for appealing State regulatory decisions.
    Mr. Hall. There would have to be a final decision by 
someone, somewhere, sometime, though, that would be appealable 
by the court, and would that not lead to the courthouse? And 
that is where something like that is going to wind up.
    Ms. Moler. We are headed there in many respects in this 
business. The restructuring statutes have been appealed even 
without a mandate in a number of States. So that is not a new 
problem.
    I also think that establishing a mandate for customer 
choice and then having the States take some sort of voluntary 
action is consistent with the Constitutional questions that 
have arisen under the Prinz v. United States, the Brady Bill 
Supreme Court decision.
    Mr. Hall. Linda, do you have any comments on that? I think 
you--go ahead. I am not trying to tell you what to say, but I 
would like to hear it.
    Ms. Stuntz. Well, thank you, Mr. Hall. I actually agree 
with Mr. Naeve. I support retail choice, but for the reasons I 
said and I think he articulated very well, I do not believe any 
mandate, frankly----
    Mr. Stearns. Could you move your microphone just a little 
closer?
    Ms. Stuntz. I do not believe any mandate is essential--a 
date certain--is an essential component of necessary Federal 
legislation.
    Mr. Hall. What are the complicating factors in a date 
certain?
    Ms. Stuntz. I do not think it is necessary, although I, 
too, think retail choice is the right policy, and I think it is 
going to happen; I think it is happening, and it will happen 
more quickly if we get rid of some of the Federal barriers.
    Mr. Hall. Mr. Stalon?
    Mr. Stalon. I guess I agree with what Linda has said. I 
think it will happen, and I am very much in favor of it 
happening. I would like to see all consumers with a choice. But 
I am most impressed with a need to get the large ones in to 
make the markets work well. Once the markets are working and 
working fairly well at the wholesale level, it is much easier 
to persuade legislators to have choice at the retail level for 
smaller customers.
    Mr. Hall. My time is up, Mike. I will get back to you in a 
little bit.
    Mr. Stearns. I am pleased to recognize the chairman of the 
committee, Mr. Bliley.
    Chairman Bliley. Thank you, Mr. Chairman.
    For all of you, everyone seems to believe that retail 
competition is inevitable. Why? Is it because competition is 
better for consumers than regulation or what? We will go from 
the left to the right.
    Mr. Naeve. I think that is the basic answer. I think 
competition--there are many aspects of this industry, perhaps, 
that cannot be made competitive, but there are aspects that can 
be: the marketing of power; the ownership of generation; the 
construction of generation. These are parts of the industry 
that can be made competitive. And a part of those components 
becoming competitive is giving customers the choice to decide 
who they are going to buy from. So I think it is a part of the 
competitive landscape if we believe that competition is better 
than regulation; in those parts of the industry where we can 
introduce competition, then, this is a part of the landscape.
    Chairman Bliley. Does anybody disagree with that?
    Well, good.
    There are many States that would prefer Congress to do 
nothing with respect to retail choice and kind of let the 
market evolve. Can retail markets evolve without some Federal 
or State action? Are there barriers to national retail 
competition?
    Ms. Moler. I think all four of us have testified to the 
fact that there are significant impediments in existing law to 
retail competition, yes.
    Chairman Bliley. So we will have to have Federal 
legislation at some point in time.
    Ms. Moler. The State legislature in the Commonwealth of 
Virginia, to my knowledge, cannot amend the Federal Power Act, 
PUHCA, et cetera.
    Chairman Bliley. No; Dominion Resources would like it very 
much if they could. But unfortunately, they cannot.
    Does wholesale competition provide consumers with the 
lowest prices, the best service and the greatest degree of 
innovation, or do we need to move to retail competition?
    Mr. Stalon. I would insist we must move to retail 
competition and fairly quickly for all of the large users in 
order to make wholesale competition work and work efficiently. 
If buyers cannot respond when prices change, and they are 
continually required to buy at regulated rates which are 
averages over some period of time, the buyer for them, the 
utility, is required to submit a perfectly inelastic demand 
curve.
    Look at the recent studies in California where the demand 
curve is perfectly vertical as submitted by the distribution 
utilities. It is very difficult to have an efficient market 
with a perfectly vertical demand curve.
    Chairman Bliley. Well, but there is a corresponding 
argument. If you have the big users and are able to bargain and 
to get better prices, what about the other side of that coin 
which says, well, if that happens, then, the little guys are 
going to have their rates increased to make up the slack?
    Mr. Stalon. No, I do not think that is true at all. In a 
competitive market, if you take a cut on one side, you cannot 
arbitrarily charge someone else unless you have monopoly power. 
If we take away the monopoly power of the generators, I am not 
concerned about that.
    Chairman Bliley. Does anybody take exception to what he 
said?
    Mr. Naeve. No, I do not take exception. I will point out 
that in a tightly regulated market, there are a lot of built-in 
cross subsidies. As markets become competitive, many of those 
cross subsidies may evaporate, so you can see cost shifts from 
one customer class to another. It is not necessarily a result 
of competition; it is a result of getting rid of cross 
subsidies.
    I will also add that I do not think there is disagreement 
among us as to whether retail competition is the right policy. 
Nor do I think there is disagreement among us as to whether or 
not you need legislative changes. I think the only disagreement 
is which legislative changes are needed to get us there, and 
how can we get there the quickest? And some of us think there 
should be a Federal mandate; some of us think there should not 
be; and I must admit I am a little in between. I think we 
should do what we can first; unleash competition. I think the 
mere force of that competition will drive us toward retail 
competition, and if, in the long run, we do not get there, 
then, I think we should consider a Federal mandate, but I think 
once you unleash competition, it forces the industry to change.
    In fact, that is already happening now. There are 
tremendous changes in this industry because of the changes that 
were enacted by this Congress a decade ago, a little bit less 
than a decade ago. And I think if we could do some of these 
other things now, we are going to see a continued movement, a 
momentum toward greater and greater competition, and that will 
drive the industry and the States to retail competition very 
quickly. It is already happening. If it does not, we need to 
look at mandates.
    Chairman Bliley. Thank you; I see my time has expired, Mr. 
Chairman.
    Mr. Stearns. I thank the gentleman.
    The Chair recognizes the gentleman from New Jersey, Mr. 
Pallone.
    Mr. Pallone. Thank you, Mr. Chairman.
    I wanted to ask Ms. Moler and also Ms. Stuntz a couple of 
questions. I know that in the next panel, we have two witnesses 
who are going to say that they oppose a Federal mandate to 
deregulate their States' retail electricity industry, and we 
have, I guess, 23 States who have stated their concern that 
retail competition will result in higher costs for their 
consumers. You have kind of gotten into this a little bit, but 
I wanted to, if you would, tell us why you think, if you do, 
you know, why should we force these States to deregulate if 
they do not think it is a good idea, and are there compelling 
price or transmission or delivery problems in these States that 
warrant intervention by the Federal Government?
    I know, Ms. Moler, you kind of touched on that a little 
bit, but I wanted you, if you could, both of you, to respond a 
little more fully.
    Ms. Moler. Many of the States have initiated some kind of 
regulatory proceeding. In many cases, those regulatory 
proceedings are just sort of meandering and have not come to a 
conclusion that retail competition is contrary to the interests 
of their consumers. In many instances, it is not likely that 
those regulatory proceedings will ever get to a final 
conclusion, so that those who are interested in customer choice 
really do not have anywhere to go. They are stymied.
    So I believe that if States do not want to have 
competition, I would respect that as a determination by the 
State regulatory authorities, but I would make them put that on 
the record. I believe, furthermore, that having to go through 
such a proceeding and make those kinds of determinations will 
force very significant changes in the industry in those States 
that are now just stymied. There is no other major market in 
this country where consumers cannot choose from whom they want 
to buy, whether it is bananas or automobiles, and there is no 
compelling technological or engineering reason in this day and 
age why consumers need to be protected and prohibited from 
exercising their choice of from whom they buy electricity.
    Mr. Pallone. So the lack of clarity about what the States 
are doing in itself is sort of a negative in your opinion?
    Ms. Moler. Yes, sir.
    Mr. Pallone. Okay; would you like to respond, Ms. Stuntz?
    Ms. Stuntz. Thank you, Mr. Pallone.
    I do see it a little differently. I believe most States are 
looking at this, and I think they are looking at this 
seriously, and I guess I do not, at this point, see the need to 
preempt a State decision that it may not be in the interests of 
that State at this time to move forward. Some States--I know 
New Jersey just enacted legislation this year; Ohio; I know one 
of the issues out there, and it is not unique, has been a 
question of taxes. Many of--much of Ohio's school funding came 
from taxes that were levied on utility sales, and they 
suddenly, if you are going to put this into a competitive 
environment, you can no longer tax utility property at a hugely 
different rate, which meant you had to make up for those 
revenues, and it has been a big problem that is going to take 
some time to work through. I hope they will work it through; I 
hope they will pass a law this year, but I think it is just an 
illustration of the difficulty, I think, for the Federal 
Government to say now is the time; here is the date; have it 
done by then.
    And every State plan is different in some respects, and I 
think, to echo what Mr. Naeve said, I really think if we get 
some of the barriers out of the way; for example, clarify that 
the States can do this so that they cannot be taken to court on 
an issue of Federal Power Act preemption if they choose to move 
ahead. I think that would be a very helpful thing for us to do 
to let the States move forward who want to move forward.
    Mr. Pallone. Well, let me--in your testimony, Ms. Stuntz, 
you stated that--you said this committee need not tackle now 
those issues as to which consensus is remote, the issues are 
not yet ripe, or the issues are only loosely related to 
restructuring. What kind of issues would you put into that 
category? And, you know, why do they fall into those 
categories?
    Ms. Stuntz. Well, I would certainly say date certain is one 
of those in which I do not think a consensus can be forged 
soon, and there are others. I personally do not think Congress 
knows enough yet or anyone knows enough yet to say Congress 
should authorize FERC to order people into transmission 
organizations of a particular type. I am not sure that there is 
consensus on a renewal portfolio standard. I think there are 
efforts underway that may result in that. I think there is some 
good work that potentially needs to be done: things like fuel 
diversity for our generation mix is an important policy issue, 
but I am not sure we have consensus yet on exactly what the 
mechanism should look like; how it should be funded. The States 
are doing it different ways, and those are some examples of 
issues that I think may be too hard to deal with right now.
    Mr. Pallone. Okay; thank you.
    Thank you, Mr. Chairman.
    Mr. Stearns. I thank the gentleman.
    The Chair is pleased to recognize the gentleman from 
Georgia, Mr. Norwood.
    Mr. Norwood. Thank you very much, Mr. Chairman.
    I would like to again associate my remarks at the beginning 
with Ms. Stuntz and Ms. Moler. My views today are my own.
    But the difference is for both of you that I admit freely 
that I am influenced greatly in my views by my clients, all 
650,000 of them in the Tenth District of Georgia.
    Now, I am going to ask you some questions that I am going 
to ask as kindly and gently as I can, and I would like the 
record to reflect that I am smiling, not frowning. I do not 
intend to impugn your motives or your character, and I am going 
to ask these same questions to every panel that comes before us 
in this great debate.
    Now, I would like for each of you for the record, really so 
that the committee can better understand your testimony, state 
for me whether you are receiving compensation by a client or a 
coalition of clients to lobby Congress on electricity 
restructuring. Either end.
    Ms. Moler. Mr. Norwood, I am a registered lobbyist for the 
Enron Corporation. I serve as counsel to the----
    Mr. Norwood. For which corporation?
    Ms. Moler. Enron.
    Mr. Norwood. Enron.
    Ms. Moler. Enron Corporation, a Texas corporation.
    Mr. Norwood. Okay.
    Ms. Moler. I----
    Mr. Norwood. I am glad the chairman is not here. Go ahead.
    Ms. Moler. [continuing] serve as counsel to a group known 
as Americans for Affordable Electricity. However, and I also do 
work for an alliance of companies who are interested in forming 
a regional transmission organization. And it is early in my 
practice, and I hope to have more clients one of these days.
    Mr. Norwood. And I hope you do, too, Betsy, and I hope you 
do not take this question personally.
    Ms. Moler. I do not take it personally.
    Mr. Norwood. Thank you.
    Ms. Moler. I understand the public interest behind the 
client.
    Those clients have not paid me for the time, nor will I ask 
them to do so, for the time I have spent during this testimony.
    Mr. Norwood. I understand that.
    Linda?
    Ms. Moler. And indeed they probably disagree with some of 
the things I have said.
    Ms. Stuntz. Mr. Norwood, I am counsel to a group called the 
PURPA Reform Group, which has advocated the prospective repeal, 
cost recovery of the Public Utility Regulatory Policies Act. I 
am a registered lobbyist for Southern California Edison 
Company, and I am on the board of American Electric Power 
Company.
    Mr. Stalon. I am not being paid by anyone to participate in 
this hearing. I am a member of the Board of Directors of ISO 
New England; I am a member of the California Market Monitoring 
Committee, and I have many other interests in the utility 
industry and clients in the past from the utility industry. 
Given my age, I have been withdrawing from the consulting 
business, and so, currently, I only have one, and that one is 
not in the United States.
    Mr. Norwood. The implication in the question is not about 
this hearing. I know none of you are being paid to come here; 
you are doing it because you are good Americans. But what I am 
after is if you are actually lobbying during this debate over 
the next 4 or 5 months.
    Yes, sir?
    Mr. Naeve. I am not being paid to lobby Congress on these 
issues. I represent a great many companies that have positions 
on these issues, because I am involved in a lot of transactions 
in this industry. They are largely mergers, asset divestitures, 
that sort of stuff, and I am sure my clients in those 
transactions have views on all of these issues. I also am quite 
confident that, given the breadth of that client base, that 
they have very diverse views.
    Mr. Norwood. I appreciate your answer, and I presume you do 
not represent or lobby any coalition.
    Mr. Naeve. I do not.
    Mr. Norwood. Okay.
    Mr. Naeve. And I attached to my testimony a list of the 
transactions I am currently in and the parties in those 
transactions, but I have not consulted with them on their views 
and----
    Mr. Norwood. Now, here is the second question, which is the 
zinger. Now, this is not personal, but I need an answer. If you 
are lobbying a coalition of clients, will you identify for this 
committee the major sources of funding for your coalition? Who, 
in fact, are the biggest financial participants? And last, if 
you lobby for a coalition, does your coalition favor a Federal 
solution or a continued State experimentation?
    Ms. Moler. Mr. Norwood, as I said previously, I am 
registered as a lobbyist for the Enron Corporation. They are 
the largest supporter of the Americans For Affordable 
Electricity. That group, however, does have many, many active 
corporations and public interest groups that are in favor of a 
Federal solution to this issue.
    Mr. Norwood. Enron is in favor of a Federal solution.
    Ms. Moler. Yes, sir.
    Mr. Norwood. Well, I guess all Americans need to be a 
member of the Affordable Electricity. We all want to be part of 
that.
    Ms. Moler. We welcome your membership.
    Mr. Norwood. I mean, everybody wants cheaper electricity, 
do we not?
    Linda, could you explain for us?
    Ms. Stuntz. Yes, sir, and this is filed in our lobbying 
registration form. The PURPA Reform Group does advocate a 
Federal solution, because only the Congress can reform PURPA. 
It is about 12 members at the moment, including a number of 
investor-owned utilities and Edison Electric Institute, ranging 
from Florida Power Corporation, Central Maine, GPU, Duke, 
SEMPRA Energy. I am going to get in trouble if I forget one of 
them now but----
    Mr. Norwood. No, you will not with me. The idea is that you 
went to work for the right people, because your views happen to 
work very well with theirs on having a Federal solution. That 
is the way you ought to do it.
    Ms. Stuntz. I have always been in favor of reducing the 
U.S. Code; thank you.
    Mr. Norwood. Mr. Stalon, do you have any comment at this 
point?
    Mr. Stalon. No, I do not.
    Mr. Norwood. Mr. Chairman, I am going to ask this question 
every time, and here is the problem: in an industry that moves 
around $250 billion a year, which is a lot of money, it attends 
to attract a lot of lobbyists when Congress starts to interfere 
in their business, understandably so. And I would suggest 
perhaps our committee ought to, if they can find anybody, an 
expert in this area to testify before us at each hearing that 
is not a lobbyist.
    Mr. Stearns. I thank the gentleman from Georgia.
    A couple of things I might comment. First of all, all the 
background and their lobbying interests are already disclosed 
in their resumes, which are part of the packages that each of 
us have. The second thing is, for example, some of these folks, 
including the Honorable Moler, Elizabeth Moler, actually wrote 
the Clinton Administration's bill. If she was working for EEI 
or a co-op or a municipal, no matter where, we would have her, 
because experts do not necessarily live on a mountaintop. You 
are going to have to go to industry and say, by golly, what do 
you know and give us your opinion.
    And so, my point would be is that we are going to find with 
these individuals that their expertise was developed somewhere 
and somehow. But I appreciate what the gentleman is referring 
to, but I would point out that the staff has assured me that 
all of these people were selected on the basis of their 
knowledge, and any questions you have, you certainly can look 
in their resumes.
    Mr. Norwood. Mr. Chairman, I was not impugning anybody, 
their character. I knew they were based on their knowledge. But 
surely, in this large country, there are enough people with 
knowledge that we can have come before us that are not 
lobbyists, and I would ask for unanimous consent that my 
question and the answers be placed in the written record just 
prior to the testimony.
    Mr. Stearns. Agreed.
    Mr. Norwood. I yield back the----
    Ms. Moler. Mr. Norwood, I would also point out that I am a 
retiree, so I am here on behalf of Federal retirees.
    Mr. Stearns. There you go.
    All right; the Chair is pleased to recognize the gentleman 
from Ohio, Mr. Sawyer.
    Mr. Sawyer. Thank you, Mr. Chairman. I have really enjoyed 
the testimony this morning, and I have particularly been 
gratified by the focus that every one of the witnesses has 
brought to the largely unresolved and, in some cases, 
unaddressed questions of how we deal with the infrastructure of 
transmission in this country.
    Let me just ask you a basic question. Is it your belief 
that all infrastructure, whether currently owned by an IOU or a 
public power entity or a co-op be treated in essentially the 
same way in terms of FERC's authority to regulate?
    Ms. Moler. I would treat all transmission----
    Mr. Sawyer. I am speaking specifically of transmission.
    Ms. Moler. Transmission infrastructure the same and put it 
under the same Federal Power Act amended, obviously, set of 
rules and also the same reliability rules, which is vitally 
important.
    Mr. Sawyer. Ms. Stuntz?
    Ms. Stuntz. I would agree with that.
    Mr. Sawyer. Everybody?
    Mr. Naeve. I endorse that.
    Mr. Stalon. I endorse that as well.
    Mr. Sawyer. There are some who have suggested that FERC 
ought to have the authority to order generating entities to 
join a particular regional transmission organization. Do you 
subscribe to that? And if you do, how will FERC know which is 
best for any individual generating portfolio on a case-by-case 
basis?
    Ms. Moler. My testimony focuses on this issue. I do not 
think of it in terms of generating entities; I think of it in 
terms of transmission entities, and I would give the Commission 
authority to order those who are not currently a member--
integrated transmission companies, because that is where the 
vertical integration raises the market power questions, but I 
would have them be able to order those who are transmission 
entities are part of integrated companies----
    Mr. Sawyer. Right.
    Ms. Moler. [continuing] to join a regional transmission 
organization of their choice.
    Mr. Sawyer. Of their choice?
    Ms. Moler. Yes, so only those who are not currently 
members----
    Mr. Sawyer. But that is the crux of my question.
    Ms. Moler. Right.
    Mr. Sawyer. You are not suggesting that FERC would assign 
them to a particular----
    Ms. Moler. I would not have FERC draw the lines on the map, 
no, sir.
    Ms. Stuntz. I think I agree with that, but I have a little 
concern about, getting back to why we care about RTOs in the 
first place, which is market power. And I guess I would rather 
FERC say these are the rules in order to protect against abuse 
of market power and leave it to the utilities, the transmission 
owners and the generation owners to decide how they are going 
to address that. And I understand that RTOs can include both 
transcos and ISOs, which is important, because I do not think 
we know yet which is the right way to do this, but I am 
thinking also about some small utilities that may own 
transmission, and is there some line that should be drawn at 
some point? Is there a market power issue raised by a small, 
integrated utility that requires a FERC remedy? And I just do 
not know the answers to that.
    Mr. Stalon. I would disagree on this point with Ms. Moler. 
I think the FERC must have the authority to draw lines, to 
define transmission regions and markets, the edges of markets. 
One thing seems to be very clear: we now have approximately 150 
control areas on the North American continent; we probably need 
less than 20. There needs to be a merger, and somebody has to 
draw those lines, and I do not know of any other agency that 
can draw the lines other than the FERC. And so, I would draw 
the lines; define the regional organizations and insist that 
every significant player in those regional organizations be 
integrated by communications and perhaps also operating rules 
and perhaps for other reasons with the control area operator, 
whether it be a transco; whether it be an ISO or a transco that 
is an ISO.
    However we choose to do this, someone has to draw the 
lines, and I do not know of another agency other than the FERC 
that could do so.
    Mr. Sawyer. Mr. Naeve?
    Mr. Naeve. Well, I agree with the other panelists that we 
do need regional transmission organizations. We do not need so 
many as we have now. We need a very small number. I think it is 
more than for just market power reasons. I think it very much 
helps in reducing market power, but I also think it is for 
reliability reasons. I think we get more rational transmission 
investments; we can better plan the grid, and we can better 
operate the grid if done so on a regional basis.
    With respect to legislation, I think we need to encourage, 
and the FERC is encouraging, the formation of regional grids. I 
think they have a lot of power, frankly, they are not using. 
For example, in merger cases, there are pending merger cases 
today where we could force the creation of very large regional 
organizations if they choose to do that.
    So I think they have a great deal of power. I also, as I 
mentioned in my prepared remarks, think one of the most 
important things we can do to facilitate the creation of RTOs 
is to get the Federal agencies in it. In the Pacific Northwest, 
Bonneville is a giant. They dominate the system. There have 
been attempts to create RTOs out there, and the difficulty of 
integrating Bonneville into that RTO has been a huge problem.
    Likewise, TVA sits right in the middle of the southeastern 
United States with tremendous transmission assets. It is a 
pathway between markets, and if with Federal legislation 
requiring TVA to participate in RTOs, that would greatly 
facilitate the formation of large regional RTOs.
    Mr. Sawyer. Mr. Chairman, I appreciate your flexibility on 
those answers.
    Is it possible that we might have a second round with this 
panel?
    Mr. Stearns. If members would like it, we will have a 
second round.
    Mr. Sawyer. Thank you.
    Mr. Stearns. I thank the gentleman. I just wanted to 
clarify that what Mr. Norwood indicated in his request, I want 
to interpret his request that his oral statement will appear in 
the record in accordance with the point or at the point in the 
record where he said it.
    At this point, we will recognize a gentleman from 
Tennessee, Mr. Bryant.
    Mr. Bryant. Thank you, Mr. Chairman.
    I would like to ask the panel about a concern I have that 
would it be possible that low-cost providers may raise their 
rates in a competitive environment? And also, I guess, do you 
believe in a competitive world, electricity suppliers will have 
that ability, will truly have the ability to sell to some 
customers at prices higher than the market? Anybody want to 
jump in?
    Mr. Naeve. In a competitive world, there will be a market 
price, and that market price may fluctuate from hour to hour, 
day to day, season to season. And there will be times when low 
cost providers who today are regulated at a price that is very 
low will be able to sell their power at prices higher than they 
receive today. At other hours, they will sell their electricity 
at prices lower than what they receive today. On average, I 
believe prices will be lower than they are today, because 
competition is a better regulator than regulation.
    And there is also, I think, a misunderstanding that if we 
have competition, what we will have is an averaging of pricing 
throughout regions or an averaging of pricing throughout the 
United States. If that is all we do, it is not worth doing. I 
think what we will have is a lowering of prices, because 
competition will drive prices down.
    Mr. Bryant. Let me ask you another question. You spoke 
about--you felt that Federal regulation ought to require TVA to 
participate in the RTOs. What impact will that have on TVA and 
its consumers?
    Mr. Stalon. I draw a distinction between the retail 
activities and the wholesale activities. Integrating the 
transmission system of TVA and Bonneville into the North 
American network and subjecting it to FERC regulation would 
permit more efficient trades, but nothing changes at the 
distribution level unless you approve it. The Bonneville 
structure would still benefit the Bonneville area to the extent 
that it does today. We are not, to my knowledge, discussing the 
changing of the distribution sector of the industry. It will be 
subject to the same regulation that it is today.
    Mr. Bryant. Mr. Naeve, do you have any additional comment?
    Mr. Naeve. I would agree with that. Today, there are 
prohibitions against selling power to certain TVA distribution 
customers. You can integrate TVA into an RTO and not upset 
those prohibitions. Now, I would say down the road, perhaps you 
should do away with those prohibitions as well. That may cause 
TVA to incur stranded costs, just like we might impose stranded 
costs on any other utility, but that is the price of 
competition, and we should find ways to deal with that.
    And I do think it is good policy to permit recovery of 
stranded costs. In this case, TVA, the stranded costs may 
belong to the Government.
    Mr. Bryant. Let me ask, again, whoever wants to answer 
this. We seem to all agree that something is going to happen 
either at the Federal level or the State level and that retail 
competition is inevitable. This being the case, would one of 
you like to describe some of the things that companies are 
doing to prepare for this competition and also describe, 
perhaps, some of the products or services that you believe 
might be available in a competitive marketplace that are not 
available today?
    Ms. Moler. I think that companies that are facing 
competition, and I do serve on the Board of Directors of the 
Unicom Corporation, though I am not retained by them to lobby 
in any way, shape or form, have looked at their assets. They 
are selling assets at the present time that are not performing 
as well as they would like. They are working very hard to take 
the assets, such as Unicom's nuclear fleet, and have them 
perform much more efficiently and have made significant 
progress there. They are also investigating a wide variety of 
non-regulated business opportunities, and just one of the 
things that needs to happen with the repeal of the Public 
Utility Holding Company Act, for example, is to free up 
corporate structures so that they can invest in new lines of 
business and have the kind of creative opportunities that are 
now precluded from entering into if they are PUHCA-registered 
utilities.
    There are just any number of efficiency opportunities and 
new kinds of businesses that they are anxious to get into.
    Ms. Stuntz. Yes; I would just add that as Mr. Naeve 
mentioned, there are some more than 50,000 megawatts of 
formerly utility-owned generation that is being divested. 
Utilities are saying people who invest in my company are 
looking for a stable rate of return; a regulated rate of 
return. The generation business is not going to provide that 
anymore, right, because it is competitive, and I do not think I 
want to be in that business, so I am going to get rid of those 
assets; I am going to focus on my wires business. I mean, that 
has been one, I think, emerging strategy.
    Others are looking at diversification. They are looking 
into energy services, and I think consumers are going to get 
tremendous benefits from people now looking to offer them 
bundled packages of, you know, we are not going to be electric 
or gas; we are going to be lighting or heating or cooling and 
put it together in a way, or maybe it is going to be onsite, a 
lot of people, you know, whether it is fuel cells or 
distributed generation, more control over your energy future.
    You may not have time to monitor or run home because it is 
a peak price at 12 in the day, and you might want to throttle 
down your refrigerator or your air conditioning, but people 
will do that for you, and it is already happening, certainly at 
the commercial level, where you can see chains like McDonald's 
and department stores now coming together in one building and 
one provider for their units all across the country.
    It is just beginning to unfold, but it is very exciting, 
and I think it is going to continue to accelerate.
    Mr. Stearns. I thank the gentleman.
    The Chair is pleased to recognize the gentleman from 
Oklahoma, Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman.
    I would just say that I guess I have a little different 
view than my friend from Georgia about our witnesses today. I, 
frankly, admire people who have enough knowledge that they can 
market it and make a living as well.
    Ms. Moler, I wanted to ask you a question about what I 
referred to as kind of a rogue study that was conducted by the 
USDA, kind of released prematurely, that reflected that some 
States would not benefit from competition. Do you have any 
comments about that?
    Ms. Moler. Like you, I was quite curious about the USDA 
study. I got a copy of it from a reporter. They are a wonderful 
source of information and misinformation as well.
    I have personally read the USDA study that purports to show 
that there will be significant increases in costs from retail 
competition in a number of States. While I was in my prior life 
at the Department of Energy, we did what was then the most 
comprehensive analysis of what would happen in a competition 
scenario. It was released as the supporting analysis for the 
Comprehensive Electricity Competition Act. It was a region-by-
region study of the benefit of competition, and it showed that 
in every region of the country, all classes of consumers would 
benefit from competition.
    I believe that there is considerable controversy within the 
administration over the USDA study, and I am very much looking 
forward to the really expert analysts at the Department of 
Energy, and there are some terrific people there, who are 
committed to doing unbiased analyses, coming to grips with the 
assumptions in the USDA study.
    It seems to imply that you are going to deregulate 
distribution, for example. I know of no one who is seriously 
talking about that. So I do not worry about what happens from 
deregulating distribution, and I do not think that is a valid 
assumption.
    Mr. Largent. Ms. Stuntz, let me ask you a question. Can you 
just tell us, for the record, who the largest generator of 
electricity in this country is, what single entity is the 
largest single generator of electricity?
    Ms. Stuntz. You know, I should know that. I believe it is 
the Southern Company but----
    Mr. Largent. Actually, I think it is the Tennessee Valley 
Authority.
    Ms. Stuntz. Probably.
    Mr. Largent. It is the largest generator of electricity.
    Ms. Stuntz. I believe you.
    Mr. Largent. So, in light of that, if you do not have a 
date certain, how do you deal with TVA and Bonneville in 
particular and States that they serve?
    Ms. Stuntz. I see them somewhat different questions, Mr. 
Largent. I think you do have to deal with TVA and Bonneville. 
You have to deal with their transmission systems; you have to 
deal with wholesale competition, getting them firmly engaged in 
that, which they are not yet, and ultimately, I think you will 
have to deal with retail competition, and I think that is going 
to be hard to do. I am sure you are aware that TVA has a debt 
in the neighborhood of $27 or $28 billion. That is the reality 
you have to deal with.
    The BPA is facing a whole lot of issues. I think they are 
close to deciding that they are going to separate generation 
from transmission, which I think would be a good thing. I think 
it would make it easier for their transmission to be put into 
an RTO or to become part of the national grid. I do not believe 
TVA is close yet, and I think it is very important for the very 
reason you say: their size, their location, that they cannot be 
left outside.
    But I am not sure that we are close enough yet to be able 
to work through those issues, to say that needs to be done 
right now, because I think it will further delay legislation 
and prevent some good things that could be done in the near 
term from being done.
    Mr. Largent. Ms. Moler, I wanted to ask you about--in your 
testimony, you talk about market oriented approach to renewable 
power. Would you say that the administration's proposal that 
was submitted last year is a market-oriented proposal to 
renewable power?
    Ms. Moler. Yes, I believe it is a market-oriented.
    Mr. Largent. It is not a mandate?
    Ms. Moler. It is both, and I believe it is possible to have 
both.
    Mr. Largent. A market-oriented mandate?
    Ms. Moler. Yes, sir.
    Mr. Largent. Okay; could you explain that? That is unique.
    Ms. Moler. It is market-oriented in the sense that it would 
require any entity that sells power to have, eventually, 5.5 
percent of its portfolio from renewables. However, and that is 
the mandate part. The market part is that if that entity does 
not own those particular generating sources, it could buy 
credits, renewable credits, on the market just as we do now 
with Clean Air Act SO2 credits.
    So, it has a trading scheme in it. In that sense, it does 
not say that you, ABC Utility, have to have 5 percent or 4 
percent or 3 percent of your power from renewable. You could 
trade for your credit.
    Mr. Largent. Okay; Mr. Chairman, if I could just have one 
additional minute----
    Mr. Stearns. Without objection.
    Mr. Largent. [continuing] The question I wanted to ask you, 
it seems to me that I recall that there was some aspect of the 
proposal from the administration that actually took some of the 
savings from moving to a retail market and spent that--I mean, 
that savings came to the Federal Government in some capacity. 
Do you know what I am talking about?
    Ms. Moler. The administration believes that the Federal 
Government would be a huge beneficiary from retail 
competition----
    Mr. Largent. As a consumer; I understand that.
    Ms. Moler. [continuing] as a consumer, but there was not 
any transfer payment of the sort you are describing.
    Mr. Largent. And one last question, was the renewable 
portfolio, was that sunset in----
    Ms. Moler. It had a date certain 5.5 percent by the year 
2010. It also, if the price of the credits reached a certain 
level, it would have said okay, that is enough. So it had a 
cap.
    I would also, if I may, mention the administration is 
developing a proposal on both Bonneville and TVA. We had an 
advisory committee that looked at considerable length at the 
TVA while it was in the administration. They came up with a 
proposal for restructuring TVA. I believe, though I have not 
talked to them, the administration is refining that proposal, 
and it will include provisions, instead of the placeholders, 
with respect to Bonneville, that were in last year's 
legislation. There will hopefully be a more refined proposal 
that should give you a good starting point for integrating 
Bonneville and TVA.
    Mr. Largent. Mr. Chairman, thank you, and if we have a 
second round, I have some other questions. But I would like to 
say thank you to all of our panelists and particularly Ms. 
Moler, because I think she has really added a lot of impetus in 
keeping us moving forward by, you know, putting together the 
administration's proposal.
    Ms. Moler. Thank you.
    Mr. Stearns. The Chair intends to let every member present 
ask the first round. Then, we are going to give the panel a 
personal convenience break.
    And then, we are going to do a second round at Mr. Sawyer's 
request. So, we have got Mr. Pickering, Mr. Shimkus, Mr. Burr 
and Mr. Whitfield. Then, we are going to take a little break. 
And then, we will come back for one round of second questions. 
Then, we will go to the second panel.
    Mr. Pickering for 5 minutes.
    Mr. Pickering. Thank you, Mr. Chairman.
    I have two directions or two questions that I would like to 
ask. One is a followup on the cost shifting concern.
    Ms. Moler, you mentioned that you did a regional analysis 
when you were at the DOE. It must be my sense, from what I have 
heard on the Department of Agriculture study, that it was a 
State-by-State analysis. Given the nature of my State, being 
very rural, Mississippi, one of the States mentioned in the 
USDA study, can you see, in some instances, if we go to 
competition, could a rural State like Mississippi, which is now 
a low-cost State, could you see some cost shifting and higher 
costs and that type of situation.
    If you could please respond.
    Ms. Moler. The DOE's economists and other modelers did the 
study. I cannot claim to have any personal expertise in this 
area, although I have read it in detail. It was not a State-by-
State study, though I believe that they are doing the analysis 
now and have a collaborative between the various analysts in 
the Government to look State-by-State.
    I believe that, as I stated earlier, that each State should 
be able to choose its own destiny as far as whether to have 
retail competition is concerned, and if they have real problems 
to determine on the record that competition would be 
detrimental to the citizens. As I have said, I would respect 
that.
    I do not believe, however, that it is likely that 
competition would be bad for consumers. I believe that you can 
deal fairly with the stranded costs and transmission issues and 
come out ahead, with lower costs for all customer classes, 
State-by-State.
    Mr. Pickering. Does the rest of the panel share that view 
that in a State like Mississippi, that it, too, would benefit 
from competition?
    Mr. Naeve. I would have to say in the short run, I have 
done no analysis, so I do not know. In the long run, I tend to 
believe that all customers will benefit. In the short run, I 
cannot say.
    Mr. Stalon. I guess I would add, again, that I have done no 
detailed analysis here, but a reality of a competitive market 
in the short run is that if you have a barrier between the two 
markets, and you remove the barrier, prices will tend to 
equalize, which means that they will go up in a low-price area, 
and they will come down in a high price area. And it was the 
nature of the old utility system that there were quite 
remarkable differences in cost from area to area because of 
accidents of history when things were built.
    And I think it is inappropriate to look in the short term 
here and ask yourself what are the incentives being provided to 
minimize costs over a long term.
    Mr. Pickering. Excuse me; you realize that Congress runs in 
the short-term, every 2 years.
    Mr. Stalon. But we are creating an industry that will, we 
hope, in the future act with a longer-term time horizon than it 
has in the past, and it has a long time horizon even in the 
past.
    I cannot make a flat assertion that there is not somebody 
in the Nation who will lose because of this process, although I 
think the effort has been made to make sure that everybody is a 
winner.
    Mr. Pickering. Let me just say that that is a concern that 
we are going to have to address, each of us in our own 
respective districts. I do believe in the benefits of 
competition. We just want to see if there is a flexible way 
that will minimize any harm while we maximize the benefit.
    Having said that, let me ask a question to see if we can 
reach a consensus among this panel, and let me ask the date-
certain question in a little bit different manner. Previously, 
it was asked who supports a date certain; what kind of date 
certain? Let me ask the pragmatic question that I think Mr. 
Naeve hits at the heart of, and that is if we do not have a 
date certain, whether it is, as Ms. Moler recommends, a State 
opt-out; I believe Mr. Stalon was talking about a mandate, but 
it would apply to the class or the size of the utility.
    Let us remove all date-certain mandates, whether it is by 
State or by size, and if we had a core element of a bill that 
established an organization for reliability; that clarified the 
Federal Power Act concerning retail wheeling; that removed 
barriers such as PUHCA; prospectively removed PURPA; tried to 
look at any other issues such as jurisdictional issues on 
stranded costs, leaving that to the States; if we could not 
reach consensus on a date-certain, would all four panelists 
still support moving forward on that core framework that I just 
outlined?
    Ms. Stuntz. I certainly would.
    Mr. Stalon. I would with one exception, and it is that by 
not having adequate demand elasticity in the market, we may end 
up with some uncomfortable price spikes after we move to 
competitive markets.
    Mr. Pickering. If we did not have a mandate.
    Mr. Stalon. If we did not succeed in attracting or 
compelling all of the large users into that market so that they 
can provide demand elasticity, we could end up with 
uncomfortable price spikes.
    Mr. Naeve. I support making as much progress as soon as you 
can make it, and if that is what we can do now, I would say let 
us do that. And I think if you were to do that, it would 
further increase competition in the market, and that 
competition would drive down prices and would create additional 
pressure to bring about retail competition in the States that 
do not have it.
    Mr. Pickering. Ms. Moler?
    Ms. Moler. I have stated my position on the mandate. I also 
think you need to address market power issues. That was not in 
your list.
    Mr. Pickering. If you add that to the list?
    Ms. Moler. Then, I would not let the perfect be the enemy 
of the good.
    Mr. Pickering. Thank you, Mr. Chairman.
    Mr. Stearns. The next on the list is Mr. Shimkus of 
Illinois, but our senior member, Mr. Bilirakis, may be seeking 
recognition.
    Congressman Bilirakis, do you have another engagement? I am 
sure Mr. Shimkus would yield to you.
    Mr. Bilirakis. No.
    Mr. Stearns. Mr. Shimkus for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman.
    And it was good to see Ms. Moler here again, because as 
this is my second term, and I cut my teeth in the last Congress 
and, of course, being with the administration, I think you help 
educate and move this process along, and I just--a short note. 
I think Mr. Largent's question on cost shifting is something 
that I addressed a lot in the last Congress was I think the 
administration would always see moving the energy dereg as a 
way to mitigate the additional costs of global warming. Now, 
there is nothing ever written down, but I have heard the 
administration state that if we have increased costs under the 
Kyoto Accords, the saving, the mitigation would be energy 
dereg, and I just throw that out; I will not ask for a comment, 
but we had discussed that numerous times.
    There were two things I wanted to address briefly, and I 
hope I can get both of these out. One deals with regional 
pools, and one deals with merchant plants. So I am going to 
talk on the regional pools issue, and Mr. Pickering is here, 
and I think this addresses the price spikes and some of the 
concerns. Of course, being from the Midwest, we had the price 
spikes last year, and during that, the PJM pool, which we all 
know is the Pennsylvania, New Jersey, Maryland pool, there is a 
lot of criticism that that pool did not do its duty to help the 
Midwest, and you all know the argument that they held--they 
thought they were going to have the demand, so they held their 
pool, and it turns out that they did not need it.
    I am interested in your short, concise comments on the 
export rules of the PJM or just, as we move to energy dereg, 
what do we need to do at the Federal level to preclude this 
from happening? Why do we not just go down the line, starting 
with Ms. Moler?
    Ms. Moler. I believe that you need much more transparent 
markets. I believe that you need to have much more clearly 
defined capacity rights in the transmission system. That is why 
I think it is very important to have integrated companies be a 
part of some sort of regional transmission organization so that 
they take service under the regional transmission 
organization's tariff for their bundled load as well as for 
their wholesale load.
    By doing that and getting much more flexible, fungible 
transmission rights and congestion management, which you will 
get as a result of those regional transmission organizations, 
you will have a much more fluid flow of power between pools. 
And you also have to deal with and have the same reliability 
rules of the road apply across the board, so that individual 
companies cannot cheat.
    Mr. Shimkus. Does anyone else have anything to add to this 
question?
    Mr. Stalon. I would differ with one particular point. I do 
not support the extensive development of capacity rights in the 
transmission grid. That grid has traditionally been allocated 
10 minutes at a time or 5 minutes at a time under continuous 
control. It must continue to do that. Assigning firm 
transmission rights that are real rights rather than financial 
rights will greatly expand the need for transmission assets for 
the system to function and function reliably.
    What we need, I think, primarily are bigger control areas. 
As big as PJM is, and it is the largest control area we have, 
it is not big enough. We need to expand it with larger control 
areas. The border problem becomes less troublesome and more 
easy to handle.
    Mr. Shimkus. Anyone else?
    I would like to move to merchant plants if I may. Some 
States require a certificate of need from merchant plants, and 
they make the argument that the rate-payers are at risk, and 
so, they do not approve plants where, in today's environment, 
only the shareholders would be at risk. Do you have any 
comments on what we should do at the Federal level with the 
issue of merchant plants?
    Mr. Naeve. Well, obviously, if you are going to have a 
competitive market, you do not want to create barriers to 
entry, and if some States adopt siting requirements that limit 
entry, of course, in the long run, it is their consumers who 
will pay. I must say, I have not personally come across this as 
a major problem, because I think as we move to a competitive 
market, most States recognize that there is a need to build new 
generation; most welcome new generation. So I have not seen it 
as a problem but----
    Mr. Shimkus. There is a recent case in Florida where the 
incumbent utilities tried to block construction of a Duke 
merchant plant on this very basis, so there is obviously that 
possibility out there.
    Ms. Moler. I would congratulate the regulators in Florida 
who have determined that Duke should be allowed to build that 
plant. In order to have a competitive market, you need 
competitors.
    Mr. Shimkus. Great.
    Mr. Barton. Mr. Burr of North Carolina for 5 minutes.
    Mr. Burr. I would like to welcome all four of you here, 
especially Ms. Moler and Ms. Stuntz, to have you guys back.
    Let me just--Ms. Moler, you make it very clear in your 
testimony that you do not feel that there is a Federalization 
of stranded cost recovery needed; that that is a State issue. 
Let me ask: if there was a date-certain in a piece of 
legislation, do you believe that that changes whether there is 
any Federalization of that stranded cost?
    Ms. Moler. No, sir, I do not.
    Mr. Burr. Ms. Stuntz, how about you? Clearly, you made some 
comments on PURPA that you believe that our actions as it 
related to PURPA make us obligated, then----
    Ms. Stuntz. Right.
    Mr. Burr. [continuing] to participate in the stranded 
costs. Do you believe that a date-certain would move that 
marker one way or the other?
    Ms. Stuntz. I do believe that if the Federal Government is 
going to mandate a date-certain, it takes upon itself more 
responsibility for determining how retail stranded costs are 
going to be dealt with, because they have taken the choice out 
of the States' hands in terms of what the time should be, and, 
I mean, I have heard this argued both ways. It just seems to me 
that if the Federal Government is going to make that choice, it 
does take upon itself more responsibility to do that.
    Now, with respect to PURPA and possibly things like Federal 
nuclear decommissioning funds, I think those are already 
Federalized, and I really think it is the Federal Government's 
obligation to make sure that in the competitive transition, 
those responsibilities are carried forth.
    Mr. Burr. You said in your testimony that repeal of Section 
203 was too big a step. Can you just elaborate on that a little 
bit?
    Ms. Stuntz. Well, I said I agree with you personally, 
because I believe that for consumers who truly enjoy the 
benefits of a competitive market, we cannot continue to have a 
utility industry that looks like it did when we had exclusive 
retail franchises. I think I had a triangle in my testimony 
that talks about the 200 and some investor-owned utilities, 
more than 1,000 co-ops. I mean, this industry has got to 
rationalize; there has to be consolidation; there have to be 
mergers and acquisitions, and I believe under Betsy's 
leadership and subsequent, the FERC has tried to find a way to 
accommodate that necessary consolidation, but I, for one, think 
the process is bogging down; that it is duplicative now of the 
FTC and Justice reviews that should go forward. They have the 
antitrust expertise, and I would basically leave it to them, 
since they regulate this activity in the rest of our economy, 
to let them do this in this area as well. But I suspect we need 
to do more educating on that, and what I tried to set forth was 
a potential half-way measure that would at least, perhaps, 
allow this consolidation to occur when I----
    Mr. Burr. Certainly, my hope to repeal Section 203 is not 
indicative of the past leadership at FERC and the participation 
of commissioners. And one quick followup to that for each of 
you. FERC in the future: bigger, smaller, the same? Those are 
the only three choices.
    Ms. Moler?
    Mr. Stalon. Going to be bigger.
    Mr. Burr. Bigger?
    Mr. Stalon. Yes.
    Mr. Burr. I guess my question, let me say should it be 
bigger, smaller or the same?
    Mr. Stalon. It should be the same.
    Mr. Burr. Ms. Moler?
    Ms. Moler. If you repeal the Public Utility Holding Company 
Act, there are some functions that the Commission will need to 
perform. They are well-recognized in the PUHCA repeal 
legislation. And the Commission's resources are taxed like lots 
of agencies' resources. I give my successor Jim Hoecker, 
Chairman Hoecker, credit for trying to reinvent many of their 
processes, and the thing I worry about most there is burnout of 
the best people.
    Mr. Burr. Bigger, smaller or the same?
    Ms. Moler. I think it depends on how successful the 
reinvention effort is.
    Mr. Burr. Okay.
    Ms. Moler. Most likely--I said bigger with respect to 
PUHCA, though.
    Mr. Burr. Ms. Stuntz?
    Ms. Stuntz. I believe it does not need to get bigger. I 
think it is hard to make it smaller. But remembering that they 
also regulate things like natural gas and hydroelectricity and 
oil pipelines, where I think there are opportunities to make it 
smaller--in electricity, I think we would be doing well to keep 
it the same.
    Mr. Burr. Mr. Naeve?
    Mr. Naeve. It will change. Their mission will change, and I 
must say I, at this stage, cannot tell you whether they will 
need more people or fewer people to carry out that mission, but 
it will be a much different agency than it is today. There will 
be certain functions that they carry out today that they will 
continue to carry out, but they will be relieved of the 
obligation to regulate wholesale markets. They also will be 
given the responsibility, though, to protect competition, to 
make sure that the preconditions are there for competition.
    Mr. Burr. I see my time has run out.
    Mr. Barton. Yes; we have a pending vote, and we have got 
two other members. I want to try to get both members' questions 
in in the first round, so then, we can go vote; let them take a 
break; and then come back.
    So I am going to recognize Mr. Bilirakis for 5 minutes, but 
Mr. Burr will be given an opportunity in the second round.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    Ms. Stuntz, utilities, in many States, certainly in 
Florida, have been obligated to sign numerous long-term 
contracts under PURPA. Let us get into PURPA. Is there any 
reason why Congress should not act to repeal this mandatory, 
and I underline mandatory, purchase obligation--and at the same 
time ensure the recovery of those Government-mandated costs? 
And I mean eliminate it not necessarily tied into deregulation. 
Why should it be tied in? I cannot really believe that we, in 
our infinite wisdom, passed that type of a thing awhile back.
    Ms. Stuntz. I do not remember that you were on the 
subcommittee at the time.
    Mr. Bilirakis. I may not have been. Hopefully, I was not at 
the time.
    So go ahead.
    Ms. Stuntz. And I think there is really a consensus on 
that. It is just a question of what it gets linked to.
    Mr. Bilirakis. There is a consensus that we can eliminate 
PURPA regardless of deregulation? Because last year's 
legislation basically said as soon as a State opts in, then, 
PURPA is eliminated. That need not be the case, is it?
    Ms. Stuntz. Well, I do not think so, but as I said, I think 
there are still some who would link it either expressly or say 
it cannot go until we get other parts of this restructuring.
    Mr. Bilirakis. Yes, blackmail kind of a thing, right?
    Ms. Stuntz. Yes.
    Mr. Bilirakis. Well, all right, but do you think that is 
wrong? It can be done without it being tied in.
    Ms. Stuntz. I certainly think so.
    Mr. Bilirakis. Should it be done?
    Ms. Stuntz. I think so.
    Mr. Bilirakis. Ms. Moler? Now, you indicated earlier, and I 
wrote it down; you said you would respect that if a State 
decided to opt out. So apparently, you are flexible insofar as 
the States coming on board by a date-certain.
    Ms. Moler. Yes, I am.
    Mr. Bilirakis. All right; that being the case, how would 
you feel about PURPA being eliminated now rather than later?
    Ms. Moler. I believe, as I said, that there are some core 
elements of a package that can be moved. I do not believe that 
PURPA will move on its own, nor should it.
    Mr. Bilirakis. Nor should it?
    Ms. Moler. No, sir.
    Mr. Bilirakis. Why? Because you do not think that the 
others will move without it?
    Ms. Moler. PURPA is our statement at the present time of a 
policy in favor of renewables, and if you repeal PURPA, I would 
make whatever statement the Congress wishes to make with 
respect to renewables policy----
    Mr. Bilirakis. Okay.
    Ms. Moler. [continuing] as a part of a comprehensive 
restructuring bill.
    Mr. Bilirakis. All right; so, you might tie it into 
renewables but not necessarily to the date-certain.
    Ms. Moler. No, as a part of a comprehensive restructuring 
bill. Whatever you all can put together, but there is clearly a 
need to do as much as you can possibly do.
    Mr. Bilirakis. Frankly, I am very pleased with your 
testimony, all four of you. You seem to be very flexible in 
that regard. You feel that it needs to be done and should be 
done but do as much as can be done and then tackle the tough 
parts.
    Yes, sir.
    Mr. Naeve. I would first say, as I stated earlier, do what 
you can when you can.
    Mr. Bilirakis. Yes.
    Mr. Naeve. If you can do this now, do it.
    I would add one thing. I think you need to do more than 
prospectively repeal the purchase obligation. I think there are 
other things in PURPA you can do, and one of the more important 
things is to change the ownership restrictions. Right now, 
utilities and utility holding companies cannot own more than 50 
percent of a QF. That may have made sense back when we were 
trying to encourage independent power development. When 
Congress passed the Energy Policy Act, though, we decided that 
was not important anymore; we did not put that restriction on 
the ownership of exempt wholesale generators. I think we should 
go back and take it off of QFs.
    Mr. Bilirakis. I want to be fair to Mr. Whitfield, sir, and 
the chairman wants to really finish up this first round, so 
maybe I will just cut you off, and we can continue in the 
second round, because obviously, I want to hear what you have 
to say and Mr. Stalon too.
    I am going to yield back for that reason, Mr. Chairman.
    Mr. Barton. Thank you, and the Chair would recognize Mr. 
Whitfield for 5 minutes, and we have got about 7 minutes to 
vote, which means we have about 10 minutes actually, because 
they give us about 3.
    Mr. Whitfield?
    Mr. Whitfield. Mr. Bilirakis, I have always been a fan of 
yours; thank you.
    We all know that one of the major opponents to deregulation 
are the rural co-ops, and I think, in a nutshell, they are just 
concerned that if you go to deregulation, they are going to 
have to discount their rates in order to keep their large 
industrial customers; and then, the concern is that they are 
going to raise the rates on the residential users, because they 
are going to have to make up at least some revenue somewhere.
    Now, what arguments would you all make to the rural co-ops 
as to why they should support deregulation?
    Mr. Stalon. I would make one quickly. The traditional 
justification for REAs as distribution utilities is unchanged 
by anything we are doing, and I just simply do not see why all 
users of electricity, especially large users, should not pay 
the competitive market price for electricity, and we can only 
determine that price with a competitive market.
    Ms. Moler. I also believe that they should clearly be given 
authority to deal with transition costs just as I would have 
any other utility deal with transition costs, and if they need 
to do exit fees in order to get from here to there in terms of 
a transition, that would be fine with me as well.
    Ms. Stuntz. I think you have asked one of the hardest 
questions of this whole issue, and it is one we have struggled 
with. I guess where I come out is I think if a rural co-op 
wants to continue to do what it has historically done as, you 
know, not a big owner of generation, not a G&T, because they 
are different, and provide that distribution function, I think 
there is a real role for them to play, continuing to do that. 
Choice could be provided through aggregation if they thought it 
desirable, but if they want to stay in that role, and their 
owners are happy with that, I would sort of come down and say 
okay, that is fine.
    I think the tougher issue are larger co-ops, particularly 
the G&Ts, who, in many cases, are not in great financial shape; 
who are very concerned about what this transition is going to 
mean for them but for whom it seems to me it is essential that 
they be part of the process; that they need to allow their 
customers choice; their transmission needs to be put into the 
system with everyone else's, and we deal with the debt issues 
like we are dealing with stranded cost issues for other 
utilities.
    Mr. Barton. Would the gentleman yield on that?
    Mr. Whitfield. Yes.
    Mr. Barton. Just as an elaboration.
    Would it not be possible for a co-op to at least 
collectively and in this new era bargain for a better supplier? 
Would that not----
    Ms. Stuntz. Oh, absolutely.
    Mr. Barton. They would not be disadvantaged, and it is 
possible they could actually be advantaged.
    Ms. Stuntz. No, absolutely, Mr. Barton, and I think that is 
one of the tough things now is because they can do that now, 
and many of them, as wholesale buyers, are doing it very 
effectively. So sort of stopping your wholesale competition for 
them in many respects is the best of all worlds.
    Mr. Barton. Okay; we have 3 minutes until the vote.
    Mr. Whitfield. Well, there is more than one component to 
the cost charge of the co-ops and, for that matter, utilities, 
and one component is the cost of the supply itself, and that is 
what we are talking about with competition here. Would the 
industrials have access to lower-cost supplies? Because many 
co-ops do not own generation but buy their power themselves, 
they may not incur additional costs by allowing those 
industrial users to go out and buy directly from other 
suppliers.
    There are other costs, such as the costs of the 
distribution system itself; the cost of manpower and so forth. 
They can continue to allocate those costs as they do today 
because in many cases, those industrial customers are still 
going to need their wires serviced.
    Mr. Whitfield. Mr. Chairman, I am in a tough district, and 
I cannot miss a vote so----
    Mr. Barton. Okay; we are going to recess until 2. We are 
going to go vote, and we will reconvene at 2. We want this 
panel to come back, because a number of members want a second 
round of questions.
    [Brief recess.]
    Mr. Barton. As is usually the case, the people who wanted a 
second round of questions are represented as empty chairs. But 
we are going to go ahead and reconvene; it is 2; there are two 
members present, so a quorum is present.
    The Chair is going to recognize himself for 5 minutes of 
questions. I will get the clock turned on.
    I want to ask a question to our two former FERC 
dignitaries. Most observers indicate to handle the transition 
rules and to handle the reliability issue that we need an 
expanded role for the FERC. I question the wisdom of making 
that a permanent expansion, so my question to Mr. Stalon and 
Mr. Naeve, what is your opinion of transition rules that give 
FERC an expanded role but do it in a sunsetted fashion?
    Mr. Stalon. The principal reason for giving the FERC any 
particular authority here is so that the new international 
reliability regulatory organization can impose financial 
penalties on players in all three nations. The principal 
weakness of the NERC today is that it relies entirely on peer 
pressure in order to get its rules obeyed, and peer pressure, 
obviously, is not adequate; it has not always been adequate 
even in the old system when it was a club.
    It is clearly not adequate with a lot of entrepreneurs in 
the game, and it seems to me that the FERC will have an ongoing 
oversight rule, because there will be appeals, and somewhere or 
the other, the appeals of parties have to get to some point 
where a government agent--it could be a court--says yes, this 
is a correct form of behavior; the reliability organization is 
behaving in accordance with its charter and exercising powers 
that we have explicitly approved and doing it in the right way.
    So I think that role is a never-ending role now for some 
agency, and I cannot think of one better than the FERC for 
that.
    Mr. Barton. Mr. Naeve?
    Mr. Naeve. I will defer to people who have spent more time 
studying this subject, but I am not completely convinced that 
more legislation is required to give FERC an important role in 
reliability. FERC has jurisdiction over transmission service, 
and every reliability rule that is adopted has an effect on 
transmission service. So, through its jurisdiction over 
transmission services and over the grid, FERC has indirect 
jurisdiction over reliability. I think if we were to have a 
reliability organization that is independent; that is composed 
of a variety of participants in the industry or has an 
independent board, FERC would be in a position to give 
substantial deference to their recommendations and would not 
have to become directly involved in reliability issues.
    To the extent that those reliability issues have an effect 
on nondiscriminatory transportation, FERC could serve as an 
appellate body to look at them and review them; but again, as 
long as they are recommended by an independent board, I think 
they would be in a position to give tremendous deference to an 
independent board.
    As to the issue of penalties and the ability to impose 
penalties, to the extent that you have large, regional 
transmission organizations, and those penalties are embedded in 
their operating tariffs and procedures, I would think those, 
too, would be jurisdictional to FERC and that they perhaps 
would have the ability to authorize the imposition of penalties 
and have jurisdiction over them without additional legislation, 
but again, I am prepared to defer to people who have spent more 
time studying that subject.
    Mr. Barton. Ms. Moler, you are a former FERC commissioner 
also. Do you wish to have an opinion on this question?
    Ms. Moler. Yes, I do. I think it is, as my prepared 
statement says, I think it is essential to give the Commission 
expanded jurisdiction for reliability over the bulk power 
system. That is not a conclusion that I, alone, have. While I 
was at the Department of Energy, former Secretary of Energy 
O'Leary did establish a very broadly based group of individuals 
who struggled with the reliability issue for a couple of years 
under Phil Sharp's leadership, and they are very, very firm in 
their conviction that additional authority is needed here.
    Mr. Barton. But does the additional authority need to be 
permanent? See, my view is if you really believe markets will 
work, you may need an expanded FERC authority to get to that 
perfect world, but once you get to there, it is no longer 
necessary, except perhaps on a monitoring or an appellate 
basis, you know, occasionally. But I am willing to give 
additional authority, but I am not yet willing to do it 
permanently and expand the power permanently.
    Ms. Moler. The markets that we are talking about working 
really are generation markets, and the transmission grid is the 
facilitator, if you will, and you have to make sure that on a 
long-term basis, that everybody plays by the same rules, and I 
do not believe that we can foresee the loss of the monopoly 
that is transmission.
    Mr. Barton. Okay.
    Ms. Moler. That still has not happened in the gas area many 
years after we have had increased competition in the natural 
gas area.
    Mr. Barton. And my time has expired.
    Ms. Stuntz, did you want to----
    Ms. Stuntz. Mr. Barton, if I may just add, I have a little 
different take on that, maybe, because I am not at FERC, but I 
do support the legislative proposal that has been worked out by 
the industry and a lot of shippers and interested consumers, 
and I do not really see it as necessarily adding to FERC's 
authority. What it would do is it actually empowers an 
independent organization to set these rules. You have to have 
FERC as a backstop, because otherwise, you have a 
Constitutional problem under the delegation clause.
    But if we do not do that, then, I agree with Mr. Naeve. I 
think FERC could do it through top-down and start setting rules 
for every grid all over the country, for every interconnection. 
That would be a very central thing. I think they could probably 
do that now if they had to. I think it would be much better to 
have this independent organization with deference procedures 
that are embedded in it, for example, to the Western Systems 
Coordinating Council, and FERC plays only a necessary backstop 
role to make sure that the arrangement is Constitutional.
    Mr. Barton. Okay; Mr. Bilirakis for 5 minutes.
    Mr. Bilirakis. Mr. Chairman, I am not sure that anybody on 
this panel is not for deregulation. It is a case, again, of how 
it is done and how it affects our States. Let us face it; we 
are Representatives, and how it affects our States, is our main 
concern, after all.
    And the gentleman from Oklahoma mentioned, that you have 
got to deregulate by a date certain, and everybody has got to 
be regulated by that particular date. I guess that is what 
Steve is saying. And I just wonder, why is that the case? You 
have your high priced States, and you have your low-priced 
States. In Florida, and I mean to get parochial, is different. 
We have a peninsula that sticks out there, and the energy that 
comes in the State is transmitted from the northern border.
    And Florida is a low price State. I am not picking on New 
York, but if New York is a high price State, then, deregulation 
might be better for their consumers. Why does it mean that just 
because it is good for New York's consumers, it is good for 
Florida's consumers? Ms. Stuntz, can you describe a scenario 
for us? Let us say deregulation goes into effect, and some 
States, as is the case now, have deregulation in effect, and a 
few States do not have it in effect. Let us say maybe Georgia 
and Alabama, which border on Florida, have deregulation in 
effect.
    Now, what kind of a scenario might we expect as far as 
Florida is concerned? How would the Florida consumers be 
benefited by their being forced to deregulate when, the Public 
Service Commission and the State legislature have turned it 
down in the past, in the distant past, in the more recent past?
    Linda, I am not sure the question is a clear one but----
    Ms. Stuntz. Well, I think the argument for a date-certain 
is that you would have more uniformity; that maybe in some 
instances, you know, judgments based on parochial concerns are 
not the best judgments in the national interest, and that sort 
of once you require them to do this by a certain date, and I do 
not know that we are really so far apart, because I think at 
some point, a flexible mandate or an opt-out, or I do not want 
to put words in your mouth, is not so different than what we 
are saying, which is that it is probably a good idea, but you 
are going to have to give States an opportunity to take into 
account local needs, and if they do not want to go now, as long 
as they have considered it in a good faith fashion, that may be 
enough.
    At some point, I mean, maybe that is the way that lets us 
get out of this, because I think that in the end, it is very 
hard to say that the people would----
    Mr. Bilirakis. But if it were the case, where we would have 
more flexibility opting out off opportunities, you are not 
going to have the uniformity that you mentioned.
    Ms. Stuntz. Well, I think it will happen over time. I think 
it is a question of timing. I mean, right now, California is 
open; Pennsylvania is soon going to be open; Massachusetts is 
open. You know, I have not noticed any huge problems that we 
could say other people should be open; other people should be 
open sooner, and maybe their consumers would benefit sooner, 
but I think in the end, you know, it is happening for 50 
percent of the population already on a schedule; Virginia has 
said now no later than 2007.
    Mr. Bilirakis. Should we allow it to just continue 
happening rather than mandating it from this ivory tower?
    Ms. Stuntz. You know, I do not think this is the most 
important issue. I think that you can without being adverse to 
consumers.
    Mr. Bilirakis. You mean deregulation is not the most 
important issue or the mandate?
    Ms. Stuntz. No, I think the date-certain is not the most 
important issue.
    Mr. Bilirakis. Yes.
    Ms. Stuntz. Deregulation, you have already deregulated 
generation effectively in the Energy Policy Act of 1992 and 
wholesale markets, and the question is is that going to be 
expanded to retail customers? And if so, when? And who is going 
to make that decision? And what are individual retail customer 
choice programs going to look like? And how many of those 
decisions do you want to make? And how many do you want to 
leave to the good folks who are coming up later? And those are 
hard questions.
    Mr. Bilirakis. Thank you a lot.
    Thank you, Mr. Chairman.
    Mr. Barton. Well, as the chairman of the ivory tower 
subcommittee, I would like to recognize my ranking member, Mr. 
Hall, for 5 minutes.
    Mr. Hall. I will not take the 5 minutes. I just would point 
up some questions because I do not know what has been asked, 
and we have another panel waiting, and we have beat on these 
folks for a long, long time here.
    But, Mr. Stalon, I appreciate the concern that you showed 
about the need for new transmission capacity to make the 
competitive market work. I did not totally understand some of 
the things that you said, and I am going to write you a letter 
and ask you for that if I might. We had a lot of warning signs 
in the real world last summer and then in the form of a DOE 
blue ribbon task force, both of which tell us that the system 
might lack the capacity to function reliably. I think I am 
correct in understanding you, Mr. Stalon, that you recommend 
Congress enact legislation to set up a Federal authority, FERC 
or some other entity, with sitting authority that would preempt 
State and local authority.
    Is that your position?
    Mr. Stalon. The States, no, I would not agree with that 
wording. We are asking that the powers of the existing 
organization, which are being eroded dramatically by 
competitive forces be reestablished, and the reestablishment of 
those powers to set and enforce standards must now be 
accompanied by the ability to levy financial penalties. So we 
need a new international organization to carry out the 
functions that the old one carried out fairly well for the club 
of big utilities.
    Mr. Hall. With sitting authority that would preempt State 
and local authority.
    Mr. Stalon. My proposal, as embodied in my written 
testimony, was a compromise proposal to leave with the States 
the power to determine the precise route of a new transmission 
line after the Federal Government, the FERC, has made a finding 
of need for the line and perhaps specified several points on 
the line that must be interconnected but leave the details to 
the States.
    Mr. Hall. Okay; I will ask more pointed questions to you in 
writing, and I thank--is it all right, Mr. Chairman, that we do 
that? It will save me time.
    I think I know what you are saying. I will go back and 
reread the testimony.
    Mr. Nave, your testimony seems to make a case for Federal 
authority over the transmission construction, and you used a 
Gas Act provision as a semi-model or something, and my 
questions to you will be if the Gas Act provisions are the 
model, what changes are you going to have to make to make it 
fit electricity if any, and those are some of the questions I 
will ask you. You need not answer them now.
    In the interests of time, I will yield back the balance of 
my time.
    Mr. Barton. You do not want him to give you a partial 
answer now?
    Mr. Hall. Oh, he will give me a full answer a little bit 
later.
    Mr. Barton. The Chair recognizes Mr. Largent of Oklahoma.
    Mr. Largent. Ms. Moler, one of the statements you make in 
your report or your testimony, it says that support for 
research and development in the electric technology area has 
plummeted in the wake of restructuring. It seems to me that, I 
mean, it sort of flies in the face of what we are trying to 
talk about in a competitive market that technology and research 
would actually increase as your competitors are seeking market 
share and new services.
    Ms. Moler. The difficulty is that in the prior regulatory 
regime, States imposed R&D and other public benefits kinds of 
requirements on the regulated utilities. Now that the regulated 
utilities are out competing with, in the States that have 
customer choice and open access, are out competing with those 
who do not have similar obligations, they have cut support for 
R&D very significantly. State regulators have expressed a major 
concern with this phenomenon. They have developed a proposal 
that is similar to what happened under the telecom bill, where 
States could impose an R&D charge, if you will, that would be 
an across-the-board charge done as an add-on on distribution 
rather than on the utility, so that everybody would have to pay 
it.
    Mr. Largent. Would it not be better to wait until we 
actually are in a totally deregulated market and see if 
competition does not drive technology as opposed to on the 
front end, imposing an R&D tax on, you know, end users?
    Ms. Moler. My proposal, as I said, is one that was 
developed by the State regulators. I would leave it up to them 
to monitor the efforts in their States and determine whether 
such a charge is necessary.
    Mr. Largent. Yes?
    Ms. Moler. The Federal role should be performed by the 
Department of Energy-supported R&D.
    Ms. Stuntz. Mr. Largent?
    Mr. Largent. Yes.
    Ms. Stuntz. I am the chairman this year of the Electric 
Power Research Institute, which has been the umbrella 
organization coordinating the electric utility industry's 
research enterprise, and it is a real issue. Particular types 
of research, I would say, have been more effective than others. 
It tends to be longer-term, higher-risk things that it was 
easier to fund when you were not facing competition for utility 
contributors. EPRI is struggling right now to come up with a 
proposal that it could present to you. I would say on behalf of 
the committee that there is not uniform support within EPRI for 
that particular matching fund proposal. It has got goods and 
bads, but it is something that I think will need to be 
addressed, because it is one of the many mechanisms that worked 
in the old regime that is not necessarily going to work in the 
new regime.
    Mr. Largent. Yes; okay.
    Ms. Moler, could you explain how your opt-out works? And 
the other question I wanted to ask about that is did you look 
at other flexible, date-certain options beside the one that you 
chose? I mean, is this a subjective thing that has taken, say, 
well, we just do not feel like doing it? We will go on record 
in saying we do not feel like doing it?
    Ms. Moler. The provision is fully drafted and was presented 
when the administration's bill was transmitted to the Congress 
last year, and the mechanism is actually fairly simple, you 
know; State authorities would write to the Federal Energy 
Regulatory Commission and say we have determined we are not 
going to do this. It is not hard.
    Mr. Largent. So it could be a totally subjective thing; not 
necessarily a----
    Ms. Moler. They would have to have a record that would back 
up their determination. Their determination that they did not 
want to do it would not be challengeable as a matter of Federal 
law, and so, whatever is the ordinary mechanism under the State 
regime would apply for challenging decisions of the Public 
Service Commission, presumably, and that is a fairly well-
settled body of law, how one goes about doing that.
    Mr. Largent. But basically, what you are saying is that 
would be a fairly easy thing for a State to do to just opt out.
    Ms. Moler. A self certification, if you will, is the 
concept.
    Mr. Largent. Okay.
    Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from Ohio is recognized for 5 
minutes.
    Mr. Sawyer. Thank you, Mr. Chairman.
    It is probably fair to say that some regions of the country 
are having difficulty in transmission constraints and that in 
no small part, that is due to the difficulties just simply in 
siting transmission facilities. With transmission facilities 
being used in terms of large bulk sales over long distances in 
ways that they may well not have been designed for, 
increasingly, the business of siting new facilities will become 
even more important and more difficult. Do you have thoughts on 
how the Congress, in legislation that deals broadly with these 
kinds of questions, might address that specific kind of problem 
State-by-State?
    A State might well be even expected to be reluctant to 
build transmission facilities that will not directly benefit 
their populations. Can you talk about that for a moment?
    Mr. Naeve. For the very reasons that you mentioned, I 
recommended in my testimony that we transfer to FERC, as we did 
in the Natural Gas Act, the responsibility for siting and the 
power of eminent domain for interstate transmission facilities. 
That is not to say that local interests should be ignored, and 
indeed, FERC does not ignore local interests when they site 
natural gas transmission facilities. They have a great many 
local hearings; they hear from all of the affected 
environmental agencies. There is a great deal of local input 
into the process.
    So the local concerns are taken care of, but nonetheless, 
the decisions to build the line in the first place are made on 
a regional basis or a national basis, the national need. And 
then, once those decisions are made, then, you have to factor 
in local consideration and environmental issues when you are 
doing the siting, but the decision to go forward is done on a 
national or regional basis.
    Mr. Sawyer. Any other points of view on the question?
    Ms. Moler. Mr. Naeve and I did not consult on this ahead of 
time. On page 11 of my prepared testimony, I made a very 
similar proposal to emulate the Gas Act, the Natural Gas Act 
jurisdiction for Federal siting authority.
    If you cannot muster the support for that, at a minimum, I 
would urge you to clarify that States can exercise authority on 
a regional basis and to encourage them to do so. The 
administration bill has an interstate compact concept in it 
that is worthy of thought. One of the hopes I hold out for 
these large regional transmission organizations that we are 
trying to either compel or induce into being is that they will 
begin to plan and think regionally, and if you can build a 
regional consensus that this new capacity is necessary, I have 
hope, but it is tempered with a hard dose of reality that 
transmission companies will undertake to build new 
transmission.
    It is incredibly expensive and incredibly difficult to do 
so, and they do not get paid enough to make it worth their 
while these days to do that.
    Ms. Stuntz. Mr. Sawyer, that was the point I wanted to 
make. I think this may be a useful proposal, but even under the 
Natural Gas Act now, it is getting increasingly difficult to 
site this stuff, so there are siting issues. But you have got 
to have the right incentives, and right now, I agree with what 
Betsy said. It is extremely expensive, and frankly, I do not 
think transmission pricing is--nobody is encouraged to do it.
    Mr. Stalon. I would agree that no one is encouraged right 
now to do it, but I would also, and I did in my proposal, 
postulate that the States are going to be very resistant to 
build when the principal benefit is to someone outside the 
State, and I can give examples where transmission in the 
western system is needed, and it ought to be built in Idaho, 
and the principal beneficiaries are Southern California and 
Arizona. By the way, it was never built.
    My proposal would give to the FERC the power to make the 
finding of need, and that would impose a legal obligation on 
the State, and the Federal agent could also specify several 
points on the route to make sure that the objective is achieved 
and then let the details of the routing be left to the States.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Barton. Thank you.
    Mr. Sawyer. Thank you all very much.
    Mr. Barton. The Chair would observe that there are 3 or 4 
young men in the far back corner who are having entirely too 
much fun for such a serious hearing, and I am going to deputize 
the lovely young lady, Ms. Ireland, to serve as their detention 
monitor, and they are going to be required to write down the 
answers to the questions they just missed verbatim for the next 
30 minutes, and that will be deducted from their client billing 
for monitoring this hearing.
    The Chair would recognize Mr. Burr of North Carolina for 5 
minutes.
    Mr. Burr. Mr. Chairman, I do not know who is more 
challenged: the members to come up with more questions or for 
you guys to rephrase the answers that we did not get the first 
time, but I will try to go to some new areas other than to 
rehash things.
    Let me ask you: do any of you believe NERC's draft 
reliability language? Do you believe that there exists 
consensus on that language?
    Mr. Stalon. I do not. It was a compromise within the NERC, 
and I am sure that if every member who voted for that 
compromise was to write his own, parts of that would be 
missing. I know I would have left out certain parts of that and 
changed it, so yes, it was a compromise piece of legislation, 
proposed legislation.
    Ms. Moler. I would say it is a lot like when Congress 
passes legislation by a very lopsided majority to a small 
minority. You have decided it is the best you can do, and it is 
in the public interest to go ahead. You would have written your 
bill differently, just as Mr. Hall would have written his bill 
differently, but you have decided it is a good thing to do, all 
considered.
    And I think it is like consensus building in any 
organization.
    I'm sorry, Mr. Hall would have written his billed 
differently, but you decided it is a good thing to do, all 
considered. I think it is like consensus building in any 
organization.
    Mr. Burr. Mr. Stalon, let me ask you a question. How much 
capital will chase the industry without any Federal 
legislation?
    Mr. Stalon. I am sorry, I don't understand the question.
    Mr. Burr. How much available capital in the marketplace 
will be made available to the entities, those generators out 
there, if, in fact, there is not Federal legislation that 
clears up some of the laws and the hurdles that exist on the 
books?
    Mr. Stalon. Well, I don't have any concern that we will 
create adequate generating capacity. I think firms can borrow 
that money. The capital is there.
    Mr. Burr. You feel that the capital is sufficient even with 
the hurdles still in place?
    Mr. Stalon. Right.
    Mr. Burr. Even with the hurdles? But the price is going to 
be unnecessarily high, the industry is going to be 
unnecessarily inefficient. Do we accelerate the availability of 
capital when we move to that open marketplace?
    Mr. Stalon. I think you lower the cost of capital. In the 
American economy, capital is almost an unlimited supply. It is 
the cost that matters. And by making the industry more 
efficient, you will lower the cost of capital to key players, 
because it gives them more security. But they can live in an 
inefficient market and they can borrow money to produce in the 
inefficient market.
    Mr. Burr. Mr. Naeve, did you want to----
    Mr. Naeve. Well, I generally agree with what Charles said. 
I would focus, though, on other parts of the industry as well, 
not just the generation sector. And there are a variety of 
potential participants in this market who would have capital 
and intellectual capital to bring to bear on it, if they were 
permitted to do so, but are precluded from doing so under the 
Public Utility Holding Company Act.
    Mr. Burr. Ms. Moler, let me go back to you for a second. I 
want to follow up on what Steve Largent raised. When you came 
on behalf of the Administration's plan last time, I left with 
the impression that opt-out was a very difficult process for a 
State to go through, but, in fact, States would have to prove 
that there was no benefit at all, from a rate standpoint, to 
their consumers in their marketplace in their State. I heard of 
something a little bit different from that with your response 
to Congressman Largent. I'm allowing an opportunity for 
clarification. Is it one or the other, or somewhere in the 
middle?
    Ms. Moler. I think it's a simple process. In most States, 
determinations by regulatory bodies are given a presumption of 
validity, just as they are under the Federal statute. And if 
the PUC said ``We've decided not to do this, because we don't 
think it would be good for our consumers,'' I do not believe--
first, that would be fine under the way the administration's 
bill is drafted so there would not be any Federal mandate 
imposed upon that State. I don't think it is a difficult 
process at all.
    Mr. Burr. If the administration does what is rumored, and 
that is that their next bill incorporates a 10-percent 
renewable, you feel like they would be headed in the wrong 
direction. Would that be an accurate statement?
    Ms. Moler. I think that is a little steep.
    Mr. Stalon. Ten percent is a little steep, or being an 
accurate statement is a little steep?
    Ms. Moler. I have not kept up on the rumor mill about the 
administration. I will say, I shy away from that, because I 
have very strict restrictions these days. I can't talk to them 
about what they are up to. I was very comfortable with where 
the administration bill was last time. I don't know what else 
they might be putting in a bill that would make it so that you 
still had significant consumer benefits from the piece of 
legislation, which I think is important. So I don't have a 
judgment at this point.
    Mr. Burr. You made a statement, and I appreciate the 
chairman's indulgence; you made a statement earlier that the 
inaction of Congress is holding the marketplace back. I don't 
disagree with you, but I guess I would ask you, do you believe 
that this administration is ready and willing to deal with 
Congress to move legislation?
    Ms. Moler. Yes, I do. I have nothing but the highest 
respect for Secretary Richardson's negotiating skills. They are 
legendary around the World, and I believe that they will come 
prepared to come to the table and work with the Congress to 
enact legislation.
    Mr. Burr. But you would counsel us to negotiate and not 
necessarily just to blindly accept?
    Ms. Moler. I have nothing but the highest respect for this 
Congress' negotiating skills either. I think you are a fair 
match.
    Mr. Burr. I thank the chairman.
    Mr. Barton. Thank you. I have one final question, then we 
are going to let the panel go. When I was in graduate school, 
my two favorite subjects were economics and marketing, and 
every case study always started with the assumption, assume a 
perfect market. We never have a perfect market in the real 
world, but we always study to assume a perfect market, so 
you've got perfect knowledge and perfect allocation of marginal 
costs. But, we have an opportunity to create a more perfect 
market, if we can move this legislation. And, I want to ask 
Mrs. Moler directly, but anybody can answer it; it would seem 
to me in trying to create a more perfect market that you would 
want some Federal guidelines on stranded costs, because, while 
it's true most States are allowing some stranded cost recovery 
as they act, it is theoretically possible that some States 
would not, and if you were in a situation where you had States 
that were interconnected and had a greater likelihood that they 
would be transmitting power, if one State did their stranded 
cost recovery a totally different way or the impact was 
disproportional, wouldn't that cause quite a bit of problem?
    So you indicated, Ms. Moler, you didn't think stranded 
costs necessarily need to be a part of a Federal bill, and it 
would seem to me it would almost have to be a part of a Federal 
bill.
    Ms. Moler. The States in New England, which have all 
enacted customer choice, all have very different stranded cost 
recovery mechanisms. We have a practical experience with 
adjoining States having very different stranded cost recovery 
mechanisms. I am not aware that it has been a problem there, so 
I don't see why in the future it would be a problem.
    Mr. Barton. That's a fair answer. Anybody else?
    Mr. Stalon. I would endorse that by saying the difference 
in rates shows up in the distribution charges, and that is 
still a monopoly, which will permit you to sustain those 
different rates.
    Ms. Moler. Right.
    Mr. Stalon. The energy market will be competitive, and such 
differences need not be and could not be sustained.
    Mr. Barton. But if you take a State like California that 
pretty well allowed stranded cost recovery up-front, so their 
utilities got quite a bit of money, they can then use that 
money to go into the marketplace and buy power plants and do 
things that in States that allow stranded cost recovery over an 
extended period of time, they don't have that opportunity. It 
creates an imbalance, at least the appearance of an imbalance. 
That's my point.
    Mr. Naeve. I would say this. I think governments, like 
people, should take responsibility for their actions. To the 
extent that restructuring is mandated by a State legislature or 
a State public utility commission, I think the responsibility 
is theirs for deciding how they are going to deal with the 
consequences of their action, namely, the stranded cost. I 
think if the stranded cost in a particular case is the bi-
product of a Federal mandate, then the Federal Government 
should take, in part, responsibility for that.
    Mr. Barton. I could go down that line, too.
    Well, I'm going to excuse this panel. We will have other 
questions for the record. We do very much appreciate your time 
and your expertise on this issue, and I'm sure that you will be 
called on again, if not formally, informally to give us your 
advice. Thank you very much.
    Ms. Moler. Thank you for the opportunity to appear. This is 
my idea of a good time.
    Mr. Barton. Yes, well. It's my idea of a time, I don't know 
how good of a time. It is interesting.
    We would like to call our second panel now, please. We have 
the Honorable John Quain, who is the Chairman of the 
Pennsylvania Public Utility Commission; the Honorable Craig 
Glazer, Chairman of the Public Utility Commission of Ohio; we 
have the Honorable Vincent Persico, who is the Co-Chairman of 
the Special Committee on Electric Utility Deregulation for the 
Illinois General Assembly; we have the Honorable Susan Clark, 
the Commissioner from the Florida Public Service Commission; 
and the Honorable Marsha Smith, the Commissioner for the Idaho 
Public Utility Commission.
    Welcome. Your testimony is in the record in its entirety. 
We are going to recognize each of you for approximately 7 
minutes to elaborate on it. Mr. Persico, I am told, has a plane 
at 4 o'clock. Is that correct?
    Mr. Persico. Correct.
    Mr. Barton. So we are going to let you go first, and we are 
going to give the panelists an opportunity to question you 
before we allow the others their opening statements, so that 
you can catch your plane.
    Does anybody else have a place to catch?
    Ms. Smith. At 5:30.
    Mr. Barton. You are 5:30. You don't count.
    Ms. Clark. Six o'clock.
    Mr. Barton. Okay. But the earliest is the 4 o'clock plane, 
right?
    Mr. Persico. Correct.
    Mr. Barton. So we are going to recognize you for 7 minutes 
and then give the panel an opportunity to specifically ask 
questions to you and then you can be excused, since it is 2:45.
    So, Mr. Persico?

   STATEMENTS OF HON. VINCENT A. PERSICO, CO-CHAIR, SPECIAL 
 COMMITTEE ON ELECTRIC UTILITY DEREGULATION, ILLINOIS GENERAL 
ASSEMBLY; JOHN M. QUAIN, CHAIRMAN, PENNSYLVANIA PUBLIC UTILITY 
  COMMISSION; CRAIG A. GLAZER, CHAIRMAN, OHIO PUBLIC UTILITY 
   COMMISSION; SUSAN F. CLARK, COMMISSIONER, FLORIDA PUBLIC 
 SERVICE COMMISSION; AND MARSHA H. SMITH, COMMISSIONER, IDAHO 
                   PUBLIC UTILITY COMMISSION

    Mr. Persico. Thank you, Mr. Chairman, and members of the 
committee for the opportunity to present testimony before the 
subcommittee on this very important issue. Hopefully, I can 
bring another perspective to the debate on this issue, because 
for one thing, not only do I represent the 39th District of 
Illinois, which is in a western suburb of Chicago, but also, 
for 6 months a year, I try to harness a different kind of 
energy, and that is teaching seventh graders government and 
history, and you know how lively 12 and 13 year olds can be. 
Plus, I am one of the few, I guess, members in the whole United 
States that have actually voted on this particular issue, and 
we went about it in a somewhat different way. Besides my role 
as a regular member in the general assembly, I was appointed as 
Co-Chairman of the Electric Utility Deregulation Committee, a 
special committee established 2 years ago to help guide our 
members to through the debate of deregulation and restructuring 
of the electric industry in our State.
    The Committee is unique in the sense that it is made up of 
equal numbers of Republicans and Democrats, and has one Co-
Chairman from each party. The leadership of the General 
Assembly in Illinois felt that this was the best approach to 
take, because, first of all, we had to draft a bill that was 
not only good for the State of Illinois, but also a bill that 
we could go back to our respective caucuses and have it pass in 
the law. And that's precisely what happened. After 4 years of 
debate in the legislative process, the Illinois General 
Assembly passed the Electric Service Consumer Choice and Rate 
Relief Law of 1997, in November of that year, and our former 
Governor, Jim Edgar, signed it into law in December.
    Historically, the retail electricity industry has been the 
policy and regulatory responsibility of the States, whether it 
was in the establishment of the traditional rate base rate of 
return regulatory system which served our States and Nation 
well for over 75 years, or in the most recent review and 
adjustments made to that system. State policymakers have 
established that the interests of their constituents can be 
best served by the exercise of local control over the electric 
industry. Each State has unique characteristics which bear on 
how the industry operates within its borders and boundaries, 
and State legislators, Governors and regulators have always 
been in the best position to oversee that process on the retail 
level. My own State of Illinois provides an excellent example 
of the wisdom of this approach. Illinois is diverse in many, 
many respects. Not only do we have a huge urban metropolis in 
the city of Chicago, but we have small and medium sized towns 
throughout the whole State, and a very large agricultural area. 
We also have a very diverse people, a mixture of races, creeds 
and colors, and we are in many ways the microcosm of the whole 
United States. In the same way, we also run the spectrum in 
terms of the electricity industry. Commonwealth Edison serves 
the city of Chicago and most of Northern Illinois, and is one 
of the largest investor-owned electric companies in the United 
States. Prior to the passage of our law, it also had some of 
the highest electricity rates in the Midwest, rates which can 
be traced back to its concentration of nuclear generating 
capacity. In other parts of Illinois, we have electricity 
companies which have much lower prices, because they generate 
power with one of their most abundant resources, which is coal. 
We have larger customers served by municipal electric companies 
and rural cooperatives. Again, the Illinois electricity 
industry is very representative of the industry in the Nation 
as a whole.
    The point of the description of the State is to emphasize 
that as policymakers in Illinois, we cannot even govern our 
State with the one-size-fits-all approach, especially when it 
comes to restructuring our electric industry. Our challenges 
were unique to our State, and we were successful in meeting 
them only because we had the necessary familiarity with the 
issues, the stake holder and the constituents which were 
affected.
    I have attached supplemental material to my testimony in 
the form of a two-page layman's summary of the law which we 
passed in 1997. If you examine the issues which we have 
highlighted in that summary, I believe that you will find most 
of the restructuring issues which are being addressed at the 
State level. These include such major issues as the timing of 
customer choice, the recovery transition costs, and the 
provision of delivery service. Also included in our law were 
such issues as maintaining the obligation to serve, how to deal 
with entrance to the marketplace, consumer education and 
protection, restructuring of our utility tax system, and a host 
of other public benefit issues, including protections for 
utility industry employees. I can tell you from literally 
hundreds of hours of personal experience that in each of these 
areas, Illinois policymakers and stake holders struggled to 
craft solutions which were very unique to our own State.
    I would also like to take this opportunity to point out 
that Illinois is not alone in meeting the challengings of 
restructuring the electricity industry. Now, like two dozen 
other States have taken on either legislative or regulatory 
action, or both, to begin the process of moving from a 
traditional monopoly electricity industry to the new 
competitive environment. More will follow. So the States have 
definitely stepped up to the plate and met this challenge. We 
simply ask that you let us continue this process and assist us 
when necessary. While some States have taken a regulatory 
approach to restructuring their electricity industry, we, in 
Illinois, decided early on to address the matter with a 
comprehensive legislation, and our product is probably the most 
comprehensive law passed by any State. As you can see from the 
summary, we tackled every major issue involved in the debate, 
as well as a host of minor ones. When some State legislators 
have merely adopted a list of general principles and then asked 
their State public utility commissions to turn them into 
reality, we, in Illinois, opted to have our elected legislators 
make the critical policy decisions which are found in our law. 
Our regulatory commission and other State agencies were charged 
with implementing these decisions, and that process is well 
underway as we speak. In fact, we are progressing toward the 
first phase of opening our mark on October 1, 1999, and we will 
meet that deadline.
    The decision made by our legislative leaders and Governor 
to take the comprehensive legislative route reflects the 
necessity of crafting unique solutions to the challenges 
presented by our State's diversity, as I outlined at the 
beginning of my remarks. Other States have chosen other 
approaches which work better for them. They and we should have 
the ability to make these choices, both in the overall approach 
and the details of our work product. If there ever was an area 
of public discourse where one side does not fit all, it is in 
the deregulation and restructuring of the electric utility 
industry.
    And, finally, after a long and difficult process of 
education, discussion and legislation, we, in Illinois, passed 
a law which we believe will bring the benefits of competition 
in the electricity industry to all citizens of our State. We 
passed a law which is comprehensive in its approach and 
balanced in its provisions. We believe it will provide an 
orderly transition for all the industry stake-holders from the 
old world to the new. In short, we, in the Illinois General 
Assembly, are convinced that it is the best possible law for 
Illinois. I would urge you to respect that judgment by taking 
no Federal action which would have the effect of changing our 
law or disturbing a very delicate balance that we have so 
crafted.
    And, with that, I will be happy to answer any questions.
    [The prepared statement of Hon. Vincent A. Persico 
follows:]
     Prepared Statement of Hon. Vincent A. Persico, Illinois State 
                             Representative
    Thank you, Mr. Chairman, and Members of the Committee, for the 
opportunity to present testimony here today before this Subcommittee on 
the important issue of the evolving federal and state roles in 
fostering competition in the electricity industry. My name is Vince 
Persico and I represent the citizens of the 39th District in the 
Illinois House of Representatives. I live in Glen Ellyn, Illinois, 
which is a suburb of the City of Chicago. In the Illinois House of 
Representatives I serve as Co-Chairman of the Electric Utility 
Deregulation Committee, a special committee established two years ago 
to help guide our Members through the debate over deregulation and 
restructuring of the electricity industry in our state. The committee 
is unique in recent Illinois legislative history in that it is bi-
partisan, has one Co-Chairman from each party and is made up of equal 
numbers of Republicans and Democrats. The leadership of our General 
Assembly felt that such an approach provided the best chance of success 
in terms of producing legislation which could pass both the House and 
Senate and be approved by our Governor. And that is precisely what 
happened. After a full year of debate and legislative process, the 
Illinois General Assembly passed The Electric Service Customer Choice 
and Rate Relief Law of 1997 in November of that year. Governor Jim 
Edgar signed the bill into law the next month.
State Role in Electric Regulation
    Historically, the retail electricity industry has been the policy 
and regulatory responsibility of the states. Whether it was in the 
establishment of the traditional rate-base, rate-of-return regulatory 
system which served states and the nation well for over 75 years or in 
the more recent review and adjustments made to that system, state 
policymakers have established that the interests of their constituents 
can best be served by their exercise of local control over the 
electricity industry. Each state has unique characteristics which bear 
on how the industry operates within its boundaries and state 
legislators, governors and regulators have always been in the best 
position to oversee that process on the retail level. My own state of 
Illinois provides an excellent example of the wisdom of this approach.
    The State of Illinois is diverse in many, many respects. We have an 
urban metropolis in the City of Chicago, we have fast-growing suburban 
areas which provide their own special challenges for policymakers, and 
we have lots of medium-sized and small towns and agricultural areas. We 
are also a diverse people, a mixture of races, creeds, colors and 
nationalities which reflects the nation as a whole. In many ways, 
Illinois is a microcosm of this country. And, in this same way, we also 
run the spectrum in terms of the electricity industry. Commonwealth 
Edison Company serves the City of Chicago and most of Northern Illinois 
and is one of the largest investor-owned electricity companies in the 
United States. Prior to passage of our law, it also had some of the 
highest electricity rates in the Midwest, rates which can be traced to 
its concentration of nuclear generating capacity. In other parts of 
Illinois, we have electricity companies which have much lower prices 
because they generate power with one of our most abundant resources--
coal. We also have large numbers of customers served by municipal 
electric companies and rural co-operatives. Again, the Illinois 
electricity industry is very representative of the industry in the 
nation as a whole.
    The point of this description of our state is to emphasize that as 
policymakers in Illinois, we cannot even govern our own state with a 
``one-size-fits-all'' approach, especially when it comes to 
restructuring our electricity industry. Our challenges were unique to 
our state and we were successful in meeting them only because we had 
the necessary familiarity with the issues, the stakeholders and the 
constituents which were affected.
The Need for Changes to the State Role
    I am of the opinion that the basic policy decision which you, as 
federal legislators, should make in terms of deregulating and 
restructuring the electricity industry is to maintain the traditional 
division of responsibility between the retail and wholesale aspects of 
the industry. For many of the reasons which I outlined above, states 
are best equipped to govern the retail electricity industry which 
operates within their boundaries. This is true on both a constitutional 
and a practical basis. The federal government, through the Federal 
Energy Regulatory Commission and any potential national transmission 
reliability body, is best equipped legally and practically to handle 
the wholesale, interstate commerce side of the industry.
    However, there may be issues which arise during the course of the 
transition from the traditional electric utility industry to the new 
competitive marketplace where the federal government should act to 
assist the states and its own regulators so that they can better 
perform their roles in the overall system. There may well be some areas 
where only the Congress can act to clear up ambiguities or remove 
roadblocks to a smooth transition. These areas may include interstate 
transmission, federal power marketing administrations, repeal or reform 
of the Public Utilities Holding Company Act and other issues. However, 
the emphasis should always be on assisting the states who remain the 
primary drivers of the changes taking place in the retail electricity 
industry.
State-Level Restructuring Issues
    I have attached supplemental material to my testimony in the form 
of a two-page layman's summary of the law which we passed in 1997. If 
you examine the issues which are highlighted in that summary, I believe 
you will find most of the restructuring issues which are best addressed 
at the state level. These include such major issues as the timing of 
customer choice, the recovery of transition costs and the provision of 
delivery services. Also included in our law were such issues as 
maintaining the obligation to serve, how to deal with new entrants to 
the marketplace, consumer education and protection, restructuring of 
our utility tax system and a host of public benefit issues, including 
protections for utility industry employees. I can tell you from 
literally hundreds of hours of personal experience, in each of these 
areas Illinois policymakers and stakeholders struggled to craft 
solutions which were very unique to our state.
    I would also like to take this opportunity to point out that 
Illinois is not alone in meeting the challenges of restructuring its 
electricity industry. Nearly two dozen states have now taken 
legislative or regulatory action, or both, to begin the process of 
moving from the traditional, monopoly electricity industry to the new 
competitive environment. More will follow. The states have definitely 
stepped up to the plate and met this challenge head on and will 
continue to do so because it is of critical importance to each of our 
constituents and to the various state economies. We simply ask that you 
let us continue this process and assist us when necessary.
The Illinois Approach
    While some states have taken a regulatory approach to restructuring 
their electricity industries, we in Illinois decided early on to 
address the matter with comprehensive legislation. And our product is 
probably the most comprehensive law passed by any state. As you can see 
from the summary, we tackled every major issue involved in the debate 
as well as a host of minor ones. Where some state legislatures have 
merely adopted a list of general principles and then asked their state 
public utility commissions to turn them into reality, we in Illinois 
opted to have our elected legislators make the critical policy 
decisions which are found in our law. Our regulatory commission and 
other state agencies were charged with implementing those decisions and 
that process is well under way as we speak. In fact, we are progressing 
toward the first phase of opening our market on October 1, 1999 and we 
will meet that deadline.
    The decision made by our legislative leaders and governor to take 
the comprehensive legislative route reflects the necessity of crafting 
unique solutions to the challenges presented by our state's diversity 
as I outlined at the beginning of my remarks. Other states have chosen 
other approaches which work better for them. They, and we, should have 
the ability to make those choices, both in our overall approach and in 
the details of our work product. If there was ever an area of public 
discourse where one size does not fit all, it is in the deregulation 
and restructuring of the electricity industry.
Conclusion
    After a long and difficult process of education, discussion and 
legislation, we in Illinois passed a law which we believe will bring 
the benefits of competition in the electricity industry to all the 
citizens of our state. We passed a law which is comprehensive in its 
approach and balanced in its provisions. We believe it will provide an 
orderly transition for all of the industry's stakeholders from the old 
world to the new. In short, we in the Illinois General Assembly are 
convinced that it is the best possible law for Illinois. I would urge 
you to respect that judgment by taking no federal action which would 
have the effect of changing our law or disturbing the balance contained 
therein.
summary of the electric service customer choice and rate relief law of 
                                  1997
Customer Choice of Supplier
    By May 1, 2002, all Illinois electricity consumers will be able to 
choose their electricity supplier. On 10-1-99 customer choice is 
phased-in beginning with the ability to obtain direct access to 
alternative suppliers given to industrial customers with loads of 4 
megawatts or larger and aggregated commercial loads of 9.5 megawatts or 
larger. On that same date, one-third (1/3) of all other commercial and 
industrial customers get choice based on a lottery. On 12-31-2000, the 
remainder of commercial and industrial customers get choice. The 
residential class gets choice on 5-1-02.
Rate Reductions
    Illinois utilities are divided into two categories for purposes of 
rate reductions. Those above the current Midwest average residential 
rate must reduce their rates for residential customers by 15% on August 
1, 1998 and an additional 5% on May 1, 2002. Utilities (except CILCO) 
below the current Midwest average must reduce residential rates by 5% 
effective 1-1-98. Additional 5% reductions are scheduled for 10-1-2000 
and 10-1-02 if those utilities are not below the Midwest average on 
those dates. CILCO rates must be reduced 2% on 1-1-98, 2% on 10-1-2000, 
and 1% on 10-1-02.
    Utilities will receive credit against any rate reductions under 
this law for rate decreases ordered by the Illinois Commerce Commission 
in regulatory proceedings before the effective dates of the reductions. 
The Commission cannot alter rates during the phase-in period except in 
case of financial emergencies for utilities. If utilities have excess 
earnings during the transition, they must share them with their 
customers. Rate reduction provisions apply to all companies with more 
than 12,500 customers in Illinois.
Transition Costs
    The bill uses a ``lost revenues'' methodology to determine the 
amount of transition costs which utilities can recover from customers 
during the change from a regulated to a competitive environment. The 
amount of the charge is calculated by first determining the amount of 
revenues lost to the utility when a customer leaves its system for a 
new electricity supplier, and then subtracting from that figure the 
value of the now-available power previously used by the former 
customers. Also subtracted is the amount of the charge which that 
customer still pays to the utility for delivery of the power from the 
new supplier. Finally, a ``mitigation'' factor is subtracted. This 
factor reflects the amount of cost-reduction for which the utility is 
directly responsible and the number subtracted increases during the 
transition. After all the subtractions, the number which remains is the 
transition charge which the utility can collect from the departed 
customer. 2006 is the final year of recovery of transition costs by 
utilities. Transition costs are paid only by those customers leaving 
the utility's system.
Obligation to Serve
    Utilities have a continuing obligation to provide traditional, 
bundled service to customers who do not wish to shop for power. 
Residential customers who leave the host utility are allowed to return 
without penalty but cannot switch again for 24 months.
Transition Funding
    Often referred to as ``securitization,'' this transition funding 
mechanism allows utilities to lower their cost of debt. Upon petition 
by a utility, the Illinois Commerce Commission can issue a Transitional 
Funding Order which the utility could then use to secure financing and 
raise funds to pay down transition costs. Up to 20% of the monies can 
be used for costs such as employees transition, billing and metering 
transition and ISO start-up. Transitional funding ends in 2006.
Delivery Services
    While the generation aspect of the electric industry is 
deregulated, the transmission and distribution functions remain 
regulated. In order to facilitate competition, however, the bill 
provides mechanisms to establish non-discriminatory delivery of power 
by local distribution utilities.
Independent System Operator
    In addition to unbundling delivery services from power generation 
and using non-discriminatory transmission techniques, eventually 
utilities will have to turn over operation of their transmission 
systems to an independent system operator who will run the system in 
order to institutionalize the fairness concepts. Illinois utilities 
must seek to become part of a regional independent system operator plan 
or, if none is available, establish an in-state ISO. In the meantime, 
Illinois utilities must ``functionally unbundle'' their generation, 
transmission and distribution operations.
Municipal Utilities and Cooperatives
    The bill allows municipal electric utilities and electric 
cooperatives the right to decide for themselves whether to become part 
of the competitive power supply market. These customer-controlled 
entities can elect to open their current territories to competition or 
remain in their current status. If they seek customers from other 
suppliers, they automatically subject their own territories to 
competition.
Alternative Retail Electric Suppliers
    Alternative Retail Electric Suppliers (ARES) will be allowed to 
compete for the customers of current Illinois electric utilities. They 
must first meet minimum certification requirements and along with their 
competitors comply with a Code of Conduct set out in the bill.
Consumer Education and Protection
    Working with suppliers, the Illinois Commerce Commission will 
develop materials which will be sent to all electric consumers in the 
state seeking to educate such consumers on the new competitive electric 
supply system. Additionally, a new Consumer Utilities Unit will be 
established in the Attorney General's Office to deal with complaints 
regarding the new system and the state's consumer fraud statute is 
amended to be consistent with a customer choice environment.
Public Utilities Act Amendments
    Several provisions of the state's Public Utilities Act are amended 
to streamline the current regulatory process and make it more amenable 
to a competitive electricity environment. These include such areas as 
removal of least-cost planning requirements, options for utilities to 
do away with fuel adjustment clauses and making utility reorganization 
and financial activities less cumbersome and time-consuming.
Taxes
    The state's revenue-based utility tax system is completely revamped 
under the bill in order to treat all suppliers equally and maintain 
revenue neutrality as closely as possible. Except for a transitional 
period where large customers will pay utility taxes based on the old 
percentage of gross receipts basis, the state will move to a ``use'' 
tax system where charges are based on consumption of electricity rather 
than revenues. This will be the case not only for state utility taxes 
but for municipal taxes as well. Additionally, the state's Invested 
Capital Tax as it applies to electric utilities is replaced by a usage 
based tax. Finally, a usage based infrastructure maintenance fee system 
is established for the imposition and collection of fees associated 
with the use of public right of way for delivery of electricity.
Environmental Provisions
    The bill mandates disclosure to customers of sources of power and 
amounts of pollutants. On a quarterly basis, suppliers must inform 
customers of the known sources of the power which they are supplying, 
such as coal, nuclear, wind, etc. They must also list the known amounts 
of pollutants such as carbon dioxide, sulfur dioxide and nitrous oxide 
which come from those sources. Also, funds to promote renewable energy 
resources and clean coal technology are created and paid for by charges 
to customers. An energy efficiency fund is also established with the 
money for same coming from suppliers of electricity. Effective 1-1-98.
Assistance to Low-Income Customers
    The legislation establishes a fund to supplement federal money 
received for energy assistance to low-income consumers. When fully 
implemented the fund will generate over $75 million per year. 
Additionally, a long-term planning process is put in place which will 
develop a permanent low-income energy assistance program for the new 
customer choice environment. Effective 1-1-98.
Utility Employees
    Provision is made for assisting utility employees in the event of 
dislocations resulting from moving to a competitive electricity market. 
These include severance pay, retraining, outplacement and voluntary 
retirement plans. Utilities must develop workforce reduction plans if 
dislocations occur.
Other Provisions
    The 250+-page bill includes a myriad of other provisions, each of 
which has individual importance to stakeholders in the electricity 
industry. These include the ability of utilities to engage in billing 
experiments before and during the transition to competition, options 
for customers to elect real-time pricing of their power supply, and 
safeguards on the reliability of the transmission and distribution 
functions.

    Mr. Barton. Thank you, Mr. Persico. Does any member of the 
subcommittee have specific questions for Mr. Persico? Does 
anyone, because I want to excuse him if there are no specific 
questions.
    Mr. Hall. I take it, Mr. Persico, that you and all the 
others of you, that none of you favor a Federal mandate 
requiring States to enact any kind of a specific type of retail 
competition plan on a specific time table? You all five are in 
agreement on that, aren't you?
    Mr. Persico. Well, I think it would be out of my place to 
recommend a certain time table for Utah or Idaho, or whatever 
State. I mean, Illinois has a time certain in the year 2002, 
all industry and all residential customers will have the 
ability to choose. And, again, it was through major hours of 
negotiations where we literally sat in a room this large with 
80 to 90 people and we went point-by-point, because what we 
first did is we gave them 12 guidelines. We wanted obligation 
to serve in there. We wanted protection for utility employees. 
We wanted to cover the issue of transition costs--I mean, 
stranded costs. So we sat down and said, ``This is what we 
want,'' and then we hashed it out and debated and discussed, 
and finally came up with a bill that fit Illinois.
    Mr. Hall. Your State's act, right?
    Mr. Persico. Pardon me?
    Mr. Hall. Your State has acted?
    Mr. Persico. Yes, it passed it in 1997.
    Mr. Hall. So you would want an unconditional grandfather 
under your State's plan?
    Mr. Persico. Without a doubt.
    Mr. Hall. Okay.
    Mr. Persico. I think we crafted a very delicate balance of 
a very good piece of legislation that is unique to Illinois, 
and I believe other States should be given the same 
opportunity.
    Mr. Hall. Do I get some kind of a ``yes'' from all five of 
you when I asked----
    Mr. Barton. Well, let's try to be specific to Mr. Persico 
so we can let him go. We are going to give you time to----
    Mr. Hall. I'm trying to leave, too. I've got a 5:10 flight. 
Seriously, he can hold up his hand as quick as the other four 
do. I don't want to defy the chairman, not this early in the 
game, anyway. I said, I take it that none of you favor a 
Federal mandate requiring States to enact a specific type of 
retail competition plan on a specific time table. That's right, 
isn't it?
    Mr. Quain. Representative John Quain from Pennsylvania. I 
don't----
    Mr. Hall. I'll get you later, John.
    Mr. Quain. Okay.
    Mr. Hall. You would hold your hand up to that?
    Mr. Persico. I don't favor a one-size approach fits all.
    Mr. Hall. I yield back my time.
    Mr. Barton. Before we let Mr. Persico go, does Mr. Shimkus 
have a question for him, since he represents your State?
    Just a specific question for him and Mr. Burr also has a 
specific question.
    Mr. Shimkus. What can the Federal Government do to help 
prohibit the price spikes that we experienced in Illinois last 
year, question No. 1?
    Mr. Persico. These are issues, again, that we struggled 
with. And one of the things that is in the Illinois bill is we 
eliminated the fuel adjustment cost, which meant that when we 
had those price spikes in Illinois last Summer, where they were 
buying it 4, 5, 10 times over the original cost, they couldn't 
pass it on to the consumers. And so, many utilities which, 
through discussion and debate and agreement, agreed to 
eliminate this fuel adjustment clause, because everybody was 
giving in on each side, it meant that the consumers, both at 
the industrial and residential level, were not affected by it. 
So how you do that on a more national level is something that 
this committee and Congress, as a whole, are going to struggle 
with.
    Mr. Shimkus. But you can see how that is a critical role 
for the Federal Government to get involved with?
    Mr. Persico. Yes.
    Mr. Shimkus. The last question. Illinois addressed low-
income assistance in its law. Should the Federal Government do 
the same?
    Mr. Persico. Again, I think what you decide is important, 
and what we decided in Illinois were those 12 guiding 
principles, and one of them was assistance to low-income 
customers. And as a result of that piece of legislation, we 
enacted, I believe, a forty cent charge per month on a 
customer's bill, for a residential customer, which went into a 
low-income assistance program which generates around $75 
million a year to provide assistance, as well as, I believe, 
like $50 million to $55 million in Federal assistance. So we 
felt, as a General Assembly, that that was important. By the 
same token, we also felt that any restructuring act, that we 
would pass that reduction by law for residential customers as 
well as industrial customers. For example, we had a 15 percent 
rate cut which took effect last August 1998 that what ever the 
customer's bill was as of July 1998, it was 15 percent less in 
their August bill and from then on, and another 5 percent in 
2002.
    Mr. Shimkus. And let me ask one last question. If the 
Federal bill changes one comma, colon, or period in the 
Illinois law, what does that do to the Illinois restructuring 
law that you all passed?
    Mr. Persico. Well, again, it was a very delicate balance 
with each giving and taking, or whatever they felt was 
necessary. For example, one of the things that we are 
struggling with right now is--and we knew that it was coming, 
and that's why we set up a special commission to study that 
problem; was the school districts and the municipalities in 
certain areas where they have these nuclear generating plants 
would be adversely affected, because the value of those plants 
would dramatically go down. And so, right now we are trying to 
craft a piece of legislation that again will be very difficult 
to pass the Illinois General Assembly on how to help out these 
school districts and municipalities. So if you came in with a 
one-size-fit-all, and so on, it could very much upset this 
balance that we're still struggling with ourself.
    Mr. Shimkus. What about the severability clause that you 
all have?
    Mr. Persico. Again, I'm not an expert on this, but we did 
have a clause in there that if one part was found 
unconstitutional, that everything would found.
    Mr. Shimkus. Not just unconstitutional.
    Mr. Persico. That it wouldn't work. It wasn't going to----
    Mr. Shimkus. But if the Federal Government preempted any 
part of your statute, isn't that correct?
    Mr. Persico. I believe that's correct.
    Mr. Shimkus. We would want to follow-up and make sure we 
can get that into the record.
    Mr. Barton. Does Mr. Burr have a question for Mr. Persico?
    Mr. Burr. Just one quick question. Do you believe it's 
possible for Congress to pass a comprehensive piece of 
legislation that, in fact, does not preempt you and does not 
require grandfathering, but eliminates many of the Federal 
hurdles that have been identified?
    Mr. Persico. I guess we started at the same page almost. We 
had people on all sides of the spectrum on either end, and we 
finally were able to craft a piece of legislation through 2 
years of very hard work and 2 years of compromise. Yes, I think 
the Federal Government does have a role, you know, whether 
through the wholesale transmission lines or the PURPA Act, or 
so one, eliminating and repealing the PURPA Act. I think you 
definitely do have a role. This is my humble opinion, I think 
if you come in and say that every State has to do this by this 
certain date, I think it is going to be very difficult to craft 
that kind of piece of legislation. I think you're going to have 
a hard time selling it to your members.
    Mr. Burr. Clearly, a date certain would be preemptive. And 
I'm talking about, do you think it's possible for us to do a 
bill that's comprehensive, that addresses the Federal hurdles, 
that's not preemptive?
    Mr. Persico. Yes, I do.
    Mr. Burr. I'm going to deal back, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Persico. We are going to excuse 
you so that you can catch your airplane. We are going to resume 
regular order. We will hear from Mr. Quain, Mr. Glazer, Ms. 
Clark, Ms. Smith, and then we'll allow each member to question 
them in turn.
    Mr. Persico. Thank you, Mr. Chairman, and members of the 
committee.
    Mr. Barton. We appreciate your testimony. Mr. Quain, you're 
recognized for 7 minutes.

                   STATEMENT OF JOHN M. QUAIN

    Mr. Quain. Thank you, Mr. Chairman, and members of 
subcommittee. Let me answer the question that was asked 
earlier. I do favor a time-line mandate in Federal legislation 
for States to act. Although, I believe that should be far 
enough in advance to allow each State to craft a solution 
individual to its own needs. Listening to Mr. Persico talk, it 
sounded very much like my State in the sense that we have some 
of the highest costs to utility providers in Pennsylvania and 
some of the lowest cost providers in the Nation. And when we 
sat down to look at the electric choice process, we began at 
the Public Utility Commission in Pennsylvania in 1995, and by 
the Summer of 1996, we had concluded as a group that generation 
was no longer a natural monopoly and, as a result, should not 
be regulated as such, but transmission and distribution should. 
But with the findings in that report, the Governor of 
Pennsylvania, Tom Ridge, one of your former colleagues, 
requested that I convene a group of stake-holders to see if we 
could identify problems, reach a consensus piece of legislation 
to present to the Pennsylvania General Assembly that would 
handle all the issues from the various prospectives on such a 
complex and difficult matter. And we did just that. We had 
certainly our electric utilities in the room, we had our rural 
electric co-ops, we had labor, environmentalists, low-income 
consumers, residential consumers, small business advocates, 
large industrial consumers, marketers, independent power 
producers, and the like, and I'm sure I've missed some. But we 
had 50, 60 people sitting around a table, and in over a 2-month 
period of time, we reached a piece of consensus information, 
that all agrees was a good way to open the market in 
Pennsylvania. So the center to that was the environmentalist 
who wanted us to put provisions in the statute that we believe 
were in conflict with Federal law, so we parted ways on that 
singular issue.
    Having done that, we moved to the General Assembly and we 
had a lobbying effort that was rather unique. We had large 
industrial customers sitting in their representives office with 
small and low-income consumers. We had marketers and brokers 
sitting in with industrial users, as well as IOU's, all saying 
the same thing; this is a good way to open up the Pennsylvania 
market. In October 1996, the General Assembly passed the bill 
in both Houses without amendment. In December 1996, the 
Governor signed it into law.
    Now, as of January 1, 1997, the details for implementing 
the electric choice law moved to the Pennsylvania Public 
Utility Commission. We had, under the law, an obligation to 
open the market by January 1, 1999. I am pleased to report that 
over the last 2 years, we have gone through that transition 
process. On January 1, 1999, the market for 66 percent of all 
consumers in Pennsylvania opened, and we believe, in our humble 
opinion, it is a tremendous success story. Let me just give you 
some basic facts. Beginning in July, when we asked people to 
begin to enroll for the first 66 percent of capacity available 
under electric choice, out of 5.2 million customers in 
Pennsylvania, electric customers, 2,000,000 signed up and said, 
``We want to learn more.'' And as time passed, about 1.2 
million of those 2,000,000 customers actually participated in 
the choice process, actually went out and looked for 
alternative suppliers. Now this is a maturing marketplace. We 
are 2 months into the first 66 percent of our electric choice 
program. At this date, over 400,000 Pennsylvania citizens and 
businesses--I'm sorry, just under 400,000. That represents 
approximately 33 percent of all winter peak load in 
Pennsylvania are now shopping for alternative energy in the 
State. Once we passed the legislation, we, of course, had to 
handle such issues as stranded investment and the other 
restructuring issues, and we brought each of our electric 
utilities in for a prolonged rate case proceeding. At the 
conclusion of those rate case proceedings, there were, of 
course, a number of appellate actions which challenged the 
Commissions authority, rights and obligations to enter the 
orders that it did.
    We then turned around and sought to settle the five major 
electric utility cases in Pennsylvania so we could avoid 
litigation. Why did we do that? Because we believe that the 
marketplace needs certainty. The greater the certainty, the 
greater the market, the greater fluidity, the greater 
competition will occur in Pennsylvania. And we were successful 
in five our of five cases negotiating results that all the 
parties, with very few exceptions, have signed off on.
    So today in Pennsylvania, in 1999, if not a single person 
shops in 1999, rates will go down by $458 million in 1 year, 
and at the same time, low-income funding has gone up 122 
percent, as compared to what it was under traditional 
regulations. We have sustainable energy funds that will be 
funded to the tune of $60 million over 5 years. We have 
announced $1.1 billion of additional investment and generating 
capacity in Pennsylvania in 1999 alone. In additional to that, 
we have rate caps in place under the negotiated settlements 
which last years in Pennsylvania. And just looking at the 
energy component that rate payers pay, which you normally see 
our energy cost rate, which is a direct flow-through, by 
tapping those costs through negotiated settlements, we project 
the citizens avoid $8.7 billion, what would otherwise be 
automatic pass-through under traditional regulations. And we're 
excited about the possibility of electric choice in 
Pennsylvania. We look to open up the remainder of the market in 
1 year. We have a tremendous amount of consumer education left 
to do. There is a transition process, there is a need to have 
States develop their own plans to fit the nature of the 
demographics, but to say that regulation is a suitable 
substitute where competition can and should exist, to me, makes 
very little sense. Regulation was only intended to be a 
surrogate where competition could not exist. And if generation 
competition can exist in the United States, it should, and, as 
a result, free market enterprise should be allowed to develop 
and regulation should pull back. That is the philosophy which 
we are operating under, and we think we are beginning to see 
very quickly the benefits of that philosophy in Pennsylvania.
    I'm happy to answer any questions. Thank you.
    [The prepared statement of John M. Quain follows:]
  Prepared Statement of John M. Quain, Chairman, Pennsylvania Public 
   Utility Commission, on Behalf of the Commonwealth of Pennsylvania
    Good afternoon, Mr. Chairman and members of the Subcommittee. Thank 
you for your kind invitation to speak on the role of state regulators 
in restructuring the electric industry. I come before you today to 
discuss the Pennsylvania Public Utility Commission's (``PaPUC'') role 
in electric industry restructuring, and the steps taken by the PaPUC to 
foster competition in electric energy generation. I will also discuss 
the effects these steps have had on the PaPUC's traditional role in 
electric regulation, and identify issues the Pennsylvania Public 
Utility Commission believes should continue to be addressed by the 
states as the electric industry changes.
    Retail electric competition in Pennsylvania is a success story. It 
represents the vision of our Governor, Tom Ridge, the will of our state 
General Assembly, and the cooperation of all of the parties involved in 
the process. Pennsylvania's Electricity Generation Customer Choice and 
Competition Act 1 (``Competition Act'' or ``Act'') was 
signed into law by Governor Tom Ridge on December 3, 1996. The Act 
provides for a careful transition to full retail generation choice by 
January 1, 2001. Sixty six percent of retail electric customers in all 
classes are already eligible to choose their electric generation 
providers. After January 1, 2001, all retail customers will have the 
opportunity to choose their electric generation provider. The purpose 
of the Act is to open up the electric generation market for competition 
in Pennsylvania. Transmission and distribution services continue to be 
regulated by the F.E.R.C. and the PaPUC, respectively.
---------------------------------------------------------------------------
    \1\  PA H.B. 1509, Session of 1995, 66 Pa.C.S. Sec. 2801 et seq., 
``The Electricity Generation Customer Choice and Competition Act'', 
effective January 1, 1997.
---------------------------------------------------------------------------
    Pennsylvania's Act provides for a four-year transition and phase-in 
period to prepare utilities, shareholders, consumers and regulators to 
achieve the maximum benefits of competition. This phase-in period began 
on April 1, 1997, and will continue to January 1, 2001, at which time 
transition to full customer choice will be complete. The purpose of the 
phased transition was to permit our traditional, vertically integrated 
utilities a chance to file restructuring plans functionally unbundling 
their services while allowing all parties to grow into competition. The 
transition has been challenging, but it has also been a success. Retail 
customers now have the choice of who will provide their electricity.
    As I come before you today, more than 1.2 million customers in 
Pennsylvania are eligible to shop for electricity. I should note that 
even if one single customer did not select an alternate supplier, 
Pennsylvania ratepayers will still save approximately $458 million in 
guaranteed rate reductions over the next year by virtue of the 
economies of restructuring and mandatory rate relief. However, I am 
pleased to report that approximately 400,000 customers say they have 
already switched to a competitive market supplier. Those who have 
elected to remain with their traditional utility have also made a 
choice--a choice that was not open to them before the passage of this 
innovative and dynamic legislation. Pennsylvania's consumers are 
leading the nation in exploring the benefits of electric choice. These 
numbers are a strong indication that Pennsylvania is well on its way to 
developing a viable competitive electricity market.
    The Act was the result of a considered process. Prior to 
facilitating the stakeholder process that led to the Pennsylvania Act, 
the PaPUC undertook an investigation into retail competition 
2 which concluded after two years of extensive testimony. 
Among other things, the investigation confirmed that restructuring the 
electric industry at the retail level would be a formidable challenge. 
On the most basic level, it is imperative to balance full retail access 
and customer choice with the need to assure utilities and their 
shareholders a reasonable level of financial stability. Pennsylvania's 
Competition Act provides a reasonable opportunity for utilities to make 
the transition to retail competition and customer choice while 
preserving their financial stability through the opportunity to recover 
stranded costs--utility assets rendered uneconomic by the move to 
competition.
---------------------------------------------------------------------------
    \2\ See, Report and Recommendation to the Governor and General 
Assembly on Electric Competition: From the Investigation into Retail 
Competition, PaPUC Docket No. I-940032 (July 3, 1996). http://
www.pa.us/PA--Exec/Public--Utility/electric--competition
---------------------------------------------------------------------------
    In its role as arbiter and adjudicator in each of the restructuring 
proceedings which have taken place since the effective date of the Act, 
the PaPUC has analyzed all the evidence submitted in favor of and in 
opposition to each company's stranded costs and has led negotiations 
among all parties addressing the appropriateness of each company's 
proposed stranded cost recovery. Ultimately, the PaPUC adjudicated the 
stranded cost issue for each utility in a way which has proved fair to 
both the consumers and the utility shareholders.
    The Act also contains a clear set of directives that electric 
system reliability must be maintained at present levels, or it must 
exceed those levels. The PaPUC has issued competitive safeguards in the 
nature of a proposed rulemaking and continues to ensure that utilities 
adhere to this mandate. Further, the Act guarantees that all consumer 
protections now in place under the Pennsylvania Public Utility Code and 
its attendant regulations will continue in the new era of customer 
choice. The role of the PaPUC in this regard continues, as the 
Commission modifies its regulations as necessary and adjudicates 
consumer complaints. The PaPUC has also implemented the universal 
service provisions contained in the Act, and will continue to do so 
through the issuance of orders and the promulgation of regulations as 
necessary.
    Electric industry competition and restructuring transcends state 
borders. Many of the electricity generation providers licensed to do 
business in Pennsylvania are located outside of our Commonwealth. 
Pennsylvania's Competition Act recognizes that the interconnected 
electric system is a regional and national as well as a state resource. 
The PaPUC is committed to working with the federal government and with 
other states in the region to accomplish the goals of industry 
restructuring, open access and competition. I would be remiss if I did 
not point out that to date, the cooperation which the Commission has 
received from the Federal Energy Regulatory Commission has been 
exemplary and indeed indispensable. Open communication and cooperation 
between the states and the federal government, as well as within 
regions, is essential to realize the full potential of competition. 
Regional cooperation is also necessary to maintain system reliability.
    Pennsylvania prefers that each state be allowed the opportunity to 
set its course into retail competition; however, we recognize that 
there will be those states who choose not to act. We therefore submit 
that the implementation of retail competition on a national basis by a 
date certain is a logical and equitable approach that the PaPUC 
endorses. In order to insure that all states are subject to the same 
competitive forces and that no state is disadvantaged by the creation 
of a new market, reciprocity, nationally and regionally, is imperative. 
Accordingly, any federal legislation which is enacted should contain a 
reciprocity clause.
    Notwithstanding the recognition that federal legislation providing 
for retail competition is necessary, Pennsylvania's Competition Act 
reflects our desire to maintain a necessary measure of control of our 
state's destiny in this area. Accordingly, it is our hope that any 
federal legislation would allow the states an opportunity to act on 
their own by a date certain and would ``grandfather'' existing state 
legislation to the extent that a states' actions are not inconsistent 
with the principles of open access, on a non-discriminatory basis, for 
all of the market participants. We have provided draft language on this 
subject as an attachment to this testimony.
    Additionally, the PaPUC's proposed language includes specific 
language addressing Pennsylvania's desire to have any federal 
initiative preserve the states' authority to collect taxes on energy 
provided to end users situated within the states, regardless of the 
source or its location. One of the stated goals of the Pennsylvania 
legislation was to make competition ``revenue neutral'' with respect to 
tax matters. The proposed language would ensure that any federal 
legislation also remains ``revenue neutral'' as applied to the states.
    In the event that federal legislation is drafted which does not 
contain a grandfathering clause, the PaPUC submits that the legislation 
should preserve the states' authority to enforce regulations to 
implement the requirements of the Act, to the extent feasible, without 
compromising the legislative intent to open up retail competition on a 
state, regional and national basis. Particularly, the PaPUC believes 
that any issues relating to system reliability, universal service, 
retail stranded costs and consumer protections should remain within the 
states' jurisdiction. Pennsylvania has successfully addressed these 
issues through its Competition Act and the issuance of Commission 
orders and regulations, and we hope any federal legislation will 
preserve our authority to do so.
    The consensus-building process that led to the adoption of 
Pennsylvania's Competition Act was intense, sometimes contentious, but 
ultimately very rewarding for Pennsylvania's consumers and, I believe, 
for the electric industry. Managing the transition from regulation to 
increased competition has been our greatest challenge. However, we are 
confident that our efforts will result in benefits for all 
Pennsylvanians, as they have access to safe, reliable and efficient 
service at competitive prices. We will continue, as a state, to do 
everything within our power to make electric competition work for 
Pennsylvania and for the region. We look forward to cooperating with 
Congress in an effort to further the goal of customer choice in 
electric energy.
    I thank you for your attention, your consideration, and I await 
your questions.

    Mr. Barton. Thank you, Mr. Quain.
    We would now like to hear from the Honorable Mr. Craig 
Glazer from the great State of Ohio. Your statements in the 
record in its entirety, and we'll give you 7 minutes to 
summarize.

                  STATEMENT OF CRAIG A. GLAZER

    Mr. Glazer. Okay. Thank you, Mr. Chairman, and members of 
the committee. It is a great honor to testify before you on the 
subject of evolving Federal and State responsibilities in 
electric competition.
    My name is Craig Glazer. I'm the Chairman of the Public 
Utilities Commission of Ohio, and have served in that role for 
the last 8 years and under three Governors, at this point.
    I have to sort of let you in on a little bit of a secret. 
One of your esteemed colleagues on this committee, 
Representative Tom Sawyer--unfortunately, he's not here; used 
to work for us. He worked at the Commission many, many years 
ago, and we still find memos from him----
    Mr. Barton. He's complained about that repeatedly. No, he 
spoke very positively of it. I think you have 4 or 5 Ohioans on 
this committee, so I think your State's position is going to be 
well represented when we get to the mark-up.
    Mr. Glazer. Well, that's good. That's good. We like it that 
way, and we consider ourselves one of the other great States, 
along with the great State of Texas. I've also worked with your 
esteemed minority counsel. I spent many years in the law 
library at Vanderbilt University trying to figure out this 
thing called the ``Interstate Commerce Clause'' years ago.
    We are something of a bellwether for the national mood, as 
you all know. On election night, Ohio is one of the swing 
States that people watch to get a feeling for what's happening 
in the national elections. By the same token, McDonald's and 
Wendy's test markets products in our cities and towns, and so 
we kind of consider ourselves sort of a good indicator as to 
where the national mood is. And like Pennsylvania and Illinois, 
we also were something of a microcosm of the Nation. We have 
high costs and low costs in the same State. We're both a large 
energy producer and a large energy consumer. We are coal State. 
We are also a natural gas producing State. We have strong 
transmission systems, have two competing ISO's going in our 
State at the same time, and we have more registered holding 
companies under PUHCA, the Public Utility Holding Company Act, 
than just about any other State. So we have a great interest in 
these issues.
    Where are we at? Well, it's interesting. Literally, we are 
in the throws of trying to pass electric deregulation in our 
State. We feel the heat from my esteemed colleague, Chairman 
Quain, from Pennsylvania. The Governor just last week 
announced, ``We want to get this done,'' and the House and 
Senate are in intensive discussions. I literally was faxing 
back amendments this morning to proposed legislation. With that 
being said, how do you get your hands around this and what can 
the Federal Government do. That's sort of the questions I heard 
this morning. I'd like to propose a path that would avoid some 
of the mandate problems, of date certains, but also be very 
constructive, I would argue, in moving this issue forward. 
Because, I think this is a Federal and State partnership and 
think there are important things this Congress can do to move 
this forward without stepping over the line and mandating the 
States that might not want to move forward.
    We've got to come up, in my opinion, with a harmonized plan 
that moves forward and serves individual State goals, but has 
incentives, the things that the Federal Government might want 
to see happen, as well. But I would definitely--First, I'm 
going to talk about what I would recommend you not do and then 
talk about what you might do.
    What I would recommend you not do is pull out any one piece 
of legislation, repeal the Public Utility Holding Company Act, 
for example, and do nothing else. It think that that would be 
huge mistake, and there's a lot of reasons for that. I think, 
instead, you ought to borrow a page from your own 
Telecommunications Act of 1996, which set up a checklist for 
States to follow, some incentives for things to happen, but 
also provided for some State flexibility. And I think I would 
argue that that might be the key here, and I can talk about 
that in a minute. But let me go back to sort of what you 
shouldn't do and why, taking PUHCA for a minute, I think it 
would be a mistake to just rip up PUHCA, to just repeal it on 
its own. Let's look at PUHCA for a minute. Well, it addressed a 
number of issues that we are still talking about today, issues 
this Congress dealt with in 1935 that are still issues today. 
PUHCA had provisions about corporate structure. We're still 
talking today about corporate structure; should people be in 
this business or that business. It was an issue back then, an 
issue today. PUHCA talked about cross-subsidization from 
competitive businesses into monopoly businesses, from one 
business into another. That's also a subject we're still 
talking about today. PUHCA was concerned about the 
effectiveness of State regulation on the monopoly parts of the 
business. There are provisions in PUHCA that deal with that. 
That is also something we are still dealing with today. And, 
frankly, the statute is not exactly ancient. This Congress just 
modernized it in 1996 as it related to electrics going into the 
telephone business. PUHCA, in effect, was a market power 
statute, because it dealt with many of these same issues. Is it 
the right statute for the 1990's? Absolutely not. Does it need 
modernization? Absolutely, it does.
    With that being said, my fundamental point is, I think, the 
biggest mistake would be to just rip it up without addressing 
the market-power issue in some other way. And it is for those 
reasons I ask the committee to consider sort of a different 
approach where you would, in fact, adopt a checklist approach. 
How would that work. Let's take PUHCA. PUHCA has line of 
business restrictions, its got merger restrictions, et cetera. 
Those would be lifted under this model, once the individual 
States certified that they had appropriate protections under 
State law that addressed abuses in market-power by large multi-
state holding companies. So a State that has moved toward 
retail competition, those utilities operating in that State 
would be free of PUHCA, as long as there, in fact, was some 
other market-power protection that the State legislature or 
State commission had come up with. For a State that doesn't 
want to move toward retail competition at all, PUHCA could also 
be lifted for those States, but those States would certify that 
the effectiveness of State regulation would still be available 
over a large multi-state holding company. They would certify 
that issue. Just like in the Telecom Act, we certify that 
certain things have happened, and then the FCC, in fact, takes 
some action. So, too, would I suggest you could use that model.
    Now, what happens if one State says, ``Well, I don't want 
to play, I just want to be a hold-out``? I'd be willing to say, 
if there's one State holding out, and it's holding out in a way 
that's having an adverse effect on other States, then and only 
then should there be some kind of override provision, some kind 
of preemption provision. And there is language in the Federal 
Telecom Act that dealt with that. With a State that just didn't 
want to move forward, the FCC then had some authority to move 
forward.
    But under this checklist approach, you could craft a number 
of things. You could give incentives for the very issues that 
you raised. You could give incentives for independent 
transmission. You could give incentives for States to resolve 
stranded costs in a fair way. You could address all of these 
issues and have the States make certifications of them, rather 
than have this one-size-fits-all solution being decided here 
inside the beltway. The bottom line is I think we can work 
through this issue, I think we can find the appropriate 
balance. You did it in the Telecom Act. It hasn't worked 
perfectly, but it's a very sound piece of legislation, and I 
think if you adopt an approach like that, you might be able to 
accomplish some of the ends. I stand ready to work with this 
committee on putting some of these ideas into action.
    [The prepared statement of Craig A. Glazer follows:]
   Prepared Statement of Craig A. Glazer, Chairman, Public Utilities 
                           Commission of Ohio
    Chairman Barton and Committee Members: It is a great honor to 
testify before you on the subject of the evolving Federal and State 
roles in electricity competition. My name is Craig Glazer and I have 
had the honor of serving over the past eight years and under three 
Governors as Chairman of the Public Utilities Commission of Ohio. In 
fact, my appointing authority and former boss, George Voinovich, now 
serves as a U.S. Senator in this Congress as does my former Cabinet 
colleague, then Ohio Lieutenant Governor now U.S. Senator Mike DeWine. 
I bring you greetings from the Buckeye State, which, coincidentally, is 
in the throes of legislative debates on this very topic this week. I 
want you to know that these are my comments and not necessarily those 
of the Public Utilities Commission of Ohio.
    As you may know, our state is something of a bellwether for the 
national mood. We are often one of the swing states that is closely 
watched on election night. By the same token, McDonald's and Wendy's 
often test market products in our cities and towns since Ohio is 
considered a good testing ground of the tastes and fancies of the 
nation.
    Not surprisingly, the same is true with the issue of electricity 
competition. We are something of a microcosm of the nation on this 
issue: we have high-cost and low-cost power in the same state; we are 
both an energy producer and energy consumer; we have large reserves of 
both coal and natural gas; we have strong electric transmission 
systems; we have two different ISOs forming with a border which slices 
our state in two; and we have more registered holding companies subject 
to the Public Utility Holding Company Act (PUHCA) than any other state. 
For all these reasons, we consider ourselves something of a bellwether 
with some unique perspectives from being both a high-cost and low-cost 
state.
    Although only seventh largest in population, Ohio is the fourth 
largest energy consumer in the nation. We are very much part of the 
industrial heartland of the nation and our steel and auto industries 
have retooled and have taken on the international competition. Because 
of our heavy industrial base, the issue of electric competition is very 
important to us. Ohio has high electric costs in the northern part of 
our state (up to 12 cents per kWh), and much lower costs in the 
southern part of the state. However, we are surrounded by states such 
as West Virginia, Kentucky and Indiana, which have lower costs still. 
Even more pressing, at least two states which border us, Michigan and 
Pennsylvania, are aggressively moving forward with restructuring 
implementation.
    For the third year in a row, our state is attempting to pass 
comprehensive restructuring legislation. The leadership of the House 
and Senate of the state legislature are involved, and our Governor, in 
his State-of-the-State message just last week, indicated that the time 
to move forward is now. We've tried to learn from the good and bad of 
the states around us. The proposal now on the table, put forward by a 
bipartisan working group of state legislators, calls for a number of 
things:

a. The commencement of full retail competition on 1/1/01;
b. A ``black box'' approach to stranded costs wherein a specific 
        company-by-company time period for recovery of revenues is set 
        forth in legislation, thus avoiding protracted proceedings;
c. An aggressive stance on ensuring against abuses of market power 
        harming competitive markets. A number of tools are put in place 
        by legislation including: mandatory independent operation and 
        separation of transmission from generation; elimination of 
        pancaked transmission rates; large shopping credits designed to 
        provide an approximate 10% up-front savings for residential and 
        commercial customers if they switch providers; an auctioning 
        off of default customers after the transition period to avoid 
        the incumbent realizing the horizontal market power associated 
        with incumbency; and, incentives for divestiture;
d. Various state tax reforms to ensure a level playing field between 
        in-state and out-of-state generators.
    We are hopeful that this proposal will be passed by June of this 
year enabling us to meet the 1/1/01 start date.
    I firmly believe that there is a role for BOTH state and federal 
legislation in the area of restructuring of the electric industry. I 
want to compliment this particular Federal Energy Regulatory Commission 
under the leadership of Chairman Jim Hoecker, and with an excellent 
group of Commissioner, for reaching out and working with the states. 
There is a dual role here that, if we get it right, can lead to a 
success story for the nation.
    As I mentioned, I firmly believe there is a role for both the 
states and the federal government. Because the provision of electric 
service has BOTH interstate and intrastate qualities, I think it 
critical that we come up with a harmonized plan that moves forward and 
serves individual state goals while recognizing the national and 
international nature of the markets being created. To pull out any one 
piece, be it PUHCA repeal, PURPA repeal, or the imposition of mandatory 
date certains without examining the complex role of how the pieces all 
fit together, would be a mistake. For this reason, I urge the House not 
to pass stand-alone PUHCA repeal or mandatory date certain legislation 
at this time. Rather, I suggest the crafting of a complementary role 
for states and the federal government similar to that embodied in the 
Telecommunications Act. The 1996 Act hasn't worked perfectly; there 
have been state and federal conflicts. But the Congress correctly 
recognized a dual role with states setting local interconnection 
agreements and arbitrating disputes on local matters concerning same, 
and the FCC, after mandatory state consultation, ultimately passing on 
the national issue of the Regional Bell Operating Companies' (RBOC) 
entry into long distance. The basic framework of the Act was sound, 
although the FCC and individual states have gotten in trouble when they 
pushed too hard one way or the other and tried to occupy the field 
rather than recognize the delicate state/federal role.
    I think we can achieve a similar harmonized role if we look to and 
adopt the basic structure of the Telecommunications Act passed by this 
Congress in 1996.
    Let's look at PUHCA for a moment. PUHCA basically provided for a 
corporate structure of this industry which revolved around ``home 
town'' utilities locally based rather than spread across the country. 
PUHCA, through its geographic integration requirements and line of 
business restrictions, was, in effect, a market power statute--one 
designed to address the market power abuses as well as the investor 
abuses of the 1930's multi-state holding companies. After all, one 
cannot forget that a big part of PUHCA was the recognition of the 
otherwise inability of the states to properly regulate a large multi-
state holding company operating through many subsidiaries in multiple 
jurisdictions so as to prevent abuses of markets and customers. In 
fact, the statute was just modernized in 1996 by this Congress to 
include a section to address the complex issues of cross-subsidization 
that can arise when electric companies enter the telecommunications 
market. The statute certainly isn't a perfect one--it definitely needs 
modernization, but that's my whole point. We shouldn't just rip it up 
without carefully ensuring that the market power issue, which can so 
harm competitive markets, is addressed. The same holds true for PURPA 
or provisions of the Federal Power Act.
    It is for these reasons, that I ask the Committee to consider a 
``checklist'' approach to federal legislation as was done in the 
Telecommunications Act of 1996. PUHCA line of business and other 
restrictions would be lifted once the states certified that they had 
appropriate protections under state law that address abuses of market 
power by a large multi-state entity in a state moving toward 
competition. For a state not moving toward retail competition, the 
state would certify that the effectiveness of state regulation over a 
large multi-state holding company is not impaired. There could also be 
a safety valve for federal preemption of a state if the state's actions 
in not certifying lead to a ``one-state holdout'' that is having an 
adverse effect on interstate commerce.
    There has been much talk about the FERC and the states developing 
incentives for companies that take steps to structure themselves in a 
way which fosters independent transmission. Companies that participate 
in ISOs or otherwise eliminate pancaking of rates and improve 
reliability through large multi-state Transco's should get credit for 
that under the checklist approach, leaving clear incentives in federal 
relief from statutes if the underlying goals are met. Through a 
checklist approach, the Congress would be fostering movement toward a 
restructured industry, providing a clear path to the industry itself 
and indicating its intent to be flexible and respectful of individual 
state policies rather than holding a gun to the heads of industrial 
states or centralizing the solution for the country inside the halls of 
FERC, the SEC or this Congress. I would be happy to work further with 
this Committee on the development of such a checklist approach.
    I also want to briefly discuss the issues of setting a mandatory 
date certain for retail electric competition nationwide. At some point, 
the forces of competition are going to force a state to open up its 
markets. But that shouldn't be done through Congressional fiat, but 
rather through the actions of the marketplace and the inevitable 
demands that customers will place on the system. Thus, I would 
discourage a date certain approach in favor of a state opt-out 
approach, so long as the state's actions do not unduly harm the 
interests of other states. I have much respect for the interests of the 
low-cost states. I have low-cost power in my own state. But, at some 
point, in order to maintain a state's competitive position, the low-
cost generating plants will have to be replaced and then this issue 
would be faced. It is in no ones interests to have investors passing 
over investing in a particular state in the process.
    For all these reasons, I encourage a harmonized approach through 
the development of a checklist, with state certification and 
appropriate overrides for an errant state's refusal to cooperate if 
such refusal has a serious impact on interstate commerce and is 
affecting the states around it. Regional oversight would be encouraged, 
and a harmonized patchwork would be developed that would avoid the 
problems of a one-size-fits-all solution on one hand, or the dangers of 
total inaction on the other.
    I look forward to working with this Subcommittee on these concepts 
in the weeks and months to come. Thank you for this opportunity to 
testify today.

    Mr. Barton. We thank you, Commissioner.
    Now, I would like to recognize the Honorable Susan Clark 
from the Great State of Florida and the Chair noticed with 
great sense of envy the show of public affection you gave to 
Congressman Bilirakis as he left the hearing room earlier. We'd 
hope you would extend that to all the other members of the 
subcommittee at the appropriate time.
    Your entire statement is in the record and you are 
recognized for 7 minutes.

                  STATEMENT OF SUSAN F. CLARK

    Ms. Clark. Well, for a minute, I'm speechless, but if I 
turn to the substance of what I want to say, I think I may 
recover a bit.
    Obviously, we disagree on the mandate. And I'm going to put 
that aside, because I think we've had questions on that and 
I'll await any questions on that particular issue. I would only 
point out that what savings you might realize depends on where 
you start from. If you are a high cost State, you are likely to 
recognize much more savings than one that is a low cost State. 
And I know with interest, the savings that were articulated 
with respect to deregulation in Pennsylvania, I would only 
point out to you that recently we approved a rate decrease in 
Florida for Florida Power and Light that will represent over $1 
billion in savings to Florida customers of FP&L over 3 years. 
That isn't to say, I think that is justification for continued 
regulation, but I would only point out that we continue to look 
at how our companies provide power and continue to look at 
whether or not it is at the appropriate price. But let me tell 
you what we do agree on, and I think there are a number of 
things that you can do, Congress should do, and let me start 
with the first one, and that has to do with reliability. I 
think you will get agreements that there needs to be some 
Federal legislation with respect to liability. And I believe 
that authorizing a self-regulating reliability organization to 
establish mandatory standards for reliability and operations of 
the Nation's transmission system are in order. There is a need 
for mandatory compliance with reliability standards and a 
provision of explicit authority for FERC and for States to 
enforce those necessary standards. I would note that we have 
been working with Bonnie Suchman and we have worked with FERC. 
There is a sticking point on the language on the savings clause 
with respect to what jurisdiction and the authority the States 
might have with respect to reliability. And on that point, I 
would remind you that when the lights go out, it's not likely 
that they will call you all, it's not likely they will call up 
here to Washington; they are going to call our Governor, and 
the Governor is going to, in turn, call us at the Public 
Service Commission. So, in course, we feel if we are going to 
be held responsible for it, we should have some responsibility 
in that area. The other thing is, with respect to market-power, 
I think there are areas in which we will need your assistance 
in ensuring that there is not an abuse of market power. We 
recommend, for instance, authorizing, but not mandating, the 
formation of voluntary regional transmission organizations or 
other kinds of entities to promote regional reliability and 
fair and nondiscriminatory open access.
    You know that FERC, at this time, has undertaken a 
proceeding to hear from the States on that subject and 
hopefully come to some resolution with respect to those areas 
that would like their help and those areas that they think need 
further guidance. I can tell you that in Florida, in response 
to FERC's concern about the fairness and nondiscriminatory 
nature of the transmission system, we have workshops, where the 
transmission owning utilities, the transmission dependent 
utilities, and all interested parties are trying to work out 
exactly how we can manage, and by that I mean plan and operate 
the transmission system in Florida, to the advantage of 
everyone. I attended one of those workshops this last Monday 
and I can tell you that there is movement on the part of 
transmission owning companies to accommodate those concerns, so 
that we can have a truly fair and nondiscriminatory open 
process.
    With respect to PUHCA reform, I think it's appropriate to 
repeal PUHCA, provided that there are other measures to guard 
against market power abuses. And the repeal of PUHCA should 
include a provision that State commissions and FERC continue to 
have access to holding company books and records.
    Finally, I agree with the idea that PURPA should be 
repealed. I would note that our commission hasn't taken a 
formal position on this, at this point. But, it would seem if 
you were going to have an open competitive market for 
generation, a mandatory obligation to purchase is inconsistent 
with that. I would point out that I think we should be careful 
in any PURPA legislation, with respect to mandating stranded 
cost. I think that PURPA contracts should be handled in the 
same way utility investment is handled that might be stranded. 
There should be an obligation to mitigate those costs. I 
believe the State commissions are in the best position to deal 
with stranded cost. They are likely to have been involved in 
the decision in the first place, with respect to those 
investments or the contracts. And so, they have some ideas as 
to the way they may be mitigated and the fairness of the 
recovery, with respect to them.
    I suppose I'm here as one of those States that has not 
moved forward with retail competition and, at this point, there 
is nothing on the horizon with respect to State legislation to 
do that. But, I would point out that we have been a leader in 
bringing competition to our regulated industries, when we think 
it's a good idea. We have had competition in the wholesale 
market importer since the late 1970's. We have what is called a 
broker system. We mandated the formation of the broker system 
and then provided incentives to utilities to buy and sell their 
power on that system, so the lowest cost generation would be 
the next generation to be dispatched at any time.
    Also, with respect to telecommunications, we passed our 
Telecommunications Deregulation Act in 1995. We found local 
competition would be beneficial, and so we moved to introduce 
that competition.
    I make those comments today in response currently to Ms. 
Moler's comments, with respect to mandating retail competition. 
In my mind, it assumes that State regulators and State 
legislators will not move to do that, when it is in the 
interest of the people of the State they represent. I think 
that's a false premise. We will move to do that when we see the 
benefits of it. And with that, I will turn my time over to Ms. 
Smith.
    [The prepared statement of Susan F. Clark follows:]
Prepared Statement of Susan F. Clark, Florida Public Service Commission
    Mr. Chairman and members of the subcommittee: Good afternoon. My 
name is Susan Clark. I am a Commissioner on the Florida Public Service 
Commission and Chair of the Committee on Electricity of the National 
Association of Regulatory Utility Commissioners, commonly known as the 
NARUC. Today, I am here representing the Florida Public Service 
Commission (Commission). I have submitted a written statement that I 
respectfully request be included in today's hearing record.
    I understand this subcommittee may soon be dealing with profound 
issues surrounding changing the electric utility industry. You have 
asked me to offer my opinion as to what issues require federal 
intervention to restructure this industry, what areas are best left to 
state authority, and what areas are best addressed by joint state/
federal authority. Before responding, I would like to take just a few 
brief minutes to give the historical backdrop and explain why we find 
ourselves at this junction in reforming the electric industry. For over 
a half century, state public utility commissions (PUCS) have been 
charged with the duty of regulating the retail rates and services of 
electric, gas, water and telephone utilities operating within their 
respective jurisdictions. We have the obligation under state law to 
assure the establishment and maintenance of such energy utility 
services as may be required by the public, and to ensure that such 
services are provided at rates and conditions which are just, 
reasonable and nondiscriminatory for all consumers.
    The Energy Policy Act of 1992 (EPAct) injected a mandatory open 
access requirement for the transmission system that acted as a catalyst 
to promote and encourage wholesale competition. Wholesale competition 
is the sale and purchase of bulk power between utilities and suppliers 
which will ultimately be delivered to the end-use customer by regulated 
companies. Both before and after the competitive changes brought about 
by the EPAct, the U.S. has enjoyed the most economical electricity 
rates among the Western industrialized nations not heavily dependent on 
hydropower. Times and fashions change, of course, and now the electric 
utility industry is one of the last regulated industries to undergo the 
transformation from a monopoly franchise to an open access system. 
States are taking the lead in promoting this change when the state PUC 
and legislature have judged it to be in the public interest.
    Some seventeen states have gone beyond the EPAct and have adopted 
retail electric restructuring programs that enable end-use customers to 
choose among energy suppliers while ensuring the safety, reliability 
and quality of electric services. A substantial number of other states 
are examining whether and when to permit retail access.
    While some argue that this level of activity is insufficient, the 
states that have adopted retail open access electricity programs are 
home to nearly half of the nation's population. All this activity has 
taken place within the last three years, and I believe states will 
continue to pursue restructuring programs if those programs benefit the 
retail customers.
    The states pursuing retail open access are acting with great care 
and precision to ensure the continued reliability of electric services, 
universal access to retail services and public benefits previously 
provided by a vertically integrated industry. Careful review of these 
activities discloses that state restructuring initiatives contain many 
common elements: customer choice, functional unbundling, pricing 
reform, stranded cost recovery, protection of public benefits, market 
power mitigation, and mechanisms to support emerging regional markets. 
It should also come as no surprise that the timing and implementation 
of such initiatives differ from state to state in ways that reflect 
local customer needs and other market realities including such factors 
as climate, demographics, indigenous resources, environmental impacts, 
past choices of technology, current resource preferences, system 
capacity, geography, and form of utility ownership--to name a few.
    It is just this attention to detail that warrants that the states 
continue to have the ultimate responsibility for deciding if and when 
retail competition is permitted. I strongly believe that it would be a 
mistake for any federal legislation to require a mandated date certain 
for retail competition. Clearly, a federally mandated one-size-fits-all 
approach cannot and will not account for the unique concerns and 
circumstances of the individual states. We have seen confusion created 
by the federalization of the telephone industry. Therefore, my most 
important message as a regulator of a state that is taking a more 
deliberative view of retail competition is to not force a federal 
mandate on us. Recently, commissioners from 23 states (The Low-Cost 
States Initiative) addressed a letter to members of Congress confirming 
this stance.
               essential elements of federal legislation
     Federal Energy Regulatory Commission's (FERC) Order No. 888 
spurred the creation of a competitive wholesale power supply market and 
is still in the early stages of development. We believe it prudent for 
Congress to not risk disrupting these policies through prescriptive 
national models, but rather consider targeted and focused legislation 
that facilitates state restructuring efforts. Congress can take steps 
to help the states by removing uncertainty and reducing the prospect of 
tortuous litigation. I believe there are four areas where federal 
action would be helpful in facilitating electric restructuring. These 
four areas include reliability, market power, and PUHCA and PURPA 
reform. Let me address each one of these in some detail.
    As I mentioned earlier, the EPAct opened up the transmission grid 
to promote wholesale competition. Retail competition has imposed even 
more demands on the nation's transmission system in terms of more 
transactions, greater power flows, and therefore higher risks of power 
interruptions and system failures. It is important to keep in mind that 
the overwhelming number of transmission lines that have been 
constructed were primarily designed to serve native retail load. Over 
time, utilities extended transmission lines to import and export 
limited amounts of power and to help backup each other's electrical 
control areas. The system was not designed to act as a huge seamless 
network to transmit bulk electric power around the nation, but FERC 
Orders 888 and 889 specifically intend for these systems to perform 
this function.
    Historically, regional coordination councils have operated 
voluntarily in geographic areas with interconnected transmission or 
control areas to maintain reliable and uniform standards for all users 
of the transmission system. These voluntary and regional councils 
operate under the auspices of the North American Electric Reliability 
Council or NERC. Again, these are voluntary associations with the 
common objective of maintaining a safe and reliable transmission 
system.
    However, with the increased volume of users and new competitive 
users of the system, the NERC recognized the need for a more open and 
representative council that would balance the needs of both the 
historical owners of the system (i.e. the regulated utilities) and the 
new competitive users created by FERC Orders 888 and 889. The NERC has 
worked on legislation that would authorize this self-regulating entity 
to establish mandatory standards for reliability and operations of the 
nation's multi-transmission regions.
    Both the NERC and the NARUC have concluded that Federal legislation 
would be useful in this area. In fact, the NERC has voted to move 
forward with specific language this year. While I do have some concerns 
about the specific NERC legislation because of its lack of mention of 
any role for the states in ensuring planning and operational 
reliability, I am personally convinced that any authorizing legislation 
to give certain regulatory powers to the NERC is needed. Any such 
legislation should explicitly confirm the public interest in 
transmission grid reliability, the need for mandatory compliance with 
reliability standards, and a provision of explicit authority for the 
FERC and the states in cooperation to enforce the necessary standards. 
I emphasize the cooperative nature of this task. This kind of focused 
legislation would further the goals and objectives of the FERC Orders 
and therefore encourage wholesale competition.
    As you consider reliability legislation, I would encourage you to 
remember that the state commissions are the ones that have the ultimate 
responsibility for keeping the lights on, and we are the ones who are 
held accountable when the lights go out. When there is an outage of an 
essential service like electricity, utility customers do not call, nor 
should they be expected to call, the NERC, the FERC or the DOE. Rather, 
customers call the staff and commissioners of the individual state 
PUCs. Our legislative leaders and governors also call us to find out 
when the problem will be resolved.
    Secondly, Federal legislation should authorize, but not mandate, 
the formation of voluntary regional transmission organizations or other 
kinds of entities to promote regional reliability, and fair and 
nondiscriminatory open access. Some movement in this direction is 
happening with the recent announcement by the FERC that it intends to 
consult with the states to explore such organizations. The DOE recently 
transferred its authority under Section 202(a) of the Federal Power Act 
to the FERC with the stated purpose in its news release to, ``provide 
the FERC with the authority to establish boundaries for ISOs, or other 
appropriate transmission entities which could aid in the orderly 
formation of properly sized transmission institutions and enhance the 
development of ISOs in a rational, comprehensive manner.'' The FERC 
recently issued a Notice of Consultation to pursue this stated 
objective. I am optimistic at this time that the voluntary and 
cooperative approach that I am advocating will be championed by the 
FERC.
    The third area in which federal legislation would be helpful is in 
repealing the Public Utility Holding Company Act (PUHCA) and the Public 
Utility Regulatory Policies Act (PURPA) provided certain conditions are 
met. As you may recall, the PUHCA statute was established during the 
1930s to give regulatory oversight to multi-state utility holding 
companies. With today's dramatic transformation of this industry and 
the many mergers and acquisitions that are occurring, the PUHCA appears 
to have outlived its usefulness. The PUHCA law probably is inconsistent 
with the goals of a highly competitive wholesale and retail market, but 
states do not have the authority to grant waivers or exempt utilities 
from the provisions of this act. There is, however, concern that some 
states may not have the authority to address market power issues. In 
light of this concern, Congress should specify in any repeal of the 
PUHCA that state commissions and FERC have access to holding company 
books and records.
    Finally, with respect to PURPA, I would recommend that this statute 
be repealed, but that any existing contracts not be abrogated. Please 
note that our Commission has not formally addressed this particular 
point, however, so my comments here are my own. This statute derives 
from the late 1970s when this law required utilities to purchase power 
from qualifying cogeneration facilities at full avoided costs. Now, 
with a vibrant wholesale market, this requirement simply burdens retail 
customers with long-term power obligations that are usually above 
market rates. However, any legislation on this issue should preserve 
state utility commissions' authority to require electric utilities to 
mitigate costs associated with above-market contracts.
                helpful elements of federal legislation
    Florida has not taken steps to introduce retail choice. 
Nevertheless, we recognize that other states have found such 
restructuring efforts to be in their best interests. To that end, we 
believe legislation should be aimed at assisting those states' efforts 
by:

 Affirming states' authority to order and implement retail 
        access/customer choice programs free from the threat of 
        preemption under the Commerce Clause or the Federal Power Act;
 Affirming states' authority to impose wires charges to support 
        the recovery of stranded costs, state-sponsored energy 
        efficiency and/or environmental programs, and universal service 
        programs;
 Clarifying state jurisdiction to regulate rates, terms and 
        conditions of unbundled retail transmission services;
 Affirming states' exclusive jurisdiction over the rates, terms 
        and conditions of retail electric services.
    With these issues resolved legislatively, while continuing to 
accord states the discretion to determine whether, when and how to open 
retail electricity markets to competition, states would be confident of 
their legal authority to move forward on restructuring efforts. Without 
these changes, states contemplating market reforms may find themselves 
in the position of states like Michigan and New Hampshire where federal 
court litigation, although not yet successful in attacking state 
programs, has slowed restructuring processes.
                               conclusion
    While many believe that wholesale competition provides the vast 
bulk of any uncaptured economic efficiencies for ratepayers, I respect 
the fact that many states have concluded that additional benefits are 
to be gained from direct retail access. In Florida, we are carefully 
watching the more experimental states to learn what models work and 
what lessons are applicable to Florida. At this time, neither the 
Commission nor the Florida legislature has opted to initiate the 
necessary changes to permit retail access. Just last week however, the 
Commission did approve a petition for determination of need for the 
state's first merchant power plant that will be constructed to compete 
on the wholesale level. While still subject to judicial review and 
approval of our governor and cabinet, this project is a major step in 
promoting ever greater wholesale competition in Florida.
    The states are now performing their historic role as laboratories 
to test how the words ``greater competition for retail consumers'' can 
be turned into real-world services that customers will buy. As the FERC 
moves forward in its implementation of Order 888, the state commissions 
and legislatures must be allowed to continue to experiment with retail 
access, including customer choice initiatives. As the consequences of 
competitively-based wholesale markets become clearer, states are 
putting in place complementary retail policies which are adapted to 
regional market conditions. State commissions are developing and 
implementing compatible retail policies which preserve reliability, 
prevent the stranding of ``public goods,'' ensure consistency with 
environmental values, minimize cost shifting, provide for stranded cost 
recovery, and most importantly, improve economic efficiency. Over time, 
states will work together, as some are now doing, to devise and 
implement regional institutions to adapt their regulatory 
responsibilities to the reality of regional power markets.
    If Congress chooses to act in this area, any federal legislation 
should preserve broad state authority to implement these policies 
flexibly in response to the conditions in local retail markets. The 
development of retail customer choice should be implemented in a manner 
that respects these differences. In our view, that can only happen if 
decision makers closest to these conditions--State commissions and 
legislatures--enjoy the flexibility to adapt pro-competitive policies 
to the needs of local retail consumers. In the weeks and months ahead, 
my colleagues and I look forward to working with Congress, with our 
colleagues at the FERC, and with all interested parties to develop 
workable policies that support an efficient and environmentally sound 
electric services industry that meets the needs of all retail 
customers.

    Mr. Barton. Thank you, Ms. Clark. We would now like to 
recognize last, but not least, the commissioner from the great 
potato State of Idaho----
    Ms. Smith. That's right.
    Mr. Barton. Ms. Smith, and point out that when Congressman 
Craig was in the House, he had a photograph, and I don't know 
if he still does, on his Senate office wall of Marilyn Monroe 
in an Idaho potato sack.
    Ms. Smith. Well, I think everyone would look good in an 
Idaho potato sack.
    Mr. Barton. Well, Ms. Monroe did look very good in a burlap 
Idaho potato sack.
    Ms. Smith. Just eat them spuds.
    Mr. Barton. Your testimony is in the record in its entirety 
and you're recognized for 7 minutes.

                  STATEMENT OF MARSHA H. SMITH

    Ms. Smith. Thank you, Mr. Chairman, and members of the 
committee. It's a great honor to be here. Although I would note 
that airline deregulation may work differently, my ticket here 
was $1,764. But, you're worth it.
    Mr. Barton. Doubt that.
    Ms. Smith. Well, maybe I'm worth it.
    Mr. Barton. That's definitely true.
    Ms. Smith. I just want to make some brief remarks, 
basically reacting to comments that I heard earlier today in 
opening statements and from questions of members, because, like 
you say, my comments are in the record. And I am definitely 
here as a State that's not going to retail competition anytime 
soon. And I guess I'd like to point out first of all, in my 
mind, competition is not a goal. Competition is a tool, just 
like regulation is a tool. And the question is: when and where 
do you use which tool to bring adequate, reliable, and 
reasonably price electric service to consumers.
    Many opening remarks seem to be based on the assumption 
that retail competition in this industry will benefit all 
Americans. And I don't believe that's a foregone conclusion or 
a self-fulfilling prophecy. Instead, I would like to turn that 
back to you, as a challenge: if you're going to do something, 
it has to benefit all Americans. And I think that's a big 
challenge.
    And, of course, the key is: first do no harm. So far in the 
past 3 years plus of working on this issue, Idaho hasn't found 
a way to make that happen for our citizens, so that they will 
all benefit. We enjoy some of the lowest electric rates in the 
Nation, due in part to a longstanding active wholesale market 
in the northwest and the west, a market that existed before the 
Energy Policy Act of 1992, and I might add a market that's 
essential to Idaho as a net power importer.
    Another key to our uniqueness in the northwest is the 
predominance of hydroelectric generation, both publicly owned 
and privately owned dams, immense in scale and generation 
output, both, of course, not without its own set of concerns 
and problems. Given our circumstances, Idaho has adopted a go 
slow approach. Just because we've said be cautious, don't rush 
into it, and know what you're doing before you do it, doesn't 
mean we haven't done anything.
    As pointed out in my written remarks, the Public Utilities 
Commission has instituted several pilot programs with our 
investor-owned utilities. Results of one showed some savings in 
the first year of a 2-year pilot, and a change in the wholesale 
market meant there were no savings for those participants in 
the second year and, therefore, they were not anxious to have 
the pilot continued. And at its end, it was terminated. In 
another pilot, they got no one to sign up for it.
    So, I guess another approach we took for which the 
Commission was criticized is for a large industrial customer. 
We allowed them for half of their load to be priced at a market 
rate. In other words, they buy and sell power through their 
local utility, but the utility does it at their direction, and 
they're essentially playing the market. Reports are that 
they've learned a lot. They may be marginally ahead price-wise. 
The price varies, so sometimes they're up and sometimes they're 
down. But, the important thing they told me to point out was 
that this contract has been operating in a time of 
exceptionally good water conditions, where power is plentiful, 
low-cost power is plentiful in the wholesale market. So, 
everybody is kind of concern what happens when we don't have a 
good water year and low cost power isn't plentiful. Because, if 
they're barely saving money now, we don't know what will happen 
in the future. And if this sophisticated large industrial 
customer can't save a lot of money, we worry for the other 
customers.
    The region has also been very active. I think several years 
ago, the four Governors of the northwest States, Washington, 
Oregon, Idaho, Montana, developed a regional review committee 
that gave several recommendations. And out of that has come a 
subscription process for the power of Bonneville Power 
Administration, which, as you know, is a large Federal power 
marketing entity in our region. So the region hasn't been 
inactive and has been going forward in the manner that they see 
might benefit our citizens.
    We've, also, been working hard on the area of 
interconnection. The western interconnection has a group that 
works regularly together, called the Committee for Regional 
Electric Power Cooperation or CREPC. We meet at least twice a 
year on these important issues. It includes Canadian provinces 
and also some States of Mexico, because the interconnection is 
international in scope. And I think one of the most important 
things that Ms. Moler mentioned in her list today, but which 
she didn't emphasize in her oral comments, was that you should 
recognize the regional nature of markets and allow regional 
solutions. And I'm a strong proponent of that, because I think 
the west has a system set up to address issues of a regional 
nature that come up and to see that the region solves its own 
problems.
    Mr. Chairman, I said I wanted to be brief. I found your 
questions very interesting, and I enjoy that interaction. So, 
I'll just close with the comments of one of my colleagues in 
Montana, who when I said I was coming here to do this and did 
he have any suggestions, he said, well, for sure, there 
shouldn't be a Federal mandate. He said, every State should be 
free to do it, even like Montana, to do it in the wrong way at 
the wrong time.
    Thank you, Mr. Chairman.
    [The prepared statement of Marsha H. Smith follows:]
     Prepared Statement of Marsha H. Smith, Idaho Public Utilities 
                              Commissioner
    Good morning. I would like to thank Chairman Barton for this 
opportunity to address the United States House Subcommittee on Energy 
and Power. This valuable process of defining our respective roles in 
the evolving era of electric restructuring will serve the best 
interests of the American public.
    The first issue I've been asked to address this morning is a review 
of the State role in electric regulation. Idaho law requires the 
regulation of investor-owned electric companies, of which there are 
three, but not municipal and cooperative electric providers. Eighty 
percent of Idaho citizens are served by regulated investor-owned 
electric companies. Idaho's electric companies are protected from 
encroachment by other service providers through the state's Electric 
Supplier Stabilization Act. Unless the incumbent provider consents to 
allow service by other providers, it has an exclusive right to serve in 
the geographic area assigned to it.
    In its regulatory authority, the Idaho Public Utilities Commission 
has quasi-legislative and quasi-judicial as well as executive powers 
and duties. In its quasi-legislative capacity, the Commission sets 
rates and makes rules governing utility operations. In its quasi-
judicial mode, the Commission hears and decides complaints, issues 
written orders similar to court orders and may have its decisions 
appealed to the Idaho Supreme Court. As an executive agency, the 
Commission enforces state laws affecting the utility and transportation 
industries.
    Idaho residents consistently enjoy some of the least expensive 
electric service in the nation, according to surveys conducted by the 
National Association of Regulatory Utility Commissioners (NARUC), the 
Edison Electric Institute and the Energy Information Administration of 
the U.S. Department of Energy.1
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    \1\ Attachment #1
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    According to NARUC, Idaho's electric utilities--Idaho Power Co., 
Avista Utilities and PacifiCorp (application on file to merge with 
ScottishPower)--ranked 1st, 6th and 25th among the investor owned 
utilities nationwide with the least expensive rates for residential 
customers during the 1996-97 winter season.
    Our role, then, as state utility regulators is to ensure our 
citizens continue to enjoy affordable, adequate and reliable service 
from providers, which are assured a fair, reasonable and just return on 
their service to and investment in Idaho.
    The second issue I have been asked to address this morning concerns 
any ``dramatic changes'' occurring at the state level and within the 
electric industry which may require changes to the state role in 
regulating our electric service providers.
    Let me begin by saying that electrically, Idaho is in the Northwest 
and part of the Western Interconnection. The key to the uniqueness of 
the Northwest is its hydro predominance, both federally- and privately 
owned dams immense in scale and generation output. In addition there is 
a major federal presence in transmission and an already advanced 
integration of power markets. The Western Interconnection will continue 
to be, in essence, electrically separated from other Interconnections 
in North America. Thus, the power market for western consumers is 
defined by the boundaries of the Western Interconnection.
    As far as any ``dramatic changes'' occurring at the state level and 
within the electric industry, there really haven't been any as far as 
Idaho is concerned. Initially in Idaho, as the national debate over 
restructuring the electric industry heated up, there seemed to be a 
sense of urgency to figure out what was happening before we got run 
over. Now that some states have taken steps, however, many problems and 
unintended consequences seem to have arisen even in states that 
actively sought to restructure in their belief it would be a real 
source of relief from high costs. The blush is off the rose, so to 
speak, and low cost states feel a little more comfortable stating 
openly the real doubts we have had from the outset.
    As a low-cost energy state, Idaho has been and remains very 
interested in the role federal and state policy makers have in 
restructuring the nation's electric industry. And while our perspective 
and concerns may appear somewhat unique to members of this committee, 
particularly those esteemed members from high-cost energy states, I can 
assure you that nearly half the states in the Union 2 share 
Idaho's concerns and they too are determined to play a vital part in 
defining and fulfilling these roles.
---------------------------------------------------------------------------
    \2\ Low Cost Electricity States Initiative signed by the 
Commission's of Alabama, Florida, Georgia, Idaho, Indiana, Kentucky, 
Louisiana, Minnesota, Mississippi, Missouri, Montana, North Carolina, 
North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, 
Tennessee, Utah, Virginia, Washington, West Virginia and Wisconsin.
---------------------------------------------------------------------------
    The Low Cost Electricity States Initiative 3, in brief, 
states, ``As a restructured electric industry becomes a reality in many 
parts of the nation, little attention has been given to the concerns of 
low cost states . . . these low cost states are being pressured into 
opening their electric industries to competition with little or no 
consideration of the effects on native retail customers.''
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    \3\ Attachment #2
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    This is an important document and I strongly encourage the members 
of this committee who may not already be familiar with it to study the 
Initiative closely as it represents the views of 23 states.
    Because we could not find a clear potential for significantly lower 
rates, the Idaho Public Utilities Commission in 1996 issued Order No. 
26555 (Case GNR-E-96-1) which stated that we should be ``cautious with 
respect to an outright deregulation of Idaho's electric markets.'' 
Because our citizens already pay some of the lowest electric rates in 
the nation, deregulation may actually result in lower quality of 
service. We also believe that deregulation has the potential to 
introduce significant rate volatility--something we know from past 
experience that customers do not like.
    Before proceeding to the third and final topic of discussion this 
morning, I would like to take a moment to address the Committee's 
inquiry pertaining to what specific restructuring issues are best 
addressed at the state level. Let me just say that the decision on 
whether to authorize retail competition with a state remains and must 
continue to remain a state decision.
    This brings me to the third issue you have asked me to address . . 
. a review of the steps taken by Idaho to open its retail markets.
    It has been almost two years ago that I appeared here and reported 
to this subcommittee that our Legislature had appropriated $100,000 to 
fund a committee to study electric restructuring. Their work has led to 
a series of generally negative conclusions indicating a feeling that 
electric restructuring is more likely a source of peril than of benefit 
for the state of Idaho. The legislative report 4 also 
vigorously reinforces my earlier testimony to this subcommittee that 
water resource questions of the sort unlikely to even appear on the 
national scale are of vital importance to any consideration of electric 
restructuring in Idaho as well as for other Northwest states.
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    \4\ Attachment #3
---------------------------------------------------------------------------
    In it's final report to the Idaho Legislature, the legislative 
committee formed and funded to study electric restructuring made seven 
recommendations. The first two of these seven recommendations are 
strong position statements that best sum up the political and, perhaps, 
social position in Idaho toward electric restructuring. Recommendation 
One: ``The Committee recommends that our Congressional delegation 
vigorously oppose further deregulation at the federal level.'' 
Recommendation Two: ``The Committee recommends that no state 
legislative actions be taken at this time that would encourage retail 
electric power restructuring.''
    The Idaho legislative committee on electric restructuring has been 
extended by the current Legislature, but their focus seems to have 
become even more clearly, how can Idaho protect itself from 
restructuring.
     Although Commission Order No. 26555 encouraged a cautious approach 
to electric restructuring for Idaho, it also encouraged utilities and 
other interested groups to continue to make innovative proposals. The 
Idaho Commission has approved several utility pilot programs that allow 
for limited tests of retail access.
    Two of these pilot programs were conducted by Washington Water 
Power Co., now known as Avista Utilities, and the third was conducted 
by the Idaho Power Co. The two Avista pilot programs targeted 
industrial, commercial and residential customers. The two programs 
combined had a total eligible customer base of 5,581. Of that base, the 
two pilots attracted 66 participants. Out of fairness, it should be 
noted that 61 participating customers did realize some small savings in 
the first year of the retail pilot. Those savings, however, had 
completely disappeared by the pilot's second year of operation. The 
pilot program offered by Idaho Power Co. to 11 of its industrial 
customers failed to attract even one participant.5
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    \5\ Attachment #4
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    The Commission has also approved a special contract between Idaho 
Power and its largest customer that some opponents claimed was a de 
facto restructuring pilot. The contract allows Idaho Power's largest 
customer--constituting 20-percent of Idaho Power's total load--to shop 
on the market, through an Idaho Power employee, for half its power 
needs.
    Early results of this contract seem to indicate that even this 
major customer, whom one would expect is sophisticated enough to fend 
for itself in a market environment, has not fared any better during the 
first few months of trying the market than it would have with regulated 
rates. It is important to note that the Northwest has experienced 
banner water conditions since the approval of this contract. Thus, 
power has been plentiful and low priced on the wholesale market. If 
this type of customer doesn't benefit under these favorable 
circumstances, what will happen to the majority of Idaho's small 
commercial and residential customers as they try to cope with real 
market choices?
    The Idaho Commission will continue with a number of efforts aimed 
at bringing our state closer to full and informed participation in a 
restructured electric environment 6, but past programs and 
their numbers graphically illustrate the definite lack of interest for 
electric restructuring in Idaho and other low-cost energy states.
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    \6\ Attachment #5
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    Given this resistance by state lawmakers, a coalition of 23 states 
and customers overcome with a complete and utter lack of interest to 
engage in pilot programs imitating free-market conditions, we in Idaho 
do not feel federal authorities should simply impose a ``one size fits 
all'' mandate on the theory that deregulated electric conditions may--
and I emphasize the word ``may''--benefit some customers in the high-
cost energy states . . . states that comprise less than half of the 
country.
    It is the role of citizens and authorities at the state level, and 
where appropriate, the regional level--not federal lawmakers, agencies 
or commissions--to decide and shape this issue according to our own 
energy use patterns, geography, market dynamics, values and interests.
    If Congress is to consider electric restructuring legislation, a 
``Northwest Chapter'' should be incorporated to address the unique 
situation and circumstances of Idaho and her Pacific Northwest 
neighbors. This Northwest Chapter must also include provisions for the 
future of the Bonneville Power Administration.
    Most importantly, the states must have assurances that any federal 
legislation will not force local utilities to renounce their native 
service areas in order to survive in a restructured environment. And 
finally, if you determine that some federal electric restructuring 
policy is unavoidable, we implore you to develop this policy to allow 
for regional differences. The states can work out regional differences 
within the context of broad federal policy guidelines, but without 
federal interference.
    In closing, I would again like to thank you for this opportunity to 
address the subcommittee. Idaho has taken a proactive approach to 
determining what will work best for Idaho industry and Idaho consumers. 
We are a fiercely independent sort in Idaho and while we believe the 
federal government should address broad principles that are of national 
necessity, the details of implementing those principles and other 
matters that are local and regional in nature really belong and must 
remain under state jurisdiction.
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    Mr. Barton. Sounds like a Texan talking, if you ask me.
    The Chair's going to recognize himself for 5 minutes and we 
expect to vote any time between 3:30 and 4, so, hopefully, we 
can get one round in before we break. Unless there's just a 
huge interest, we'll only ask one round of questions of this 
panel and then let the rest be in writing. So, I'm going to 
recognize myself for 5 minutes.
    Commissioner Smith, you obviously have come from what we 
call a low cost State, so it's not exactly a surprise that you 
tend not to want a Federal role in this issue, at this point in 
time. But, I think that you're aware that Idaho did participate 
in a comprehensive review of this issue, along with three other 
States: I think Washington, Oregon----
    Ms. Smith. Montana.
    Mr. Barton. [continuing] and Montana. What were the 
findings of that comprehensive review?
    Ms. Smith. Well, I didn't bring the entire list with me. 
The Bonneville subscription process was one of those I 
mentioned. I believe they also had a finding that the region 
should go to retail choice by July of this year or next year. I 
would say the only State in the region that's enacted 
legislation has been Montana, and they did not choose the date 
in the regional review.
    Mr. Barton. What was the conclusion of the regional review 
about the need, if any, for Federal legislation in this area?
    Ms. Smith. I don't recall that. Perhaps, you have a better 
idea than I do right now.
    Mr. Barton. Well, my staff has the idea that it said that 
there was some Federal legislation necessary.
    Ms. Smith. Well, and I think that's correct. And we've 
heard the areas of Federal legislation that need to be 
addressed. The Holding Company Act, the PURPA purchase 
requirement, I think, are some things that are in Federal law 
now that only Congress can fix.
    Mr. Barton. Again, the staff----
    Ms. Smith. And, I guess, the other item that I think I 
mentioned when I testified here not quite 2 years ago was that 
we need some help with the Bonneville Power Administration, in 
how to deal with that Federal entity as the region 
restructures, because only Congress can address some of the 
requirements and restrictions.
    Mr. Barton. Well, again, we're not here to be argumentative 
and we know that your State, as any low-cost State, is going to 
be less than effusive about the Federal position preempting 
anything in your State. But, this comprehensive review, at 
least according to my staff, did indicate that you needed some 
changes in the Federal Power Act and the Bonneville Power 
Administration that would require Federal legislation. So, even 
in a low-cost State like yours, there has been some political 
input, at least at the gubernatorial level, that you might 
support some change without going whole hog into the issue.
    Ms. Smith. Absolutely. I think you're entirely correct, 
that the northwest does need help in dealing with Bonneville. I 
think what we'd like to work toward is having a place for what 
we have been calling the northwest chapter in any legislation 
that Congress would draft, that would then directly address the 
specific and unique concerns that deal with those agencies in 
our area.
    Mr. Barton. Now, my general question to the other three 
panelists that are still with us: is there anyone at the table 
that doesn't support any type of Federal legislation at all 
this year? Ms. Clark, would Florida's position be----
    Ms. Clark. Well, I have indicated to you the areas that I 
think that you need to act: in reliability market power, PUHCA 
reform, and PURPA repeal. I guess I would characterize it as 
you need to clear out the brush, so that we can move forward, 
as is appropriate for us to do.
    Mr. Barton. Mr. Glazer and Mr. Quain?
    Mr. Glazer. As I indicated, Mr. Chairman, in my remarks, I 
think you can do actually the whole hog, if you will, but do it 
in an incentive based way, such as was done in the 
Telecommunications Act. And that way, you can respect the 
rights of the low-cost States, but still put some stamp on 
moving forward on the national issues.
    Mr. Barton. Okay. Mr. Quain?
    Mr. Quain. I find myself being very much in agreement with 
many of the comments of the first panel, that I think it's 
appropriate to move forward with Federal legislation. I would 
go farther than some of my colleagues sitting at this table, 
but I think a lot of the discussion you had in the first panel 
gave you good ideas as to what needs to be done and I think 
it's appropriate that you do it.
    Mr. Barton. Now, with respect to the grandfathering issue 
in a State like Pennsylvania or a State like Illinois that has 
acted or is in the process of acting, some of the issues that 
both those two States mentioned in their testimony was low-
income energy assistance. So, I would assume that if we pass a 
Federal statute, that grandfathered States, specific activities 
within State boundaries may preempt some of the transmission 
issues, because of the interstate nature of the interconnection 
and the reliability, that that would be an acceptable 
grandfather compromise. And, again, I'm only talking in general 
terms, now. But, as long as we didn't tell you how to dot the 
Is and cross the Ts on how you do low-income energy assistance 
or be too specific on stranded costs recovery, if you've 
allowed for stranded cost recovery and we focused on the 
interstate aspect of the electricity generation and 
transmission system, your State would tend to find that 
acceptable. Is that a fair statement?
    Mr. Quain. I think that's a fair statement, Mr. Chairman. 
I'd be happy to work with you on the details of that. Some of 
those issues seem to fall into the general transmission 
category at first blush, that may have unintended impacts on a 
delicate balance in our legislation, just as Mr. Persico talked 
about it in Illinois. But, I think it's a general proposition, 
that's correct.
    Mr. Barton. Well, I can assure that, as the representative 
of the States, my State of Texas has moved the bill out of the 
State Senate yesterday. It has a number of provisions on low 
income energy assistance and market allocation, and I don't 
think Congressman Hall or myself intends to preempt those. So, 
we're very aware that if the States have acted and it's not 
directly an opposition to the goal of the Federal legislation, 
we see no reason to preempt that.
    My time has expired. I recognize the gentleman from Ohio, 
Mr. Sawyer, for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman. Welcome, Craig Glazer. 
I used to work where he works and----
    Mr. Barton. He was bragging on you when you weren't here. 
He was.
    Mr. Glazer. I've got some secret memos of yours still in 
the file.
    Mr. Sawyer. That was 25 years ago. In any event, I wasn't 
here for the testimony. I read some of your testimony. And so, 
I'm reluctant to consume a lot of time asking questions. Let me 
ask you, though, Craig, you mentioned incentives for fostering 
independent transaction. Could you develop that a little bit 
more for us?
    Mr. Glazer. I think if we borrow the telecommunications 
model, there could be incentives for companies that went 
forward with independent transmission, that separated out 
transmission, from generation. And that would be part of the 
checklist and that would get them some PUHCA relief or some 
other additional incentives. Those are the kind of things that 
I was talking about.
    Mr. Sawyer. Do you have strong feelings about the design of 
independent transmission entities or do you believe we should 
simply describe characteristics that we'd like to see and let 
them develop as they will region by region?
    Mr. Glazer. Well, Representative, it's an excellent 
question. And there was discussion earlier about the price 
spikes in the Midwest that were felt in Illinois and felt in 
Ohio. The Federal Energy Commission did a report on what caused 
that and what's the prospect of the future and the Ohio 
Commission did a report, as well.
    The Federal Energy Commission, I'm not criticizing them. 
The report was excellent. But, it said, it was a one-time 
thing. I don't think we have to be concerned about. We actually 
found, no, this really could happen again and in a retail 
environment could really then affect customers. And your 
constituents start calling you, as they'll call us when they 
see their bill fly up.
    Part of the problem we found is there are no rules for of 
road. There are separate transmission companies. There are five 
just in Ohio. There are five different toll booths to move 
power just from Cincinnati to Akron, Ohio. And there's no rules 
of the road. I sort of analogize it to the air traffic control 
system. Imagine if the air traffic controllers, each worked for 
a different airline, and had an incentive to move their planes 
from their airline, as opposed to having some neutral system--
--
    Mr. Sawyer. Sounds like Europe.
    Mr. Glazer. [continuing] and then imagine on top of that 
that all of them around the country had a different set of 
rules. The planes are flying and nobody knows what the rules of 
the road are. That's kind of where we are in transmission.
    Mr. Barton. That sounds like Congress.
    Mr. Glazer. And the Federal Energy Commission says they 
don't feel that there's a debate whether they have enough 
authority from this Congress to move forward to deal with that 
issue. We think it's got to be solved.
    Mr. Sawyer. Let me ask--take a different task here. I don't 
know whether you saw Energy Daily today. There is an article I 
don't want you to comment on. It's Ohio IOUs take stock hit 
over State deregulation bill. And I think their point is that 
Ohio, being--sitting there betwixt and between now for an 
extended period of time, with legislation on the table that 
gives some people heartburn and the cures aren't there yet and 
being uncertain about whether or not it's going to be able to 
move forward, has had this kind of consequence.
    Mr. Glazer. Yes.
    Mr. Sawyer. Without commenting on that, at some point, it 
seems to me that we run the same risk nationally, having 
legislation that--in many different forms, where we don't move 
and, yet, the market and the technology and the economy is 
moving all around us. Would any of you care to comment on 
problems that that might create within the industry, itself?
    Mr. Glazer. The only comment I would make on that, I think 
it's a very good point, that's why I sort of had suggested this 
checklist approach. There's some broad Federal things you want 
to see happen: independent transmission, some easing of the 
PUHCA restrictions; but, then, still having the flexibility to 
deal with the specific problems of Florida, of the northwest, 
of Pennsylvania. There might be a way around having to tackle 
this very difficult issue, a date certain. And what is that 
date? Is that the same date in Ohio as it is in Idaho?
    I wouldn't want to be in your shoes, having to make that 
decision.
    Mr. Sawyer. Well, Pennsylvania, it's yesterday; in Ohio, 
it's tomorrow; and in Idaho, it's never; right?
    Thank you, Mr. Chairman.
    Mr. Barton. Okay. Mr. Quain, do you want to comment on it?
    Mr. Quain. Well, I just had the comment that I think if you 
set the date certain out far enough and make it clear that 
you're going to give the States individual opportunities to 
craft a piece of legislation that makes sense for their 
jurisdiction, I think you've accomplished the best of both 
worlds, because I think you do run the risk, without a date 
certain, that you do get a patchwork type of approach to this 
and we end up with the same kind of problems with market 
barriers that Chairman Glazer talked about in the transmission 
system. And they ought to be avoided. We ought to have a free-
flowing, open marketplace, but give each State plenty of time 
to develop their own solutions as to how we get there.
    Mr. Sawyer. Thank you, very much.
    Mr. Barton. We recognize the gentleman from Oklahoma for 5 
minutes.
    Mr. Largent. Thank you. Ms. Smith, a question I have for 
you is, we refer to Idaho as a low cost State. Does that also 
mean that your cost of production is low?
    Ms. Smith. The costs that we have related to electric that 
are low are generation costs and transmission costs. Actually--
--
    Mr. Largent. So, generation costs are low?
    Ms. Smith. Our generation costs are low. I think right now 
they're probably below the wholesale market. Our transmission 
costs are low. We found that out when we tried to create 
INDIGO. But, however, I would note that our distribution costs 
are significantly above the national average, because of our 
low density and our terrain.
    Mr. Largent. Right. The question I have for you, then--I 
mean, I guess I'm taking the opposite view of our Chairman, who 
concedes we understand why low-cost States would not want to 
participate in a competitive market. I don't understand that. 
If you are the low cost producer in a competitive marketplace, 
you have a distinct advantage in a competitive field. You've 
got a lot of States to choose to sell to, if you can get to a 
competitive market. You're the low cost producer. Why wouldn't 
you want to compete and earn money? I mean, that's the nature 
of a de-monopoly, that you can do that.
    Ms. Smith. And I agree. And I've often wondered if I were 
sitting on the Board of one of my investor utilities and one of 
my goals was to maximize the company's profits, why wouldn't I 
divest my generating assets, thumb my nose at the State Public 
Utility Commission and the State legislature and make all the 
money I could in the wholesale market. I guess from a 
regulator's point of view, the rates are based on a return that 
the Commission allows. Maybe the company could make more money 
in the market; I'm not sure. But, you see the dilemma.
    Mr. Largent. Not yet. I'm trying.
    Ms. Smith. It's a distinction of whether you're looking at 
it from the point of view of an investor of a utility company 
and whether you're looking at it from the point of view of a 
customer in Idaho. Is that something, if you're the customer, 
that you want your utility to do.
    Mr. Largent. Okay, let me ask you this question: would 
deregulation cause the cost of production to increase?
    Ms. Smith. I don't think so. And I guess I would say that 
in the market we have today, when there is surplus power by one 
of our investor-owned utilities, they do sell that on the 
market, and those revenues are then used to keep our rates 
lower for the regulated side of the company.
    Mr. Largent. So, you like to compete when it benefits you?
    Ms. Smith. That's right.
    Mr. Largent. Well, of course. I mean, that's true for 
anybody. But, I guess what I'm not understanding is, you have 
low cost of production. And you go into a unregulated market or 
a free market, where you have competition, you still have low 
cost production. And now, you are the low cost producer. That's 
the term we hear all the time in free enterprise. You want to 
be the low cost producer. So why would a low cost producer in 
the electric generating industry not want to compete, when 
you've got so many opportunities? I don't get that.
    Ms. Smith. Well, I think you have to distinguish between 
the wholesale market and the retail market.
    Mr. Largent. That's what we--we've already----
    Ms. Smith. Right. Wholesale is deregulated.
    Mr. Largent. We're there; right. We're talking about 
retail. And so what I'm saying is to your customers, who are 
paying a low cost, your cost of getting that electricity to him 
does not go up in a competitive market. So, you don't have to 
raise the rates. You still get to produce it at the same cost. 
You see what I'm saying?
    Ms. Smith. Well, the other complicating factor, I think 
that always snags our legislators is water rights and the 
issues of river governance, because as I stated before, in an 
average water year, 60 percent of our State's electricity is 
generated by hydro projects. And I think Montana has 
deregulated in Montana Power, their generating assets. And I 
believe that they're finding that there are some complications 
with priority rights over the use of that water and the 
availability of the water. So, it's not just the price of power 
that you tinker with when you're dealing with, basically, 
hydroelectric system. And that's one of our legislation's major 
concerns.
    Mr. Largent. That's above our pay grade for sure, because I 
think God is in control of that water issue. But, are we going 
to get another round?
    Mr. Barton. I don't----
    Mr. Largent. I have one short question.
    Mr. Barton. Well, then ask it right now, because we are 
expected to vote in the next 15 minutes. And I think once we 
break for voting, we won't be able to come back.
    Mr. Largent. Okay. This question is for Ms. Clark. You were 
talking about Ms. Moler's comments. But, I'm trying to figure 
out if, say the administration bill passed to deregulate 
electricity and they had a opt out for a State. Why would you 
be opposed to that, when you would have the ability, and it 
sounds like its fairly easy, for your permission to say, you 
know, we've decided that our State is not going to benefit from 
that and so we elect to opt out of this? Why would that--why 
would you be opposed to that?
    Ms. Clark. Let me answer it this way. First of all, if 
those were our choices, you're either going to mandate or opt 
out, we certainly want the opt out.
    Mr. Largent. Well, it's a mandate with an opt out clause.
    Ms. Clark. Well, I know there is, in some legislation, 
that's a pure mandate.
    Mr. Largent. Yeah, right. Okay, we're talking about the----
    Ms. Clark. We're moving up the ladder of what's acceptable. 
What I take issue with is the premise that State commissions 
and State legislators will not make the move to retail 
competition, when they see it as in the best interest of the 
customers in their State. And I agree with what Ms. Smith said, 
competition, in itself, is not the goal. The goal is to get 
lower rates, adequate and reliable service to your customers.
    Mr. Largent. Are commissioners in the State of Florida 
elected or appointed?
    Ms. Clark. No, we are appointed.
    Mr. Largent. Well, I would say that as an appointee, you're 
probably not as sensitive as somebody who would be elected. 
But, I agree with you, I think that you are sensitive to--I 
mean, I think that your serving the public in the capacity that 
you're----
    Ms. Clark. Well, let me point out, and I'm not sure if you 
were here, we have had competition in the wholesale market in 
Florida since the late 1970's.
    Mr. Largent. Yeah, I heard you say that.
    Ms. Clark. We saw the benefit of that. We moved more 
quickly than you all did to introduce competition into 
telecommunications.
    Mr. Largent. Right, I heard you say that.
    Ms. Clark. And we are now taking further steps to assure 
that our transmission in Florida achieves better the goal of 
nondiscriminatory and open access. And we're dealing with the 
issue of merchant plant.
    Mr. Largent. And did you benefit from moving to wholesale 
deregulation in the State of Florida?
    Ms. Clark. You bet. In 1978, I think that was the year, and 
then up through the early 1990's, when we took----
    Mr. Largent. And did you benefit from deregulating telecom?
    Mr. Barton. We do need to recognize Mr. Shimkus, here.
    Ms. Clark. Well, I think there's still a debate going there 
and just let me say, the demographics of Florida are such that 
some of our elderly population don't feel that they've 
benefited from it.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Barton. The Chair would recognize Mr. Shimkus for 5 
minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. As many of you know, 
Illinois was very close to rolling blackouts last summer. One 
of the clear problems that the FERC report pointed out was that 
transmission constraints reduced the ability of utilities to 
move power where it was needed. To address this problem, the 
administration's bill and Congressman Largent's bill have 
included provisions to set up regional transmission planning 
agencies.
    Would your State consider joining voluntary regional 
transmission planning agencies, even if that meant giving up 
some authority to site transmission?
    Mr. Quain. Pennsylvania, yes.
    Mr. Shimkus. Good answer.
    Mr. Glazer. That's hard to top, if you like that answer. We 
are a member of a regional transmission organization. I'm not 
sure that organization has to go so far as to actually locate 
lines in people's backyards, because as Commissioner Clark 
mentioned, at the end of the day, they're going to call the 
Governor and they're going to call us. And giving them the name 
of a regional transmission organization to call to complaint 
about that is just not going to satisfy them.
    Mr. Shimkus. But, you understand the problem in Illinois 
last summer?
    Mr. Glazer. Very much so. We had the same problem.
    Mr. Shimkus. Right. And for us, it was getting through the 
transmission lines that kind of crossed the State of Ohio.
    Mr. Glazer. Well, we actually think it was Pennsylvania 
that was the problem. We are cooperating. They were not 
cooperating. But putting that aside, again, I think, 
Representative, the problem is we have this patchwork system, 
but we don't have any rules of the road. It's like the air 
traffic control system operating----
    Mr. Shimkus. But, you know, when you make that argument, 
you're making the argument for a Federal role.
    Mr. Glazer. I agree. I am suggesting a Federal role on 
transmission. I don't think it has to go so far as to literally 
siting the lines. That's figuring out whose backyard the line 
goes in. But, I am totally in agreement that the Federal 
Government needs a role in transmission----
    Mr. Barton. Would the gentleman yield? You're saying you 
support something, I think, that former FERC Commissioner 
Stalon talked about, where the Federal role is to say there is 
a need and it is the State role to dictate the siting of the 
transmission line?
    Mr. Glazer. I'd certainly be willing to work out something 
along those lines. I think that we need to take a broader view 
of the need for lines, than just the not in my backyard 
syndrome.
    Mr. Barton. Right.
    Mr. Shimkus. Can we go to--let's go to Florida and then 
let's go to the great State of Idaho, where my brother lives.
    Ms. Clark. I'm not quite sure how to answer that, because 
siting transmission is a very difficult problem. Our commission 
has a responsibility for finding a need for a transmission line 
and then it goes to a separate siting board to determine where 
it goes. Last time we sited a transmission line where we said 
there was a need, it did not get built, because they couldn't 
get through the litigation and all the problems of putting it 
in my backyard. I don't know if you'll be any more successful.
    Mr. Shimkus. I'm going to have a follow-up question to 
this, so Ms. Smith----
    Ms. Clark. But, I would just say, I would urge you to be 
aware of that issue, the difficulty of siting transmission.
    Mr. Shimkus. Ms. Smith?
    Ms. Smith. I guess I just want to first say that I don't 
think the western interconnection operates in the same 
patchwork manner that apparently there exists in the Midwest. 
So, I just want to clear up that and state that electrically, 
the western interconnection is separate from the east, so you 
can do anything you want.
    Mr. Shimkus. Okay, let me follow up with this question.
    Ms. Smith. Because, it's people in the east.
    Mr. Shimkus. Let me follow up with this question. Isn't it 
true, though, that in the west, in your area, Bonneville has 
got 80 percent of the transmission grid?
    Ms. Smith. That may be true for the northwest as a whole. 
But, if you look at the map, you will see that there is very 
little Federal transmission in Idaho and most of ours is owned 
by investor-owned utilities, which has given rise to the big 
debate of how you do this RTO. And one way around constraints, 
some of the investor owners say, is let's look at a for-profit 
transco., which would have the incentive to build the line, 
because they're going to make money.
    Mr. Shimkus. Let me follow up: it is most likely that 
Congress will not take away the duty of siting from the States. 
However, if the Federal Government does not site lines and the 
States are reluctant to move forward, how will high quality 
regional markets be established?
    Mr. Glazer. Let me jump in to say I think you need to give 
the FERC some clear authority, relative to these regional 
transmission organizations, so that we get out of this debate 
that we're in, as to do they have authority or not. I would 
strongly suggest that that is a key to getting effective 
wholesale markets; and with effective wholesale markets, then 
effective retail markets can happen. Without effective 
wholesale markets, you can pass all the retail laws you want, 
all the date certains you can, it won't work. So, we've got to 
get the wholesale structure, and really that is something for 
Congress to do.
    Mr. Quain. I think you're exactly right, Representative. I 
think that's the problem in a nutshell. If we're going to move 
toward a new paradigm, we've got to let go of the old and we've 
got to be willing to talk about new structures. And the way I 
heard your question, you didn't say the States were going to 
give up all rights; you said would you be willing to give up 
some. I mean, we have to start talking about new ways to look 
at the movement of power in a reliable fashion, which also 
provides cost benefits to the consumer. And you can't hold on 
to old paradigms just because you're afraid to let go and try 
something different. To have that kind of discussion, to sit 
down and look at those details and determine whether it's a 
better way to handle a developing marketplace is absolutely 
appropriate.
    Mr. Barton. The Chair recognizes the gentleman from Texas, 
Mr. Hall, for 5 minutes.
    Mr. Hall. Mr. Quain, I'll let you answer what you've tried 
to answer for me a while ago. Go ahead.
    Mr. Quain. Well, I thought the question was, do we all 
agree there should not be a Federal mandate for a time line 
certain, and I think there ought to be.
    Mr. Hall. That's one. And you're uncertain, I reread your 
testimony to this.
    I'll stay on the issue that we're on here about 
transmission capacity. I think most of you heard the testimony 
of the first panel and you heard Mr. Stalon, who expressed his 
concern about new transmission capacity, in order to have a 
competitive market. He just felt like you had to have it. And I 
may or may not have misread his testimony as to his 
recommendation that Congress enact legislation to set up a 
Federal authority. And did I understand, Mr. Glazer, that's 
what you think they ought to do?
    Mr. Glazer. I seem to recall there were two different 
Federal authorities he was talking about. If he was talking 
about a regional transmission organization, some independent 
transmission organization, I totally agree with him, and making 
that same argument.
    Mr. Hall. Are you saying ``transition'' or 
``transmission?''
    Mr. Glazer. Transmission, I'm sorry; transmission. If he 
was talking about physically some Federal organization 
physically siting lines, that's all bound up in local zoning 
and local issues, and they want to hear from somebody locally 
on that. So, I think that, frankly, would be stepping over the 
line, if you did that.
    Mr. Hall. Well, I couldn't detect in any of his testimony 
any practical suggestion, if he had his way to craft the 
Federal authority. I think what you're saying there certainly 
carries that out. But, then Mr. Naeve, also, went on to talk 
about making a case for Federal authority. He didn't say 
transition or permanent or what. And he cited the Gas Act and 
you remember I asked him if he could tell us the difference in 
using it for electricity, if it's the Gas Act, and I'll have 
some questions to send to him on that.
    Now, the other witnesses were, I guess, kind of all over 
the place on whether or not the country could truly realize the 
benefits of competition, if FERC, and that was kind of the 
suggestion of the first gentleman, Mr. Moler, or some other 
national entities--he said FERC or another national entity--
couldn't fully realize the benefits, unless some of those 
people were given the authority to site new transmission lines. 
And you may have hit on the answer to it, to give somebody some 
initial transitory authority, but leave it with the States, 
leave it with the local people.
    So, you know, it's pretty easy to understand from the 
viewpoint of just a purely economic theory, that it might 
easiest just to turn it over to feds and let them have full 
power. But, that would be a very controversial political 
decision. I know the chairman here remembers well that we've 
had difficult deciding a permanent nuclear repository site in 
one State, let alone punishing all the other 49. So, I just 
don't think that would sell. But, I think we do well--and I may 
send some more questions to you about some more suggestions 
that you have about an initial thrust that would be transitory 
only. Maybe something good comes out of these hearings.
    Mr. Barton. Wouldn't that be a revelation.
    Mr. Hall. And I thank you for your visit by my office 
yesterday--the day before yesterday. I'm sorry I wasn't there, 
because I enjoyed your testimony. I believe in Atlanta and 
maybe Chicago. I don't know, where you at Chicago--Atlanta? You 
testified in Atlanta?
    Ms. Clark. It was in Atlanta. I don't think it was in 
Chicago, but it's hard to remember.
    Mr. Hall. It was another nice looking lady in red, then. I 
think I've asked everything that I don't intend to ask in my 
letter. Thank you, Mr. Chairman.
    Mr. Barton. We recognize the distinguished vice chairman, 
Mr. Stearns, for 5 minutes.
    Mr. Stearns. Thank you. Thank you, Mr. Chairman. Of course, 
my colleague from Florida, Mr. Bilirakis, already recognized 
the Honorable Susan Clark. And so, I'm belatedly----
    Mr. Barton. She gave him a smooch when he left the hearing 
room. And I'm told that's why you came back.
    Mr. Stearns. That's why I came back. Let me ask you: do you 
know all about--I mean, you studied the Clinton proposal for 
deregulation of energy, Susan?
    Ms. Clark. I have looked at it. But to be honest, you know, 
you get so many things in between, I can't remember the details 
of it, and there have been so many other issues. Unless I have 
it right before me, I don't----
    Mr. Stearns. Oh, I understand.
    Ms. Clark. So, I'd be willing to try and answer your 
question.
    Mr. Stearns. Well, let's just try it. The two things that I 
think are controversial are the portfolio standard and the 
Public Benefits Fund. And I think I was going to ask you and I 
was going to ask all the witnesses what their impressions are 
of that. Maybe if you would care to----
    Ms. Clark. With respect to the portfolio standard, as I 
recall it, it increases costs to Florida, because it calls for 
some percentage of renewables.
    Mr. Stearns. And it mandates it.
    Ms. Clark. Right. And while we are the sunshine State, 
there are problems with solar energy, as far as its cost 
effectiveness. We don't have any wind to speak of either. Well, 
just to indicate that that kind of mandate would not bring 
costs down in Florida.
    Mr. Stearns. Okay. Marsha Smith?
    Ms. Smith. I think that probably the issue is, as 
Commissioner Clark had said it, it probably won't bring costs 
down. But I guess the judgment call for policymakers is, is it 
something that's good for us, even if it cost us money. And I 
guess in my State, it's hard for me to imagine us getting 
public benefits program, unless Congress told us we had to. So, 
if you think that's a good thing, then maybe Congress should 
tell us we have to.
    Mr. Stearns. Well, what the President is proposing is 
through this Public Benefits Fund, a national transmission tax 
and then distributing these funds to the States, if they 
provide matching funds.
    Ms. Smith. Right.
    Mr. Stearns. And so what we're trying to get a feel for, if 
you support that idea, if so, why, and if not, why not?
    Ms. Smith. Well, it's a terrible dilemma for me, 
personally, here, because I suspect that a majority of Idaho 
legislature would not support that. But, I, personally, think 
there may be some benefit to it.
    Mr. Stearns. So, you, personally, support it, but you don't 
think your State legislature would?
    Ms. Smith. I don't think so.
    Mr. Barton. Would the gentleman yield on that?
    Mr. Stearns. Yes.
    Mr. Barton. Well, Pennsylvania and Illinois both have a 
State low income or public benefits funds. So why would we need 
to have a Federal fund, also? Wouldn't that be an area we'd 
just let the States do what they want to do? Wouldn't that 
solve your problem?
    Ms. Smith. Well, I think the Public Benefits Trust Fund 
that I think Mr. Stearns is speaking of is something different 
from a low income assistance program that's on a State level.
    Mr. Barton. But, they go toward the same general purpose. 
It would just balance the needs of the less affluent in those 
States, in some way.
    Ms. Smith. Well, I think the public purposes, as I 
understand it, is to encourage the development of renewables or 
alternative energy sources and research and development, as 
opposed to helping individual low income consumers.
    Mr. Stearns. Of course, once you set up a government fund, 
you sometimes don't know where it's going to go.
    Ms. Smith. That's true.
    Mr. Stearns. Mr. Glazer, maybe you would like to comment, 
as well as Mr. Quain.
    Mr. Glazer. Thank you. Two things on that, and they're sort 
of two different things. This Public Benefits Fund and then the 
portfolio standard, as I understand it----
    Mr. Stearns. Those are the two that I----
    Mr. Glazer. Two, yes, and----
    Mr. Stearns. [continuing] want to know what you feel about 
it.
    Mr. Glazer. Okay. This Congress actually has a Public 
Benefits Fund, in the form of the LIHEAP program, the Low 
Income Home Energy Assistance Program, and, frankly, my State 
and some other States are very dependent on that program. We 
would have people literally going cold in the winter without 
that program.
    The fear is that that program, because of various other 
Federal requirements, gets cut and there's nothing put in its 
place. So, perhaps if there was some kind of ability to put a 
wires charge, we could get out of this every 2 year debate 
about the LIHEAP program, which has been difficult for the 
Congress and difficult for the States.
    The issue of a portfolio standard, which goes to do we have 
renewables, to me, that's a national energy security issue. And 
I think this Congress is uniquely qualified to render a 
judgment on that. We did have energy security problems in the 
1970's and we went to war in the Middle East. So, I don't think 
we should just brush away that on the grounds that it may cost 
us some money. I think it's really an issue to consider, in 
terms of international energy security and national energy 
security.
    Mr. Quain. I thank you. I think this is one that's clearly 
best handled by the States. We do have a low income energy 
assistance program built into our statute and to all of the 
settlements I talked about. We do not have a portfolio 
requirement in the law. But, I would note that when we sat down 
and negotiated each of the settlements for the five major 
electric companies in Pennsylvania, we came up with one, and we 
came up with one that was a little different and funded a 
little differently for each of the five, taking into note that 
the specific characteristics of that utility and the goals that 
that fund was trying to reach. It's different in Philadelphia 
than it would be in the western part of the State, out near 
Allegheny County. So, I think my preference on that would be to 
let that one to the States.
    Mr. Barton. I thank the gentleman from Florida. I recognize 
the gentleman from Ohio, Mr. Strickland, for 5 minutes.
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Glazer, you 
said, I think correctly, that Ohio is a microcosm of the 
Nation. And as you know, in Ohio, we have low cost energy 
regions and high cost energy regions. I happen to represent 
what is a low cost energy region. So, I assume my question to 
you, if Ohio is a microcosm, means that there are such 
conditions existing across the Nation.
    Is it possible or are you concerned that deregulation in 
Ohio will result in the electricity cost for some of the low 
cost regions, which tend to be the poorer parts of the State of 
Ohio, will actually increase, while they may be reduced in 
higher cost parts of the State?
    Mr. Glazer. Representative, it's an excellent question. In 
fact, it is an issue in the Ohio General Assembly right now and 
it's essentially going to tear the General Assembly apart on 
just that very issue. I don't see it, though, as being a 
situation where, oh, if we do this, rates automatically go up 
in the southeastern Ohio, for a couple of reasons. One is 
although southeastern Ohio is low cost, there, in fact, is 
lower cost around us, in Kentucky and West Virginia. And the 
national wholesale market is even cheaper today than the rates 
that your constituents in southeast Ohio pay. So, there's some 
room to move there, to even go lower. Also, we're looking at 
rate caps, some protection for the low cost regions. For 
example, American Electric Power, we would put a rate cap on, 
so they cannot see an increase for a period of time.
    Over the long term, one of the concerns is if we don't move 
at all, what happens is the investment community just says, 
we're not going to invest in generation, in those States that 
are just closed. And, in fact, an AEP or utilities like that 
start disinvesting in southeastern Ohio. And, in fact, then, 
service goes bad and rates then potentially can go up.
    So, I think we have to take some steps to protect the low 
cost areas of the State. I am very concerned about those. And I 
think we can achieve that proper balance. It's an excellent 
question.
    Mr. Strickland. I would like to ask our friend from 
Pennsylvania, have there been regions in Pennsylvania where 
consumers have actually experienced an increase in what they 
have paid versus--prior to deregulation?
    Mr. Quain. We have in our legislation, in our law, rate 
caps for all of our electric utilities in Pennsylvania. And 
it's a two-piece rate cap. There's a generation rate cap that 
runs generally the length of your stranded investment recovery 
and there's a separate transmission distribution rate cap for 
local line rates. So, if you choose to do nothing or you choose 
to stay with your host utility, your rates are capped.
    Interestingly enough, one of the major players that we've 
seen in the early parts of our choice marketplace are renewable 
energy companies coming in that say, I will sell you green 
energy and, yes, it's more expensive than what you're currently 
paying now under rates--we started this whole process, because 
we thought they were too high, and they're more expensive than 
that, but we will guarantee you that it's green energy. It's 
compatible with the environment. And lots and lots and lots of 
people are buying it. So, in that instance, the rates are going 
up. But, it's their choice to do that. They have the protection 
of the rate caps not to make that decision. But, they're 
consciously doing it, because they want to use energy that's 
environmentally compatible.
    Mr. Strickland. And Mr. Glazer, one other question. As you 
know, my region has coal mines.
    Mr. Glazer. Yes.
    Mr. Strickland. And I'm interested in your opinion, as to 
the effect of deregulation on the coal industry. And if the 
other panel members would have thoughts about that, as well, I 
would be interested in what they may think.
    Mr. Glazer. Representative, I'm really glad you're asking 
me this question this morning. I thought Mr. Pallone would come 
after me on environmental stuff from New Jersey.
    I actually see deregulation as having a huge benefit for 
the coal industry, because where does low cost power, which 
they'll be such a demand for, come from. It comes from coal. 
We've got to make sure we deal with these environmental issues, 
in a way it doesn't make coal obsolete, which would be a 
disaster. But, in fact, I see it as a great benefit for the 
coal industry and for the coal miners, because all these States 
around us, Pennsylvania, Illinois, are looking for low cost 
power. That comes from the coal fields in southeastern Ohio.
    Mr. Strickland. Thank you, sir. And I'll try to deal with 
my friend, Mr. Frank Pallone. Help you out there. Thank you.
    Mr. Barton. We thank the gentleman from Ohio. And may I ask 
the gentleman from North Carolina to bring us home; bring us 
around home, third base, and home run down at the home plate.
    Mr. Burr. The pressure is tough.
    Mr. Barton. I know. The Tar Heel State can deliver. 
Although North Carolina didn't exactly shine in the NCAAP 
tournament.
    Mr. Burr. The word is Duke.
    Mr. Barton. My team didn't even make it, so--five minutes.
    Mr. Burr. Mr. Glazer, tell me what significant difference 
the Ohio Commission's position would be, other than yours. You 
made a note in your testimony, ``I speak as an individual and 
not as the Commission.''
    Mr. Glazer. It was just a CYA here, if you will. We didn't 
actually have the time to vote on these comments as a 
Commission, sir.
    Mr. Burr. But not--your views are not inconsistent with 
what's going on in Ohio?
    Mr. Glazer. No, they are not.
    Mr. Burr. Thank you. Ms. Clark, let me just ask you a real 
bold question. Do you believe that there's any generating 
company out there that can bring to Florida cheaper prices than 
what you have today?
    Ms. Clark. You mean the average price?
    Mr. Burr. I'm talking about is there anybody out there, 
given that we went to retail competition that could supply 
Florida customers cheaper than they currently pay for 
electricity.
    Ms. Clark. Well, you need to remember, we price on average 
cost. And I'm sure there are marginal cost plants and the new 
plants are going to be lower cost. I would point out to you 
that I think those benefits come from wholesale competition. 
The question is how much more benefits come from retail 
competition.
    Mr. Burr. If one believed that to be really a solution, 
then I would suggest that Mr. Glazer wouldn't have--as a matter 
of fact, I might even go to Mr. Quain, because I think 
Pennsylvania had the biggest disparity between high price and 
low price power of any State. Am I right, Mr. Quain?
    [Witness nodded yes.]
    Mr. Burr. And given that there's wholesale capabilities to 
buy, you would think that they wouldn't have a disparity of 
that kind, wouldn't you?
    Mr. Clark. A disparity in cost from different plants?
    Mr. Burr. A disparity in what the consumer pays.
    Mr. Stearns. Would the gentleman yield just to follow up 
what you said? I think he's asking what the average residential 
family pays, kilowatt per hour----
    Ms. Clark. Right.
    Mr. Stearns. [continuing] is pretty good, relative to New 
Hampshire and New York.
    Ms. Clark. Florida, yes.
    Mr. Stearns. But, if we had retail competition, do you 
foresee the average residential customer getting it cheaper 
than it is today?
    Ms. Clark. Not necessarily.
    Mr. Burr. All right. Let me rephrase my question in the way 
it was asked.
    Is it possible your customers might get lower cost 
electricity?
    Ms. Clark. Again, I would point out that you need to make a 
distinction between if you introduce it in wholesale 
competition and you're assuring that the next unit you dispatch 
is the least cost unit, then everyone benefits from it. You 
spread the cost across the whole body of ratepayers.
    Mr. Burr. Ms. Smith, is it true that Bonneville does supply 
some power to Idaho?
    Ms. Smith. Yes. About 20 percent of customers in Idaho are 
served by either cooperative or municipal utilities. And while 
some of those own a small amount of generation, most of them 
are full requirements customers of Bonneville, which means they 
take power wholesale from Bonneville at a preference rate.
    Mr. Burr. Would you have any objection if Congress passed a 
bill that required Bonneville, over some period of time, maybe 
5 years, to pay back the Federal Government and to recover that 
through the power cost of their sale price?
    Ms. Smith. I believe Bonneville is paying back the Federal 
Government. I've sat at lengthy meetings, where they discussed 
their revenue and their debt payment and how they're going to 
cover it. So, I believe that Bonneville is paying back the 
Federal Government.
    Mr. Burr. Actually, I would challenge you on that. I've 
heard the same statements by them and, unfortunately, on the 
balance sheet, there's very little effort. As a matter of fact, 
I don't believe that we can give Bonneville away today, as a 
Federal entity, that there's any power concern out there that 
we can turn it over to and that they would accept it.
    But, let me ask you about--Congressman Crapo, I think, 
drilled in and said, you can't reach much lower prices than you 
have in Idaho. So, I'll give you that. Do you believe that if 
Idaho were to stay closed, but everywhere else stayed open, 
should the investor owners in Idaho be able to sell into the 
other States?
    Ms. Smith. Absolutely.
    Mr. Burr. So, reciprocity would both you, if you didn't 
open up your market, but--and other States said to your 
investor owners, sorry, if you're not--if your State isn't 
open, then you can't sell into ours.
    Ms. Smith. Well, I wouldn't see why a State, which 
advocated competition, both wholesale and retail, would want to 
foreclose the opportunity of their citizens to buy from anyone, 
who had the lowest price. So, to me, I don't understand that 
kind of thought.
    Mr. Burr. I guess we would have trouble understanding why a 
State, who had the lowest cost, would close their State from 
retail competition.
    Ms. Smith. Well, like I pointed out in my response earlier, 
when you're dealing with a hydro system, it's not just the 
price of power that people are worried about, and it's all 
these other things they haven't figured out how to manage in 
that transition.
    Mr. Burr. But, you wouldn't see an inequity in the fact 
that you chose not to open your marketplace, and your investor 
owners were not offered the opportunity to sell into other 
States? You would see a problem with that?
    Ms. Smith. Well, I would not understand the State that 
opened that said we're foreclosing some people from 
participating in selling to our customers, especially if those 
are entities that maybe could provide the lowest cost energy.
    Mr. Burr. I'll wait and try to ask you some further 
questions written, because I think just your actions sort of 
answers the questions for me, as far as Idaho's position. 
Currently, it's fairly easy for that to happen or for people to 
understand it. It doesn't make much sense to me.
    Mr. Barton. We know North Carolina and Idaho can disagree 
agreeably. So, let's wrap this up, Ms. Clark has a plane to 
catch at 5.
    Mr. Burr. I thank the chairman and I thank all of the 
witnesses. And the attempt here is not to highlight the 
differences, it's to really figure out where the consensus is; 
but more importantly, as we proceed forward, either as States 
or as a Congress, to find out how we do it right. And I thank 
the chairman.
    Mr. Barton. That's correct. The Chair would ask unanimous 
consent that a statement by the National Retail Federation be 
put in the record. It's been reviewed by the staff and both the 
majority and minority, and there's no objection.
    Do I hear an objection from any of the members?
    [No response.]
    Mr. Barton. Hearing none, so ordered.
    [The statement follows:]
          Prepared Statement of The National Retail Federation
    The National Retail Federation is the world's largest with 
membership that comprises all retail formats and channels of 
distribution including department, specialty, discount, catalogue, 
Internet and independent stores. NRF members represent an industry that 
encompasses more than 1.4 million U.S. retail establishments, employs 
more than 20 million people--about 1 in 5 American workers-and 
registered 1998 sales of $2.7 trillion. NRF's international members 
operate stores in more than 50 nations. In its role as the umbrella 
group, NRF also represents 32 national and 50 state associations in the 
U.S. as well as 36 national associations representing retailers abroad.
    NRF's vision of the way in which electricity will be purchased in 
the future is quite simple. A large network of electricity generators 
and power marketers will sell electricity to end-users across the 
country, either directly or including power marketers, at prices set by 
the competitive markets. Prices will be determined as they are with any 
other commodity, based on supply and demand, through both spot and 
future markets. Power will be purchased from power plants across the 
country, transported through transmission systems operated by 
independent systems operators and delivered through distribution 
companies which will appear, to consumers, to resemble today's public 
utility companies. Distribution and transmission companies will remain 
regulated monopolies for the foreseeable future.
    Our view of the future is a FEDERALLY deregulated electric industry 
in which:

 All customers benefit from deregulation.
 Deregulation is achieved through universal direct access, 
        rather than a government-mandated pool approach.
 Direct access occurs simultaneously for all customers. If 
        technical constraints require that, in a few instances, direct 
        access to be phased-in, the phase-in will not disadvantage any 
        class of customers.
 Generation, transmission, and distribution services, are 
        unbundled, either functionally or through divestiture.
 Smaller electric consumers participate in the competitive 
        market place through aggregation.
 Stranded cost recovery is shared equitably by utility 
        customers and by utility shareholders.
    All Customers Will Benefits From Federal Deregulation. Deregulation 
will lead to a competitive environment which will benefit all 
customers. The benefits to be derived from competition are evident in 
the federal deregulation of the natural gas, airline, trucking and 
telecommunications industries. When pressure builds for electric rate 
relief, regulated monopolies react by giving relief to large customers 
who threaten to self-generate or to leave the service area of the 
monopoly. Everyone else pays for the benefit received by the few 
customers who have the economic power to negotiate discounts.
 A deregulated environment will not allow for such distortion 
        of the competitive market. NRF member companies want to 
        purchase electricity competitively so that they can share in 
        the benefits of competition at the earliest possible time. NRF 
        members also want their customers, the residential electric 
        consumer, to share equally in those benefits. After all, 
        retailers benefit whenever their customers have additional 
        disposable income.
 Competition Is Best Achieved Through Universal Direct Access. 
        Direct access to competing generators of electricity provides 
        consumers with the incentives necessary to participate in the 
        competitive marketplace. Those incentives are muted in the 
        poolco approach which has been proposed in some states. Direct 
        access, whether through bilateral contract or through 
        aggregation, provides the opportunity for a willing buyer and a 
        willing seller to set prices through competitive negotiation, 
        rather than relying on a price auction controlled by utilities, 
        which could distort free market pricing. Mandatory pools will, 
        in essence, result in a shift from multiple utilities within a 
        state to a single larger utility. Such a shift will not create 
        competition and does not drive prices down. The pool approach 
        will most likely lead to a re-regulation rather than to 
        deregulation. If pools develop they should develop through the 
        action of market forces rather than as a result of government 
        mandate.
 Direct Access Should Occur Simultaneously For All Customers. 
        In the few instances where technical constraints might prohibit 
        immediate direct access for all customers, no class of customer 
        should be disadvantaged by any resulting phase-in of universal 
        direct access. In those instances where a phase-in is 
        necessary, it should be implemented in such a way which will 
        benefit all classes of customers simultaneously.
 Unbundling is Necessary to Promote Competition. Unbundling, 
        whether it is functional unbundling or unbundling through 
        divestiture, is necessary to insure that utilities do not 
        unfairly shift generation expenses to their transmission and 
        distribution functions, or otherwise give unfair advantage to 
        their generation components, which will be to the detriment of 
        true competition.
 Smaller Electric Consumers Can Participate in the Competitive 
        Market Through Aggregation. Some consumers, especially large 
        consumers, will aggregate off of their own facilities in a 
        given area. Other consumers, including small commercial and 
        residential consumers, will aggregate with a number of 
        unrelated companies or individuals in a geographic area. 
        Aggregation could provide participants an average rate 
        reduction of 18 percent. Innovative planning such as 
        aggregation will define the electricity market in years to 
        come, insuring that electricity consumers, large and small, 
        will benefit from competition.
 Stranded Cost Recovery Dominates Much Of the Electricity 
        Utility Deregulation Debate. We do not believe that utilities 
        are entitled to total stranded cost recovery. Stranded Costs 
        caused by government mandate should be recovered to the extent 
        utilities are unable to mitigate those costs. Stranded costs 
        caused by bad management decisions should not be recovered.
 We envision a burst of competitive pricing as deregulation 
        becomes a reality. This will be followed by a period of 
        reflection as consumers and electric generators analyze the 
        effect of this new pricing. As competition forces utilities and 
        other power suppliers to become more efficient, as stranded 
        costs are dealt with and as competition encourages innovation 
        in load management and conservation techniques, electricity 
        prices will enter into a period of long, steady decline and 
        savings will increase over a period of many years.
 In Conclusion, the National Retail Federation looks forward to 
        the development of a federally deregulated electric market 
        throughout the United States which will provided competitive 
        benefits for all consumer classes on a non-discriminatory basis 
        through customer choice. The Congress is encouraged to enact 
        legislation which will facilitate nationwide retail competition 
        as soon as possible and which will insure that federal 
        regulatory activity will not impede competition.

    Mr. Barton. We want to thank you, ladies and gentlemen, for 
testifying. We will work with the minority next week to 
determine the next hearing on this issue, and we hope that we 
will be able to reach agreement, as to the subject and the time 
and be able to announce that sometime next week.
    The next hearing the subcommittee is going to convene is on 
the Iraqi oil for food program that's been sanctioned by the 
United Nations. There will be additional questions for each of 
you in the record. We appreciate your timely response.
    And this hearing is adjourned.
    [Whereupon, at 4:15 p.m, the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
        Prepared Statement of American Public Power Association
    The American Public Power Association, the national service 
organization representing the interests of the nation's 2,000 
community- and state-owned, not-for-profit public power systems, 
commends Chairman Barton on restarting the hearing and discussion 
process on the details of electricity competition. Sorting out the 
appropriate federal and state roles in this matter is among the most 
important activities that can be undertaken in order to move the 
process forward.
    Public power systems have long played a vital, pro-competitive role 
in the electric utility industry, and APPA supports the enactment of 
federal legislation that removes federal barriers and encourages the 
creation of retail competition. Since the first municipal systems were 
established over 115 years ago, public power has fostered competition 
by serving as a comparison ``yardstick'' for consumers against which to 
judge the performance of private utilities. Today, APPA's members are 
actively participating in efforts at the state and local level to 
implement retail choice initiatives. Public power associations in 
several states have endorsed ``customer choice'' initiatives under 
consideration by their respective legislatures. In addition, cities 
like Cleveland, Ohio, and Lubbock, Texas, have had ``door-to-door'' 
retail competition in place for decades.
    With this in mind, APPA believes the following issues are 
appropriate and necessary to deal with at the federal level:

 ensure there are no federal legal impediments to state and 
        local decision-making regarding retail competition and clarify 
        jurisdictional questions, while preserving the traditional 
        authorities of state and local governments over retail electric 
        service;
 mitigate market power through provisions such as a revised 
        merger standard that provides FERC with clear authority to 
        condition proposed mergers on divestiture of such generation 
        and transmission facilities as necessary to prevent market 
        power in any relevant geographic or product market;
 remove federal tax impediments on public power systems' 
        ability to compete and participate in independent regional 
        transmission organizations by including the provisions 
        contained in H.R. 721, the Bond Fairness and Protection Act;
 provide clear and specific authority to require the creation 
        of strong, truly independent regional transmission 
        organizations in order to facilitate the development of 
        vigorously competitive regional power markets;
 maintain or enhance the reliability of the electric system by 
        including the industry consensus language which assists in the 
        transition of the North American Electric Reliability Council 
        (NERC) to the North American Electric Reliability Association 
        (NAERO);
 address regulatory impediments to hydropower's competitive 
        position in a restructured marketplace;
 ensure that electricity is available to all consumers at a 
        reasonable price through options such as municipal aggregation 
        programs;
 encourage cost-effective renewable energy without prescribing 
        quotas;
 promote energy research and development.
    The balance of the detailed decisions should be left up to state 
and local authority.
    Examples of decisions better left to the states include:
 When (or 10 the state can realize benefits from choice and is 
        prepared to move to retail competition;
 Determination of reasonable stranded cost recovery for 
        generation assets;
 The percentage (if any) that electricity providers are 
        required to generate from renewable resources, including 
        hydropower;
 The level at which all participants in the electricity market, 
        including non-traditional power providers, are required to 
        contribute toward the costs and other obligations of public 
        interest programs;
 Deference to regional and customer decisions in certain areas 
        of the country served by federal power marketing 
        administrations on how best to deal with those entities in a 
        restructured environment. These regional approaches should be 
        encouraged and respected by Congress in any federal 
        restructuring legislation. In the Pacific Northwest, for 
        example, issues regarding the Bonneville Power Administration 
        involve a multitude of complex and interrelated concerns. 
        Stakeholders in this region, including public power systems, 
        are in the best position to develop consensus solutions to the 
        unique concerns affecting their region. The same is true in the 
        Tennessee Valley, where TVA power distributors, TVA, and the 
        Department of Energy are developing a consensus proposal on how 
        best to deal with the complex issues surrounding the evolution 
        of TVA in competitive markets;
 Maintaining ultimate decision-making authority over customer 
        safeguards and service quality protections;
 Determination of which ancillary services should be opened to 
        competition, such as metering and billing functions in order to 
        retain the highest levels of accuracy, customer privacy, and 
        public safety.


    RELIABILITY AND TRANSMISSION IN COMPETITIVE ELECTRICITY MARKETS

                              ----------                              


                        THURSDAY, APRIL 22, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2322, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Bilirakis, 
Stearns, Largent, Burr, Whitfield, Norwood, Shimkus, Pickering, 
Bryant, Ehrlich, Bliley (ex officio), Hall, Sawyer, Markey, 
Gordon, Wynn, and Dingell (ex officio).
    Staff present: Cathy Van Way, majority counsel; Joe 
Kelliher, majority counsel; Donn Salvosa, legislative clerk; 
Sue Sheridan, minority counsel; and Rick Kessler, minority 
professional staff.
    Mr. Barton. If the subcommittee could come to order, we 
would like to start the second in a series of hearings in the 
electricity restructuring issue. Today's hearing is on 
reliability and transmission and how that will help us to a 
competitive electricity market.
    I want to welcome everyone today. The changes sweeping the 
electric industry in recent years have been nothing short of 
incredible. The industry is rapidly transforming itself from a 
highly regulated industry to one where competition plays a 
driving role. I believe this trend toward retail competition is 
irreversible. At the same time it is becoming apparent it is 
time for our Federal laws and regulations to catch up where the 
marketplace is headed.
    As Chairman Bliley has said and I have said, the question 
before the Congress has shifted from whether Congress should 
pass legislation to open retail markets, to when Congress 
should pass such legislation. Today we are going to examine 
what the scope of Federal legislation should be with respect to 
reliability and transmission.
    When I accepted the gavel at the beginning of this 
Congress, one of the goals we set for the subcommittee was to 
pass a comprehensive bill that lowers electricity prices for 
consumers by promoting competition. Toward this end, we are 
going to hear today from witnesses about two issues that are 
critical to restructuring. Those issues, as I said earlier, are 
transmission and reliability. They are certainly issues that 
are not unfamiliar to this body.
    From the input that we have received from the largest and 
smallest consumers and everyone in between, reliability is a 
very big concern. The question that is raised time and time 
again is, Who will I call when our lights go out? It is a 
simple question, but it is an important question. Similarly, 
while everyone recognizes competition changes the way we need 
to think about reliability, it does not necessarily imperil it. 
In fact, separating generation, which will be competitive, from 
transmission and distribution, which are likely to remain 
regulated, will have a positive impact on reliability.
    As the system changes, I believe we need Federal 
legislation to provide for enforceable reliability provisions. 
There is a broad consensus that continued reliance on voluntary 
reliability standards is not viable and will lead to 
significant reliability problems. Consensus is forming around a 
self-regulating organization certified by the FERC that will 
develop reliability standards ultimately enforced by the FERC.
    Today we are going to take a close look throughout the 
reliability proposal developed by the North American Electric 
Reliability Council, or NAERC.
    Similarly, for competition to truly flourish, we must make 
sure that our transmission system is genuinely open and is 
governed by one set of rules. It is clear that EPAct and Order 
No. 888, went a long way to make access to the transmission 
system more open. However, most of today's testimony verifies 
that complete open access to transmission lines has not 
arrived.
    We hope to hear some suggestions today about how to assure 
our interstate transmission lines are as open as possible so 
that consumers can reap the benefits of competition. We look 
forward to hearing from all of our witnesses today.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                               and Power
    The changes sweeping the electric industry in recent years have 
been nothing short of incredible. The industry is restructuring itself 
with every diversification, with every merger, and with every voluntary 
and involuntary divestiture. I believe the trend towards retail 
competition is irreversible.
    As Chairman Bliley and I have said many times before, the question 
before Congress has shifted from ``whether'' Congress should pass 
legislation to open retail markets to ``when.'' Today we examine what 
the scope of Federal legislation should be with respect to reliability 
and transmission.
    When I accepted the gavel at the beginning of this Congress, one of 
the goals we set for this Subcommittee was to pass comprehensive 
Federal electricity legislation that lowers electric prices for 
consumers by promoting competition in retail markets. Towards this end, 
today we are going to hear from two panels about two of the most 
talked-about issues related to the restructuring of the electricity 
industry in this country. The issues are transmission and reliability 
and they are certainly not unfamiliar to this body.
    From the input we have received from the largest and smallest 
electricity consumers, and everyone in between, reliability is one of 
the biggest concerns. The question that is raised time and time again 
is, ``Who will I call if my lights go out?'' It is a simple question, 
and it is important. Importantly though while everyone recognizes this, 
we must change the way we think about reliability, it does not 
necessarily imperil it. In fact, separating generation which will be 
competitive and suppliers will be looking to cut costs from 
transmission and distribution which are likely to have a positive 
impact on reliability.
    I believe Federal legislation will provide for enforceable 
reliability provisions. There is a broad consensus that continued 
reliance on voluntary reliability standards is not viable, and will 
lead to significant reliability problems. Consensus has developed 
around developing a self-regulating organization certified by FERC that 
will develop reliability standards ultimately enforced by FERC. I 
believe we should take a close look at the work done by the North 
American Reliability Electricity Council.
    Similarily, for competition to truly flourish, we must make sure 
our transmission system is genuinely open and is governed by one set of 
rules. It is clear that EPAct and Order 888 went a long way to make 
access to the transmission system more open. However, most of today's 
testimony verifies that access to transmission lines are still subject 
to problems. I hope to hear some suggestions today about how to assure 
our interstate transmission are as open as possible.
    I look forward to hearing from all of the witnesses on both of 
these important issues and learning from what they have to tell us.

    Mr. Barton. Now I would like to recognize the distinguished 
ranking member of the full committee, the gentleman from 
Michigan, the Dean of the House of Representatives, Mr. 
Dingell, for an opening statement.
    Mr. Dingell. Mr. Chairman, I thank you. Mr. Chairman, I 
commend you for holding today's hearings. These hearings will 
touch on one of the most important issues in this entire debate 
on electrical utility restructuring.
    Historically, the United States has enjoyed the most 
reliable electric transmission system in the world. It also has 
enjoyed the cheapest and the best service. This gives a 
tremendous advantage to ordinary citizens, residential 
dwellers, business and consumers alike and also to American 
industry. It is a major factor in the high competitiveness of 
the American economy.
    The electrical utility industry faces changes on every 
front, all of which bear upon the issue of reliability. About 
20 States are now at some stage of switching over to retail 
competition. This raises question about how generation reserves 
will be maintained and how adequate transmission capacity will 
be preserved under even more competitive circumstances. It is 
evident already that reliability in certain areas of the 
country may be jeopardized by constraints in the transmission 
system at a time when building new lines is more difficult than 
ever.
    Last summer we saw real stress on the system and we came 
very close to serious trouble, including major blackouts and 
brownouts, particularly in the Middle West.
    On the environmental front, the timing of new regulatory 
requirements is going to result in plants being temporarily 
shut down. This means that reliability is going to again be 
stressed. I would note this threatens to occur at the worst 
possible time in the need to maintain the system's reliability. 
And that is something to which EPA and others who are pushing 
for changes in the system could better direct their attention.
    Last summer, as I mentioned, the Midwest experienced real 
difficulties which should be unsettling to anyone concerned 
with electric reliability and the well-being of consumers. 
Although we did not have blackouts, these were narrowly averted 
and only then because a number of customers were curtailed and 
because things like rolling cutbacks occurred. Utilities in 
this region did it by the book, but that did not lessen the 
inconvenience and the costs to those whose service was 
interrupted.
    I would note that a lot of wholesalers got into the 
business and a fair number of them were incapable of delivering 
power at the time and under the terms that their contracts 
required. I think that is something we better take a look at 
because I would note that in most instances, the bills before 
us, and other proposals, impose less requirements for good 
character, financial capability, and other things important 
than do the requirements of State law with regard to 
beauticians.
    Let us look a little bit at what happened last year. Only a 
small volume of power was sold at spectacular prices but those 
were in the range of $7,000 per kilowatt hour. In California, 
they went $9,000 and more per kilowatt hour. These price spikes 
should warn us that we can ill afford to take the stability of 
our electrical utility system for granted in a time of power 
change, particularly as it appears that the level overall of 
reserves is falling.
    State regulators and utilities in the Midwest are braced 
for another difficult summer. And it behooves all of us to 
closely examine the forces at work in this rapidly changing 
marketplace.
    I want to commend you again, Mr. Chairman, for holding this 
hearing. And I want to tell you how important it is that we 
look to see what is going to occur with regard to the question 
of reliability of service. Clearly, this must be one of the 
committee's central concerns as it considers--as it continues 
its deliberations on these matters. Again, I commend you and I 
thank you, Mr. Chairman.
    [The prepared statement of Hon. John D. Dingell follows:]
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Today's hearing touches on one of the most important issues in the 
electric restructuring debate. Historically, the United States has 
enjoyed the most reliable electric transmission system in the world. 
This is a tremendous advantage to residential and business consumers 
alike, and one which we simply must maintain.
    The electric industry faces change on every front, all of which 
bear on reliability.
    About twenty states are at some stage of switching over to retail 
competition. This raises questions about how generation reserves will 
be maintained, and how adequate transmission capacity will be 
preserved, under ever more competitive circumstances.
    It is evident already that reliability in certain areas of the 
country may be jeopardized by constraints in the transmission system, 
at a time when building new lines is more difficult than ever.
    On the environmental front, the timing of new regulatory 
requirements will result in plants being temporarily shut down, which 
threatens to occur at the worst possible time in terms of the need to 
maintain the system's reliability.
    Last summer the Midwest experienced difficulties which should be 
unsettling for anyone concerned with electric reliability and 
consumers' wellbeing. Although we did not have blackouts, these were 
narrowly averted and only because certain customers were curtailed. 
Utilities in the region did this by the book, but that did not lessen 
the inconvenience and cost to those whose service was interrupted.
    And while only a small volume of power sold at the spectacular 
prices in range of $7,000 per kilowatt hour, these price spikes serve 
notice that we can ill afford to take the stability of our electric 
system for granted in this era of rapid change. State regulators and 
utilities in the Midwest are braced for another difficult summer, and 
it behooves all of us to closely examine the forces at work in this 
rapidly changing marketplace.
    I thank the chairman for holding this hearing and for focusing on 
what certainly must be this Committee's central concern as it continues 
its deliberations on the future of the electric industry.

    Mr. Barton. Thank you, Mr. Dingell.
    We recognize the distinguished gentleman from Kentucky, Mr. 
Whitfield, for an opening statement.
    Mr. Whitfield. Mr. Chairman, thank you very much. Although 
I was not in Congress at the time, I was involved in 
deregulation of the airline industry, the railroad industry, 
and the trucking industry, all of which I supported. And when 
you represent an area of the country that has some of the 
lowest rates in the country for electricity, you want to 
proceed with these hearings with an open mind but also to look 
closely at issues like reliability and others and their impact 
on the district that you represent.
    So I am delighted that we are continuing these hearings and 
particularly today to focus on reliability. I noticed that we 
have two panels of nine witnesses, all of whom have a lot of 
experience in this area, and I know that their testimony will 
be quite helpful to us as we proceed to explore this 
opportunity of deregulation. I yield back the balance of my 
time.
    Mr. Barton. Thank you. I recognize the distinguished 
ranking member, Mr. Hall.
    Mr. Hall. Mr. Chairman, thank you very much. I think 
today's hearing on transmission and reliability issues is 
probably one of the most important hearings that we will have 
today as we address the Federal Government's role in the 
restructuring of the electric utility industry.
    It seems to me that the issues that are before us today are 
not mandates and the dates certain are the real centerpiece of 
what might be contained in any Federal legislation. Reliability 
has got to be the one word that we can't give up on, our right 
to rely or someone to call in case it fails. And quality. And, 
of course, quality is the end word for reliability and 
transmission.
    So I am glad to see us get away from talking about mandates 
and dates certain and all of that and get to what the real 
centerpiece of what this thing is. These are unique Federal 
issues, issues that can only be dealt with by Congress, and 
what we ultimately do will have profound implications on 
reliability, and that is reliability of the power system and 
the viability of all the stakeholders that use it.
    Now, Mr. Chairman, I expect that there will be a number of 
questions and additional issues raised here today that are 
going to need even some further examination, which will lead us 
into other questions and answers that we need to seek to make 
the puzzle fit together. While I am not a fan of endless 
hearings, I think we owe it to ourselves to make certain we 
have a good grip on all the policy options. It looks as if we 
need it. If it looks that way, why I know and hope you will 
schedule such additional days as are required to develop a 
thorough and complete record.
    I know you, Mr. Chairman, and I know your background. I 
know that you have been recognized as engineer of the year in 
your own State, that you have an inquiring mind--and I am 
buttering you up here.
    Mr. Barton. Keep buttering.
    Mr. Hall. You are enjoying it, aren't you?
    Mr. Barton. It is good.
    Mr. Hall. And the courage to act. You know, those are 
ingredients that a good chairman needs. Believe me, Joe Barton 
has every one of those. So it is a pleasure to work with him 
and take this information. That is the reason we have the 
interest in this legislation. That is the way you attracted 
``his honor'' here to testify for us today, so it is too 
important to the economic well-being of this country not to 
build a complete and accurate record and that is what we are 
doing.
    I think we need the best minds to come before us and the 
consequences of not doing it and not doing it right can be very 
unfortunate. Speaking of the best minds, we have some of them 
here today, Mr. Chairman. Thank you for being here, and other 
witnesses. I want to issue a special welcome, if the chairman 
hasn't already done it, to Trudy Utter of Garlington, Texas, 
who is on our second panel.
    I yield back the balance of my time, Mr. Chairman, unless 
you would like me to talk about you a little more, but I think 
I read it just exactly as you wrote it.
    Mr. Barton. I don't think the recording clerk got it down, 
though.
    Mr. Hall. Would you like a second reading?
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Hall. The Chair would 
like to recognize the distinguished gentleman from the great 
State of Tennessee, Mr. Bryant, for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman. I was going to echo 
the remarks of Mr. Hall up to the point where he started 
talking about you, and then I realized what we had was two 
Texans here. I looked down there at Ed Markey from 
Massachusetts, and we kind of shook our heads. I just want 
Texas fans to realize there would not be a Texas were it not 
for Tennessee, Sam Houston, David Crockett, and all those good 
volunteers we sent down there to help them out.
    Mr. Barton. Amen to that, brother.
    Mr. Bryant. Amen. Along that line, I do want to echo what 
Mr. Hall and Mr. Whitfield said, and others I am sure had said 
before I arrived, about this issue being an important one--
along with the cost, I think, low cost, I think reliability is 
the other key to any system that we go to in restructuring. I 
am just pleased to be here today and also to welcome Matthew 
Cordaro, a friend I have known from years past in Nashville. He 
is the President and CEO of the Nashville Electric Service and 
will be testifying today on behalf of the Large Power Council. 
I look forward to hearing from Matthew and the other 
distinguished members of this panel, and would simply remind 
all of you that, as you know the business of Washington--we are 
at various meetings throughout the day, and at times you will 
see us come and go, and it is not anything that you should view 
as disrespectful. It is just that we can only be at one place 
at one time. We unfortunately are scheduled to be at other 
hearings throughout the Capitol area today, so if we have to 
leave, that is our reasoning or excuse early on; but again, we 
thank you and look forward to hearing from your distinguished 
panel. Mr. Chairman.
    Mr. Barton. Thank you. I might point out that my relatives, 
way back when, came from eastern Tennessee but they got to 
Texas about 1840.
    Does the gentleman from Massachusetts, Mr. Markey, wish to 
make an opening statement?
    Mr. Markey. Thank you. Thank you, Mr. Chairman, very much. 
As we move from the era where the wholesale demonopolization of 
the electricity marketplace, which was enacted and ultimately 
implemented pursuant to the Energy Policy Act which was passed 
out of this committee in 1992, to an era of retail competition, 
it is very important for us to deal with the issues of 
reliability. That is, guaranteeing that the lights don't go out 
or dim in people's homes, that their television sets work, that 
they are never interfered with, that industries don't have 
unfortunate interruptions of their service. After all, that is 
what the American economy is all about. And I think that is 
really where our committee once again comes into play.
    We have an opportunity to make sure that as we break down 
these State and relatively small regional conglomerates and 
create national marketplaces, we have to make sure that as 
electricity is being wheeled around the country, that there are 
guarantees that the system is going to be reliable, that all 
parts of it understand that they have a responsibility now to 
other parts of the country to guarantee that the electricity is 
flowing into every home, every industry in the United States.
    And toward that goal, I have been able, without question, 
to partner with a great Texan, a man whom I admire, and I think 
someone who as a partner is somebody who I believe will help to 
give us the leadership which we need. And, of course, I am 
speaking here of Tom Delay, the Majority Whip, who has 
introduced with me a piece of legislation on these issues to 
guarantee----
    Mr. Barton. Is he a member of this subcommittee?
    Mr. Markey. You have got to have a Texan to be in this 
fight. I feel a little bit like I am at the Alamo a lot of the 
time, coming in from another State. So I am looking for all the 
help I can get. These Texans are tough.
    So, Mr. Delay and I have introduced a piece of legislation 
that would establish authority over the North American 
Electricity Reliability Council and the regional reliability 
councils, enhance FERC's authority to deal with market power 
abuses that could degrade reliability, and create incentives 
for new transmission siting. It seems to me that this is the 
kind of thing that our subcommittee is uniquely qualified to be 
able to deal with.
    As we move from smaller, more isolated regional and State-
based electricity networks to national networks, in turn we 
have a responsibility to make sure that these national networks 
in fact are effective.
    I thank you, Mr. Chairman. I share the gentleman from 
Texas, Mr. Hall's admiration for your knowledge in these areas. 
I think that we are really kicking off this subject with just 
the right kind of hearing today and I look forward to working 
with both of you toward the goal of resolving this issue this 
year. I thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Markey. We recognize Mr. 
Burr from North Carolina for an opening statement.
    Mr. Burr. Thank you, Mr. Chairman. I would be remiss if I 
didn't also highlight your good qualities and follow up on Mr. 
Bryant's suggestion that had it not been for Tennessee, there 
would have been no Texas, and had there not been the kind gift 
of North Carolina, there would have been no Tennessee. So now 
that we have gotten to the front of the food chain----
    Mr. Markey. Can I say something here? I am going to put in 
a word for Plymouth Rock here.
    Mr. Burr. If you can bring that rock in. I have learned one 
valuable thing this morning: why Texans wear boots and high 
pants.
    Mr. Barton. I think he has gone to meddling now. Time is 
up.
    Mr. Burr. I do, on a serious note, want to thank the 
chairman for the continuation of this process. I believe moving 
forward is the thing for us to do. We have a great set of 
witnesses today to hopefully guide us through, and I only wish 
that the answer to the reliability question were as easy as the 
lights that somebody in the back of the room cutoff just a few 
minutes ago and very quickly cut back on but. It is not that 
simple to identify where the problem is, and in many cases the 
problem exists before you know there is one.
    And I think that one of the responsibilities of the 
industry and of the Congress is as we move forward to better 
understand how to have the safeguards and to hopefully take--
Mr. Hoecker, your first paragraph where you said, ``Let markets 
not regulators, determine the price of,'' and you had 
``wholesale power,'' and I think our attempt is just to say 
``power.'' I am confident the markets can do it and that we can 
have the assurances of reliability and the effectiveness of our 
transmission system.
    And with that, I yield back, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Burr.
    We now recognize the gentleman from Ohio, Mr. Sawyer. I am 
interested to see how he is going to talk about his State in 
the beginnings of the great State of Texas.
    Mr. Sawyer. Mr. Chairman, while I live in Ohio, my family 
first came to this country through Virginia, one of those dates 
that you memorized in your history books. I have always 
hesitated to talk about that and I discovered why when Kika de 
la Garza told the story that he loved to tell. I am sure you 
know about when he was first asked, when he first came to the 
Congress, by the daughters of Texas how long his people had 
been in this country, and he paused for a moment and smiled and 
said, ``Well, it is kind of hard to tell. You see, first, we 
lived in Spain. We lived so many places. We lived in Spain and 
we lived in Mexico. Then we actually lived in the Republic of 
Texas and then we lived in the Confederacy, and then finally 
lived in the State of Texas and, you know, we never left the 
land. We settled in 1604.'' It puts things into perspective for 
all of us as you might----
    Mr. Hall. I think my uncle Christopher knew your people.
    Mr. Sawyer. To get back to the topic, one of my staff 
clipped an item that noted trade journal, Rolling Stone, in 
which John ``Cougar'' Mellencamp observed that in the thirties, 
rural electrification brought electricity to rural dwellers and 
with that came radios, record players, music. According to 
Mellencamp, his upcoming tour will be called the ``Rural 
Electrification Tour.'' In many ways, he is trying to take from 
one era and build into another. It is exactly what we are 
trying to do.
    I have a longer opening statement that I would like to 
offer for the record, but I just want to make one observation; 
and that is, today's transmission structure works but it works 
largely by the accident of physics and not through any 
particularly well-crafted, thoughtful, far-seeing vision of 
what an effective transmission system ought to look like. It 
really comes about because various service territories, rate of 
return, regulated entities, really abut up against one another, 
and it provides the capacity for product to move.
    In that sense, it seems to me that it is very much like the 
condition of the U.S. highway system prior to the 1950's. Yes, 
people could get from one place to another and it worked 
reasonably well, but it was wholly unsuited to the kind of 
commerce that developed in the fifties and sixties and since 
then. With the growth of the interstate highway system, the 
highway system became a backbone of commerce in the United 
States and, in many ways, created personal freedom that allowed 
communities to grow and develop in wholly natural ways. But 
those systems followed the siting of the interstate highway 
system, that growth.
    We face a similar circumstance here where the development 
and growth of a transmission system can be the genuine backbone 
of competition in this industry as it evolves in the next 
century. It is that which it seems to me offers the greatest 
opportunity for an effective and flexible Federal framework 
within which that private growth can take place.
    How well we do that is really going to be at the heart of 
how well we succeed in this large national undertaking of the 
deregulation and restructuring of a large and complex century-
old business. We have the strongest economy on Earth. It is in 
no small way due to the effectiveness of that system that has 
grown to this point, and how well we nurture that growth in the 
coming century may well depend on how well we do this job here.
    With that I conclude my comments and thank you, Mr. 
Chairman, for your latitude in offering----
    Mr. Barton. Thank you.
    I recognize the gentleman from Oklahoma who has been one of 
the strongest advocates for this issue and has worked 
tirelessly on it for many years. Mr. Largent of Oklahoma.
    Mr. Largent. Thank you, Mr. Chairman. Thanks for having 
this hearing. We have got a number of issues to work on. I am 
excited that we are developing the momentum. The question is 
not whether we are going to do electricity restructuring, it is 
just when. And I think reliability is one of those issues that 
is important to everybody.
    And so I look forward to hearing from both panels this 
morning on what we need to do to make our transmission system--
if in fact moving to a restructured environment actually can 
improve reliability and transmission innovations. So thank you 
for holding this hearing and I look forward as we continue the 
march forward on electricity restructuring.
    [The prepared statement of Hon. Steve Largent follows:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress 
                       from the State of Oklahoma
    Thank you, Mr. Chairman, for continuing the forward momentum of 
comprehensive restructuring of the electricity industry monopoly with 
this hearing on reliability and transmission issues in a competitive 
market.
    When those with concerns about the federal role in electricity 
restructuring ask why we need to move at the federal level--ensuring 
nationwide system reliability is among the best of reasons. In fact, 
now that 21 states have moved toward a restructured marketplace it is 
critical that reliability provisions be enacted at the federal level.
    While I believe that the need exists for strengthened reliability 
provisions regardless of whether you support federal restructuring 
legislation, I also believe that it should be a vital part of any 
restructuring bill that this subcommittee considers later this summer.
    I think the witnesses today can enlighten us on all the major 
issues associated with reliability and transmission in competitive 
markets, beginning with FERC Chairman Hoecker. In addition, I look 
forward to hearing about more pure market solutions to increasing 
reliability and transmission capabilities. These solutions include 
superconductor technologies that maximize current transmission 
capacities by reducing line losses and distributive power advances that 
place the generation closer to the end user. I look forward to their 
testimony.
    Last week, Secretary Richardson unveiled the Administration 
Electricity bill and I believe momentum grows each day that this 
Subcommittee sits down and works through these issues. I think we will 
soon discover that we can move a good, fair, bipartisan bill to the 
floor because there is more that joins us then separates us. The 
importance of reliability of our electrical energy is something I think 
we can agree on.
    Thank you once again Mr. Chairman.

    Mr. Barton. Thank you. Does the gentleman from Georgia, Mr. 
Norwood, wish to make an opening statement?
    Mr. Norwood. No, Mr. Chairman. Thank you very much for 
having the hearing. I would like to offer my statement for the 
record. It is very lengthy, but frankly I have talked so much 
this week I am tired of hearing myself talk so I will pass.
    Mr. Barton. The audience appreciates that, I am sure.
    Does the gentleman from Illinois, Mr. Shimkus, wish an 
opening statement?
    Mr. Shimkus. Thank you, Mr. Chairman. Thank you for holding 
this hearing. I just look forward to hearing today how the 
regional transmission organizations, expanded NAERC authority, 
and additional FERC authority will help address price spikes. 
Of course, Illinois experienced those last year. I think it 
would be a good day to get some questions answered. So I want 
to welcome Chairman Hoecker, and I look forward to the 
testimony.
    Mr. Barton. Being no other members present--oh, I am sorry. 
I didn't see Mr. Wynn. I apologize.
    Mr. Shimkus. He is small.
    Mr. Barton. I recognize the distinguished gentleman from 
the great State of Maryland, Mr. Wynn, for an opening 
statement.
    Mr. Wynn. Thank you, Mr. Chairman. I will be brief. Let me 
also applaud you for holding these hearings and continuing this 
process of moving this forward.
    I am particularly interested in today's hearing because I 
think it hits on an area where we may in fact have a 
significant Federal role. We are looking at a system that was 
designed around a regional concept of transmission. We are now 
entering an era in which we will be looking at a very different 
interstate, a national interstate system, larger amounts of 
electricity traveling longer distances. And I think that will 
pose new challenges in the area of reliability. I am very 
excited to hear the witnesses and would like to submit a full 
statement at a later time.
    Mr. Barton. I want to apologize to Congressman Wynn. I 
recognized two Republican Congressmen who came in after you. I 
sincerely didn't see you. I apologize.
    Mr. Wynn. No problem.
    Mr. Barton. The Chair, taking a very careful look around 
the room, I see no other members present. All members that are 
not present will have the requisite number of days to put a 
written statement in the record. All members present who wish 
to elaborate on their statements will do so without objection.
    [Additional statement received for the record follows:
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida
    Thank you Mr. Chairman. As always is the case, I commend you for 
the decision to hold a hearing on this subject, and for your diligent 
work on the broader topic of energy-related matters. Today's hearing is 
timely considering the current State and Federal efforts toward 
restructuring.
    At the heart of the Federal debate are the issues of transmission 
and reliability. They are the cornerstone of the electric utility 
industry. Put simply, Americans expect power to reach their homes and 
turn on the lights each and every time they flip a switch.
    In developing a Federal approach to competition, we have an 
obligation to consider the merits of competition and its effect on the 
reliability of the system. The current scheme is remarkable. System 
reliability is achieved by a dynamic and intricately crafted framework. 
The organization chiefly responsible for this transmission framework 
and the reliability of bulk electric systems in the US is the North 
American Electric Reliability Council, or NERC.
    The best and most important features of the NERC is that it was 
developed by the utilities, not by the government, and that it depends 
entirely upon itself for guidance and regulation. But there is a 
drawback in that NERC does not enforce compliance with reliability 
standards because it lacks enforcement power. Additionally, FERC is not 
authorized to enforce reliability standards.
    Given increasing competition in the electricity industry, some 
propose that we establish a new self-regulating reliability 
organization subject to FERC certification and oversight that would 
develop enforceable reliable standards. A number of legislative 
proposals provide for enforcement of reliability standards by a FERC-
certified self-regulating organization.
    Another key issue in this discussion will surely be the fact that 
the transmission system is not subject to the same set of rules. FERC 
is only authorized to regulate the transmission systems owned by 
investor-owned utilities. FERC does not regulate the other 34% of the 
transmission system owned by the Federal electric utilities, State and 
municipal utilities, and rural electric cooperatives. Additionally, 
distributive generation technology presents the question of how to 
interconnect this dispersed generation with the traditional 
distribution grid.
    Many believe that a competitive market would better operate if the 
transmission market were fully open and subject to one set of rules. 
This would require legislation to amend the Federal Power Act and other 
laws.
    Transmission owners are collaborating to create regional 
transmission organizations, or RTO's to manage and operate the 
transmission grid and provide nondiscriminatory access to the grid. 
RTO's are proposed as one response to address concerns that internal 
practices and procedures would be inadequate to prevent manipulation of 
transmission systems to limit competition in generation. FERC is 
expected to issue a notice of rulemaking on RTO's in the near future. 
This may provide guidance, however some fear that FERC may exceed its 
authority under current law in the rule.
    Clearly a consensus is developing that the transmission and 
reliability are foremost in the list of issues Congress must deal with 
in formulating a Federal deregulation strategy. I anticipate a fruitful 
and enlightened debate today, I welcome our panels and I look forward 
to their testimony. Again, I commend the Chairman of the Subcommittee 
for his work on this issue.

    Mr. Barton. The Chair would now like to recognize our first 
witness, the distinguished Chairman of the Federal Energy 
Regulatory Commission, The Honorable James Hoecker, and your 
statement is in the record in its entirety. We will recognize 
you for such time as you may consume.
    We will just simply say as a personal aside that it has 
been a pleasure to share the dais of several events with you in 
the last 3 months, and I am sure we are going to continue to do 
so in a very cooperative and congenial way. The floor is yours.

 STATEMENT OF HON. JAMES J. HOECKER, CHAIRMAN, FEDERAL ENERGY 
                     REGULATORY COMMISSION

    Mr. Hoecker. Thank you, Mr. Chairman, and members of the 
subcommittee. It is a pleasure to be here today to discuss the 
current restructuring of the electric power industry. I, too, 
commend you, Mr. Chairman, and members of the subcommittee for 
focusing on this critical development involving the Nation's 
most capital-intensive industry.
    As you requested of me, I plan to testify this morning on 
matters related directly to electrical reliability and 
transmission issues. Of course, these are precisely the issues 
that concern the Commission most in its continuing effort to 
promote competitive bulk power markets, and you certainly have 
my commitment, Mr. Chairman, that the Commission will support 
this subcommittee's investigation of these issues in any way 
you think is appropriate.
    Competition is growing in wholesale power markets in 
response to the Energy Policy Act of 1992, technological and 
business developments and the Commission's effort to remove 
barriers to competition and let markets, not just regulators, 
determine the price of wholesale power.
    Wholesale competition will provide substantial benefits to 
industry and to consumers. Among other things, it offers the 
prospect of reduced prices for end users, even where retail 
choice is not available, by lowering the cost of power 
purchased for them by utility suppliers.
    But getting to competitive markets is a journey that is not 
without its complications, however. The Commission's Order No. 
888, which in 1996 made open nondiscriminatory transmission 
access an important feature of the bulk power market, did not 
solve all problems. Significant impediments to full competition 
in wholesale markets remain. Even for utilities already subject 
to the requirements of Order No. 888, there remain substantial 
concerns about the use of transmission to deny access to 
competing sellers of power. Moreover, substantial gaps remain 
in the availability of open access transmission service 
nationwide.
    Approximately one-third of the Nation's integrated 
transmission grid is, with limited exception, not subject to 
the Federal Power Act or to the Commission's open access 
requirements. These gaps reduce the trading opportunities and 
prevent customers from realizing the full benefits of 
competition. And although the laws of physics and the growing 
number of bulk power transactions mean that wholesale markets 
tend to operate across States and regions, management of the 
transmission system which supports this trade is not regional 
in most parts of the country. So competition and efficiency 
benefits are consequently being lost.
    Ironically, Mr. Chairman, even the arrival of competition 
itself, for all its promise, creates some new problems. Because 
there are many more bulk power transactions and because 
transmission facilities are increasingly used in ways not 
contemplated when they were planned and built, the need for 
better congestion management and more efficient pricing and 
regional planning is likewise increasing.
    But, most importantly, reliability of electric service, so 
vital to the Nation's economy and the welfare of individual 
citizens, may be challenged in significant ways.
    Assigning responsibility for maintaining transmission 
system reliability is more problematic in a dynamic environment 
where market participants have competing or conflicting 
commercial interests in how the grid is to be operated.
    Well, what are the solutions? In my view, it would be a 
mistake to resurrect Federal command and control regulation as 
our policy goal. The FERC's basic policy continues to be to 
substitute competition for wholesale price regulation where 
possible, and to maximize competition in bulk power markets by 
facilitating access to transmission services everywhere.
    It is consistent with these objectives and the competitive 
goals set by Congress in the Energy Policy Act that I commend 
to you a select few Federal legislative proposals:
    The Congress should first provide that all transmission 
facilities in the lower 48 States must operate under the same 
general open access transmission rules that apply to investor-
owned utilities.
    Second, it should promote regional management of the 
transmission grid by clarifying the Commission's authority to 
establish new regional transmission organizations.
    And third, it should establish a fair and effective program 
to protect reliability of the transmission system.
    The administration's proposal and various House and Senate 
bills have addressed these matters. To my mind, development of 
regional transmission organizations or RTOs that have real 
control of grid operations, that are independent of commercial 
interests of market participants and that cover a large market 
area represent the most effective and expeditious way to view 
these issues together and to begin developing solutions.
    Now, in conclusion, I recognize that these proposals may be 
misperceived as extraordinary or unnecessary expansions of 
Federal regulatory powers, contradicting what we at the 
Commission otherwise are saying about greater reliance on 
markets and lighter-handed regulation.
    And not surprisingly, perhaps my view is quite different 
and it is different for three simple reasons. First, as I noted 
in my written testimony, the Commission is already heavily 
involved in all these areas, often because the electric 
industry or its customers seek our assistance. Second, the 
Commission has been careful to recognize the views and to 
accommodate the legitimate regulatory interests of States. And 
most importantly, Mr. Chairman, the Commission is aggressively 
promoting competition and wholesale markets, not more onerous 
regulation, as our primary policy objective.
    I want to thank you, Mr. Chairman, again, for asking me to 
be here this morning and for the opportunity to offer my views 
on this important topic, and I would be pleased to respond to 
any questions you may have.
    [The prepared statement of Hon. James J. Hoecker follows:]
 Prepared Statement of Hon. James J. Hoecker, Chairman, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: I am pleased to 
appear before you today to discuss key aspects of the current 
restructuring of the Nation's electric power industry, namely 
reliability and transmission issues. Thank you for this opportunity.
    The Federal Energy Regulatory Commission (Commission or FERC) is 
fully engaged in the critical task of promoting competition in the 
wholesale or ``bulk power'' market, consistent with the goals of the 
Energy Policy Act of 1992. To achieve these goals, the Commission's 
fundamental regulatory policies are to substitute competition for price 
regulation in wholesale power markets to the extent possible, and to 
regulate essential transmission facilities so as to enable competition 
in power markets. Today I will address the progress the Commission and 
the industry have made in creating an efficient, reliable, fair, and 
transparent wholesale market, and identify the important ways in which 
the Congress can further assist the Commission in completion of this 
important task.
    My testimony will focus on three key issues for advancing robust 
competition--open access to all transmission facilities, efficient 
regional operation of transmission facilities, and mandatory 
reliability standards. First, there remain important gaps in the 
availability of open access transmission service nationwide, which, if 
left unaddressed, will impede the development of competition and 
prevent wholesale customers from realizing the full benefits of 
competition. Second, bulk power markets operate regionally and should 
be governed to foster competition and efficiency by increasing the 
trading opportunities of many participants. However, management of 
transmission systems is not regional in most cases, and thus the 
benefits of full competition may be lost. Third, the reliability of 
electric service, so vital to our Nation's economy, may be threatened 
by the difficulties of assigning responsibility for transmission system 
reliability in a dynamic environment where participants have competing 
or conflicting commercial interests in how the grid is administered. 
The Commission is increasingly asked to exercise its existing, but 
inadequate, statutory authority to ensure compliance with industry 
standards. To fully realize the competitive goals set by Congress in 
the Energy Policy Act of 1992 and promoted by the Commission since 
then, additional legislation in these areas is needed.
The Status of Open Access Transmission
    The Commission works to ensure a well-functioning bulk power 
market. It oversees sales of electricity by ``public utilities'' to 
other utilities--that is, wholesale transactions. ``Public utilities'' 
mainly include investor-owned utilities and exclude the federal power 
marketing administrations, municipal utilities, and most rural electric 
cooperatives. Moreover, the Commission does not regulate sales to 
consumers or electric local distribution services. Those retail 
services are generally regulated by the states. The electricity prices 
paid by retail consumers nevertheless include the cost of any power 
purchased by their utility suppliers in wholesale markets. So, 
competition in bulk power markets ultimately benefits consumers by 
reducing the cost of power supplied to them, whether or not a state 
chooses to allow retail competition.
    The Commission's pro-competitive approach tracks what is occurring 
in the industry itself. Once characterized universally as heavily 
regulated, vertically-integrated monopolies, public utilities have been 
increasingly subject to the forces of competition over the past two 
decades ago, due to various economic, legislative, and technological 
developments. Congress gave competition a strong boost in the Energy 
Policy Act of 1992, increasing the Commission's authority under section 
211 of the Federal Power Act to order transmission service in 
appropriate circumstances.
    The Commission fostered the development of competition by adopting 
light-handed regulation for power suppliers shown to lack market power. 
Specifically, the Commission began allowing such power suppliers to 
sell at market rates instead of rates determined by the Commission 
based on the cost of service. To date, the Commission has authorized 
market-based rates for literally hundreds of power suppliers, including 
power marketers and traditional investor-owned utilities.
    Understandably, competition in bulk power markets will never be 
vibrant unless wholesale sellers are able to deliver power to any 
buyers in the market. Access to buyers is key. In the electric 
industry, transmission facilities make this possible. These facilities 
form an interstate grid for delivering power, in the same way the 
interstate highway system allows trucks to deliver other commodities. 
There are important differences, however. Electricity cannot be stored. 
It is delivered instantaneously over an integrated network of wires and 
a transaction between two parties can affect the capacity of the system 
and the transactions of others. Most importantly, the electrical grid 
is owned by individual utilities and, absent regulation, these 
utilities can effectively prevent the use of these facilities by their 
competitors.
    Several years ago, the Commission recognized that competition in 
wholesale markets was being inhibited by the lack of non-discriminatory 
access to transmission facilities. Sellers owning transmission 
facilities were stifling competition by discriminating against others 
seeking to use their transmission facilities, either by denying or 
delaying transmission service or by imposing discriminatory rates, 
terms and conditions for service.
    Consequently, the Commission in 1996, through a major rulemaking 
called Order No. 888, ordered open (non-discriminatory) access to the 
transmission facilities of public utilities. Order No. 888 is an 
exercise of the Commission's duty under sections 205 and 206 of the 
Federal Power Act to ensure non-discriminatory transmission services.
    Since I last testified before this Subcommittee in October 1997, 
the pace of change among utility companies has continued to accelerate. 
The Commission has reviewed and acted upon 18 major utility mergers. 
Fully ten percent of the Nation's electric generation plants have been 
divested by traditional electric utilities. Electric utilities and gas 
pipeline or distribution companies have combined to form major energy 
concerns. The number of power marketers and independent generation 
facility developers entering the marketplace has continued to rise, 
placing additional competitive pressure on traditional utilities. Five 
independent system operators (ISOs), three of which are currently 
operational, have been established to operate entire regions of the 
transmission system. Three state legislatures now require their 
utilities to join a regional transmission entity. Trade in bulk power 
markets has continued to increase significantly and the Nation's 
transmission grid is being used more heavily and in new ways. Finally, 
18 state legislatures have enacted legislation to initiate, or set a 
date for, retail electricity competition. In other words, the industry 
is changing to meet the strategic and economic challenges of the 
competitive marketplace.
    Yet, despite the successes of Order No. 888 in fostering 
competition, not all potential market problems have been addressed. The 
remaining impediments to full competition fall largely into two 
categories. First are the engineering and economic inefficiencies 
inherent in the current operation and expansion of the transmission 
grid, inefficiencies that are hindering fully competitive power markets 
and imposing unnecessary costs on electric consumers. Changes in trade 
patterns and industry structure have made it more difficult to maintain 
reliable grid operations, manage transmission congestion, and plan for 
expansion of transmission facilities. Without further reform, 
traditional pricing and transmission practices will likely hinder the 
further development of competitive and efficient bulk power markets. 
Among these impediments are the ``pancaking'' of transmission access 
charges from one system to the next, the absence of clear and tradeable 
transmission property rights, and the virtual absence of a secondary 
market in transmission service.
    The second category of impediments consists of continuing 
opportunities for transmission owners to unduly discriminate in the 
operation of their transmission systems so as to favor their own or 
their affiliates' power marketing activities. As profit-maximizers, 
utilities that control monopoly transmission facilities and also have 
power marketing interests have every incentive to deny equal quality 
transmission service to competitors. Order No. 888 addressed many forms 
of undue discrimination by requiring public utilities to separate 
transmission and power marketing functions, to take transmission 
service under the same tariff as available to other transmission 
customers, and to abide by standards of conduct that prohibit the 
preferential treatment or sharing of information between the utility's 
transmission and power marketing functions.
    In the wake of Order No. 888, however, many market participants 
continue to allege, and the Commission has in some cases confirmed, 
that transmission service problems related to discriminatory conduct 
remain. Allegations relate to standards of conduct violations and 
manipulations of the operation of transmission systems to frustrate 
power marketing competitors, for example by the imposition of 
transmission curtailments on congested lines. As might be expected in 
maturing commodity markets, there is a great deal of mistrust among 
market participants with respect to the fairness of the system. The 
pace and scope of restructuring and the future of certain companies 
therefore remain uncertain. Nothing is more detrimental to shareholder 
values than uncertainty.
    These issues represent a challenge to the industry and to the 
Commission. Although the Commission is committed to full competition in 
wholesale markets and will pursue that goal through all reasonable 
means, Congressional action may prove critical to our ability to reach 
that goal.
Gaps in Open Access
    Order No. 888's mandate for open access transmission has key 
omissions. The Commission's authority does not apply to Federal power 
marketing administrations, municipal utilities, and most rural electric 
cooperatives. While the Commission has authority to require these 
entities (``non-public utilities'') to provide transmission service 
based on a case-specific application under section 211 of the Federal 
Power Act, it lacks authority to generically order all of them to offer 
service under open access transmission tariffs.
    Approximately one-third of the Nation's integrated transmission 
grid is beyond the reach of Order No. 888's open access requirements. 
For example, because the Federal power marketing administrations that 
own transmission (such as the Bonneville Power Administration and the 
Western Area Power Administration) and the Tennessee Valley Authority 
are not public utilities, their transmission systems are beyond the 
Commission's authority to require open access. Similarly, many 
municipal utilities and cooperatives control transmission but need not 
comply with our open access rules. In fact, approximately 70,000 
circuit miles of interstate transmission--over 30 percent of all 
interstate transmission--are not subject to the Commission's open 
access authority. An additional 7,000 miles of intrastate transmission 
within the Electric Reliability Council of Texas (ERCOT) is beyond our 
open access authority.
    Non-public utilities are nevertheless encouraged to offer open 
access transmission service under the concept of ``reciprocity.'' In 
other words, when these utilities take transmission service under a 
public utility's open access tariff, they must also offer reciprocal 
service to the public utility, unless the public utility or the 
Commission waives this requirement. Several non-public utilities have 
begun offering open access service under a FERC-filed tariff. However, 
many transmission-owning non-public utilities still do not offer open 
access service.
    Efficient markets in network industries generally require that all 
service providers be subject to the same rules. This gap in the 
availability of open access service on the interstate grid raises 
serious questions about how competitive and efficient the interstate 
power marketplace can become. Gaps in open access to the grid can cause 
customers to pay more than they should for power. There is little more 
that the Commission can legitimately do to address this problem under 
existing law.
    Only a change in the Federal law can effectively address this 
difficult gap in the availability of open access transmission. Such 
legislation need not unnecessarily intrude into the activities of these 
entities. In fact, the experience of those non-public utilities that 
have voluntarily adopted open access tariffs demonstrates that open 
access service consistent with the Commission's requirements is as 
workable for non-public utilities as for public utilities, although 
appropriate legislation is needed to address related tax consequences. 
However, the benefits of competitive access will be delayed until 
transmission access is universal. The Administration's proposed 
legislation addresses these issues, by extending Federal Power Act 
jurisdiction over the rates, terms and conditions for transmission 
services provided by non-public utilities that own, operate, or control 
transmission facilities under the same terms that apply to public 
utilities.
Regional Transmission Organizations
    The wholesale electric business is changing rapidly from many 
smaller local markets to fewer, larger regional markets that usually 
span multiple states. Power sales in these large markets involve use of 
all the high-voltage power lines in a region. I believe it is 
essential, for reliability as well as for commercial reasons, that all 
of the transmission lines in a region be under the operational control 
of a single operator that has no financial interest in the more 
lucrative generation market. I call them Regional Transmission 
Organizations (RTOs). RTOs can include ISOs of the transmission system 
as well as independent transmission companies (transcos) that own and 
operate the system.
    Grid regionalization is not a new concept. Bulk power reliability 
has been maintained for almost 40 years by voluntary regional industry 
councils. The Commission encouraged Regional Transmission Groups (RTGs) 
in the early 1990s to engage in regional planning. Order No. 888 
encouraged, but did not require, the formation of ISOs. However, the 
increasing need for such regional organizations is evidenced by the 
fact that, without a regulatory or statutory mandate, the industry has 
already proposed or implemented RTOs in California, the mid-Atlantic 
states, New England, New York, and the Midwest.
    If properly constituted and truly independent, RTOs will be a major 
step in addressing obstacles to competition and obtaining major 
efficiencies. First, RTOs will ensure that vertically-integrated 
transmission-owning utilities do not discriminate in favor of their own 
generation over another seller's generation. Second, RTOs can be 
structured to eliminate pancaking of transmission rates that raises the 
cost of moving power across multiple utility systems. Third, RTOs that 
have the proper tools can better manage transmission congestion, reduce 
the instances when power flows on transmission lines must be decreased 
to prevent overloads, and effectively solve short-term reliability 
problems. Fourth, RTOs can facilitate transmission planning across a 
multistate region and, by operating the grid as efficiently as 
possible, may give confidence to state siting authorities that new 
transmission facilities are proposed only when truly needed. 
Significantly, the Commission also will be more inclined to defer to 
the planning, pricing and control area decisions of an RTO if it fairly 
represents the interests of all stakeholders through open membership 
and fair governance procedures.
    To achieve these benefits, the development of RTOs must focus on 
three criteria. First, RTOs must have real control of the grid, to 
ensure that use of the grid is efficient and non-discriminatory. 
Second, RTOs need to be independent of the commercial interests of 
market participants, so that decisions are accepted by all stakeholders 
as non-discriminatory and fair. Finally, RTOs need to include a large 
area, to allow a truly regional market to develop to the full extent 
desired by market participants. When RTOs meet these criteria, 
consumers will begin benefitting from the greater competition in 
broader, more vibrant wholesale markets.
    RTOs can provide these benefits while taking account of state and 
regional preferences and circumstances. RTOs do not require a one-size-
fits-all approach and can be custom-designed. The Commission has 
recognized the need to be flexible in how these organizations are 
established, in order to accommodate local concerns. For example, in 
considering RTO policy, the Commission has solicited state views 
extensively, including by holding eleven hearings--nine of which were 
outside Washington. The Commission also intends to provide additional 
opportunities for consultation.
    The Commission is poised to act on RTOs generically. A generic 
instruction from the Congress would dispel uncertainties about the 
Commission's authority to order establishment of, and participation in, 
RTOs to promote efficient operation of bulk power markets. I feel 
confident that the Commission will preserve the ability of utilities 
joining an RTO to take into account the regional needs in various parts 
of the country, as well as flexibility to select the organizational 
format that will serve the region best. In my view, the 
Administration's proposed legislation addresses these concerns 
appropriately. A clear directive would enable the Commission to proceed 
to develop efficient, reliable regional power markets, which will 
significantly lower the cost of power to consumers, without the 
likelihood of court challenges.
Reliability
    Let me turn next to reliability. In the past, regulators and 
industry participants relied upon voluntary industry organizations to 
establish reliability standards and practices. The regional reliability 
councils and the North American Electric Reliability Council (NERC) 
were composed primarily of the transmission-owning public utilities. 
These companies could and did rely upon voluntary cooperation and peer 
pressure for compliance. The approach worked well before the advent of 
competition and the Nation's electricity system became the envy of the 
world.
    Competition in power markets increased concern that reliability 
rules could not be set or enforced in the same manner. Power markets 
today have extraordinary numbers of participants and numbers of 
transactions. The Secretary of Energy's Task Force on Electric System 
Reliability reexamined the consequences of these developments in 
detail. In brief, new and expanding demands for service on the system 
change operating conditions and the increasing number of sellers make 
it harder to stay competitive in many instances. Faced with competitive 
pressure, some participants may be prompted to cut corners on 
reliability.
    The importance of reliability in America's supply of electricity 
has never been greater, however. The Secretary's Reliability Task Force 
recently observed that, as our economy becomes more dependent on 
computers and other electronic tools, power disruptions pose an ever-
greater threat to productivity and even health and safety. The Task 
Force also found that ISOs are significant institutions for ensuring 
electric system reliability, and that bulk power systems can and should 
be operated more reliably and efficiently when coordinated over large 
geographic areas. Many observers, including NERC and the industry 
itself, have concluded that a mandatory system for reliability is 
needed to ensure that competition does not compromise the dependability 
of our Nation's electricity supply.
    With the possibility of noncompliance with voluntary standards, and 
the current lack of clear authority for anyone to mandate compliance 
with reliability rules, industry participants have initiated several 
proceedings at the Commission to address specific reliability issues. 
In several cases, the industry has asked the Commission to adopt 
stopgap measures and to decide the lawfulness of new reliability 
measures under Federal Power Act standards ordinarily used to review 
rates and commercial practices. However, a Commission finding that 
reliability measures meet these Federal Power Act standards does not 
ensure that the measures are themselves sufficient to maintain system 
reliability.
    In 1998, for example, NERC initiated a proceeding seeking 
Commission review of NERC's new procedures for reducing power flows to 
prevent overloads on transmission lines, so-called transmission loading 
relief (TLR). The Commission concluded that these procedures affected 
the terms and conditions of transmission service provided by public 
utilities because they determined which commercial transactions would 
be curtailed to prevent overloads. The Commission required these 
procedures to be filed and told the affected utilities to take 
additional steps to ensure that the procedures were non-discriminatory.
    Similarly, another Commission proceeding was filed by industry 
participants to address NERC's ``tagging'' requirements. NERC's rules 
required transmission users to provide transmission operators with a 
variety of information about their transactions, such as the source of 
the power being transmitted, so that transmission operators could take 
quick, appropriate action when necessary for reliability purposes. In 
that case, the collection of information, by itself, did not change the 
terms and conditions of open access service provided by public 
utilities and, thus, did not need to be filed. However, the Commission 
held that public utilities still had to provide service according to 
the terms and conditions in their open access tariffs, unless and until 
they sought and were granted permission to apply different terms and 
conditions of service.
    Finally, the Commission this month accepted on an experimental 
basis the beginnings of an entire set of regional reliability 
standards, proffered by industry participants. The Commission had 
previously never entertained such a request. This approach was proposed 
by the Western Systems Coordinating Council (WSCC), the regional 
reliability council covering the western United States. WSCC's proposal 
was contractual. Transmission providers could voluntarily sign 
contracts with the WSCC, agreeing to abide by the WSCC's reliability 
rules, and require generators connected to their transmission 
facilities to abide as well. Violations of the standards would result 
in penalties or other sanctions, subject to the Commission's review. 
Several reliability standards were filed with the Commission, which 
said it would defer to the WSCC's expertise, largely because of the 
representation enjoyed by diverse industry segments in the WSCC's 
processes. The Commission's limited role in this instance is to ensure 
the reasonableness of rates, terms and conditions of transmission 
service and to offer to mediate any disputes about possible violations.
    Congress should make compliance with appropriate reliability 
standards mandatory. Despite the Commission's cautious acceptance of 
the WSCC's proposal, it recognizes that it is incapable of ensuring 
that reliability rules apply to all industry participants or that there 
is a widely-accepted process for adopting and enforcing reliability 
rules in this diverse power market. There appears to be an industry 
consensus that it can continue to work collaboratively to develop 
reliability standards, using a process in which all market sectors are 
fairly represented. Sufficient Federal oversight will then be needed to 
ensure that the standards maintain sufficient system reliability and 
are not unduly discriminatory or otherwise anticompetitive.
    The broad support for both the WSCC filing and the reliability 
legislation proposed by NERC and included in the Administration's bill 
demonstrates the industry's recognition that federal reliability 
legislation and oversight will be important to the future integrity of 
electric service. It is nevertheless important to note that the 
Commission's role in a new reliability regime is largely reactive and 
does not impinge on the industry's ability to set its own standards and 
to apply them through a fair stakeholder process. By enforcing 
industry's agreements, the Commission can, however, prevent market 
participants from ``free-riding'' on the reliability efforts of others.
    I would emphasize, in conclusion, that the states will also 
continue to play an important role in maintaining the reliability of 
electric service. Federal legislation should respect this role by 
striking an appropriate balance that permits states to continue their 
traditional activities in a manner consistent with the industry's 
mandatory reliability standards.
Transmission Siting
    The construction of new transmission facilities, whether to serve 
local or regional needs, may represent an important means of obtaining 
the efficiency benefits of greater competition. As the Secretary's 
Reliability Task Force found, the reliability benefits of transmission 
enhancements can benefit many states, not just those where the 
facilities are sited. The grid is therefore being used increasingly for 
regional transactions. Even though the grid is being used increasingly 
for regional transactions, the siting of transmission and generation 
facilities is nevertheless subject to state law. In evaluating grid 
expansions, however, states may have difficulty balancing local impacts 
with regional benefits. State-by-state planning and the siting of 
transmission facilities that are used increasingly to support regional 
markets may be an obstacle to sensible grid development.
    The answer is not to federally preempt this traditional state role. 
I believe instead that it would be beneficial to develop institutions 
that engage in regional planning and siting of transmission facilities, 
taking into account the interests of all affected market participants 
and states. This type of institution could adopt a broad perspective of 
decisionmaking on proposed transmission expansions and fairly balance 
the local impacts and regional benefits of such expansions, as well as 
the suitability of transmission versus generation development. While 
such regional entities would be novel, the benefits of regional 
transmission planning may justify such an effort. The Administration's 
legislation provides one vehicle for balancing these interests, either 
by authorizing interstate compacts to form regional transmission 
planning agencies or by convening joint federal-state meetings to 
consider transmission capacity additions. I also suggest that RTOs 
could perform a similar planning function, although this would only be 
advisory to state siting authorities under existing law.
Conclusion
    Competition is growing in the electric industry, in response to the 
Energy Policy Act of 1992 and the Commission's efforts to remove 
barriers to competition and to let markets--not regulators--determine 
the price of wholesale electric power. However, significant impediments 
to full competition remain.
    As I stated before this Subcommittee in 1997, I believe that 
Federal legislation is needed to: establish a fair and effective 
program to protect bulk power reliability; bring all transmission in 
the lower 48 states within the Commission's open access transmission 
regime; and, clarify the Commission's authority to provide for regional 
management of the transmission grid through RTOs.
    Aspects of the Administration's proposal and similar legislation 
addressing these issues have been criticized by some as expansions of 
Federal regulatory powers that are inconsistent with the themes of 
greater reliance on markets and lighter-handed regulation. I disagree. 
Consistent with the competitive goals of the Energy Policy Act of 1992, 
the Commission is aggressively promoting competition in wholesale 
markets. Competition in these markets offers the greatest potential 
consumer benefits because the cost of generation facilities is the 
largest part of the cost of electricity to ultimate consumers, far 
larger than the cost of transmission. Wholesale competition, however, 
cannot achieve its full potential without improved access to the 
interstate transmission grid and universal adherence to reliability 
rules. Thus, effective regulatory oversight of transmission and 
reliability is a critical prerequisite to greater competition in 
wholesale power markets. The Commission's objective, in the final 
analysis, is to create market structures that will permit it to cede 
important economic decisionmaking to the marketplace and to substitute 
light-handed regulation and market monitoring for traditional command 
and control regulation.
    Federal action to ensure reliability and promote effective regional 
market mechanisms in the near future--whether from the Congress or the 
Commission--will be needed to establish a fully competitive wholesale 
power market environment for the benefit of all electricity buyers, 
including residential consumers. Wholesale competition will lay the 
groundwork for retail competition, where adopted, and continue to 
ensure efficiency and fairness even where retail access is delayed. I 
continue to believe that one cannot, in this time of industry 
transition, be both a believer in competition and an agnostic about 
market structure.
    Thank you again for the opportunity to offer my views here this 
morning. I would be pleased to answer any questions you may have.

    Mr. Barton. Thank you, Mr. Chairman. I am going to 
recognize myself for 5 minutes and the question rounds will be 
5 minutes. We are only going to have one round because we have 
the next panel, I think has seven or eight people on it, and we 
want to give ample opportunity for them.
    My first question, Mr. Chairman, is a general question. Do 
you think that Congress needs to act in a comprehensive way or, 
as some have said, if we could not do anything and let the 
States handle this issue?
    Mr. Hoecker. Mr. Chairman, I think the issues that I have 
outlined are issues that the States individually are incapable 
of addressing because they involve transmission and market 
issues that transcend State boundaries and cover entire 
regions. Comprehensive legislation implies that you would 
address retail competition. The Commission really takes no 
position on those issues. We are, however, hopeful that 
comprehensive legislation is not sufficiently slow in 
developing and passing, that the particular solutions that I 
have talked about would be delayed inordinately.
    Mr. Barton. Do you feel that in the reliability area, that 
the agency that you head needs to have the ultimate authority, 
as opposed to some of these voluntary associations that have 
sprung up around the country?
    Mr. Hoecker. Mr. Chairman, I think the basic system for 
developing reliability standards and ensuring the security of 
the system and the adequacy of generation over the years is a 
fundamentally sound one. That is, the industry has the 
expertise and certainly the commercial motivation to ensure the 
reliability of the system by developing appropriate standards.
    The question arises as to how the voluntary or self-
regulating organizations will be structured: Who will oversee 
the appropriateness of those governance structures and who will 
review the standards that are developed to ensure that they 
have no adverse implications for open access transmission and 
that they are fairly administered and uniformly enforced?
    Our role, I think, would be primarily a reactive one and a 
light-handed oversight role, not the ultimate authority in the 
sense perhaps that you mean it. We want to make sure that the 
industry continues to do the excellent work that it has done in 
the past, but that it is not defeated in its goal of ensuring 
reliability by the fact that the market is so much more 
competitive and dynamic now than it has been historically.
    Mr. Barton. Do you see any benefit in giving the FERC the 
authority to help set up the system and to set up the ground 
rules and then sunset the authority over, as you put it, light-
handed oversight, so we would put some provision in that gave a 
national agency like the FERC the ability to go out and 
interconnect, coordinate, and set up the system, but at a date 
certain that went away and the systems in place became self-
regulating?
    Mr. Hoecker. I think to a large extent it would be self-
regulating in any event. I think that the development and 
adoption of standards and the application of those standards to 
the marketplace will be an ongoing process to reflect how the 
market changes and how trading patterns challenge the 
reliability of the system. Under those kinds of conditions, I 
believe that there may be a continuing role for the Commission 
in reviewing those standards over time.
    I don't believe it is simply a matter of creating a 
governance for the NERC of the future and then stepping aside. 
I subscribe to basically what the administration's bill 
suggests, and that is an ongoing role.
    Mr. Barton. My time has expired. I have got one last 
question. What is your position or the FERC's position on 
extending authority to organizations like the Tennessee Valley 
Authority and the Boneville Power Administration, other PMAs, 
some of the co-ops and municipals right now that the FERC 
doesn't have authority over?
    Mr. Hoecker. Mr. Chairman, I believe that all transmission 
in the country should be operated under the same open access 
rules. To the extent Federal power marketing agencies own, 
control, and operate transmission--and they don't all--to the 
extent that municipalities own transmission--and they all do 
not--I think that they should be subject to the open access 
requirements of Order No. 888 and the Federal Power Act. That 
is not to say that our Commission desires to regulate municipal 
utility operations. We simply want to make sure that the 
transmission system operates uniformly and efficiently.
    Mr. Barton. The Chair would recognize the gentleman from 
Ohio, Mr. Sawyer, for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman. Mr. Chairman, in 
today's environment, transmission development is not easy even 
as it exists. There is a whole question of siting problems and 
the political and public relations difficulties that accompany 
all of that. But it seems to me that one of the abiding 
problems, at least in the current environment, that by 
comparison to other kinds of investment, the transmission has 
an inherently more difficult capacity to generate a rate of 
return on that investment, making capital formation a specific 
problem that attends to transmission investments.
    In the environment that you imagine and that we are moving 
toward, how do you see the incentive for growth and development 
not of the first-tier markets but of second-tier markets and 
beyond, where in fact there may actually be gaps of adequate 
transmission and capacity today?
    Mr. Hoecker. As I travel the country, Congressman, I have 
heard a great many concerns about the need to expand the 
transmission system or to site new generation, either to 
enhance reliability or to improve transmission capability, and 
I think that as we contemplate the disaggregation, if you will, 
of the industry and operating transmission on a kind of stand-
alone basis, either under a wires company operation or through 
some sort of independent system operator, we need to provide 
mechanisms for attracting capital to expand the system as 
appropriate. There are a number of things that will facilitate 
that. Certainly, we need good pricing of transmission, pricing 
that recognizes the value of transmission under conditions of 
constraint or congestion and encourages the market to fund 
projects to expand transmission where there could be some 
commercial advantages in doing that.
    We at the Commission may contemplate in the future things 
like performance-based ratemaking in the context of regional 
transmission organizations. We are open-minded about how to 
address this issue at the Commission, but I certainly think 
your concern is a legitimate one, and we want to ensure that 
transmission as a stand-alone enterprise remains a viable part 
of the business and maybe even a growth part of the electric 
power business.
    Mr. Sawyer. I gather from what you have said, both in your 
answer to prior questions and your opening statement and now, 
that you are not wedded to any single governance structure but 
perhaps you would see those evolving to meet the different 
circumstances in which the need for transmission finds itself 
in various parts of the country. Am I right in that assumption?
    Mr. Hoecker. That is absolutely right. I am very hopeful 
the Commission will issue a proposal in the next several weeks 
that will invite comment in part on that very issue. It is my 
personal wish that that proposal provide for flexibility in 
terms of how regional organizations are structured in the 
future.
    Mr. Sawyer. Am I not correct that in the Senate in 
testimony there, you endorsed the idea and suggested it here as 
well today, that FERC should have the authority to order 
transmission entities to participate in a specific 
organization, transmission organization?
    Mr. Hoecker. I think a clarification of our ability to do 
that would be appropriate. Our authority currently, 
Congressman, is our authority to remedy undue discrimination 
and anticompetitive effects. We think that gives us the ability 
to address these kinds of problems regionally, just as it did 
give us the ability to require open access. But it would be 
very helpful if Congress were to make it real clear in this 
regard.
    Mr. Sawyer. It is not absence of authority today, but one 
that may not be sufficiently clear in your view?
    Mr. Hoecker. That is right.
    Mr. Sawyer. Good timing.
    Mr. Barton. You have one last question?
    Mr. Sawyer. No, that is fine, thank you.
    Mr. Barton. The Chair would recognize the gentleman from 
Kentucky Mr. Whitfield, for 5 minutes.
    Mr. Whitfield. Thank you, Mr. Chairman.
    You mentioned in your testimony that the Secretary of 
Energy's Reliability Task Force recently observed that as our 
economy becomes more dependent on computers and other 
electronic tools, power disruptions pose an ever greater threat 
to productivity, and even health and safety. And then 
emphasizing the importance of this issue, you go on and you 
talk about earlier this month the Commission accepted on an 
experimental basis some regional reliability standards 
specifically with the Western Systems Coordinating Council.
    Would you elaborate on that a little bit and maybe also 
just talk specifically about some of the reliability rules that 
they propose?
    Mr. Hoecker. The WSCC proposed four reliability standards 
for us and I believe intends to submit additional ones in the 
future. They did so to obtain our approval that these standards 
were just and reasonable under the Federal Power Act. We did 
not review the standards for their adequacy from purely a 
reliability standpoint. We don't really have that authority. It 
is a matter of trying to ascertain whether their proposals 
would in any way impact the open access regime that the 
Commission has promoted.
    And what we are finding is that, despite our historic lack 
of authority in the area of reliability and governance of WSCC 
or any other regional authority, we are requested by the 
industry, both the utilities and their customers, to help 
ensure the fundamental fairness of these standards which have 
distinct commercial implications if they are misapplied or if 
they end up denying or limiting access to transmission.
    Mr. Whitfield. But the Commission has agreed to sort of 
provide oversight. My understanding, this is voluntary.
    Mr. Hoecker. Completely voluntary, yes.
    Mr. Whitfield. And that you all did formally agree to 
provide some mediation or arbitration to determine if they 
violated their agreements?
    Mr. Hoecker. That is correct. Fundamentally there is an 
appeal process within the WSCC, as I understand it. If there is 
a violation of one of these standards and if the dispute cannot 
be resolved, we would act as--I suppose you would view it as 
sort of an appellate court.
    The procedures that we envision and that WSCC envisions 
involve alternative dispute resolution, and we think that that 
is a capability that we have and have developed at the 
Commission, and we can play an important role as a forum for 
dispute resolution, but that is probably as far as this 
Commission is capable of going under existing law.
    Mr. Whitfield. This is the only regional reliability 
council that has made a proposal like this?
    Mr. Hoecker. Of this kind, yes.
    Mr. Whitfield. Mr. Chairman, I yield back the balance of my 
time.
    Mr. Barton. The Chair would recognize the distinguished 
member from Michigan, Mr. Dingell, for 5 minutes.
    Mr. Dingell. Mr. Chairman, I thank you very much. Mr. 
Chairman, welcome to the committee.
    Mr. Hoecker. Thank you.
    Mr. Dingell. I noted with some interest that you talked 
about a number of arguments where the Commission has raised 
issues relative to getting greater authority over transmission 
organizations. You have not suggested that you wanted 
additional authorities over the public power organizations, 
have you?
    Mr. Hoecker. Yes, I have. In my testimony I recommend to 
the Congress that approximately 33 percent of the transmission 
systems that is owned by Federal power marketing 
administrations, by municipal and cooperatively owned 
utilities, be subject to the Commission's open access rules.
    Mr. Dingell. TBA, Boneville?
    Mr. Hoecker. Yes, sir.
    Mr. Dingell. All of them?
    Mr. Hoecker. Yes, sir.
    Mr. Dingell. Not now, but at your convenience, would you 
submit to the committee a list of the real problems in the 
marketplace that FERC cannot address under your current 
authority and what those problems might be?
    Mr. Hoecker. I would be pleased to do that.
    Mr. Dingell. And the Energy Policy Act of 1992 has been in 
place a relatively short time, as has FERC Order No. 888. What 
specific events or items of information cause you to conclude 
that these are not sufficient to get the job done?
    Mr. Hoecker. Well, I should clarify that we believe Order 
No. 888 and open access are a big success.
    Mr. Dingell. What evidence do you have that these two 
authorities do not give you sufficient capacity to address the 
questions with regard to the matters that we are discussing 
this morning, reliability, your authority over the agencies?
    Mr. Hoecker. Well, first of all, reliability is 
historically something the Commission has never overseen. There 
is no express authority in the Federal Power Act for the 
Commission to review reliability standards or in any way to 
review the organizational governance structure of NERC.
    Mr. Dingell. You want authority to regulate the 
reliability?
    Mr. Hoecker. We want authority to review standards, to 
oversee the process of applying those standards, and to be a 
backstop enforcer, enforcement body, if the industry cannot 
resolve its disputes voluntarily. But fundamentally, the system 
we contemplate will still be self-regulating, much as the 
Nasdaq market is regulated by the SEC--very passively.
    Mr. Dingell. NERC specifically raises concerns in their 
reliability assessment about the impact of EPA's NOX 
rule upon reliability. Do you have any concern over this 
matter?
    Mr. Hoecker. Well, we are generally aware of the EPA 
processes. There is a State implementation process going on 
now.
    Mr. Dingell. Do you have any concerns about this having 
impact on reliability? Yes or no?
    Mr. Hoecker. I have some concerns.
    Mr. Hoecker. Are they serious, or are they trivial?
    Mr. Hoecker. I really don't know at this point.
    Mr. Dingell. Have you done anything to inquire as to what 
the basis for those concerns might be and whether they are 
serious or not?
    Mr. Hoecker. We have not investigated the NOX 
standards that are being developed by the EPA. Apparently those 
are due to be published and implemented later this year.
    Mr. Dingell. Don't you think it would be a good idea that 
you should do so?
    Mr. Hoecker. We definitely keep an eye on those.
    Mr. Dingell. You know they are going to be coming out and 
the time for you to comment to EPA is now past. How are you 
going to communicate to EPA these will raise questions to 
reliability if you have not already done so within the time 
limits for your comments?
    Mr. Hoecker. I would say first and foremost it historically 
has not been our job to govern the reliability process, that we 
never focused on the standards that are developed by the 
industry.
    Mr. Dingell. But this will impact the standards that are 
being developed by the industry, will it not?
    Mr. Hoecker. I don't know that.
    Mr. Dingell. You don't know that. But would you make an 
inquiry, please, into this? I am going to submit to you a 
letter and ask you to make a very careful analysis of this 
matter and report back. I would hope, Mr. Chairman, the record 
could remain to so we could get to this point.
    Now, you talk extensively about reliability in your 
statement, page 2. You say the reliability may be threatened by 
difficulties in assigning responsibility for transmission 
system reliability in a dynamic environment. The Commission is 
increasingly asked to exercise its existing, but inadequate, 
statutory authority to ensure compliance with industry 
standards.
    Doesn't that tell you that maybe you ought to be taking a 
hard look at how this matter is going to impact the reliability 
of service to different categories of wholesale and retail 
customers?
    Mr. Hoecker. Reliability is a concern for everyone, 
including our agency.
    Mr. Dingell. If EPA's orders and changes in their 
requirements impact that, you should have a concern, should you 
not?
    Mr. Hoecker. I think we should all be concerned.
    Mr. Dingell. All right. Now, you ordered nondiscrimination 
in access to the transmission facilities of public utilities. 
That did not apply to the publics; it applied only to the 
private companies. Is that right?
    Mr. Hoecker. Yes.
    Mr. Dingell. You have indicated to me it should apply to 
the publics as well as the privates, but you have no authority 
to do so.
    Mr. Hoecker. Yes, sir, none.
    Mr. Dingell. I noted at page 6 your comments are rather 
speculative and you don't really have any answers for us. You 
say, ``The remaining impediments to full competition fall 
largely into two categories. First are the engineering and 
economic inefficiencies in the current operation and expansion 
of the transmission grid, inefficiencies that are hindering 
fully competitive power markets and imposing unnecessary costs 
on electric consumers.'' Is that speculation, or is that hard 
fact?
    Mr. Barton. This will have to be the last question, Mr. 
Dingell.
    Mr. Hoecker. We have seen evidence of these kinds of 
inefficiencies in the governance of the transmission system. We 
have seen complaints about the exercise of market power.
    Mr. Dingell. You don't treat a complaint as a fact, do you? 
You treat it as a complaint. There is a difference.
    Mr. Hoecker. We treat it as a complaint, absolutely.
    Mr. Dingell. So the fact you are receiving complaints means 
you are receiving complaints, not that there is a factual 
basis.
    Mr. Hoecker. We have investigated many of these complaints. 
We have issued orders in some cases, and the Commission is 
preparing to investigate some of these concerns generically. I 
imagine that as we build a record we will have a deeper 
understanding in the kinds of concerns you express.
    Mr. Dingell. How long do you figure that will take?
    Mr. Hoecker. Probably the rest of this year.
    Mr. Dingell. Okay. And in the meantime, you are supporting 
the administration's proposal?
    Mr. Hoecker. I clearly support certain aspects of it that I 
mentioned this morning.
    Mr. Dingell. Thank you.
    Mr. Barton. We all support certain aspects of it. That is a 
fair answer. I thank the gentleman from Michigan. We can keep 
the record open. I notice he had about 10 other pages 
earmarked. I think there will be more written questions.
    Mr. Burr is recognized for 5 minutes.
    Mr. Burr. Welcome, Mr. Chairman. Let me ask you, the views 
you have shared with us, is that the consensus of the entire 
Commission?
    Mr. Hoecker. That is always a difficult question. I feel 
very confident in saying that our policy goals are to promote 
competition, not regulation; that we want to examine very 
seriously the idea of regional grid management; that we believe 
open access should prevail everywhere; and we are all keenly 
interested in enhancing the ability of the industry to ensure 
reliability.
    Mr. Burr. You have made some very strong suggestions about 
an increased regulatory role for FERC, and I guess the question 
is simple: Do all commissioners believe that that is the way to 
go?
    Mr. Hoecker. I don't think that that is quite what I said. 
I think that we are asking for is some additional authority in 
some specific areas that will allow us to promote competition. 
In the long run, that means less regulation or lighter-handed 
regulation.
    Mr. Burr. Is there anything in the 1992 Energy policy Act 
that requires RTOs to be constituted as ISOs versus transcos or 
vice versa?
    Mr. Hoecker. As far as I know, the Energy Policy Act 
doesn't address the issue at all.
    Mr. Burr. Could you have a basis for believing a transco 
cannot comply with the requirements of the Federal Policy Act?
    Mr. Hoecker. I have no basis for believing that.
    Mr. Burr. Let me ask you, do you think that the Commission 
has the authority under the Federal Power Act as it now stands 
to require public utilities to join RTOs?
    Mr. Hoecker. I think a strong argument could be made that 
it does.
    Mr. Burr. Do you believe it, or do you believe there is a 
strong argument?
    Mr. Hoecker. I believe it.
    Mr. Burr. Would that be the consensus of the Commission?
    Mr. Hoecker. I don't know. That is a very tough question to 
answer.
    Mr. Barton. Will the gentleman suspend? To give you a 
little time to think about the answer, we are going to continue 
the hearing during this vote. I have sent several members to 
vote and hope they will be back. I want all members to know we 
are not going to suspend the hearing.
    Mr. Hoecker. Thank you. I think that some of my colleagues 
have the same degree of confidence I do. I think some of my 
colleagues have publicly expressed doubts about that. I believe 
that the law is not precise, which is why I have said in my 
testimony this morning that if the Congress believes that 
regional transmission organizations, whether transcos or 
independent system operators or independent scheduling 
administrators or whatever it might be, could enhance 
reliability, improve regional planning, de-pancake the rates in 
the transmission system and so forth, that it should support 
expressly our authority to help make that happen.
    Mr. Burr. Let me ask you specifically about one area and an 
issue that is on the table, and I certainly will not delve into 
the decision that FERC has got as long as you dealt with it, 
the decision by the administrative law judge as it relates to 
the California RTO and the cut in the ROE of Southern 
California Edison. I think you are familiar with this 
situation?
    Mr. Hoecker. I am, generally, yes.
    Mr. Burr. Combining the loss of the ROE and the judge's 
denial of administrative and general expenses the company said 
it will incur for transmission operations, Southern California 
Edison charges that the ISO membership will effectively cost it 
$41 million on an annual basis. A Wisconsin Electric Power 
representative agreed that at 9.68 ROE, if it was allowed to 
stand, would discourage companies from joining RTOs; and the 
article goes on to say that, in fact, this case has been 
pending, I believe, since 1997.
    Is that an accurate article?
    Mr. Hoecker. I am not sure about how long it has been 
pending, but the initial decision was just issued and hasn't 
come to the Commission yet.
    Mr. Burr. March 31. I guess my question would be probably 
twofold. One is the assessment by the gentleman from Wisconsin 
Electric, is it an accurate statement that if companies can't 
see these as anything other than a financial drain, which would 
cause a capital flight, not a capital infusion, into the 
transmission areas, and they look at extended periods of 
indecision by FERC on the requests to set rates, what real 
belief would we have that we could ever move to this in 
anything other than a forced manner?
    Mr. Hoecker. Well, I am sure you appreciate that I can't 
comment on this, the facts of this case in particular, because 
it is pending before the Commission. But let me make a couple 
of observations.
    I would emphasize, as I did in my response to Congressman 
Sawyer, that the Commission's interest is in ensuring that the 
transmission portion of the industry, and, indeed, the entire 
industry, remains economically vital; and that typically means 
healthy rates of return appropriate to the risks and costs 
associated with providing particular services.
    I believe that you would find our Commission in complete 
agreement that the last thing we want to do is to promote 
competition through regional transmission organizations in any 
way that is going to result in a less-than-vibrant transmission 
system or industry.
    Mr. Burr. Would the Chair like to go to the other side?
    Mr. Barton. If you have one more, but I need to let 
Congressman Hall question before he runs to vote.
    Mr. Burr. Let me say that I intend to follow up with the 
other commissioners on some of the specific questions, since 
the chairman has left the ability to and certainly thank you 
and look forward to the next panel.
    Mr. Barton. The Chair recognizes the distinguished ranking 
member, Mr. Hall, for 5 minutes.
    Mr. Hall. Mr. Chairman, I am reading page 9 of your 
testimony, and you mention that the intrastate transmission 
within Texas, ERCOT, is beyond our to access authority.
    What kind of consultation have you had with the Texas 
Commission on how ERCOT and their ISO is operating and is 
working?
    Mr. Hoecker. I have talked with Chairman Wood on a number 
of occasions. He and I share common interests in this area of 
regional transmission organizations. I know that competition is 
on the minds of a lot of Texas legislators right now.
    We think that what Texas is doing in this area is very 
progressive, very helpful for Texas; and we applaud what they 
do.
    Mr. Hall. Do you think that the ISO is operating very well 
there then?
    Mr. Hoecker. I think it is, as much as I know about it. Of 
course, it is not a FERC jurisdictional transmission system, so 
my understanding is perhaps pretty general. But I believe it is 
an independent system operator that is providing some increased 
rationality at the transmission level.
    Mr. Hall. Does it appear to you to be viable, both power 
markets operating in Texas? Have you had a chance to----
    Mr. Hoecker. I really don't know. I would suspect very 
strongly, Congressman, that to the extent the independent 
system operator in Texas can reduce rate pancaking across ERCOT 
and can promote better planning and reduce barriers to 
commercial trades, that that will indeed add to the vibrancy of 
the wholesale markets there.
    Mr. Hall. If you are not satisfied with the information you 
have, either on a personal basis or through those who work with 
you, would it be okay if I bombarded you with a lot of good 
favorable information?
    Mr. Hoecker. Absolutely. That would be fine with me.
    Mr. Hall. Do you see any need to make a priority out of 
extending FERC's jurisdiction to ERCOT?
    Mr. Hoecker. No.
    Mr. Hall. Good. I yield back my time. That saves me some 
postage. I will go vote.
    Mr. Barton. All right. I am going to continue the hearing 
until we have the cavalry come to rescue me to go vote. What 
happens if we pass a bill that does not give FERC or another 
agency the authority to regulate for transmission reasons the 
TVA and the power administrations? Or ERCOT in Texas, for that 
matter.
    Mr. Hoecker. Two things happen. No. 1 is that the 
Commission will continue to promote open access on those 
transmission systems through the concept of reciprocity under 
our Order No. 888. Under that process, the Bonneville Power 
Administration, for example, has filed with us an open access 
tariff that we find to be acceptable, consistent with our open 
access regime.
    Other power marketing agencies have not so participated in 
our process. So the consequence of that, second, is that the 
competitive bulk-power marketplace will have some barriers 
related to a possible inaccessibility of transmission systems 
owned by nonjurisdictional entities, and the result of that, to 
my mind, is some degree of inefficiency.
    Mr. Barton. Well, comment on the open systems and the 
municipally owned systems. Right now I think, it is safe to 
say, I would characterize them as not very open. Would you 
comment on that?
    Mr. Hoecker. Well, I don't know if any of those systems 
provide open access under Order No. 888. I would have to check 
that, but I don't think that is the case.
    To the extent, however, that they--and there may be some 
that actually have required transmission service from an open 
access utility--they are obligated by our rule to return the 
favor.
    Mr. Barton. There are a lot of these opt-in, opt-out 
provisions. Can you apply in a Federal bill, a municipal power, 
the authority, for example, to opt out in terms of opening 
their market, but force them to opt in in terms of transmission 
across their system?
    Mr. Hoecker. It may be the difference between retail and 
wholesale. Not all municipal or cooperatively owned systems own 
transmission, and we are focused on opening the transmission 
systems that they do possess. Whether they would, in addition, 
be able to opt out of other forms of access at the retail level 
is something we really don't take a position on.
    But--well, we just don't take a position on that.
    Mr. Barton. Okay. You don't want to speculate?
    Mr. Hoecker. Not particularly.
    Mr. Barton. This is just our first hearing.
    Mr. Hoecker. I will come prepared with more speculations 
next time.
    Mr. Barton. Let us go to another touchy subject. There are 
some rumors that certain PMAs use their transmission system 
rates to actually absorb generation costs. That is one reason 
that their costs are so low. Does FERC take a positive or a 
negative view of that? And if you are given authority to set 
those rates, to regulate those rates, how would you look at 
generation costs going into transmission?
    Mr. Hoecker. Well, Mr. Chairman, I haven't given that a lot 
of thought, but I think we want to have sources of generation 
competing in a fair market on the basis of their costs and 
their efficiencies, and not being subsidized by other 
functions. I think that that would be the most efficient 
approach.
    I am not familiar with the particular situation you allude 
to, but transmission needs to be priced separately. Generation 
needs to compete on the basis of its costs separately.
    Mr. Barton. Okay. Let us switch gears a little bit. Do you 
believe the FERC should have the authority to order a 
transmission owner to join a regional transmission 
organization?
    Mr. Hoecker. Well, it certainly would expedite our process, 
I must say. I think we at this point are focused on encouraging 
the industry to create regional markets and to form regional 
transmission organizations in their own economic interest and 
in the interest of the access of their generation and 
independent generation to regional markets.
    We think the bottom line here is fair competition, and 
ultimately if we don't have regional organizations--and this is 
my opinion--we will not have the kind of broad competitive 
regional markets that will produce the greatest efficiencies, 
or the greatest savings for consumers.
    Mr. Barton. My final question, as the cavalry is arriving 
here, does the FERC have a position in terms of whether we 
should go with the transco organization system or an ISO 
system?
    Mr. Hoecker. Mr. Chairman, we have approved 5 independent 
system operators already. We have not had proposed to us yet a 
transco or an independent transmission corporation, and the 
Commission has taken no position yet on whether one corporate 
form or another is to be preferred.
    Frankly, one of the purposes of our coming initiative will 
be to explore that very issue, and I at this point see no 
inherent reason for us to be prescriptive and to say one versus 
the other should be required.
    Mr. Largent. [presiding] Mr. Hoecker, I would like to ask 
you a couple questions, if I could, about--every member of this 
committee so far, as long as I have been here, has been talking 
about reliability standards, enforceable reliability standards. 
Give me 3 or 4 examples of what a reliability standard would 
be?
    Mr. Hoecker. Well, a reliability standard might relate to 
how transmission is reserved and under what conditions or how a 
particular transaction might be curtailed or what priorities 
for uses of the transmission system might be applied in 
curtailing uses.
    If the system becomes overloaded, for example, or 
congested, and there is a threat to reliability, the 
transmission-owning utilities through voluntary agreements now 
would agree to engage in certain practices to curtail loads, 
particular end-users, to redispatch their generation in a 
certain way, to try and relieve the constraint, or to get power 
to particular customer groups or regions that might be deprived 
of power.
    It is an extremely elaborate system. That is sort of a 
lawyer's answer, not an electrical engineer's answer, 
obviously; but I think that these standards have both a high 
degree of technical sophistication, from the standpoint of 
managing the system, and a lot of commercial implications in 
terms of who gets to use the system and under what 
circumstances.
    My staff just put in front of me the kinds of criteria that 
WSCC asked us to take a look at. In our recent order we 
approved them as being just and reasonable. Things like 
operating reserves and disturbance control criteria require 
control areas to maintain specified levels of operating 
reserves and to be able to recover from a disturbance within 10 
minutes. That goes partly to generation adequacy and how that 
generation is redispatched.
    Control performance standards, operating transfer 
capability criteria. Pretty technical stuff. Frankly, the 
expertise for developing these standards exists in the 
industry. It has always existed there, and we would, even under 
the kinds of proposals that I am suggesting, continue to rely 
on the industry to develop and apply those standards. We just 
want to make sure it is done fairly.
    Mr. Largent. Basically, what you are talking about is rules 
of the road, pull over, yield, stop, those types of issues in 
transmission.
    Mr. Hoecker. That is a good analogy.
    Mr. Largent. What about reliability standards in the other 
aspects of the electric industry, generation, distribution. 
Does FERC have any authority in those areas?
    Mr. Hoecker. Reliability at the retail level, in terms of 
generation adequacy and the functioning of the distribution 
system, has historically been largely a State concern, and as I 
suggested, I think, in my testimony, we want to make sure that 
even though we have Federal oversight of the development of 
standards, that the States continue to play this important 
role.
    That relates to everything from requirements to trim trees 
and transmission line maintenance and certain kinds of response 
criteria like the ones I have alluded to here, to actually, 
perhaps, some additional requirements on transmission 
reliability as well.
    I think it is a concern the States have expressed that 
their historic role in ensuring reliability for the ratepayers 
in their jurisdictions not be curtailed because of this new 
Federal oversight regime that we are talking about today.
    Mr. Largent. All right. But when we talk about reliability, 
I guess I am thinking of the Mrs. O'Leary who lives in 
Congressman Markey's district, or everybody's district really. 
When they think of reliability, they want to make sure when 
they flip that light on, it comes on. That goes beyond just 
transmission. It has to do with generation and distribution as 
well.
    So how do you coordinate all of those functions under the 
administration's bill, for example?
    Mr. Hoecker. I am not sure the administration's bill is 
very express about that. I think the administration's bill is 
focused on transmission reliability at the bulk-power level in 
the wholesale marketplace. I think there is a lingering 
question there about States, but the fact is that the industry 
and the regional reliability organizations that exist now and 
who would continue to exist under the administration's 
legislation would have a coordinating function with appropriate 
State agencies to ensure that the lights would stay on at Mrs. 
O'Leary's house.
    I think for the most part that can be dealt with at the 
State level by itself through public service commissions and 
other agencies responsible for retail reliability.
    Mr. Largent. Let me ask you one other question. One of the 
things you have talked about in your testimony is expanding the 
ability or authority of FERC, basically, to apply Rule 888 to 
the areas that you cannot currently, the TVA's and Bonnevilles 
and municipalities, some of the co-ops.
    Is there any concern--Mr. Dingell brings this question up 
all the time in terms of the Tucker Act, the takings act--is 
there any concern that that might apply in expanding FERC's 
authority in areas it doesn't currently have, that the Tucker 
Act may come into play?
    Mr. Hoecker. I really don't know how to answer that. I 
would be pleased to look at that question. I think that our 
focus is on having uniform, accessible and efficient bulk-power 
markets on an integrated system that includes transmission not 
regulated by the Commission, and that those markets are not 
going to be ultimately very efficient without eliminating that 
jurisdictional difference.
    Mr. Largent. Is it your view that moving to a competitive 
market will improve reliability?
    Mr. Hoecker. That is my firm belief. As a matter of fact, 
we had a similar experience on the natural gas side when we 
ordered interstate pipeline systems to provide open access on 
behalf of others, and there were a good many apprehensions 
about whether that would threaten reliability of the interstate 
grid; and in fact reliability problems have diminished 
significantly in a competitive environment.
    I think this is not something to be taken lightly, that we 
can't just assume that reliability happens. It takes a lot of 
work in which the industry needs to have a key role. But I see 
no reason why we cannot create mechanisms to ensure that we can 
have our competitive cake and reliability too.
    Mr. Largent. Are you aware of any technological advances 
that are right on the horizon as we move to a restructure of 
electricity competitive industry that will improve reliability?
    Mr. Hoecker. Well, there is a great deal of talk these days 
about distributed generation, and as gas turbine technology 
gets smaller, more efficient, the availability of smaller 
efficient generation, that may generate power off the grid, or 
that could be placed in strategic locations on the grid to 
boost reliability, is probably the main technological 
innovation. It is one--the gas turbine--is one innovation that 
is both driving competition and also may be one of the ultimate 
solutions to maintaining reliability of the system.
    There are lots of other things that are talked about, 
including super-conductive transmission wire and so forth, but 
I am not sure what the reliability implications of that might 
be.
    Mr. Largent. Do the gentleman from Kentucky or Ohio have 
any other questions?
    Well, Mr. Chairman, thank you for being with us here this 
morning. We appreciate your testimony and your time. We look 
forward to the committee working with you as we move toward 
restructuring electricity. Thank you.
    The Chair would call forward at this time the second panel.
    Mr. Shimkus. Mr. Chairman, I have two quick questions.
    Mr. Barton. This is highly unusual, but if you don't mind, 
Mr. Chairman, we have just a couple quick questions from the 
gentleman from Illinois.
    Mr. Shimkus. I am a highly unusual member, so it is fitting 
that I should break with procedures.
    Real quick, in your testimony you state that even though 
the grid is being used increasingly for regional transactions, 
the siting of transmissions and generation facilities is, 
nevertheless, subject to State law.
    My question is, how are the regional planning agencies 
going to site better than the States?
    Mr. Hoecker. Well, planning and siting are two different 
things. I think that if you have regional transmission 
organizations and you plan for expansion of the transmission 
system or additional generation in ways that are most 
efficient, that is to suggest that projects are truly needed 
and not simply an attempt to pad a utility's rate base, that 
State siting authorities may be more predisposed to cite those 
facilities.
    I don't suggest that regional transmission organizations 
necessarily have siting authority, but that proposal has been 
made.
    Mr. Shimkus. Thank you. I am going to go rapidly. Some 
believe one factor in the Midwest price spikes were the 
Pennsylvania, New Jersey, Maryland pool export rules that 
cutoff power transfers from PJM to the Midwest. Do you believe 
that that was one of the factors in the price spikes?
    Mr. Hoecker. I don't recall that specifically. I think that 
there were a number of problems identified in our report. 
Imports of power from various regions, from Ontario, from the 
Southeast through Tennessee Valley Authority and from the East 
were congested, and sometimes power was not available in a 
timely fashion and where it could have been. That certainly was 
a major contributing factor.
    Mr. Shimkus. And I don't have the report on the price 
spikes that you all followed up on, but you know that the 
industry and a lot of the individuals think that there was some 
export rules that were a factor. Everybody who followed this 
issue knows there were a lot of factors.
    I would ask that we be allowed to ask questions in writing 
on this issue.
    Mr. Hoecker. Absolutely.
    Mr. Shimkus. And to follow up on this issue. Because the 
question for us in that experience last year is if those export 
rules can be attributed to some of the problems with the power 
spikes, those export rules would, I think, by definition impose 
an undue burden on interstate commerce which would be something 
we would have to address.
    Mr. Hoecker. Mr. Shimkus, let me suggest that although 
there are a number of complicated factors behind the price 
spikes in the Midwest last summer, there have been some very 
good market responses, that we are guardedly optimistic about 
this summer; but that if we are thinking long-term, that the 
kinds of issues you have just raised can be addressed very well 
through a regional transmission organization and their planning 
function.
    Mr. Shimkus. I would agree there has been some market 
responses, like the planning for new generation facilities. I 
am at a loss to understand the market responses in transmission 
and distribution. Do you know of any that have revolved in that 
area?
    Mr. Hoecker. They are long-term. I have talked with the 
Governor of Wisconsin and other parties in the Midwest, and 
they are beginning to work cooperatively to try to develop some 
long-term transmission expansion solutions, which are 
appropriate in various locales, obviously. But the response's 
that will solve or at least minimize the chance of that sort of 
thing happening again----
    Mr. Shimkus. I guess we will find out this summer, 
hopefully not.
    Mr. Hoecker. [continuing] are pretty complicated.
    Mr. Shimkus. I would like to thank my colleague, Mr. 
Largent, for pulling me back. I yield back the balance of my 
time.
    Mr. Barton. Did the gentleman from Oklahoma ask his 
questions?
    Mr. Largent. Yes, I did.
    Mr. Barton. Mr. Whitfield, you had your questions. Mr. 
Sawyer, you had your questions.
    Mr. Sawyer. Thank you.
    Mr. Barton. We are going to let you go have lunch, Mr. 
Hoecker. We are going to hold the rest of the audience captive 
in the next panel. Thank you. We will have written questions 
for the record. Thank you for your attendance. We would like to 
welcome our next panel. If there are individuals in the room 
that want to leave, we would encourage you to expedite your 
egress from the room.
    We want to welcome our second panel to our reliability and 
transmission hearing.
    We have from my left, Mr. Fred Schmidt, the chief of the 
Bureau of Consumer Protection, the office of the Attorney 
General of the great State of Nevada; Mr. Paul McCoy, senior 
vice-president for Commonwealth Edison from Chicago, Illinois. 
We have Mr. Stanley Szwed, who is the vice president for 
transmission, First Energy, in Akron, Ohio. We have Ms. Trudy 
Utter, who is the vice president and general manager for 
Tenaska Power Services in Arlington, Texas, and either is a 
constituent or lives near my constituency. We are very glad to 
have you here. And Mr. Dave Nevius, who is the vice president 
of the North American Electric Reliability Council from 
Princeton, New Jersey. Mr. Greg Yurek, the president and CEO of 
American Superconductor Corporation. We have Mr. Joseph 
Iannucci, did I get that right----
    Mr. Iannucci. Close enough.
    Mr. Barton. Distributed Utility Associates in Livermore, 
California. And last but certainly not lease, Dr. Matthew 
Cordaro, President and CEO of Nashville Electric Service. We 
want to welcome all you gentlemen and lady. We are going to put 
your statements in the record in its entirety. Since we have 
such a large panel, we are going to ask that you summarize it 
in 5 minutes. We are going to start with Mr. Schmidt and work 
our way south and then come back and have questions.
    Mr. Schmidt, you are recognized for 5 minutes.
    Mr. Hall. Mr. Chairman, I just got here. You didn't ask us 
all to go back through all those acts of bragging on you before 
this committee again?
    Mr. Barton. No, we sure didn't. We could put you out on the 
panel.
    Mr. Barton. Mr. Schmidt, you are recognized for 5 minutes.

    STATEMENTS OF FRED SCHMIDT, CHIEF OF BUREAU OF CONSUMER 
 PROTECTION, OFFICE OF ATTORNEY GENERAL, STATE OF NEVADA; PAUL 
 D. MCCOY, SENIOR VICE PRESIDENT, COMMONWEALTH EDISON; STANLEY 
  F. SZWED, VICE PRESIDENT, TRANSMISSION, FIRST ENERGY; TRUDY 
   UTTER, VICE PRESIDENT AND GENERAL MANAGER, TENASKA POWER 
   SERVICES COMPANY; DAVID R. NEVIUS, VICE PRESIDENT, NORTH 
  AMERICAN ELECTRIC RELIABILITY COUNCIL, PRINCETON FORRESTAL 
    VILLAGE; GREGORY J. YUREK, PRESIDENT AND CEO, AMERICAN 
   SUPERCONDUCTOR CORPORATION; JOSEPH IANNUCCI, DISTRIBUTED 
  UTILITY ASSOCIATES; AND MATTHEW CORDARO, PRESIDENT AND CEO, 
                   NASHVILLE ELECTRIC SERVICE

    Mr. Schmidt. Thank you, Mr. Chairman. I am Fred Schmidt, 
the Consumer Advocate from the State of Nevada. As the chief 
Deputy Attorney General in my State, I oversee a division that 
handles utility consumer advocacy as well as antitrust laws and 
consumer protection laws in my State.
    Today, I am here on behalf of the National Association of 
State Utility Consumer Advocates, or NASUCA. It is a national 
organization of which I currently serve as president. Its 
membership encompasses 39 different States and the District of 
Columbia. The background of the organization is such that each 
member is empowered by State legislation to represent utility 
consumers in their individual states. We have members from the 
States of most of the members of this committee.
    It was a little bit difficult for me to leave and get to 
Washington today for this hearing, but this hearing is very 
important, and I commend the chairman for holding it. The 
reason it was difficult is like in many States, my State is in 
the process of marathon-type hearings on electric restructuring 
to our retail market in early 2000.
    I am in the middle of both Public Utility Commission 
hearings and legislative hearings for that purpose. But one of 
the things that my experience in the State of Nevada has taught 
me is there are certain things that you cannot do at the State 
level. Although our national organization generally stands for 
principles of promoting and developing different States' rights 
issues that we all are involved in, there are certain things we 
believe, even as a national organization, that can only be done 
on a Federal level. Your topic today is one of those.
    Reliability of the Nation's transmission system is of 
paramount importance to the consumers that we represent in our 
organization. First and foremost, as we all agree, the lights 
must continue to go on regardless of what system of electric 
competition is developed, either in an individual State or on a 
national basis.
    We that represent the States are most interested in 
maintaining at least the current level of reliability, if only 
for the simple reason that each of us will be held responsible 
if and when lights don't go on.
    I hope you will keep this in mind as you work through the 
solution to the challenge, because markets in many instances do 
not answer those questions.
    For half a century, NERC, or the North American Electric 
Reliability Council, and its member organizations have played a 
vital role in promoting and maintaining reliability of the 
system. However, historically, NERC has been a closed club 
whose membership has been dominated by private utilities. That 
exclusive membership relationship will not work in an 
environment where you allow increasing competition.
    To its credit, NERC has recognized the need to permit 
greater representation in its organization, on its boards of 
directors, and expanded its membership in the last year to 
include representation of consumers. In fact, my colleague from 
Pennsylvania, Sonny Popowsky, who is a consumer advocate, the 
Attorney General's office, in that State, now sits on the NERC 
Board and our executive director of our association in 
Washington is an observer. We also serve on many of their 
committees.
    I am here to tell you today that we support the efforts to 
date by NERC to expand their representation within their 
organization, and to recognize that additional changes in that 
organization, which has historically assumed responsibility for 
reliability that we have today in the system, but there are 
three changes that I want to point out to the committee that 
are necessary as we move to an increasingly competitive 
environment.
    First, developing a national reliability organization that 
will continue the vital functions now performed by NERC is 
essential. This must be done in a competitively neutral manner 
and must recognize the paramount concerns of consumers in the 
reliability of the electric system.
    Second, NERC must be governed by an independent board of 
directors in order to function in a competitively neutral 
manner. It cannot be dominated or controlled by any particular 
independent group or segment.
    Third, we believe that FERC should have clarifying 
authority to review reliability requirements which NERC or any 
successor organization will impose and ensure that those 
requirements are adopted and implemented and followed in a 
manner that benefits consumers.
    I will leave the remainder of my remarks in for the record 
on recommendations, along with two resolutions, Mr. Chairman.
    Mr. Barton. We can give you another minute, if you want to 
put the recommendations in the record, because I think those 
are important.
    Mr. Schmidt. The other recommendations that I wanted to 
address in my written comments to you this morning relate to 
this concept of the type of regional organizations that are 
developed or being developed in different States. They are 
generally referred to as independent system operators or 
regional transmission organizations. Several ISOs have recently 
been approved by FERC. Oddly, I think it is interesting to 
point out to the committee that none of these ISOs are 
identical, neither their roles, characteristics, or legal 
structures.
    In fact, if you look at the Nation and how it has developed 
on a retail competitive basis, the regions of the country, New 
England and the mid-Atlantic States that have actually 
aggressively implemented competition to date on a retail basis, 
are regions that have effective type ISOs or power pools to 
govern the interrelationships among the utilities that cross 
State borders, whether it is mid-Atlantic States, PJM. In other 
States of the country struggling to develop retail electric 
competition, like my own States and States in the Midwest, the 
Southeast and the Northwest, there are not these types of 
organizations.
    Mr. Barton. What are your recommendations?
    Mr. Schmidt. My recommendation is FERC needs to have 
authority to develop requirements to join the organizations, 
and those organizations in different regions of the country 
need to be independent in nature from the traditional 
structures in which they exist in order to develop effective 
competition.
    [The prepared statement of Fred Schmidt follows:]
Prepared Statement of Fred Schmidt, Consumer Advocate, State of Nevada 
and President, National Association of State Utility Consumer Advocates
    My name is Fred Schmidt and I'm the Consumer Advocate from the 
State of Nevada. As a Chief Deputy Attorney General for the State of 
Nevada I oversee a division which advocates for utility consumers and 
enforces antitrust and consumer protection laws. I am here today 
testifying on behalf of the National Association of State Utility 
Consumer Advocates (NASUCA). I currently serve as president of that 
organization.
    NASUCA is an organization of 42 state utility consumer advocate 
offices from 39 states and the District of Columbia charged by their 
respective state statutes to represent utility consumers before federal 
and state utility commissions and before federal and state courts. For 
the most part, consumer advocates represent residential and small 
commercial consumers. As such, NASUCA members are intricately involved 
in electric utility restructuring debates in their states and, through 
NASUCA, in Washington, D.C. NASUCA greatly appreciates the opportunity 
to testify today and commends you for holding this hearing.
I. Introduction
    To be perfectly honest, it wasn't easy for me to make it here 
today. In my state of Nevada we are in the midst of marathon 
legislative hearings on Public Utility Commission regulatory 
proceedings to enable Nevada to open our retail electricity market to 
consumer choice by early next year. I mention this for two reasons. 
First, even without federal action the states are moving forward and I 
encourage you not to interfere or retrospectively fiddle with their 
decisions. Second, my experience in Nevada--and I'm certain that my 
viewpoint is shared by consumer advocates across the nation--makes it 
abundantly clear that there are certain issues states cannot deal with 
and need federal intervention. Reliability and transmission issues--
along with market power issues--are three of those critical issues that 
the federal government must deal with to ensure that consumers--small 
consumers--benefit from electric restructuring.
    In fact, NASUCA has called on the federal government to act on 
these issues. We understand that electrons do not respect state borders 
and with all the merger activity going on--including mergers with 
foreign companies--neither do companies. We support action in these and 
other areas so much that we stood with Secretary Bill Richardson and 
Congressmen Markey, Burr and Largent, last week at the introduction of 
the Administration's bill, not so much to endorse all of the specific 
provisions but to encourage Congress to act on several critical issues.
    There are areas, however, where we believe that Congress should not 
act. I know we are not here today to discuss them but they can be 
summarized briefly: Congress should not impose a date certain mandate 
on states and Congress should not create a federal stranded cost 
mandate or backstop. These are two absolute legislative no-no's that 
Congress must respect.
    Let me now turn to the topic at hand--reliability and transmission.
II. Reliability
    The reliability of the nation's electric system is of paramount 
importance to the consumers represented by the members of NASUCA. First 
and foremost, the lights must continue to go on when the switches are 
flipped under any new scheme or ``good enough'' should be left alone. 
We representing the states are most interested in maintaining our 
current reliable system if only because we will be held responsible if 
and when the lights go out. I hope you will keep this in mind as you 
work through the solutions to this challenge.
    For almost 30 years, the North American Electric Reliability 
Council (NERC) and its member organizations have played a vital role in 
promoting and maintaining the reliability of the nation's electric 
system. However, NERC was historically a closed club whose membership 
was dominated by private utilities. Such an exclusive membership 
arrangement will not work in an increasingly competitive environment.
    To its credit, NERC has recognized its need to permit greater 
representation on its Board of Directors and has expanded its 
membership to include representation by consumers. My colleague 
Pennsylvania Consumer Advocate Sonny Popowsky now sits on the NERC 
Board and NASUCA Executive Director Charles Acquard is an Observer. 
Other NASUCA members serve on various NERC Committees.
    NASUCA supports the efforts taken to date by NERC to expand 
representation within that organization, but recognizes that additional 
changes will be necessary to preserve reliability in an increasingly 
competitive environment. These changes include:
 Developing a national reliability organization that will 
        continue the vital functions now performed by NERC. This 
        function must be done in a manner that is competitively neutral 
        and recognizes the paramount concerns of consumers in a 
        reliable electric system.
 Establishing an independent Board of Directors that will 
        govern NERC (or any successor national organization) in a 
        competitively neutral manner that will benefit all consumers 
        and that will not be dominated or controlled by any particular 
        industry participant or segment.
 Clarifying FERC authority to review the reliability 
        requirements imposed by NERC (or any successor national 
        organization) and to ensure that such requirements are adopted 
        and implemented in a manner that benefits all consumers.
    A copy of our resolution on this issue is attached.
    Legislative language has been developed that is reasonably 
consistent with these principles. It is my understanding that Dave 
Nevius from NERC will describe them in detail at today's hearing. 
NASUCA will support this language with one additional caveat. That is, 
it is important for Congress to clarify the continuing and vital role 
of the state in maintaining the reliability, safety, and adequacy of 
the electric systems within the state borders. As long as the states do 
not act in a manner that interferes with NERC's or FERC's requirements 
in interstate commerce, the states must not be preempted from taking 
action to ensure that the lights stay on within their borders.
III. Transmission/ISOs
    Turning now to the issue of transmission, the reliability of the 
nation's electric supply depends on a high level of coordination among 
transmission facilities and generation facilities. Transmission 
facilities currently exhibit characteristics such as high fixed costs, 
difficulties in siting, and complex interactions affecting their 
integrity and available capacity. These characteristics suggest that 
transmission will require continued regulation for the foreseeable 
future.
    These characteristics allow transmission operation to materially 
affect the development, existence and continued efficiency of a 
competitive market for delivered electric power and the services it 
provides. Simply stated, open, fair, and nondiscriminatory transmission 
access is critical to developing and maintaining a competitive electric 
market. Without it, transmission owners will game the system and thwart 
competition.
    To encourage open access, Congress and several states are actively 
considering or implementing legislation which would affect the 
reliability, price, availability and competitive neutrality of the 
transmission grid by introducing competition between and among electric 
generators. Much of this legislation calls for the creation of new 
institutional arrangements known generally as ``Independent System 
Operators.'' In fact, a variety of ISOs have recently been approved by 
FERC. Oddly, none of these ISOs are identical in their roles, 
characteristics or legal structures.
    NASUCA believes that all ISOs, as well as any other entities 
charged with or assuming operations control of a regional portion of 
the transmission grid, must meet the following requirements:
 All ISOs or related regional transmission organizations should 
        be truly independent from the financial interests of individual 
        generation and transmission owners, marketers and customers. 
        These organizations should have plenary authority over the 
        operation of the interconnected transmission system, including 
        the loading and unloading of lines for reliability purposes.
 This independence may be influenced by provisions affecting 
        governance and scope of ISO authority, but can only be ensured 
        by appropriate regulatory oversight over practices, tariffs, 
        rules requirements and procedures employed or enacted by the 
        ISO.
 Such regulatory oversight should encourage and facilitate 
        effective dispute resolution, but must maintain basic due 
        process protections, including the right of appeal for all 
        parties affected by any practice, tariff, rule, requirement or 
        procedure employed or required by the ISO or related entity. 
        Such oversight and due process should also include the ability 
        to address issues related to the independence of the ISO or 
        related entity.
 Regulatory oversight must be coordinated and balanced to 
        protect federal and state interests.
 ISOs must be required by statute or regulatory oversight to 
        meet strict standards of economical operation and investment, 
        minimization of prices to consumers, open and comparable 
        access, competitive neutrality and public accountability.
 The cost of the ISO and other related entities must be just 
        and reasonable, and shared by all users in an equitable, non-
        discriminatory and competitively neutral manner.
 There must be a clearly defined and substantial role for 
        consumer advocates and other stakeholders in the governance 
        and/or oversight regarding the ISO or related entity.
 Any powers or authority delegated to the ISO to prevent, 
        identify and mitigate the exercise of market power must not 
        preempt the application of antitrust law to address illegal 
        anticompetitive acts carried out by transmission owners or 
        other market participants.
 All ISOs and related entities must enforce compliance with 
        reliability rules and protocols promulgated by the North 
        American Reliability Council or any duly authorized successor 
        organization by all members, customers, users, and owners of 
        transmission.
    A copy of our resolution on this matter is attached.
IV. Conclusion
    Crafting a new regulatory scheme that mixes competition in 
generation and other electric utility services with continued 
regulation of transmission and distribution services is a formidable 
challenge that requires cooperation and coordination between federal 
and state governments. States have and will continue to move forward to 
develop retail competition plans that best meet the needs of their 
residents. However, its clear that they cannot do it alone. They need 
the federal government to resolve issues that cross state borders.
    Two of the most important issues that the federal government must 
consider are the subject of this hearing today. NASUCA encourages this 
Committee and Congress to move forward on reliability and transmission 
issues consistent with the principles I have just outlined. Failure to 
do so may harm consumers. After all, why restructure the electric 
industry if consumers don't reap the benefit of our efforts?
    Again, I thank you for this opportunity to testify today on behalf 
of NASUCA, and I look forward to your questions.

    Mr. Barton. Thank you.
    Now I would like to hear from Mr. Paul McCoy, who is the 
vice president for Commonwealth Edison in Illinois. We will put 
your statement in the record in its entirety and recognize you 
for 5 minutes.

                   STATEMENT OF PAUL D. MCCOY

    Mr. McCoy. I appreciate the opportunity to appear before 
this panel this morning. It is fair to say that fully 
competitive markets are unlikely to emerge in the power sector 
unless we get the transmission governance structure question 
right.
    At Commonwealth Edison we have come to the conclusion that 
the structure most likely to stand the test of time is the 
following: the evolution of independently owned for-profit 
transmission companies, or ITCs, divested from the vertical 
integrated utilities from which they came, which operate--and 
this is the important piece--operate under the policy and 
regulatory oversight of regional transmission organizations, or 
RTOs. These RTOs can clearly be the existing ISOs with their 
charters modified.
    We view these ITCs as the institution of choice to manage 
systems more efficiently and effectively and to expand it where 
necessary, to implement economic pricing, and congestion 
management and to rationalize and consolidate the numerous 
generation control areas that currently exist.
    On the other hand, ITCs are unlikely to be created as 
quickly as people would like through the necessary step of 
divestiture unless regulators can ensure rates of return and 
tariff structures compatible with competitive business 
practices.
    We view regional transmission organizations as the 
inheritors of the policymaking functions currently scattered 
among the existing ISOs and the NERC reliability councils. What 
we are saying very simply is we see from our model the 
consolidation of these two entities into a single RTO oversight 
structure for the Nation.
    We don't see the RTOs as having actual operational 
responsibility, but instead ensuring that those who operate the 
system under their oversight do so competitively in a 
nondiscriminatory fashion and with no degradation in electric 
reliability.
    The RTOs needs to have a geographic scope far greater than 
reflected in current oversight structures, like the current 
ISOs. Even the Midwest ISO, which is the largest ISO filed so 
far, would be much more effective if its geographic scope were 
further increased. To ensure that this occurs and that the RTOs 
assume the current NERC functions and the expanded ones that 
have been discussed around the country, we support legislation 
that empowers a self-regulating reliability organization to 
impose reliability standards, enforce those standards, all 
under the regulatory backstop and oversight of the FERC.
    We believe, furthermore, that markets in power need to be 
created from regions like the central part of the United 
States, where they don't really exist at all. As in the case of 
RTOs, markets for power need to have broader geographic 
boundaries than they currently do in order to comprise broader 
markets and greater opportunity to foster market power 
liquidity, price discovery and management of financial risk.
    In summary, we believe the opportunity exists to reevaluate 
the first phase of U.S. power sector restructuring, especially 
at the wholesale level, learn from that experience we have had 
so far, and create the public and private institutions that 
maintain the historic separation of operational and regulatory 
function.
    Mr. Chairman, that concludes my remarks.
    [The prepared statement of Paul D. McCoy follows:]
      Prepared Statement of Paul D. McCoy, Senior Vice President, 
                      Commonwealth Edison Company
    Good Morning. I appreciate the opportunity to appear before the 
members of this Subcommittee. It has been the historical duty of the 
members of this panel to give legislative form to national energy 
policy. Today's debate can hopefully contribute substantive 
recommendations to the very complex issue of restructuring the U.S. 
transmission system to serve competitive markets for power.
    Reliability, transmission and competitive markets can be said to 
represent the foundation of power sector reform. They are at the core 
of the concerns we have in the Mid-west, where we continue to debate 
and refine the structure and governance of the institutions that will 
best serve the consumers as well as the private and public utilities of 
the region. I would note, at the outset, that our electric sector 
history and operational traditions are different from those of the 
East, which long ago found a consensus to manage its power systems in 
tight pools that centrally dispatch electricity. Hence the caution you 
will detect in my remarks as to generalized, Federal policy solutions 
to the issues that we are collectively addressing, and must resolve.
    Retail competition has been slow in coming to our region. Today, as 
a matter of fact, Illinois is the only Mid-western State to have 
actually enacted a restructuring law. By the terms of that law, some of 
our customers will begin to exercise choice in electricity suppliers in 
October 1999. All of our customers will have that choice in the year 
2002. To accommodate this very fundamental change in our region's power 
sector, and to create robust markets for power, we are required to 
address and resolve structural and managerial issues on a timetable 
more pressing than that of our neighbors, but with consequences for 
those beyond our borders.
    At the forefront of our present deliberations is the requirement to 
ensure non-discriminatory access to the transmission system for 
competitors serving both wholesale and retail customers. This is 
fundamentally a structural matter. It goes to the core of how 
responsibilities should be divided between an Independent System 
Operator (ISO) and the owners of the grid. On this issue, we believe 
that in the end the system that will be sustainable will be the one 
that separates operational and merchant functions from those of policy 
and regulation. It is our view that owners of the wires are likely to 
be the best operators of the grid, and, that successor organizations to 
the present ISOs are likely to be the necessary regional arbiters of 
the public interest.
    The public interest should be so interpreted as to encourage, 
through unequivocal economic signals, the divestiture of transmission 
assets from presently integrated utilities. But, it should be 
recognized that divestiture of critical assets is one of the most 
fateful steps that a vertically integrated utility can take. To do so, 
the utility must have ironclad assurances that its willingness to 
virtually eliminate public policy concerns about the exercise of market 
power, will create for its spun-off transmission company a reasonable 
opportunity to earn something better than traditional rates of return.
    In sum, we believe that the grid should be owned and operated by 
independent, for-profit transmission companies (ITCs). The regulation 
and oversight of ITCs should be assigned to Regional Transmission 
Organizations (RTOs). The RTOs would combine functions currently 
scattered among multiple ISOs and among regional reliability councils 
that, as presently drawn, represent institutions of sub optimal size 
and scope, although they are the best structures that have been 
constructed to date. The system resulting from this structural 
separation of duties would, in our view, reconfigure the mandates that 
are most appropriate to each of the players in the marketplace.
    We believe that divested ITC's will encourage the participation, 
under common rules, of transmission systems that are not currently 
under FERC jurisdiction. Public power and cooperative entities have 
expressed concerns about potential incompatibilities between their 
governance and participation in a transmission market made up 
principally of for-profit transmission companies. The ITCs herein 
proposed, operating under the public policy oversight of RTOs should go 
a long way in alleviating the residual concerns of public/non-profit 
market participants, perhaps to the extent of avoiding the need to 
consider FERC jurisdiction.
    We would summarize the division of labor between the above-named 
institutions as follows:

------------------------------------------------------------------------
                    ITC                                  RTO
------------------------------------------------------------------------
Owner of the wires........................  Arbitrator of Conflicts
Transmission System Operator..............  Dispatch Policy Maker
Manager of Congestion.....................  Assignor of Transmission
                                             Rights
Implementor of Constraint Resolution......  Director of Constraint
                                             Resolution
Manager of System Expansion...............  Regional Planner
Security Coordinator......................  Security Overseer
Power Exchange Operator/Coordinator.......  Market Monitor
------------------------------------------------------------------------

    Structural reform of the transmission system will have cascading 
consequence. Among these will be at least the following:

1. Significant consolidation of existing control area 1 
        offices and staff of the broadly-defined Mid-west, that are now 
        responsible for ensuring the flow of power. This 
        rationalization of the system will minimize procedural 
        differences among systems, facilitate the participation of new 
        competitors, and increase the operational and economic 
        efficiency of transmission services.
---------------------------------------------------------------------------
    \1\ The reliability council region of MAIN has 13 control areas, 
ECAR has 15, MAPP has 16. An optimal system for the geographic region 
represented by MAIN/MAPP/ECAR could be operated by no more than a dozen 
(or less) control areas.
---------------------------------------------------------------------------
2. Replacement of pro forma tariffs, filed under FERC Order 888, with 
        tariffs that more accurately reflect the cost of energy and 
        transmission 2. Market-driven locational marginal 
        price regimes, along with economic means of managing 
        congestion, would replace tariff rates.
---------------------------------------------------------------------------
    \2\  Pro forma tariffs have essentially been replaced by market 
pricing regimes in the Mid-Atlantic region (PJM), in New England 
(NEPOOL), in New York, and in California. They remain in effect in most 
of the rest of the U.S.
---------------------------------------------------------------------------
3. Replacement of current network and point to point transmission 
        service, with service based on point to point transactions 
        only. This system would increase the ability to price service 
        equally among all market participants, reduce gaming potential, 
        and eliminate the appearance of discriminatory behavior on the 
        part of transmission owners.
4. Creation of exchanges for spot forward and futures trading of power. 
        A competitive power sector is unlikely to emerge from the 
        present restructuring process unless it also contains highly 
        liquid and robust power exchanges. These exchanges are urgently 
        needed in regions such as the Mid-west which has none. In 
        addition, regions that have such exchanges as institutional 
        aggregates of the ISO, might also benefit from the creation of 
        second-generation exchanges that operate independently of the 
        ISO, and accommodate trade beyond current ISO borders. Markets 
        for power, like RTOs and NERCs, may need to outgrow traditional 
        physical and structural boundaries in order to secure for 
        consumers economic benefits greater than achievable in 
        presently constituted regions.
5. Development of more effective/more timely processes to build 
        transmission lines. Price-sensitive power markets will provide 
        reliable signals for the economic expansion of the transmission 
        system, initially for the purpose of alleviating line-specific 
        constraints. It will be in the public interest to consider and 
        efficiently approve investments that reduce system costs and 
        consumer prices. The interstate natural gas pipeline system has 
        already demonstrated the clear and present benefits of 
        regulator--encouraged new construction. Similar approaches will 
        prove essential to the optimal performance of the transmission 
        system. It would be well, in our view, if Congress could 
        clarify Federal-State jurisdictions, in this area, to achieve 
        objectives important to both.
    In conclusion, we see the need for further Federal attention to the 
structure and governance of the transmission system. Given the 
advantage of permitting further experimentation than has been possible 
so far, we would, at present, support expansion and clarification of 
flexible FERC authority. Specific to reliability, we support 
legislation that empowers the FERC to enforce the reliability standards 
that are to be delegated to RTOs, through the national oversight 
organization, the North American Electric Reliability Organization.
    We recognize that further legislation could become necessary in the 
future, in order to codify consensus on optimal transmission management 
models. For now, what seems to us essential, is movement away from the 
existing market fragmentation, and from tariffs that are incompatible 
with competition in the retail markets for electricity.

    Mr. Barton. Thank you. We would now like to hear from Mr. 
Szwed, who is also a vice president. He is Vice President of 
Transmission at First Energy, Akron, Ohio. I understand you 
have a little different idea from Mr. McCoy. 5 minutes.

                 STATEMENT OF STANLEY F. SZWED

    Mr. Szwed. Thank you very much for this opportunity to 
testify. I am Stan Szwed, vice president of transmission for 
First Energy Corporation. First Energy is the largest electric 
utility in Ohio, serving over 2.3 million customers in Ohio and 
Western Pennsylvania. We and our customers, suppliers, and 
employees are constituents of at least six members of the full 
Commerce Committee, including Representative Tom Sawyer of 
Akron, where First Energy is headquartered.
    I am here on behalf of my company and seven other major 
transmission providers who have endorsed my testimony here 
today. They include Allegheny Energy, Consumers Energy, Duke 
Energy, Entergy Corporation, Northern States Power, Public 
Service Electric and Gas, and Southern Company. Together, these 
companies form or account for more than 96,000 miles of 
transmission lines. If you were to put all that wire together, 
it would wrap the Earth about four times.
    Mr. Chairman, let me say that we share your commitment to 
competition and less intrusive regulation. There are 
differences of opinion even amongst ourselves about the best 
means to accomplish these goals, but we do agree on one 
essential point, government should not mandate market 
structure. I think we heard here today that clearly 
transmission is the backbone of the electric power system, not 
only for maintaining reliable service but being that necessary 
component to create robust competitive power markets. In 
considering potential legislation, we urge your support for the 
following 5 principles: one, to allow for a market-driven 
business-oriented resolution to transmission issues; two, the 
voluntary development of transmission institutions, practices, 
and investment necessary to support changing electric markets; 
three, the continued ability of the market to determine the 
structure of regional transmission organizations; four, 
encouragement for expansion of transmission investment; and, 
five, uniform rules for all owners of transmission.
    Transmission customers, producers, traders and suppliers 
and ultimately the public will benefit if transmission systems 
are given the chance to run as incentive-driven business 
enterprises and succeed on the basis of the value that they 
bring to the marketplace. It bears noting that the investors on 
which transmission providers must rely for billions of dollars 
in scarce capital are an indispensable part of the marketplace 
that must be satisfied.
    The value proposition for transmission investment, the 
incentive for entering, remaining or expanding in the 
transmission business, has also changed. There is a need to 
attract new investment and introduce new technology. 
Transmission systems must improve and grow to be able to keep 
pace with the thousands upon thousands of new transactions that 
will take place every day with broader electric competition.
    As a rough indicator of that, I have a chart to my left 
that describes in a very rough way, the increase in 
transactions that has taken place since 1994. This is 
significant as the trends, in my mind, are going to continue as 
we move toward more fuller competition. What this means is we 
need to continue to provide for investment, investment in 
physical facilities, investment in people, to operate these 
systems, and investment in appropriate procedures to maintain 
integrity of the system.
    A concern I have is that the future structure of the 
transmission business could become more of a regulatory 
question than a business question. The result could be that the 
attention, priority, and focus of transmission business leaders 
will be diverted on regulatory initiatives, rather than sharply 
focused on improving their service to customers.
    Again, myself and the companies that have endorsed my 
testimony are here to help and offer constructive comments. The 
companies endorsing this testimony are proudly all over the map 
on what they think is the best organization option for 
transmission business. Some, such as Public Service Electric 
and Gas, are already members of ISOs, and Allegheny Energy has 
indicated they are willing to join an ISO. Others, including 
Entergy, Northern States and Consumers, are pursuing other RTO 
options that are more efficient for their respective areas and 
businesses. We at First Energy are currently seeking regulatory 
approval to separate our transmission assets from our baselines 
of business, setting up a subsidiary for future divestiture 
into a larger regional independent transmission company.
    The companies endorsing this testimony want the flexibility 
to do what makes the most sense for each, now and in the 
future.
    In conclusion, I want to emphasize that incentive-driven 
transmission entities with appropriate government oversight, 
not prescriptive regulation, will better accommodate the future 
market. Again, I would like to thank you, Mr. Chairman. We 
welcome the opportunity to work with you to encourage greater 
competition in electric markets.
    [The prepared statement of Stanley F. Szwed follows:]
 Prepared Statement of Stanley F. Szwed, Vice President-Transmission, 
                           FirstEnergy Corp.
    Mr. Chairman: Thank you very much for the opportunity to testify 
before the Subcommittee today.
    I am Stan Szwed, Vice President of Transmission for FirstEnergy 
Corp. I am here on behalf of my company and other transmission 
enterprises whose names appear on the list appended to my testimony. 
FirstEnergy is the largest electric utility in Ohio. We serve 2.3 
million customers in Ohio and western Pennsylvania, and by one measure 
are the twelfth largest investor-owned utility in the country. We have 
annual revenues of approximately $5.5 billion and approximately $1.2 
billion invested in transmission assets. We and our customers, 
suppliers and employees are constituents of at least five of the 
Members on this Committee, including Representative Sawyer of Akron, 
which is where FirstEnergy is headquartered.
    On behalf of these companies, let me say we are here to be 
constructive. Mr. Chairman, we know that you and Chairman Bliley want 
competition in the electric industry, and we have some ideas we think 
will be helpful. We share your commitment to competition and especially 
to less intrusive regulation. There are differences of opinion, even 
among ourselves, about the best means to accomplish those goals. But we 
do agree on an essential point: government should not mandate market 
structure.
    Because transmission systems are the backbone of electric systems 
and the key to vigorous markets in electricity, transmission regulation 
must leave room for transmission owners to attract necessary 
investment, acquire or redeploy assets efficiently, and improve 
transmission infrastructure now and into the future. If transmission 
owners are not able to attract investment to improve transmission 
infrastructure, then the very backbone of the restructured industry 
will not be strong enough to support your vision of market competition. 
Unfortunately, we have not yet seen any legislative proposal that will 
encourage or permit reform of transmission regulation along these 
lines. In fact, some proposals on the table would be counterproductive.
    I commend you for devoting this hearing to transmission and 
reliability issues. From my perspective, it has been surprising that 
transmission issues have not been the subject of more discussion at 
this stage of the restructuring debate in Congress. Because 
transmission service is a critical element both in the development of 
broad and robust markets for power and in reliable electric supply, 
ensuring the proper resolution of the debate about transmission 
regulation is important. Many assume that there will be competition in 
generation services, and some can even envision the day when generation 
sales are fully deregulated. Ironically, however, conventional wisdom, 
when it considers transmission and reliability at all, assumes only 
that regulation must increase. This impulse, in my judgment, should be 
checked because it is likely to be counterproductive. The best way to 
improve transmission service and with it reliability, is to let market 
participants devise and implement new arrangements for providing 
service, new investment, new methods, and new technology.
    The companies endorsing my testimony own many of the largest 
electric transmission systems in the Eastern Interconnection. The 
Eastern Interconnection is a technological marvel, a ``grid'' comprised 
of interconnected electric systems stretching roughly from the Atlantic 
Ocean west to the Rockies and from the Gulf of Mexico north to Hudson 
Bay. One of three in North America, this Interconnection grew over the 
years almost completely as a result of voluntary effort, and the 
majority of facilities comprising the interconnection are privately-
owned. Let me emphasize: this happened largely without the government. 
The future of these vital interconnected systems is very much in the 
balance, and this hearing is part of an important historical record. I 
am honored to contribute to that record and, as I mentioned, grateful 
to you and your colleagues for the opportunity.
     My colleagues in the transmission business and I know transmission 
networks are the racetrack on which competition in electricity is and 
will be run. We have a vital self-interest in assuring that the rules 
of the track encourage or at least permit fair and more vigorous 
racing. We also share a strong conviction that the public interest 
requires nothing less.
     Transmission customers, electricity producers, traders and 
suppliers--and ultimately the public--will benefit if transmission 
systems are encouraged to run as incentive-driven business enterprises 
and to succeed on the basis of the value that they bring to the 
marketplace. It bears noting that the investors on which transmission 
providers must rely for billions of dollars in scarce capital are an 
indispensable part of the marketplace that must be satisfied.
Principles and Overview
     To capture the efficiencies and benefits of competitive electric 
markets and supporting transmission systems, we implore you to allow 
for and promote market solutions. Your decisions in a federal 
electricity bill will significantly influence the structure and 
treatment of electric transmission assets, the level of new investment, 
and the scope and quality of transmission service for the future. Thus, 
we urge that policy development adhere to the following principles:

1. A market-driven and business-oriented resolution to transmission 
        issues;
2. The voluntary development of transmission institutions, practices, 
        and investment necessary to support changing electric markets;
3. The continued ability and flexibility of the market to determine the 
        structure of Regional Transmission Organizations;
4. Encouragement for expansion of transmission investment; and
5. Uniform rules for all owners of transmission.
    If we do not continue to improve our transmission systems and 
reform the regulation of those systems, the nation will not have a 
competitive marketplace as vigorous as the one you envision. 
Transmission systems must improve and grow to be able to keep pace with 
the thousands upon thousands of new transactions that will take place 
every day with broader electric competition. It is also important to 
remove obstacles to restructuring the transmission business. One 
notable obstacle is the Public Utility Holding Company Act, which 
should be repealed.
    In your letter of invitation to appear today you asked a number of 
good questions. In answer to those questions, we have developed the 
following overview.

 Transmission providers are successfully meeting the 
        challenging opportunities associated with increased competition 
        in wholesale power markets. There has been tremendous change 
        and progress since the Federal Energy Regulatory Commission 
        (``FERC'' or ``the Commission'') issued and implemented its 
        Orders 888 and 889.
 The marketplace should take precedence over regulation in 
        determining the structure and scope of the transmission 
        business in the future. In a competitive marketplace, all 
        transmission providers, such as the Tennessee Valley Authority 
        and the Bonneville Power Administration as well as investor-
        owned companies, should be subject to the same legal and 
        regulatory requirements.
 The industry is developing the commercial infrastructure 
        necessary to accommodate even greater competition. Initiatives 
        are underway with the North American Electric Reliability 
        Council (``NERC'') to balance evolution into the future 
        competitive industry with the commitment to continue to provide 
        reliable service. This progress should not be pre-empted by 
        those seeking to mandate RTOs.
 Regional Transmission Organizations (``RTOs'') are operating 
        and, more important, are continuing to evolve. Therefore, RTO 
        structures should have the flexibility to adapt in a timely 
        manner as the market changes and as the industry changes. To 
        deny this flexibility could be to damage or impair the progress 
        of the RTOs already underway.
 The pace of change is accelerating. Industry and the markets, 
        instead of regulation, should have the first opportunity to 
        design the institutions and practices that will be needed to 
        accommodate the changes and further competition.
 The ``value proposition'' for transmission investment--or the 
        incentive for entering, remaining, or expanding in the 
        transmission business--also has changed. There is a need to 
        attract new investment and to introduce new technology, such as 
        the new Flexible Alternating Current Transmission Systems 
        (``FACTS'') devices.
 Only a business orientation for transmission business units 
        and RTOs will enable those institutions to attract the 
        investment they need. RTOs that have a market-driven, business 
        focus coupled with profit incentives are best positioned to 
        make the appropriate investment in the transmission business.
 Consequently, if Congress legislates on the subject of the 
        structure of transmission business units or RTOs, it should 
        make clear its preference for market solutions over regulatory 
        solutions.
Development of Transmission Networks
    We are at the doorstep of a new stage of development of the 
transmission system. During the first stage about 100 years ago, at the 
birth of electric service, there were small plants near densely-
populated areas, and the power didn't have to go very far. From today's 
perspective, this was really a pre-transmission period. In the second 
stage, as technology developed early in this century, power companies 
could start building big generating plants and sending the power to 
their customers across longer distances over transmission lines. But 
these lines were set up to handle a vertically-integrated company's own 
customers, not customers beyond the immediate territory.
    In the third stage, from the post-World War II period until recent 
years, as the country became more reliant on electricity and we needed 
greater reliability, companies started to interconnect their 
transmission lines to handle emergencies and provide power to one 
another in times of shortages.
    We are in the waning days of the fourth stage now. Today the 
transmission system, although designed for another purpose, is being 
relied upon to provide power to an increasing number of customers, not 
just for emergencies and for reliability, but as a standard commercial 
practice. Congress planted the seed for this fourth stage by enacting 
the Energy Policy Act of 1992 and providing explicit authority to the 
Commission to order, after affording an opportunity for an evidentiary 
hearing, that transmission lines be opened for wholesale transactions. 
The Commission's Orders 888 and 889 required wholesale transmission on 
a generic basis.
    Transmission transactions have increased significantly over the 
past five years. Transmission systems are being asked to do much more 
today than they were just a few years ago. Handling the increase in 
transactions is a challenging technical task. Transmission providers 
must respond rapidly to problems, and that often requires ready capital 
for improvements.
    The fifth stage will bring choice to every electric customer. 
Twenty states already have committed themselves to retail competition, 
and several more appear to be poised to move in that direction this 
year.
    From the standpoint of someone who is selling transmission 
services, that opportunity is music to my ears. It is a terrific 
business opportunity. There is no question that we will have to invest 
in more transmission capacity, not only to ensure reliability, but also 
to have the kind of markets that can and should emerge. As would any 
prudent business manager, we will invest wisely, not building more 
capacity than needed, but building enough to serve our customers' needs 
well.
    Now let's turn to the policy choices you have in front of you at 
this juncture, and I will tell you where we stand in contrast to some 
of the other ideas that have been advanced. You may well face a choice 
between mandatory transmission entities and voluntary ones; between a 
transmission system that is responsive to the demands of the market or 
one that is born from a rigid, government-imposed model.
    It is beyond question that the transmission system will need to 
grow, which means that you must cultivate the conditions for growth. 
Transmission is most likely to grow properly if: you allow it to 
operate as an incentive-driven business; you let business and the 
market determine growth; you let the market figure out what size makes 
sense for a particular regional transmission entity, and whose 
transmission systems become part of the entity; and you prevent the 
government from mandating new transmission structures.
    Some legislative proposals would grant the Commission new authority 
to order RTO membership without necessarily requiring the Commission to 
exercise that new authority. Many ask what harm there could be in 
giving the Commission an additional tool to ensure the ``right'' 
industry structure result. In fact, the question whether the Commission 
should stretch the limits of its current authority is being debated 
now. It is a credit to the Commission that the Commissioners are 
carefully weighing their options. Anyone who has followed the public 
statements of the Commissioners in the past several months knows how 
seriously they are looking at the options.
    There appears to be an appropriate reluctance on the part of the 
Commissioners to mandate a particular result. To a greater or lesser 
degree, the Commissioners have addressed the need for the industry to 
take the lead in RTO formation. There has also been some helpful 
commentary from economists, Wall Street analysts, numerous state 
regulators, and others to the effect that a market orientation for the 
new transmission entities will get the best results in terms of 
improving service, maximizing throughput, introducing new technology, 
and expanding the networks. One economist, Dr. Tom Lenard of the 
Progress and Freedom Foundation, in urging the Commission not to 
mandate RTOs, observed:
          The Commission should provide a framework in which 
        transmission market institutions have an opportunity to evolve 
        efficiently. This has not been possible under the pervasive 
        regulatory framework that has existed for 60 years. It will 
        also not be possible if all utilities are now forced to adopt 
        the ISO or, for that matter, any other single institutional 
        structure.1
---------------------------------------------------------------------------
    \1\ Thomas M. Lenard, ``Getting the Transcos Right,'' The 
Electricity Journal, November 1998, p. 52.
---------------------------------------------------------------------------
    Yet, the question remains: what is the harm in providing the 
Commission additional regulatory authority? The likely harm is that the 
future structure of the transmission business could become a regulatory 
question rather than a business question. The result could be that the 
attention, priority, and focus of transmission business leaders will be 
diverted on regulatory initiatives rather than sharply focused on 
improving their service to customers. If you seek to move away from 
regulation and toward competition in the electric industry, you should 
seek to avoid this countervailing, inconsistent focus on still greater 
regulation for the transmission business.
Industry Initiatives: Developing Efficient Alternatives
    The companies endorsing this testimony are proudly all over the map 
on what they think is the best organizational option for the 
transmission business. We have a responsibility to determine for our 
customers and our shareholders what will work in our own situations, 
and in each company's case that determination may be something 
different. For example, at FirstEnergy, we intend, assuming regulatory 
approval, to separate our transmission assets from the rest of the 
company to form a separate transmission subsidiary. This subsidiary is 
just an intermediate step en route to what we hope will be a large, 
independent regional transmission entity (``transco'') regulated by the 
FERC. We want to form an RTO capable of being an independent transco 
right from the start. We are working with several other utilities in 
the East and Midwest under the rubric of the ``Transmission Alliance.''
    The Transmission Alliance companies have come together and hope 
soon to seek approval from the Commission of a structure for a broad 
RTO that would maximize operational efficiencies and throughput while 
minimizing costs and providing excellent reliability. We will be 
motivated by a desire to provide outstanding customer service and to 
seek a balance between customers, shareholders, employees, and 
regulators. As an entity that both owns and manages its assets, we will 
be able to raise the capital and operating funds we need to maintain, 
operate, and expand the transmission system. We will be flexible to 
expand as dictated by the market, and will have market incentives to 
add value and services for the benefit of customers. The investment 
community has made it clear to us that since the idea of a stand-alone 
company in the electric transmission business is untested, we will have 
to win approval for transmission rates or ``prices'' that will enable 
us to earn an appropriate compensatory return. I want to emphasize the 
amount of time and the intensity of effort required from scores of 
people to design new transmission institutions and to win necessary 
regulatory approvals. These efforts are not undertaken lightly, and 
they are most serious.
     I want to emphasize that in appearing before you today with the 
endorsement of several companies, I am not advocating transcos 
exclusively and I am not advocating a mandate for transcos or 
divestiture. Other companies, such as Public Service Electric & Gas are 
already members of ISOs; others, such as Allegheny Energy, have 
indicated their willingness to join an ISO. Several other companies are 
pursuing other RTO options. Entergy Corporation, for example, asked the 
Commission to declare that its transco concept is consistent with the 
Commission's governing rules on independence and governance. Still 
other transmission providers, such as Southern Company and Duke Energy, 
which already are serving broad geographic areas at low single-system 
rates, are persuaded that the millions of dollars and thousands of 
employee hours invested in ``functional unbundling'' in compliance with 
Orders 888 and 889 deserve more than two years in operation before 
being judged as inadequate or before policymakers draw any firm 
conclusions as to the effectiveness and efficiency of the wholesale 
marketplace. As these companies point out, the volume of transactions 
has increased several fold and the reported customer satisfaction is 
generally high. Also, while the volume has steadily increased the 
reliability remains very high, which should be a hallmark of the new 
transmission structure.
    There are different levels of electric industry restructuring 
taking place across the country. While the goals may be the same, the 
pace of change and the nature of the requirements may vary. The 
companies endorsing this testimony want the flexibility to do what 
makes the most sense for each, now and in the future. By affording the 
Companies this opportunity, you will be doing what makes the most sense 
for reliability, customers, and competition.
Conclusion
    We know there are people arguing that for customers to have options 
on where to buy their power, you have to let the government reorganize 
the nation's transmission ownership and/or control. The theory is that, 
unless the government or a proxy for the government wrests control of 
transmission from self-interested companies and forces them into new 
entities devised by the regulators, claims of discrimination will 
persist; customer choice will not come to pass; transmission investment 
and expansion will wither; and reliability will suffer.
    We reject that bleak portrait of capitalism, and our experience in 
a marketplace that has already been serving merchant transactions for 
many years proves that it is wrong. Incentive-driven transmission 
entities with appropriate government oversight can accommodate the 
future market. Your new marketplace will do better without a new 
regulatory mandate.
    Again, I would like to thank you for the opportunity to present our 
views here today. At this critical juncture in the development of 
America's transmission networks, with major legislation and regulatory 
initiatives pending, we welcome the opportunity to work with you to 
encourage greater competition in electric markets and to forge the 
necessary supporting positive changes in transmission regulation.

    Mr. Barton. Thank you. Before I introduce our next panel, 
the Chair wishes to make an announcement that I should have 
made earlier. We have established a working group on this issue 
that Congressman Chip Pickering of Mississippi is going to 
chair. It is bipartisan. We are going to meet informally. If 
there are groups in the audience that wish to appear before 
that, if you will get with the committee staff, we will arrange 
it. Since we are going to have a number of hearings on these 
issues in the next month and a half, we want to give as wide an 
opportunity for members to be educated and as wide a 
possibility of forum. We are going to have a parallel track of 
our formal hearings and then have these informal brown bag 
lunches and sessions where members can come from both sides of 
the aisle, and we will have a specific topic for each session 
so that members can have an opportunity to have a little bit 
more give and take in a little bit more informal environment. 
Congressman Pickering is going to chair that and we are very 
hopeful that all members of the subcommittee will take 
advantage of that opportunity.
    We will now hear from Ms. Trudy Utter, the vice president 
and general manager of Tenaska Power Services Company down in 
Arlington, Texas. My understanding is that she has even another 
idea on how to do this.
    Ms. Utter. Of course I do.
    Mr. Barton. This is probably the best idea, since it is 
from Texas.
    Ms. Utter. I think that is exactly right, Mr. Chairman. I 
appreciate your remarks, and I appreciate the warm welcome from 
Mr. Hall and from yourself. Both of you are neighbors of mine, 
so I appreciate that warm welcome. I have to confess, though, I 
am originally from Tennessee; but I am going to go ahead and 
say this since Mr. Bryant is not here: I wasn't born in Texas, 
but I got there as fast as I could.
    Mr. Barton. We appreciate that.

                    STATEMENT OF TRUDY UTTER

    Ms. Utter. Thank you for the warm welcome. I am vice 
president of Tenaska. My company is an independent power plant 
developer and a power marketer. My company exists strictly 
because the Congress of the United States decided that the 
power market in the United States needed competition. We are 
not affiliated with any regulated utility. As an independent 
power developer, we have built 750 megawatts of cogeneration 
and independent power in the United States and another 1,500 
megawatts under development or under construction.
    As a power marketer, we are an extensive user of the 
physical transmission system. As an example, we do all of the 
buying and selling of electric power for the Public Utilities 
Board of Brownsville, Texas, a 200-megawatt municipal utility 
in the southernmost part of the continental United States.
    I have provided written comments and answers to your 
specific questions. I wanted to talk just briefly about some of 
the things that are most important to us as a wholesale 
competitor in this business.
    We believe competition works and markets work. And no one 
cares more about reliability than we do. Reliability for us is 
not just keeping the lights on, but our economic future and 
existence depend on the reliability of the electric network.
    We believe that FERC and Order No. 888, as well as the 
Energy Policy Act of 1992, took us way down the road in this 
marathon that we are running to try to get to a deregulated or 
a competitive wholesale part. However, as I understand--and 
Lord knows you can tell by looking at me I don't run 
marathons--but I heard at the end of the Boston Marathon, there 
is a hill called Heartbreak Hill. I feel like that is where we 
are in terms of getting to a fully competitive electric 
wholesale market or retail market.
    There are big barriers between where we are today and the 
end of the race, and there are a number of us standing at the 
bottom of the hill right now just essentially running in place. 
Some of those barriers are a preference for native load of 
incumbent transmission owning utilities. As a power marketer, 
that has been a great concern for us.
    As a developer of power plant projects, we consistently 
have trouble interconnecting with existing transmission 
companies and have trouble with predictable and reasonable 
transmission rates for long-term service. We believe that the 
answer to these issues can be solved through regional and 
independent transmission companies whether those are RTOs, 
ISOs, ITCs. We aren't as concerned about what the structure is 
as long as they are regional and independent.
    We have had a significant experience with the Texas ISO, as 
Mr. Hall mentioned earlier, and our experience has been 
extremely positive. That is a system where we do have both 
independent and regional representation on the transmission 
system, and it has worked extremely well.
    We believe that you have to have the right tradeoff between 
a region that is big enough to create efficiency but small 
enough to maintain sufficient engineering and technical detail 
to ensure that you have optimization of a system.
    We believe that Federal action needs to be taken to clarify 
FERC's role in this matter and that we want to make sure that 
FERC has the authority to maintain a fair, competitive, and 
reliable market. We think this needs to be done quickly because 
if it is not done quickly, those of us who are standing at the 
bottom of Heartbreak Hill are going to run out of water or air, 
one or the other. And so we want to make sure that at the end 
of this race that the people that are still standing are the 
creative, entrepreneurial companies that are bringing 
competition to this business and that we don't just find 
ourselves with a deregulated, but not a competitive, market. 
Thank you for your time and I look forward to your questions.
    [The prepared statement of Truddy Utter follows:]
Prepared Statement of Trudy Utter, Vice President and General Manager, 
                     Tenaska Power Services Company
    Good morning, Mr. Chairman and members of the Subcommittee. I thank 
you for your kind invitation to speak to you today. My name is Trudy 
Utter and I am vice president and general manager of Tenaska Power 
Services Co., a FERC-licensed power marketing company which is an 
affiliate of Tenaska, Inc. Tenaska Power Services specializes in 
trading physical power and is one of the largest non-utility users of 
transmission in the Eastern US and Texas. In addition to being involved 
with natural gas and electricity marketing, Tenaska Inc. is a developer 
of independent power projects with three U.S. plants in operation for a 
total of approximately 750 MW and an 830 MW gas-fired plant in Texas 
that is currently being constructed. Tenaska serves on the Board and 
Executive Committee of the National Electric Reliability Council 
(NERC), on the boards of four regional electric reliability councils 
and two regional transmission associations.
    Tenaska is also a board member company of the Electric Power Supply 
Association (EPSA), a trade association that represents competitive 
power suppliers, both marketers and developers of competitive power 
projects. While I am here today representing Tenaska, my statement 
reflects the consensus views held by the EPSA membership.
    Before I address directly the questions posed to me in your letter 
of invitation, let me make two general points:
    1. There is a need for federal legislation. While we believe that 
significant progress has been made under FERC's Order 888, many issues 
remain to be resolved. The wholesale power market is expanding, new 
generation is starting to be built and the promise of technical 
innovation, lower prices and better services is becoming reality. 
Nevertheless, many issues related to competition and transmission 
structure and reliability cannot be dealt with piecemeal by the states, 
nor fully resolved within FERC's existing legal authorities.
    2. Prompt action is critical. In order to maintain reliability and 
ensure a healthy wholesale market, we need competitive forces to take 
hold fully. Without a coherent, robust market framework, entrepreneurs 
will not make the investments needed to build new power plants or 
transact for necessary supplies.
    With the emergence of competitive markets in states and regions 
around the country, the picture becomes more and more clear. In Texas, 
for example, where competitive markets are starting to emerge (even 
though more has to be done), almost 9,000 MW of new plants have been 
proposed in a region with a peak demand of 52,000 MW. In many other 
areas of the United States, state regulatory commissions are predicting 
and planning for physical shortages. If you build a competitive 
framework, entrepreneurs and capital will come.
    The Committee has posed six questions. Let's consider these in 
order:
1) Is there a need to provide for enforcement of mandatory reliability 
        standards?
    Yes. The reliability of the system is at least as important in a 
competitive framework as it has been historically. We can no longer 
rely on good will or the good faith efforts of market participants to 
protect reliability, since the operation of the electrical system will 
have a direct impact on the financial health of possible competitors 
and all customers. A lack of system reliability will have a financial 
impact on marketers, generators and consumers, and it should have a 
financial impact on the transmission operators as well. Tenaska and 
EPSA endorse the stakeholder-developed legislative proposal for a new 
North American Electric Reliability Organization (NAERO). Legislation 
is needed to enable the start-up of this replacement to NERC.
2) Should FERC jurisdiction be extended over non-jurisdictional 
        transmission systems?
    Yes, although this is less critical today due to the high voluntary 
participation of non-jurisdictional transmission owners within the 
framework of Order 888. Because electricity moves at the speed of 
light, the transmission system operates as a physical unit, with little 
respect for political or corporate boundaries. If the market is to work 
well, on a truly non-discriminatory basis, the regulatory framework 
should reflect the physical one. An interconnected utility cannot 
physically ``opt out'' of the transmission network. However, a utility, 
acting on its own, can disrupt commerce on that network. If we allow 
arbitrary and discriminatory curtailment and line loading relief 
policies or local price distortions for access and service, we can 
create a regional (if not national) nightmare for market participants. 
While not urgent today, federal legislation would be helpful.
3) Should all transmission systems be governed by the same set of 
        rules?
    While greater uniformity and consistency is necessary, there is 
room for some variation. As mentioned earlier, we endorse the 
legislation to create NAERO, which encourages uniformity on a national 
or interconnection-wide basis, but allows for variances to deal with 
extreme or unique local circumstances. Increased consistency across 
utility service territory and regions will clearly promote system 
reliability. Consistent rules will also promote broader market 
opportunities and the liquidity necessary to dampen price volatility.
    For many of the same reasons outlined in the answer to question 
two, consistent regional or national policies can help prevent 
discriminatory activity. The NAERO proposal should be adopted. FERC 
should be encouraged to streamline, coordinate and encourage efficient 
transmission operation on a regional or national basis. Federal 
legislation is needed.
4) Are steps needed beyond Order 888 to eliminate the ability of 
        transmission owners to discriminate against their competitors?
    Yes. While Order 888 provides an important framework for reducing 
the possibility of discrimination, it has not and will not by itself 
prevent discrimination. Market power, both vertical and horizontal, is 
real and truly significant. If the purpose of competitive restructuring 
is to reduce cost and improve services, then there must be ease of 
entry into the market for all participants and the guarantee of quick 
justice in those instances where market power is abused.
    We remain concerned that true comparability--which would treat the 
transmission owners' ``native load'' the same as any other customer--
has yet to be achieved. We need full comparability in transmission 
rates, terms and conditions of service. All users of the transmission 
system should take service (scheduling, reserving and paying for 
service) under the same tariff. In addition, non-discriminatory rates 
are of little concern to a prospective power plant developer who is 
denied interconnection or who is overcharged for this service.
    FERC has endorsed the functional separation of vertically 
integrated electric utilities. While we do not endorse mandatory 
divestiture of utility assets as a general policy, the voluntary 
divestiture of generation assets in many states has helped remedy a 
number of issues, including the valuation of stranded costs and 
concerns about vertical market power. It may be appropriate to give 
FERC the authority to order partial asset divestiture as a response to 
the illicit exercising of market power.
    As a competitive market grows, we hope that the role of the 
Commission in the marketplace will diminish. In the meantime, however, 
it is critical for all market participants to have confidence that the 
Commission is capable of identifying discriminatory activity and has 
the tools to respond appropriately. The Commission recognizes the need 
to protect consumers against the abuse of market power and they should 
be encouraged to do so. While we urge the Committee to avoid being too 
prescriptive, legislation is needed.
5) Is there a need for regional transmission organizations (RTOs) and, 
        if so, how should they be structured?
    Yes, there is a critical need for RTOs. These organizations are not 
a panacea, but will provide a partial remedy to many of the issues 
already raised. A large RTO can offer market consistency over a broad 
geographic area and serve as a one-stop shop for transmission 
customers. In general, RTOs should be as large as possible, recognizing 
the need to reflect some regional differences or technical constraints.
    Tenaska has had significant experience with the ERCOT ISO in Texas. 
This system has functioned extremely successfully as a one-stop shop, 
with a fairly simple structure and at low cost to the market. This RTO 
is appreciated by the many market participants who depend on it, and it 
is hard to imagine the Texas competitive power market functioning very 
well without this kind of organization.
    In structure, RTOs must be truly independent, and this independence 
must extend throughout the organization, such as to the committees 
where facts are gathered and positions formulated. An RTO cannot be 
subject to control by a dominant stakeholder. While we believe that 
bigger is generally better, we also believe that market forces and 
operational requirements should influence the appropriate RTO size--
form should follow function.
    One issue that must be addressed within the RTO is the question of 
mistakes made by the RTO which have financial impact on market 
participants. Decisions made by the RTO will have direct impact on the 
market and can, if incorrect, inadvertently undermine an innocent 
company. As these transmission organizations develop, it will be 
critical to respond quickly to claims of financial injury and to 
provide a speedy and appropriate remedy.
    We believe that FERC currently has the authority to order the 
creation of RTOs and we encourage them to do so actively. Federal 
legislation would be helpful, however, to ensure that this policy is 
clearly stated.
6) Is there a need to improve the process used for transmission siting?
    Yes. As is obvious, we believe that the transmission grid is a 
national, not local, asset. Final decisions on siting must fall to a 
governmental entity capable of balancing the needs of multiple 
political jurisdictions, such as is the case with construction of 
natural gas pipelines. We encourage Congress to adopt legislation which 
vests FERC with primary jurisdiction over major new transmission siting 
and planning decisions, perhaps subject to a requirement that FERC 
involve regional or state siting authorities. As part of the planning 
process, the Commission should take into account the fact that 
transmission and generation assets can often act as substitutes for 
each other. Siting new generation in some instances will be a more 
cost-effective remedy to transmission congestion than additional 
transmission facilities. Legislation is needed to streamline and 
structure the siting process.
Conclusion
    Members of the Subcommittee, I have appreciated the opportunity to 
appear before you today and address these very important questions. 
Once again, I encourage you to act deliberately and with speed to 
protect the growth and development of competitive power markets in the 
United States. Competition is already bringing substantial benefits to 
all consumers of electric power. Congressional action can help ensure 
that the benefits from competition of lower costs, better services and 
improved technology continue to flow to the American consumer.

    Mr. Barton. Thank you. We now want to hear from our fourth 
vice president in a row, Mr. Dave Nevius, who is the vice 
president for North American Electric Reliability Council, 
which is a group that has taken on a larger role as competition 
has evolved. Your statement is in the record in its entirety 
and we recognize you to summarize it in 5 minutes.

                  STATEMENT OF DAVID R. NEVIUS

    Mr. Nevius. Thank you, Mr. Chairman. My written testimony 
as well as the remarks I will make here today are going to 
focus exclusively on reliability, not on the structure of 
regional transmission systems or markets. The interstate high 
voltage transmission system, which is the backbone of the 
Nation's electricity infrastructure, is extremely critical to 
public health, safety, welfare, and national security, as well 
as enabling robust competition in electricity markets in the 
United States and throughout North America.
    As wholesale and retail electricity markets become more 
competitive, these interstate transmission systems is being 
used in new and different ways that promote competition. As Mr. 
Szwed said, the number and magnitude of electricity 
transactions that are using the system are increasing 
dramatically, and new types of electricity suppliers, like 
Trudy's organization, are using the transmission system to 
offer innovative electricity products and services. These and 
other changes are being brought about by competition and 
electricity restructuring are unique and challenging but the 
reliability of the transmission system need not be compromised 
provided appropriate steps are taken.
    As others have mentioned, for over 30 years NERC and its 
member regional reliability costs have worked cooperatively and 
effectively to revive the essential reliability standards for 
electric utilities to make sure that the interconnected 
electric grids remained reliable and that the lights stayed on. 
This voluntary system for setting and encouraging compliance 
with industry reliability standards is simply not sustainable 
in the increasingly competitive electricity industry that we 
have today and that we see evolving before us.
    NERC's current voluntary arrangements need to become 
mandatory and applied fairly to all participants in the 
electric industry. An independent blue ribbon panel formed by 
NERC in addition to a Department of Energy task force that was 
chaired by one of your former colleagues, Phil Sharp, 
independently concluded that a single independent self-
regulating organization is the best way to develop and enforce 
compliance with the highly technical rules of the road needed 
to keep the interstate transmission system operating reliably 
as it accommodates the demands of competitive markets. Both of 
these groups, the NERC blue ribbon panel and Phil Sharp's task 
force, concluded that Federal legislation was needed to grant 
the necessary statutory authority to the FERC to approve and 
oversee such an independent self-regulating reliability 
organization in much the same way that the Securities and 
Exchange Commission oversees the stock exchanges and the 
national association of securities dealers.
    In effect, the role of the independent self-regulating 
organization drawing on the vast technical expertise that 
exists in the industry will be to set and enforce compliance 
with reliable standards. On the other side, the Commission's 
role, as Mr. Hoecker alluded to earlier, would be to ensure 
that the process of developing and enforcing these rules is 
fair and open and does not unnecessarily intrude on the 
developing competitive markets.
    The standards developed and enforced by the self-regulating 
reliability organization would apply to all owners, operators, 
and users of the interstate high voltage transmission system. 
That includes the power marketing administrations, TVA, 
municipals, co-ops, and even the systems in ERCOT. Working with 
a wide variety of public and private sectors stakeholders, NERC 
has developed an industry consensus legislative proposal. To 
establish such an independent self-regulating organization, the 
principal provisions of this proposal are, one, to establish a 
single independent self-regulating reliability organization 
modeled after the national association of securities dealers; 
two, to accredit this self-regulating organization by the FERC; 
three, to provide for the authority of this organization to set 
and enforce compliance with reliability standards throughout 
North America with oversight in the U.S. by FERC recognizing 
the comparable and coordinated oversight will be needed from 
the governments of Canada and Mexico; and, last, a requirement 
for the organization to delegate certain implementations and 
enforcement authorities to affiliated regional reliability 
entities with special deference to regional entities organized 
on an interconnection-wide basis such as the Western Systems 
Coordinating Council and the Electric Reliability Council of 
Texas. This language is supported by a broad coalition of 
industry organizations and stakeholders, including the American 
Public Power Association, the Canadian Electricity Association, 
Edison Electric Institute, the Electric Power Supply 
Association, the Electricity Consumers Resource Council, Enron 
Corp., and the National Rural Electric Cooperative Association.
    In addition, the groups that are supporting this consensus 
language are working with the States to address some concerns 
regarding the States' role in the context of the proposed 
independent self-regulatory organization. They are working to 
reach agreement on some clarifying language that can be added 
to the NERC consensus proposal. NERC urges the subcommittee's 
support of the consensus language that will ensure the 
continued reliability of the Nation's interstate electric 
system as we move forward with competition.
    Thank you very much, and I look forward to answering your 
questions.
    [The prepared statement of David R. Nevius follows:]
 Prepared Statement of David R. Nevius, Vice President, North American 
                      Electric Reliability Council
About NERC
    The North American Electric Reliability Council, or ``NERC,'' is a 
not-for-profit industry group formed after the Northeast blackout in 
1965 to promote the reliability of the high voltage electric 
transmission system. NERC works with all segments of the electric 
industry as well as customers to develop standards and encourage 
compliance for the reliable operation of the electric grid system 
throughout North America. NERC comprises ten regional reliability 
councils that account for virtually all the electricity supplied in the 
United States, Canada, and a portion of Baja California Norte, Mexico. 
NERC's mission is to promote the reliability and adequacy of bulk 
electric supply by the electric systems of North America--that is ``to 
keep the lights on.''
Summary
    The interstate high-voltage transmission system--the backbone of 
the nation's electricity infrastructure--is critical to public health, 
safety, welfare, and national security, and enables robust competition 
in electricity markets in the United States and throughout North 
America.
    As wholesale and retail electricity markets become more 
competitive, the transmission system is being used in new ways that 
promote competition. The number and magnitude of electricity 
transactions using the system are increasing dramatically, and new 
types of electricity suppliers are using the transmission system to 
offer innovative electricity products and services. Although the issues 
surrounding these and other changes being brought about by competition 
and electricity restructuring are unique, the reliability of the 
transmission system need not be compromised, provided appropriate steps 
are taken.
    The existing voluntary system for setting and encouraging 
compliance with industry reliability standards for these transmission 
systems has worked well for nearly 30 years, but is not sustainable in 
today's increasingly competitive electricity industry. The rules 
regarding reliability must be made mandatory and enforceable, and those 
rules must apply fairly to all entities that own, operate, and use the 
transmission system, regardless of who owns those entities or whether 
they are currently regulated by the Federal Energy Regulatory 
Commission.
    The mechanism for making the rules mandatory and enforceable within 
the United States is legislation that would provide for an independent 
self-regulatory organization, under government oversight, to develop 
the reliability rules and enforce compliance with these rules. We 
expect analogous government oversight will be developed in Canada and 
Mexico.
    Working with a wide variety of public and private sector 
stakeholders, NERC has developed an industry consensus legislative 
proposal to establish such an independent self-regulatory organization. 
A copy of the consensus reliability language is attached to my 
testimony.
    The NERC proposal follows the model of the Securities Exchange 
Commission (SEC) in its oversight of securities industry self-
regulatory organizations (the stock exchanges and the National 
Association of Securities Dealers).
    The principal provisions of the NERC consensus legislative proposal 
are:

 Establishment of a single, independent, self-regulating 
        electric reliability organization (SRRO), modeled after the 
        National Association of Securities Dealers (NASD);
 Accreditation of this SRRO by the Federal Energy Regulatory 
        Commission (FERC);
 Authority for the SRRO to set and enforce compliance with 
        reliability standards throughout North America, with oversight 
        in the U.S. by FERC, as the SEC oversees NASD; and
 Requirement for the SRRO to delegate certain implementation 
        and enforcement authorities to affiliated regional reliability 
        entities, with deference to regional entities organized on an 
        Interconnection-wide basis.
    This language is supported by a broad coalition of industry 
organizations and stakeholders, including American Public Power 
Association (APPA), Canadian Electricity Association (CEA), Edison 
Electric Institute (EEI), Electric Power Supply Association (EPSA), 
Electricity Consumers Resource Council (ELCON), Enron Corp., and the 
National Rural Electric Cooperative Association (NRECA).
    In addition, the groups supporting the NERC consensus language are 
working with the states to address some state concerns regarding their 
role in the context of the proposed independent self-regulatory 
reliability organization, and are working to reach agreement on 
specific language to be added to the consensus proposal.
Precursors to Change
    For three decades, NERC and its member Regional Reliability 
Councils have worked cooperatively and effectively to provide the 
essential reliability standards for electric utilities to make sure the 
lights stayed on. The introduction of wholesale and retail competition 
into the electric industry and its consequent restructuring are 
recasting these long established arrangements and requiring a ``new 
model'' to assure a reliable supply of electricity to North America's 
homes and businesses. NERC's current voluntary arrangements need to 
become mandatory and applied fairly to all participants in the electric 
industry.
    Efforts began in 1992, following passage of the Energy Policy Act, 
to transform NERC from a voluntary industry organization that used 
``peer pressure'' to encourage compliance, which worked in a regulated 
utility context, into a mandatory compliance organization that is 
needed for a competitive electricity industry.
The Need for Federal Legislation
    Both NERC and the U.S. Department of Energy support the need for 
federal reliability legislation. As part of its efforts to stay ``ahead 
of the curve'' during this period of dramatic change in the electric 
industry, NERC asked a ``blue ribbon'' panel of experts to recommend 
the best ways to set, oversee, and implement reliability policies and 
standards in a competitive and restructured industry. The panel 
recommended, among other things, that NERC develop specific federal 
legislation to create an industry self-regulating reliability 
organization with responsibility and sufficient authority to set and 
enforce compliance with reliability standards. DOE's own Electric 
System Reliability Task Force to the Secretary of Energy Advisory 
Board, chaired by former Congressman Phil Sharp, independently 
concluded that federal legislation was needed to grant more explicit 
statutory authority to the Federal Energy Regulatory Commission to 
approve and oversee a single, international, self-regulating 
reliability organization.
    For the last year, NERC has worked aggressively to develop and 
implement a number of specific action plans, including preparation of 
draft reliability legislation, that will transform NERC from a 
voluntary system of reliability management to one that is mandatory 
with the backing and support of governments. Reaching consensus on 
legislative language that everyone could support was a difficult but 
crucial step in the continuing transformation of NERC. The 
overwhelmingly favorable vote of NERC's Board, comprising a broad and 
diverse cross section of electric market participants, represents a 
strong and unified commitment to this specific legislative language.
What would this legislation do?
    This legislative language is designed to ``keep the lights on'' as 
the Nation reaps the benefits of competitive electricity markets. It 
creates an independent self-regulatory reliability organization that 
will set and enforce rules for running the interstate, high-voltage 
electric transmission system.
    This self-regulatory organization, with oversight in the U.S. by 
FERC, would operate in much the same way that the securities industry 
regulates itself through the stock exchanges and NASD with oversight by 
the Securities and Exchange Commission.
    The organization would apply the reliability rules equally to all 
that own, operate, or use transmission facilities, whether they are 
investor-owned utilities, municipalities, co-ops, the Federal 
government through the power marketing administrations, independent 
power producers, power marketers, or end-use customers.
What the legislation does NOT do
 It does NOT interfere with the States'' traditional regulation 
        of the reliability of local distribution of electricity and 
        service to retail customers;
 It does NOT interfere with the States'' traditional regulation 
        over the siting and certification of transmission lines and 
        generating plants; and
 It does NOT interfere with the States'' traditional regulation 
        of the generating reserve margins for their local utilities.
Why legislate now?
    Competition is growing rapidly in the interstate electricity 
market, and new electricity suppliers are making significant new uses 
of the interstate transmission system. Historically, the transmission 
system was designed to move power from a utility's generators to its 
own load centers. Interconnections between utilities were established 
for emergency situations, to share installed generation reserves, and 
to take advantage, from time to time, of their neighbors'' lower cost 
generation.
    Now the interstate transmission system is being called on to move 
vast amounts of electricity from one region of the country to another 
(and between the U.S. and Canada and Mexico.) Also, the number of 
participants in the marketplace has greatly expanded, and the number of 
transactions on the system each day has increased several fold.
How was reliability maintained in the past?
    Historically, utilities worked cooperatively to maintain the 
reliability of the interstate transmission system. The rules for 
running the system were not mandatory, and the only enforcement 
mechanism was one of ``peer pressure.'' Nevertheless, it worked quite 
well.
    With the coming of competition, utilities that once cooperated with 
each other are now competitors. And there are more of them as well as 
many different types of electricity suppliers.
    FERC has mandated that the public utilities subject to its 
jurisdiction file open access tariffs. Parts of these tariffs overlap 
with the reliability rules NERC has established for maintaining the 
integrity of the grid and keeping the lights on. Because there is no 
current enforcement mechanism for the reliability rules, complaints are 
increasingly being taken to FERC concerning the reliability rules. 
Without an independent self-regulatory organization, decisions about 
maintaining the reliability of the grid will increasingly be made by 
FERC instead of by industry experts in this technically complex area.
Why this form of legislation?
    It is important for FERC to be given an oversight role, because 
that is the mechanism by which the enforcement authority (which is 
inherently a governmental function) can be delegated to the independent 
self-regulatory organization. Absent the government oversight, the 
independent organization would not be in a position to enforce its 
rules because of the antitrust laws. And absent legislation, certain 
owners and operators of transmission (municipalities, co-ops, the power 
marketing administrations, the Tennessee Valley Authority and utilities 
in ERCOT) would not be brought within the mandatory reliability 
requirements of the proposal. With this legislation, those with the 
technical expertise will be able to set and enforce the technical 
standards needed to ensure reliability of the interstate high-voltage 
transmission system. FERC, in a backstop or oversight role, will ensure 
fairness, due process, and overall compatibility with the public 
interest.
Governance of the New Independent Self-Regulatory Organization
    One of the key questions that the Electric Reliability Panel and 
NERC wrestled with was how the new organization (the North American 
Electric Reliability Organization or ``NAERO'') should be governed. In 
July 1998, the Board approved a plan to transition to a board made up 
solely of nine independent directors. That plan included adding nine 
new ``independent'' members to the existing 37-member board and having 
them serve as part of an expanded board until legislation was enacted.
What has NERC Done to Prepare for the Transition to a New Self-
        Regulatory Structure?
    NERC has been working actively over the last year on a number of 
initiatives that will allow it to be transformed into this independent 
SRRO:

 Restated Mission and Expanded Membership
 Opened process for developing and approving standards
 Added 9 independent directors to Board (to take over after 
        legislation is enacted)
 Broadened representation on committees
 Established Market Interface Committee to consider impact of 
        reliability standards on competitive market
 Developed Compliance Enforcement Program Pilot
In Summary
    NERC urges the Subcommittee's support for this consensus 
legislative proposal to ensure the continued reliability of the 
nation's interstate electricity system because:

 A new electric reliability oversight system is needed to 
        ensure continued reliability of the interstate high-voltage 
        transmission system while supporting robust competition in 
        electricity markets;
 An independent, industry self-regulating system, modeled after 
        the National Association of Securities Dealers, is preferred 
        over direct federal regulation;
 The governing board of the new organization will be made up 
        solely of independent members; and
 U.S. legislation is needed for the creation and empowerment of 
        ``NAERO.''
    Thank you for the opportunity to appear and I look forward to your 
questions.

    Mr. Stearns. [presiding] Thank you. Mr. Greg Yurek for your 
opening statement.

                 STATEMENT OF GREGORY J. YUREK

    Mr. Yurek. Thank you, Mr. Chairman. My name is Greg Yurek, 
chairman and CEO of American Superconductor Corporation, a 
leader in developing commercial applications for superconductor 
technology for the electric power industry.
    Thank you for this opportunity to offer a technologist's 
perspective on how the Congress can advance our national 
interests in electric system reliability. The debate over 
whether competition will improve or degrade the reliability of 
the power grid is misplaced. It does not address a number of 
other factors that have put us on a collision course.
    During the current long economic expansion, we have seen 
not just load growth but a major load shift back to our cities. 
The areas where new facilities are most needed are also those 
which are most difficult to get siting rights for because of 
the cost of environmental and community pressures.
    The regulatory uncertainty associated with restructuring 
and the prospect of distributed generation have made planning 
almost impossible. The bottom line is that investments in the 
grid have been deferred for years. We must take this debate 
beyond issues of institutional reform structuring governance.
    Fundamentally, the reliability problem is physical. Our 
power grids are capacity constrained and subject to congestion, 
and no change in Federal laws can alter the natural laws that 
cause this reality. If competition is to yield low-cost 
reliable power for American consumers, we must aim to do better 
than merely manage congestion and price it effectively. We must 
overcome congestion through investment in new technologies and 
physical facilities. The key to success in the competitive 
transformations of both the telecommunications and natural gas 
industries lay an expanding network capacity. The case of 
electricity is no different.
    Strengthening power grids with conventional technologies 
will be problematic at best. I believe that superconductors 
offer one of the most promising approaches to meet this 
challenge. Breakthrough discoveries in the mid-1980's in the 
field of high temperature superconductivity, or HTS, have made 
possible an extremely high capacity new form of wire. This HTS 
wire can play a similar role for electric power grids as 
optical fibers have played in communications. Already HTS wire 
is capable of carrying more than a hundred times as much power 
as conventional wires. Wires of this form that we are 
manufacturing and are available today take up as much 
electricity as this large copper conductor. The change is here. 
It is available today. This enables some truly revolutionary 
electric utility applications such as high capacity 
transmission cables.
    These applications are not in the remote future. A year 
from now Detroit Edison will employ the first superconducting 
cables in a live utility grid at one of its urban substations. 
In this demonstration project, three HTS cables containing a 
few hundred pounds of superconducting wire will be inserted 
into existing conduits in the station. They will replace the 
capacity of nine conventional cables containing 18,000 pounds 
of copper wire that carry 100 million watts of power, 100 
million watts of power now carried through these new wires.
    This urban retrofit project will show how HTS cable could 
multiply the capacity of utility grids without costly and 
disruptive excavation. As production volume grows and costs 
fall, I believe the same wire and cable technology will spread 
to suburban installations and eventually regional transmission 
facilities. The technology is here today. It is being deployed 
very soon.
    Already today, superconductors are found in a commercially 
proven product known as ``superconducting magnetic energy 
storage,'' or SMES. A SMES power quality system uses 
electricity stored in a superconductor coil to protect large 
industrial customers from voltage sags and brief outages. A new 
application of this same technology called ``distributed SMES'' 
involves placing several of these devices on a weak grid to 
provide stabilization during brief but critical transient 
events. This offers a powerful and cost-effective new way to 
improve reliability.
    Like most technologists, I am an optimist. I believe that 
creative minds in a free market will respond to competitive 
opportunities with a whole array of new technologies. The 
stresses on the grid tell us that we do not have the luxury of 
time. Congress can use technology-neutral incentives to 
encourage new investment to strengthen the grid in much the way 
that section 706 of the Telecommunications Act calls for 
deployment of advanced telecommunications capability.
    I have three brief recommendations. First, setting power 
quality standards would unleash powerful market forces and 
establish a real market environment for many promising 
technologies to address what is become a very expensive 
problem. More and more our Nation's power requirements are 
driven by sensitive silicon chips, so a clean power signal is 
more important than ever.
    Second, we can speed the deployment of promising new 
technologies like HTS cable while respecting local 
environmental concerns by putting in place a streamlined 
Federalized procedure for siting new interstate transmission 
lines that fall below a certain threshold of environmental 
impact.
    And third, the testing of new technologies in real world 
environments must be accelerated to speed their 
commercialization. For this reason, there may be a place for 
tax or other incentives to support multiple demonstrations.
    Thank you for this opportunity to testify and present these 
recommendations, and I would be pleased to respond to any 
questions.
    [The prepared statement of Gregory J. Yurek follows:]
  Prepared Statement of Gregory J. Yurek, President and CEO, American 
                       Superconductor Corporation
    Introduction
    Good morning. My name is Gregory Yurek and I am President and CEO 
of American Superconductor Corporation. American Superconductor 
participates in a competitive worldwide industry focused on developing 
commercial uses for high-temperature superconductors (HTS) discovered 
in the mid-1980s. We are a leading developer and manufacturer of high-
capacity HTS wire for electric power industry applications. I would 
like to congratulate the Committee for conducting this timely hearing 
on the critical reliability challenges facing our nation's power grid. 
Let me also thank you for offering me the opportunity to present a 
perspective on the role that new technologies can play to address these 
concerns.
    Across the country, competition in wholesale and retail electricity 
markets is intensifying. As this occurs, utilities are undergoing the 
most far-reaching changes in structure and governance in the industry's 
history. The purpose of these structural reforms is to make the 
electric system more efficient and responsive to consumers. But 
restructuring has prompted concern that, if these reforms are not 
thought through carefully, they could undermine the reliability of 
electric service that Americans have come to expect. It is not useful, 
however, to focus on the impact of one factor, the advent of 
competition, on electric system reliability. Rather, the threat to 
reliability arises from a complex set of challenges utilities face at 
many levels.
The Threat to Reliability: Planning and Operational Challenges Facing 
        Utilities
    Electric industry restructuring is taking place against a backdrop 
of strong and sustained national economic growth. This cycle of 
expansion has brought not just rapid load growth but shifting load 
patterns; much of the new electricity demand is concentrated in fast-
growing urban areas. These are precisely the locations where social and 
environmental pressures make siting major new electric generation and 
transmission facilities most difficult. Important grid investments to 
cope with load growth have been deferred for years because of a climate 
of regulatory uncertainty. The prospect of new types of small-scale 
generation, which may eventually compete against grid-supplied power, 
has further complicated long-range planning.
    Other difficult operational issues loom. Power quality is 
increasingly important; our shift to a high-technology manufacturing 
base has made customer requirements for a clean power signal much more 
exacting than in the past. Even the possibility of new mandates arising 
from global environmental treaty obligations could put a premium on 
energy efficiency, forcing further changes in utility strategy. Each of 
these challenges poses complex problems. Utilities must grapple with 
all of them simultaneously, all while facing pressure to hold the line 
or even reduce rates to consumers.
Electric Transmission: The Importance of Capacity
    Reforms in industry structure and governance will be necessary but 
not sufficient to address these challenges. The most powerful 
legislative body cannot rewrite the physical laws that explain the 
fundamental problem of inadequate grid capacity. In order for these 
competitive reforms to produce benefits for American consumers in the 
form of reliable, low-cost power, it will be necessary to do more than 
find efficient ways to apportion the costs of grid congestion. Instead, 
it will be necessary to solve the problem of congestion. I believe this 
obstacle can be overcome through the deployment of new technologies to 
expand the power grid's fundamental capacity to handle new and 
unplanned power flows.
    The idea that transmission capacity is the key enabler of 
competition becomes clear when we consider its role in other network 
industries. The revolution in telecommunications would have been 
impossible without the vast increase in ``bandwidth'' or capacity 
brought on by fiber optic cable, as well as digital technologies that 
allowed more intensive use of the radio spectrum. The renaissance of 
the interstate gas market since the open access reforms of the 1980s 
required substantial investment in a robust and flexible, 
interconnected network of interstate pipelines. We simply cannot expect 
to foster broader regional electricity markets in the 21st century if 
we continue to rely on electricity transmission pathways and 
technologies built to accommodate local traffic patterns of the mid-
20th century.
Superconductivity: An Overview
    This testimony presents an overview of superconductors, and 
introduces a family of emerging technologies that hold special promise 
to strengthen power grids by revolutionizing the electric industry's 
most basic building block: wire itself. Superconductivity is a basic 
property of materials that causes them, when cooled, to lose all 
resistance to the flow of electrons and to carry far more electricity 
than copper or aluminum conductors. The ability to achieve this state 
of electrical losslessness makes it possible for superconducting wire 
to carry electricity with very high efficiency, and to store 
electricity indefinitely. This, in turn, opens the possibility of 
designing a new generation of electric system components that will be 
far more compact, powerful and efficient than their conventional 
counterparts.
    Superconductivity is not a new phenomenon. Low-temperature metallic 
superconductors were discovered in 1911. However, the cost of cooling 
these materials to near absolute zero using liquid helium made it 
impractical to consider their use in electric power grids. In 1986 and 
1987, however, researchers discovered a new family of revolutionary, 
ceramics-based superconductors that operated at much higher 
temperatures. These so-called high-temperature superconductors or HTS 
materials can be cooled with inexpensive and environmentally benign 
liquid nitrogen. These discoveries have made it economically feasible 
to use superconductors to build high-capacity cables, extremely compact 
and powerful motors, and efficient and environmentally benign 
transformers that will protect utility grids from the propagation of 
dangerous fault currents.
    American Superconductor's core product is a new type of HTS wire 
that will be at the heart of each of these applications. We are 
currently manufacturing 250 kilometers per year of HTS wire that 
carries approximately 100 times more current than a conventional copper 
wire of the same cross-section. We work with leading electrical 
equipment manufacturers through strategic alliances to develop electric 
industry applications for this wire, and are continuing to make 
progress in both wire performance, cost reduction and applications 
development. To facilitate our path to commercialization, we recently 
committed to double our wire production over the next twelve months on 
the way to a much larger scale-up in the near future.
    Early in the history of the HTS industry, the federal government 
recognized the tremendous opportunity these materials offered to 
strengthen electric power grids and improve reliability while shrinking 
the environmental footprint of the power sector. The government also 
recognized the need to ensure a strong American position in what has 
become a hotly competitive global industry. The Department of Energy 
has played a key role in fostering commercial applications for HTS 
through its Superconductivity Partnership Initiative program. In the 
comparatively short span of a decade tremendous strides have been made, 
and the fruits of this industry-government collaboration are now 
imminent, as the first commercial-scale demonstrations of HTS motors 
and cables are scheduled to take place over the next 9-18 months.
    In the following sections, this testimony describes a project 
involving one of these applications, HTS cable, in somewhat more 
detail. It also describes the application of low-temperature 
superconductors in energy storage coils used in combination with HTS 
power leads. This application has an established commercial record in 
industrial power quality applications, and will soon be employed to 
enhance transmission reliability.
Superconducting Cable
    The most visible customer demonstration of HTS technology to date 
will occur in a substation of the Detroit Edison Company one year from 
now. In this project, Pirelli Cables and Systems N.A. of Columbia, SC 
will build and install a three-phase, 24-kilovolt, 2400-ampere AC cable 
system in the Frisbie Station, a 1930s-era facility located in the 
inner city of Detroit. The neighborhood surrounding Frisbie is slated 
to undergo a series of revitalization projects over the next few years, 
including new hotels, casinos and two professional sports stadiums. The 
Pirelli cables will use HTS wire supplied by American Superconductor 
and cooling systems supplied by Lotepro Corporation. Working with 
Detroit Edison personnel, Pirelli will remove nine 400 foot copper 
cables, containing over 18,000 pounds of copper, that currently run 
through a conduit bank underneath the station. In their place, three 
high-capacity HTS cables containing an estimated 250 pounds of 
superconductor wire will be installed in the existing conduit bank, 
providing equivalent capacity but leaving six additional conduits 
available for future expansion or alternative uses.
    The Frisbie project will illustrate an ``urban retrofit'' concept 
originated by EPRI (formerly known as the Electric Power Research 
Institute). Under this concept, it is envisioned that urban utilities 
could replace conventional copper cables with high-capacity HTS cables 
in much the same way that telecommunications companies have replaced 
copper with fiber-optic cables over the past decade, literally 
multiplying the capacity of their existing infrastructure. This 
strategy is expected to be particularly useful for utilities serving 
older, densely-settled areas where underground construction is 
especially complicated, as it would enable utilities to avoid the 
costs, delays and environmental intrusions associated with excavation 
in city streets. These factors often dominate the total cost of a cable 
installation. Furthermore, the use of high-capacity HTS cables may 
eliminate the need to upgrade system voltages, enabling utilities to 
avoid the high costs associated with replacing and re-rating 
transformers.
    In the future, HTS cable could be applied more broadly as further 
improvements in performance and reductions in cost take place. 
Deployment of HTS cable is likely to begin in high-value situations 
such as congested urban centers, spreading later to suburban areas 
where community pressure mandates the underground placement of 
transmission lines, and eventually to longer, regional transmission 
facilities. An attribute peculiar to superconductors allows them to 
carry twice the capacity, with zero electrical loss, in a DC mode of 
operation as compared to AC. Because HTS cables will be able to carry 
much larger currents at lower voltages, superconductivity may 
facilitate the concept of point-to-point DC electricity ``pipelines.'' 
Indeed, older, abandoned gas and oil pipelines might serve as ideal 
conduits for projecting large amounts of electricity directly into 
congested urban pockets using superconductors.
Superconducting Magnetic Energy Storage
    I would now like to turn to an application for superconductors that 
is a proven commercial technology. One of the most intriguing 
attributes of superconductors is their ability to store electricity 
indefinitely, without degradation. A Superconducting Magnetic Energy 
Storage (SMES) system stores a powerful current in a supercooled 
electromagnet. This current flows around a coil of wire endlessly with 
no electrical loss. It can be instantly reinjected into an electrical 
circuit, for example, to boost voltage in the event of a line 
disturbance. Commercially available SMES systems sold by American 
Superconductor store nearly 3 megajoules (megawatt-seconds) of energy, 
and have amassed a track record of over 30 unit-years of successful 
operation in a variety of industrial customer settings. Packaged in a 
trailer for mobility, these devices employ conventional low-temperature 
helium-cooled magnets. Recent installations also incorporate HTS 
current leads to carry power in and out of the magnet, an advance that 
has sharply improved the efficiency and cut the cost of the system.
    To date, these systems have been used to provide power quality 
protection to large industrial customers and other large users of 
electricity with processes that are highly sensitive to voltage 
disturbances. The need for such a solution has intensified over the 
past decade as conventional manufacturing technology has been 
supplanted by modern, microprocessor-controlled equipment. The trend 
toward high technology in manufacturing has resulted in higher 
industrial productivity and improved process control. However, because 
of the low tolerance of microprocessor chips for voltage deviations, it 
has also made many large manufacturers more susceptible to disruptions 
in their operations resulting from even very brief voltage 
disturbances. The cost of such disruptions to U.S. industry, in terms 
of lost productivity, idled labor, damaged equipment, cleanup and other 
costs, has been estimated at more than $10 billion per year. While many 
industrial backup power systems are premised on the need to protect 
against a long-term blackout, the fact is that most voltage 
disturbances on the North American grid are very short-term in nature--
usually less than 0.5 seconds, and almost always less than two seconds. 
SMES technology, making use of the highest-density form of power 
storage in existence, represents a new kind of power quality solution 
to enable large industrial customers to maintain continuous operations.
Distributed SMES: Using Superconductors to Solve Network Problems
    Recognizing the building concern about electric system reliability, 
we have developed several promising new applications based on proven 
SMES technology to address the growing need to maintain and improve 
utility-level grid stability in the face of changes being brought on by 
utility deregulation and competition. We anticipate the first 
commercial sales of these new superconductor applications in the near 
future.
    To understand the important role that superconducting storage can 
play, it is important to recognize that the transmission capacity of 
many utility grids is limited, not by total steady-state flow capacity 
(which is subject to thermal limitations), but rather by their ability 
to handle very short, so-called ``transient'' events. Sudden changes in 
flow patterns--caused by transmission facility outages, as well as 
sudden shifts in loads and power plant operations--can pose the risk of 
voltage instability, causing component failures and the threat of 
cascading outages. To minimize this risk, accepted utility practice 
calls for actions to avoid exposure to contingencies that can result in 
voltage instability. Such actions, which can include generating plant 
redispatch or forgoing the sale of transmission service, can impose a 
substantial economic penalty. New technologies to relieve these voltage 
stability limitations could increase the Available Transfer Capability 
(ATC) on a given system. In this way, these new technologies could 
postpone the need for new investments in transmission facilities, and 
offer utilities and their customers a powerful and economical way to 
leverage the benefits of competition among power generators.
    The key to this new application for SMES technology involves the 
strategic placement of multiple units at critical locations on a grid, 
in a configuration known as ``Distributed SMES'' or ``D-SMES.'' During 
transient events that might otherwise cause voltage instability, each 
individual unit responds by injecting large amounts of real and 
reactive power, instantaneously, at its particular location. These 
distributed, instantaneous injections of real and reactive power offset 
the increased system losses and the corresponding low voltage caused by 
the altered flow path. By providing a critical boost to the system both 
during the fault and following clearing of the fault, they allow the 
transmission grid to avoid a voltage instability situation. The 
combination of attributes represented by D-SMES--large quantities of 
real and reactive power, instantaneously available at many distributed 
locations--is unique, and enables a solution to the problem of grid 
stabilization that is both faster, more accurate and less expensive 
than conventional alternatives.
Legislative Recommendations
    While I believe that advances in superconductivity are of 
fundamental importance, I do not come before the Committee to advocate 
specific legislation to promote any particular technology. These 
superconducting technologies are far from the only ones being developed 
to address the challenge of grid reliability; advances in power 
electronics, metering and communications, and other areas also offer 
the promise of improved electric system performance. Distributed 
generation, as well, can be counted on to make a significant 
contribution to alleviating demands on the grid. However, it would be 
an error to assume that distributed generation by itself will solve the 
problems of system-level reliability. Regardless of the future growth 
of distributed generation, our urbanized society will require a robust 
grid to ensure universal access to reliable and economical power, based 
on diverse energy sources, with acceptable local and regional impacts 
on the environment.
    The best way to strengthen and ensure the reliability of the grid 
is not to prescribe particular technology paths, but to remove 
commercialization obstacles to the technologies competing to meet this 
need. Technology-neutral legislation aimed at promoting reinvestment in 
the grid can harness market forces, allowing the market to select the 
mix of winning technologies and strategies. Accordingly, I ask the 
Committee to consider the following legislative recommendations:
    1. Initiation of power quality standards. Traditionally viewed as 
distinct issues, the problems of grid-level reliability and 
distribution-level power quality are converging. This has resulted from 
the ``siliconization'' of energy loads and the transition to 
competitive retail market frameworks. Clear, equitable and enforceable 
power quality standards, appropriate to local needs and conditions, 
will cure what could be considered a form of market failure. They will 
create a market-based framework for new services and investment in 
technology solutions to improve the quality of grid power.
    In the absence of clear standards, power quality problems lead to 
finger-pointing between utilities, customers and equipment 
manufacturers, but no satisfactory solutions. Utilities should not be 
burdened with unreasonable standards where most of their customers can 
tolerate existing levels of system power quality. Existing power 
quality conditioning equipment such as SMES, flywheels, UPS systems and 
distributed generation make it economically feasible to offer 
differentiated levels of power quality to different customers.
    Clear and unambiguous power quality standards would have the effect 
of defining and explicitly limiting utilities' service obligations. For 
those customers who have more demanding power quality requirements than 
are prescribed, the standard will remove ambiguity and place on the 
customer the obligation to obtain the services or technology solution 
to protect its electric load. In turn, standards would foster a market 
environment in which providers of these services and technologies 
compete to provide them at least cost to end users. Bringing market 
discipline to bear on the problem of power quality would ensure that 
the total cost of utility system upgrades, customer expenditures and 
power quality-related economic losses is minimized.
    2. Incentives for low-environmental-impact transmission. One of the 
most difficult and intractable obstacles to expanding the electric 
power grid over the past ten to fifteen years has been the political 
and social infeasibility of siting new overhead transmission lines. 
Such projects have provoked community opposition because of concerns 
among landowners about the property value, visual and health and safety 
impacts of new construction. While American consumers generally support 
competition and choice to power markets, we have become more insistent 
on maintaining and improving the quality of our environment, and it is 
likely that proposals to build major new lines to serve regional, as 
opposed to local, needs will continue to encounter stiff community 
opposition.
    New technology solutions such as HTS cable could make an enormous 
difference in meeting the challenge of expanding transmission. HTS 
cables will be compact and thermally independent, allowing them to be 
placed in unobtrusive underground pipes and obviating the need for 
large rights-of-way. Advanced cable designs will provide shielding from 
the effects of EMF. It is of great significance that, while electric 
transmision line construction has slowed drastically, over the last 
twenty years, some 500,000 miles of fiber optic cable has been laid in 
the United States without arousing public opposition, largely because 
it has been installed in compact, unobtrusive underground rights of 
way.
    Accordingly, the Congress should consider legislative mechanisms to 
facilitate the siting of new transmission facilities with favorable 
environmental impacts. For example, the Congress could establish a 
streamlined, federal siting process for new electric transmission lines 
carrying power in interstate commerce, where the environmental impacts 
of the project fall below a specified threshhold. To attract financial 
investment in such facilities, the Congress could also consider 
exempting these projects from conventional forms of rate regulation.
    3. Incentives for additional demonstration projects illustrating 
advanced technologies. Actual demonstration projects, such as the HTS 
cable project in Detroit, will play a crucial role in establishing the 
reliability of new technologies for use in electric utility systems. 
However, utilities cannot be expected to embrace a new technology on 
the strength of a single demonstration in a single operating mode. 
Multiple trials will be required in different operating modes and 
voltage levels, accumulating to many operating years of experience. 
Ultimate customers--the utility companies, competitive power generators 
or manufacturers who will incorporate HTS equipment into their 
operations--must develop familiarity with the technology and see how it 
will impact the operation of their systems. Only through field trials 
such as the Detroit Edison cable project will the operational benefits 
of these new systems, as well as the demands imposed by them, be fully 
understood.
    Successful commercialization of these new technologies will yield a 
tremendous payoff to the nation in the form of improved electric system 
reliability and a commercial leadership position for America. 
Therefore, it is appropriate for the Congress to consider tax or other 
financial incentives to encourage the deployment of a range of new 
technologies that enhance grid reliability.
Conclusion
    As this hearing evidences, there is tremendous concern about the 
potential for competition and market forces to undermine the 
reliability of the electric system. In fact, the marketplace response 
to electric industry restructuring suggests equally that there is 
tremendous potential to enhance electric system reliability with a 
range of new technologies offered by new players. Among these, I happen 
to believe that superconductivity is of fundamental importance. The 
development cycles for silicon chips and optical fibers have shown that 
innovations based on new materials, while they can take longer to 
achieve their impact in the form of commercially available products, 
can have the most pervasive economic and social effects in the long 
run. We expect superconductor-based technology to follow a course 
similar to these other innovations as the 21st century unfolds.
    For some time, electric industry restructuring initiatives have 
focused predominately on extracting the benefits of competition in the 
generating sector. The wires segment of the business has been perceived 
as being somehow less susceptible to innovation. Increasingly, however, 
as price spikes recur and occasional outages expose the weaknesses of 
traditional technology, the electric industry is recognizing the need 
to expand its ability to deal with broader and more variable power 
flows. If the promise of a truly continental power market is to be 
realized, an ``electricity superhighway'' featuring high-capacity, 
environmentally unobtrusive transmission cables and other ancillary 
equipment will be required. Not unlike optical fiber, superconductor-
based technologies may be the key enabler to allow this forecasted 
revolution to occur.
    Thank you for the opportunity to present this testimony.

    Mr. Stearns. Thank you. Mr. Joseph Iannucci.

                  STATEMENT OF JOSEPH IANNUCCI

    Mr. Iannucci. I am Joe Iannucci from California. I am the 
principal of Distributed Utility Associates, a small consulting 
firm specializing in distributed generation. We have clients 
around the world, small and large utilities, technology 
development companies, research organizations, various 
regulatory agencies. And occasionally I am introduced as the 
father of distributed generation. I am not so sure about that, 
but perhaps if there were a paternity suit, I might be 
convicted. I am not sure.
    I have been asked to take you outside of the box and show 
you my world of distributed resources, small generation and 
storage, integrated seamlessly into the utility system of the 
future. In fact, the SMES unit mentioned just before would be 
an example of one of those units.
    Let me define a distributed utility for you. It is really 
very simple. It is just the existing utility system with little 
bits of generation in storage out in the distribution system. 
And I will explain why they are in the distribution system in a 
moment.
    But this very simple definition belies the fact that it has 
very profound implications. And we will come back to those 
implications. It is not a technology play. I don't need any new 
technologies. I would be very happy to have my friend's 
superconducting magnetic energy storage system, but I could 
just as easily use reciprocating engines, small gas turbines, 
anything that is small, clean enough and able to be sited in 
the distribution step.
    It is really a value proposition. It is a new way of 
looking at the utility of the future and trying to make the 
most of what we have. It is putting things exactly where they 
should be placed for good reasons, either to take up peaks or 
take advantage of combined heat and power applications. There 
are many reasons. And it is based not on building larger and 
larger power plants--we have wonderful large power plants and 
large transmission systems--but rather based on the economies 
of mass production. It is a completely different way of looking 
at the utility business. It is from the outside in rather than 
from the inside out.
    Perhaps an analogy to the computer industry would be 
helpful in explaining why this might have some profound 
implication. What makes more sense a large mainframe computer 
or a thousand little PCs? That is kind of a silly question. 
They each have their uses. If you need to do some massive 
calculations, you really want to have a mainframe computer. 
They are wonderful, fast dollars per computation. The speed is 
incredibly fast, and it is the way you should be doing massive 
computations. However, if you are looking for maybe a little 
bit more flexibility, more modular investment, ways to tailor 
the computations to exactly what needs to be done, these seem 
to have taken over this market. Yes, there are still 
mainframes. This is the analogy I would like to draw to 
distributed resources. I love the central station power 
systems. I love the transmission systems. It gives us very low 
bulk power cost, but I believe it should be supplemented with 
distributed resources, distributed generation and storage. Much 
the same way the PCs have revolutionized our computer industry, 
small distributed resources may do the same thing to our 
utility business.
    Let me explain now what distributed generation and storage 
has to do with your topic today, reliability and transmission. 
First of all, let us look at the investments that utilities 
have made historically and recently in generation, 
transmission, and distribution. Where has this money gone? 
Sure, there has been a lot of money put into generation. There 
has been some money been put into transmission. But the largest 
single investment is in distribution.
    What does that mean for distributed resources? That means 
that if you put a distributed resource into the distribution 
system, you have the possibility of getting three benefits for 
the price of one. First of all, of course, you can use that as 
a central station asset. You get a signal from the central 
station asking you to put that power plant on. You can do that. 
You can also reduce the transmission line loadings, maybe get 
more congestion reductions, maybe improved reliability of the 
transmission system, and also you can help yourself in the 
distribution side. You can save investments in the wires. Only 
if you put it in the distribution system, can you get all three 
of those benefits. The benefits flow uphill, not downhill.
    So what would you do from the transmission point of view? 
You could put in more distributed resources and perhaps avoid a 
little bit more transmission investments.
    And this is true anywhere. This isn't just specific to 
California where I live; but in the utilities that I work with 
around the world, South Africa, for instance, we see the very 
same problems, the very same issues where putting things in at 
the distribution level help the most. Reliability the same way. 
Most of our reliability problems come from the distribution 
side, not from generation or transmission. And finally, there 
is also a competitive force for distributed resources. 
Customers can use distributed resources themselves to solve 
their own power quality problems, to manage their own bills, to 
make all of their energy, and it can also serve as a ceiling 
for rates in a competitive environment.
    If I can just give a few suggestions, specific suggestions 
as to what might be done. I would really like this committee to 
consider the role and potential importance of distributed power 
in the electric utility restructuring legislation that you will 
be seeing this year. I know it is an unusual request to look 
from the outside in, but the customers are out there waiting 
for you to represent them and to make sure the distributed 
resources have a fair place at the table in this legislation.
    I also would like emission rules that are written primarily 
from the standpoint of large power plants to be reconsidered 
with regard to small power plants. We can take advantage of the 
increased efficiencies of distributed power putting it in the 
distribution system, and we can also encourage States to allow 
full and open-market competition, work with the IEEE in 
developing their interconnection standards and work toward a 
DOE line item on distributed utility to really figure out some 
of these problems.
    [The prepared statement of Joseph Iannucci follows:]
 Prepared Statement of Joseph Iannucci, Principal, Distributed Utility 
                               Associates
    Mr. Chairman and members of the Technology and Energy and Power 
Subcommittee, I am Joseph Iannucci the principal of Distributed Utility 
Associates, a consulting firm specializing in distributed power. Our 
clients include many utilities and technology vendors, national 
research organizations and regulatory agencies.
    Thank you for the opportunity to testify today on reliability and 
transmission and my views on why distributed power may be critically 
important to these two issues. In the interest of time, I will 
summarize my remarks and respectfully request that the full text of the 
testimony be submitted for the record.
    I have come before this subcommittee to share a Distributed Utility 
vision of the future for the national electric supply and delivery 
system. Small electric generation sources in the utility delivery 
system should be considered as an alternative to traditional 
transmission and distribution investments, to improve customer service 
and reliability. It is my opinion that the opportunities which the 
Distributed Utility concept affords must be included in the electric 
utility industry restructuring debate and that new policies may be 
required to fairly evaluate distributed power.
    The Distributed Utility concept is the beneficial inclusion of 
small (from kilowatts up to ten megawatts in capacity) generation and 
storage installations into the electric distribution system. These 
units may be owned and operated by utilities or by customers, but 
generally can increase reliability, reduce costs, increase efficiency 
and reduce emissions. By coordinating the operation of these 
distributed power units and the central power plants, we can reduce 
utility expenditures and increase value to customers. I have attached a 
brief vision paper on a Distributed Utility future which details this 
concept.
    Perhaps an analogy to the distributed utility concept from the 
computer world would help. Which is more valuable, a main frame 
computer or a thousand desktop PCs? The answer of course depends on the 
task at hand. If massive calculations are involved the mainframe wins 
hands-down; but if personal convenience, modular investments, 
flexibility and reliability are desired, the multiple desktop units are 
hard to beat. Distributed resources pose the same challenge to 
utilities that personal computers presented to the computer industry 
over a decade ago.
    Small computers aren't less expensive than mainframes (per 
computing unit), but they do allow more of us to use our own computers 
and be more productive. Similarly, by using small power sources 
precisely where and when needed, both customers and utilities can 
potentially reduce their costs. Utilities can use distributed 
generation to make electricity while simultaneously avoiding or 
deferring costly transmission and distribution equipment upgrades. 
Customers benefit from more reliable service, reduced bills and the 
possibility of meeting their combined heat and power needs.
    Completing the computing analogy, large and small power plants can 
complement each other. The utility of the future could be mostly large 
power plants remote from the consumers, supplemented by small local 
power supplied for distribution system reinforcement, added 
reliability, and additional customer services.
    Over the last few years, there has been tremendous progress in the 
small modular power technologies. Small generation, modular storage 
units, and targeted demand management (here collectively called 
distributed resources) have caught the attention of the utility 
industry. Small gas turbines, improved reciprocating engines, fuel 
cells, photovoltaics, wind turbines, batteries, and composite flywheels 
have started down the path to commercialization. Even commonplace 
standby generators at customer sites are receiving a second look as 
cost effective sources of power. Just as important are the recent 
advances in the facilitating technologies needed to make the small 
generation units integrate seamlessly into utility systems. Smart 
controllers, flexible dispatch algorithms, improved interconnection 
techniques, expanded use of sensors and communications will each in 
their own way contribute to the accelerated inclusion of distributed 
resources into our electric delivery systems.
    Packaged with the existing grid, distributed power can create more 
reliable electric service and meet increasing customer demands for high 
quality uninterruptible power, so supermarkets and other facilities can 
continue operating during severe weather and other unforeseen 
circumstances.
    Technology advances, environmental concerns, deregulation, and 
increased customer choice all seem to be pointing toward a future where 
small generation sources could become an important part of the utility 
of the future.
    But for all of the promise and potential, distributed power has yet 
to find its way into substantially common practice. Several barriers 
remain before the concept will become widespread. Today's rules were 
drafted with yesterday's technologies and monopoly utility system in 
mind.
    Advocates of distributed power see the major impediments to be:

 Reliability is currently defined from the utilities' 
        standpoint rather than from the customers' view
 Lack of uniform and consistent utility interconnection rules 
        and requirements
 Emissions policies developed for large central power plants, 
        not taking into account credits for combined heat and power or 
        transmission and distribution inefficiency
 Equitable standby and exit fees and business mechanisms for 
        evaluating and sharing (between utilities and customers) the 
        ``wires'' benefits and responsibilities of distributed 
        generation.
    It is time to shape federal regulations and policies to include the 
likelihood of widespread distributed power. The best Federal role at 
this point is to help adjust yesterday's rules for today's competitive 
marketplace and distributed technologies. While many of these issues 
are at the state level, the Federal government can help provide 
consistency on a number of points:

1. Consider the role and potential importance of distributed power in 
        electric utility industry restructuring legislation; 
        distributed generation may be an important market power issue 
        since it sets a logical ceiling for rates; exit charges, 
        standby fees, and stranded cost recovery should be designed to 
        neither unfairly penalize customers wishing to use distributed 
        resources, nor leave utilities with unrecoverable investments 
        already made on their behalf.
2. Support emissions rules which encourage efficient use of fossil 
        fuels, for instance by rewarding net emission reductions from 
        combined heat and power and reduced line losses
3. Encourage states to allow full and open market competition in 
        distributed resources, including both customer and utility 
        ownership and operation
4. Support IEEE in developing and establishing safe, equitable and 
        effective electrical interconnection rules
5. Work toward a DOE line item for Distributed Utility research, 
        development and demonstration; an annual budget of $10,000,000 
        could do much to explore the full value of the concept, and 
        accelerate the distributed resources market.
6. Encourage, and support if needed, field tests of substantial 
        distributed power grid penetration to allow seamless 
        integration of distributed generation and storage assets
7. Consider using a reliability definition which represents the 
        customers' point of view, not the grid's
8. Consider holding more extensive hearings on distributed generation 
        to better evaluate its potential importance
                     The Distributed Utility Vision
    Joseph Iannucci, Distributed Utility Associates, April 22, 1999
    The vision of a distributed utility future incorporates distributed 
resources to optimize customer needs, large power plants, and delivery 
of our electricity. This approach would take advantage of the 
locational differences in the cost of delivering service, use of local 
fuels, and customer energy efficiency opportunities. Many distributed 
generation and storage technologies are capable of playing a major 
role: fuel cells, reciprocating engines, small and micro-turbines, 
modular storage and renewables of all types. Natural gas is likely to 
be the leading fuel due to its low cost, wide availability and minimal 
emissions.
    Distributed power systems can and will be put in by customers (or 
by Energy Service Companies for customers), and by utilities for a wide 
range of site-specific reasons and benefits. While utilities have much 
to gain by taking the lead in implementing distributed generation and 
storage, customers are even more motivated (since their rates include 
substantial utility imposed electricity delivery costs) and less 
encumbered by regulation and other institutional barriers.
    Distributed power will change the way electric power systems will 
be designed and operated. In the traditional utility system electric 
power is generated in/purchased from large central stations. Power 
flows via multiple transmission lines to the distribution network and 
then to the load. In contrast, the distributed utility concept 
supplements the large power plants with many small resources located 
throughout the entire distribution system serving customer loads.
    Distributed power economics are driven more by their value, not 
merely by producing power at the lowest cost per kilowatt-hour. 
Electric utility generation planning and operation in the past sought 
to minimize the cost of electricity production, with minimal attention 
to the substantial costs of delivery and little regard to the 
additional benefits which on-site generation and storage can provide 
customers. When the entire investment in generation plus wires, plus 
customer benefits are included, the best solution for all involved may 
not be the one with the lowest cost per kWh, but rather the one which 
minimizes all costs, including wires upgrades. A prime example would be 
dispatch of a customer's existing standby generators; the energy costs 
of those units are very high, yet their occasional use a few hours per 
year is frequently the lowest cost way for a utility to provide 
incremental supply.
    The ultimate vision of a distributed power future would include 
significant levels (for instance 5 to 30% of total capacity) of 
distributed generation, 5 to 10% of distributed storage, and 15 to 20 % 
combined heat and power; these distributed units would follow the local 
load swings as much as possible, leaving the baseload demand for 
central plants to satisfy. The remainder of the energy is made by 
clean, efficient, central station plants operating near their optimal 
design points. The central and distributed portions are designed to be 
complementary to each other in terms of dispatchability and reliability 
and are operated in a coordinated manner via contractual arrangements 
between all parties. The flexibility and portability of distributed 
power technologies will supplement the low energy costs and stable 
operational characteristics of our central power plants.
    The markets for distributed power will be significant domestically 
and for export markets especially to areas with weak infrastructures.
          If 25% of all load growth in the US were distributed power, 
        costing an average of 500$/kW, about $7 billion of hardware 
        would be installed annually; in addition there would be fuel 
        supply contracts, ongoing hardware maintenance service 
        contracts, additional customer services, and increased 
        research, development and demonstration efforts each year; 
        distributed power could easily be a $10 billion per year 
        business in the US alone.
          If only 1% of all existing industrial and commercial loads 
        were to convert annually to distributed power at similar 
        capital costs, this would be a $2 billion per year market. 
        Technologies are also being developed to address residential 
        markets.
          On a global basis the need for reliable modular power is much 
        greater than in the US; some estimates for economically viable 
        markets outside of the US are as high as 75 GW per year. If 
        exports by US firms are one fourth of this market, this would 
        represent another $10 billion per year.
          Each of these markets could be accelerated by decreasing 
        reliability of central supply, accelerated deregulation, lower 
        cost distributed power technologies, concerns for global 
        warming, etc.
    The joint optimization and coordinated operation of the generation 
and delivery of energy benefits its many stakeholders; first and 
foremost it will provide lower energy costs to consumers. Performance 
based regulation will reward wires utilities with increased utilization 
of their transmission and distribution assets. This asset utilization 
can be translated into lower costs to consumers and higher profits to 
shareholders. When performance based ratemaking is applied to the local 
distribution companies it creates a real incentive for economic 
investment in infrastructure, and allows the distributed power option 
to be added to the tools of the distribution planner. A broad range of 
Energy Service Companies will have significant presence in the 
distributed generation and storage market including forward thinking 
gas companies wanting to diversify and sell more gas. Society benefits 
from the more efficient delivery and use of energy.
    Many of the major Energy Service Companies players are the 
unregulated side of utilities. Much of the distributed power 
opportunities will be catalyzed by the Energy Service Companies through 
customers rather than by the regulated utilities. However, with 
appropriate regulation in place utilities will have a revenue 
generating mechanism to take advantage of the significant opportunities 
of asset utilization obtainable with distributed generation and storage 
technologies.
    The key to siting distributed power is location, location, 
location. This means taking advantage of the added local value of 
distributed generation and storage, for example deferring transmission 
and distribution investments while relieving local and systemwide 
demand peaks at the least cost. The concept also includes use of local 
fuels (including renewables), providing remote power, pursuing combined 
heat and power opportunities, and site-specific reliability and power 
quality improvements.
    The vision of the distributed utility includes many stakeholders, 
technologies, and fuels because they each have their place either 
economically or environmentally. Energy Service Companies and electric 
delivery companies, gas companies and technologies vendors should all 
participate because the system can not be optimized by any of them 
singularly. They each need information or services from the others. The 
distributed fossil technologies and renewables communities can be 
natural allies in jointly working towards simplifying interconnection 
rules, changing utility standard practices, net metering, minimizing 
standby charges, avoiding transition charges, etc.

    Mr. Stearns. Thank you. Dr. Matthew Cordaro.

                  STATEMENT OF MATTHEW CORDARO

    Mr. Cordaro. Thank you. Good afternoon. I really appreciate 
this opportunity to address you. I am president and chief 
executive officer of Nashville Electric Service, the tenth 
largest public system in the country, and I am here this 
morning on behalf of the large Public Power Council, which is 
an association of 21 of the largest State and locally owned 
retail and wholesale electric power systems in the U.S. LPPC 
members as a whole own and operate over 44,000 megawatts of 
generation, or about 11 percent of the Nation's capacity and 
own and operate in excess of 24,000 circuit miles of 
transmission lines.
    The LPPC, since its inception, have focused on transmission 
policy as a critical mission for its members. We were the first 
group of transmission owning utilities to support open 
transmission access in debates preceding the passage of the 
Energy Policy Act of 1992, and we led the way in developing and 
promoting regional transmission entities as a mechanism to 
manage and operate the transmission system in an open access 
environment.
    We believe that as competition unfolds, any transmission 
model must meet the needs of our customers, provide a reliable 
and cost effective delivery system, and provide for open access 
to facilitate wholesale competition. If we are going to create 
a transmission model that will achieve those goals, we must 
adhere to a few basic guidelines as we move through the 
legislative and regulatory process.
    First, any proposal for the future of the system must have 
as its foundation ensuring that there will continue to be a 
high degree of reliability of the power grid. We support the 
development of an independent self-regulating entity which will 
have the ability to set and enforce mandatory reliable 
standards and we favor the adoption by Congress of the 
consensus proposal on reliability.
    The transmission system must provide open access to 
competitive generation in order to facilitate cost-effective 
customer access to a competitive energy supply, although this 
must be accomplished in a manner that does not increase 
transmission costs to existing customers. The transmission 
system must include full and fair participation by publicly 
owned electric systems. LPPC member systems have a number of 
characteristics that distinguish them from their private 
counterparts. These include State or local charter limitations, 
IRS private use restrictions among others.
    In particular, the private-use provisions of the Internal 
Revenue Code must be changed to allow public systems that own 
transmission to fully participate in ISOs, transcos, or 
whatever entities emerge. Absent such statutory action, there 
will be significant gaps in these entities in many areas of the 
country.
    The transmission system must provide for open and 
nondiscriminatory access and transparency and independence in 
operation of the system. Given recent concerns, this should 
become a high priority.
    Transmission owners should be provided full-cost recovery 
but not windfall profits. Transmission rates have historically 
been cost based. Any transmission proposal must continue to 
encompass this basic concept and avoid the potential for 
windfall incentives as a result of asset churning or market 
base pricing.
    Transmission policy should provide for and encourage 
regional solutions, not nationally imposed mandates. The 
Federal Government FERC and State governments should all work 
to provide the tools and environment for the appropriate 
regional solutions to emerge, which capture the uniqueness of 
the physical, political, and economic circumstances of any 
region.
    Now to say a little bit about jurisdictional issues. 
Addressing the question of whether every transmission owner 
needs to be regulated in precisely the same manner, we believe 
the answer is no, and let me explain why. Public owners of 
transmission are not currently subject to full rate regulation 
under the Federal Power Act. However, most of us are subject to 
the open-access provisions of the Energy Policy Act of 1992. In 
fact, the majority of our members have adopted open-access 
tariffs and voluntarily submitted such tariffs to FERC.
    The goal of the Energy Policy Act in FERC Order No. 888 is 
to ensure that transmission owners provide access to their 
systems on the same basis as they provide it to themselves, the 
principle of comparability. I am not aware of any incidence 
where an LPPC member has been charged with an unfair or 
discriminatory denial of access to its transmission system.
    If additional Federal regulation of State and locally owned 
transmission is thought to be necessary, we recommend that 
Congress use the approach adopted by FERC in the Santee Cooper 
case. As such, public systems should file open-access tariffs 
with FERC, and FERC should review such tariffs to ensure that 
they meet the same standards of open access and comparability 
applicable to all.
    As owners of significant transmission assets, we are ready 
to work with your committee and the Congress to develop the 
necessary legislation to ensure reliable and vibrant 
transmission network operated in accordance with the principles 
I describe today.
    I thank you for the opportunity to participate in today's 
hearing. I would be happy to answer any questions that you may 
have.
    [The prepared statement of Matthew Cordaro follows:]
  Prepared Statement of Matthew Cordaro, President and CEO, Nashville 
      Electric Service On Behalf of The Large Public Power Council
    Good morning. My name is Matthew Cordaro, and I am the President 
and Chief Executive Officer of the Nashville Electric Service. I am 
here this morning on behalf of the Large Public Power Council 
(``LPPC''). I am pleased to have this opportunity to comment on a 
matter of critical importance to our customers, the future of the 
transmission system as we move into a competitive environment.
Introduction
    The Large Public Power Council (the ``LPPC'') is an association of 
21 of the largest governmentally owned retail and wholesale electric 
power systems in the country. LPPC members directly serve approximately 
6,000,000 retail customers and own and operate over 44,000 megawatts of 
generation, or about 11% of the nation's capacity. In addition, we own 
and operate in excess of 24,000 circuit miles of transmission lines. 
Our members are located throughout the country, including my own state 
of Tennessee as well as California, New York, Texas, Washington, 
Florida, Georgia, Nebraska, and South Carolina.
    The LPPC has since its inception focused on transmission policy as 
a critical issue for its members. The LPPC was the first group of 
transmission owning utilities which expressed support for open 
transmission access in the debates preceding the Energy Policy Act of 
1992. At the same time, we led the way in developing and promoting 
regional transmission entities as a mechanism to manage and operate the 
transmission system in an open access environment.
    The LPPC believes that any model for the operation and management 
of the nation's transmission system must permit us to:

 meet the needs of our customers;
 provide a reliable and cost-effective delivery system; and
 provide for open access to facilitate wholesale competition.
    In considering these three basic goals, the LPPC has developed 
criteria which need to guide us through the legislative and regulatory 
process as competition in the industry unfolds.

 Transmission policy must ensure the continued high degree of 
        reliability of the power grid. The continued reliability of the 
        interconnected grid is of paramount importance. Any proposal 
        for the future of the system must place this principle at its 
        foundation. We support the development of an independent, self-
        regulating entity which will have the ability to set and 
        enforce mandatory reliability standards. Through our broader 
        trade association, the American Public Power Association we 
        have participated in the process which has developed the 
        consensus reliability proposal, and we favor its adoption by 
        Congress.
 The transmission system must facilitate cost effective 
        customer access to a competitive energy supply. The LPPC has 
        historically supported the principle of open access 
        transmission, since it benefits customers. The LPPC supports a 
        competitive generation market and believes open access is 
        necessary to facilitate such competition. This is, however, not 
        necessarily the same as supporting an ubiquitous, liquid 
        generation market with a robust transmission system, which may 
        increase transmission costs to existing customers without 
        benefiting them through lower power costs.
 The transmission system should include full and fair 
        participation by publicly owned electric systems. LPPC member 
        systems have a number of key legal characteristics that 
        distinguish them from their private counterparts: state or 
        local charter limitations, IRS private use restrictions, 
        prohibition from participating in stock owning entities, and 
        various local oversight bodies. It is imperative that any 
        participation of publicly owned systems. In particular, Mr. 
        Chairman the private use provisions of the Internal Revenue 
        Code must be changed to allow public systems to participate 
        fully in ISOs, transcos or whatever entity emerges. Absent such 
        statutory action, there will be significant gaps in these 
        entities in many areas of the country.
 The transmission system must provide for open and non-
        discriminatory access, and transparency of operation of the 
        system. FERC's current policies on ISO formation are designed 
        to accomplish two primary objectives: the elimination of 
        discrimination in transmission use and the promotion of more 
        economic wholesale transactions through the elimination of 
        pancaking of rates. Orders 888 and 889 address discrimination 
        in transmission use but do not require unbundling. The FERC 
        must currently rely on transmission users to initiate and 
        prosecute expensive challenges to incumbent transmission owners 
        in order to monitor problems. Given the recent concerns over 
        potential misuse of the transmission system, the independence 
        and transparency of the transmission system operations and the 
        need to separate generation interests should become a higher 
        priority.
 Transmission Policy must provide transmission owners with full 
        cost recovery while avoiding windfall profits. Transmission 
        rates have historically been regulated and cost based. Any 
        transmission proposal must continue to encompass these 
        concepts, which become even more important in an environment 
        that must deal economically with congestion and the expansion 
        of the system. Any proposal that allows for or encourages 
        potential ``windfall'' incentives based on concepts such as 
        market pricing should be discouraged.
 Transmission policy should provide for and encourage regional 
        solutions, not nationally imposed mandates. The LPPC opposes 
        any nationally mandated solution to transmission system issues 
        which does not accommodate local and regional differences and 
        solutions. The federal government, FERC, and state governments 
        should all work to provide the tools and environment for the 
        appropriate regional solutions to emerge which capture the 
        uniqueness of the physical, political, and economic 
        circumstances of any given region.
Jurisdictional Issues
    LPPC members own and operate the bulk of the transmission that is 
owned by state and locally owned public power systems in this country. 
While the Federal Power Act exempts public power from the economic 
regulation provided for in Part II for profit making entities, most of 
us are subject to the open access provisions of the Energy Policy Act 
of 1992 (EPACT). In fact, the majority of our members have gone beyond 
that and have adopted open access tariffs and voluntarily submitted 
such tariffs to FERC. Such filings assure that the access provided for 
in our tariffs meets the standards of comparability and reciprocity 
that FERC requires.
    I am not aware of any instance where an LPPC member has been 
charged with an unfair or discriminatory denial of access to its 
transmission system. Notwithstanding that, some have said that our non 
profit systems need to be subject to the same type of economic 
regulation by FERC as profit making transmission owners. This is both 
unnecessary and unwise. It calls for an added layer of regulation where 
none is needed, and it fails to recognize the fundamental difference 
between a nonprofit government owned entity whose rates are set by 
elected officials and a profit making entity whose rates are set by 
private individuals.
    If additional federal regulation of state and locally owned 
transmission is thought to be necessary, we strongly recommend 
codification of the approach used by FERC in the Santee Cooper case and 
with other public power open access filings. FERC should have the 
authority to review public power open access tariffs for the purpose of 
assuring they meet the test of open access and comparability, but 
should not require such public entities to require the same FERC 
approval process for transmission rates to which profit making entities 
are subject.
Conclusion
    The members of the Large Public Power Council and the millions of 
customers we serve strongly believe that the purpose of restructuring 
and deregulation of the electric utility industry must be to benefit 
customers. This includes maintaining a high degree of reliability of 
the interconnected grid, and optimal use and operation of the 
transmission grid.
    As owners of significant transmission assets, we are ready to work 
with your Committee and the Congress to develop the necessary 
legislation to ensure a reliable and vibrant transmission network, 
operated in accordance with the principles I've described today.
    I thank you for the opportunity to participate in today's hearing, 
and I'd be happy to answer any questions you may have.

    Mr. Stearns. Thank you, Dr. Cordaro. Let me start with you 
since you just finished. Correct me if I am wrong. You had 
indicated that you don't need FERC to regulate in your area; is 
that correct?
    Mr. Cordaro. Yes, not at variance with what the existing 
situation is today. In essence, we have been voluntarily 
cooperating with FERC in enacting transmission tariffs which 
are comparable to the tariffs which they do have direct 
jurisdiction over. And we recommend a continuation of that 
process.
    Mr. Stearns. Do you want Congress to act to open the TBA 
transmission systems so you have access to other wholesale 
power suppliers?
    Mr. Cordaro. Yes.
    Mr. Stearns. Mr. Nevius, do you believe the proposed 
reliability legislation represents a dramatic expansion of 
FERC's authority?
    Mr. Nevius. No.
    Mr. Stearns. I am asking questions that are easy to answer 
for you folks here.
    Mr. McCoy, some favor creation of transcos rather than 
ISOs. However, there are different kinds of transmission 
owners: Federal agencies, State agencies, municipal utilities, 
rural electric cooperatives, and IOUs. Can transcos be formed 
with these different kinds of owners? Do you know of examples 
of entities with that kind of mixed ownership? How long would 
it take to form a transco with mixed ownership?
    Mr. McCoy. Our belief is you can form a transco with mixed 
ownership. It would take some financial and business 
engineering, perhaps the formation of a limited liability 
company, for the obvious reason that public authorities can't 
divest assets, in effect. But there are structures that can 
combine investor-owned assets and public power assets under a 
single governance structure operated as a coherent unit.
    Nothing, obviously, has been filed along those lines; but I 
am aware of discussions that have involved utilities, IOUs in 
the upper Midwest and at least one large public power entity 
toward that end.
    Mr. Stearns. How could the Federal Government own a part of 
a private company?
    Mr. McCoy. I am not a tax expert or an expert in financial 
engineering. I am not aware that the Federal Government can own 
a part of a private company. But you can set up a limited 
liability company----
    Mr. Stearns. If you take Bonneville, how could they join a 
transco?
    Mr. McCoy. They can join a transco by pledging their assets 
to be managed by a transco in turn for having a say in the 
management of the limited-liability company.
    Mr. Stearns. Mr. Szwed, your testimony suggests that FERC 
should be granted more authority over everyone but yourself. 
You say FERC should have more authority over TVA, BPA, PMAs, 
State and municipal utilities and cooperatives; but you say 
FERC should have no authority to require you to join ISOs.
    Mr. Szwed. In response to that, first of all, the first 
part of that in asking that all of the various transmission 
providers and owners, I think it is important from our 
perspective that all of those groups be placed and play, if you 
will, under the same rules. And that is not quite the case 
today. Step one.
    In response to the second part of the question, we really 
believe that as these regional transmission organizations are 
forming, that it is important for the market to work toward 
shaping these things and to create them in a way that is 
responsive to the market. And I don't think there is one cookie 
cutter approach as yet as all of these are evolving. We have 
several ISOs in operation. We have various transmission 
entities, be they independent transmission companies or 
regional transmission organizations that are on the drawing 
board coming to FERC for review and approval and so forth, that 
it isn't at this point in time a one type of construct or one 
approach that would be appropriate, given the nature of the 
industry and competitive markets continuing to evolve.
    Mr. Stearns. My time has expired. The ranking member, Mr. 
Hall.
    Mr. Hall. Mr. Chairman, thank you. Mr. Szwed, you might 
have told him what that woman sent a note to her teacher for a 
young boy starting the first grade said; he is a sensitive boy 
and for her never to try to govern him in any way. If he did 
anything wrong to slap the boy next to him. He said that would 
frighten him. Is that what his testimony said?
    I will pick up on some of your other testimony, Mr. Szwed. 
You stated on page 2 the best way to improve transmission 
service and with that reliability is to let market participants 
devise and implement new arrangements for providing service, 
new investment, new methods and new methodology. Is there a 
government role; and if so, what is it or should the government 
just stand by?
    Mr. Szwed. I think, first of all, in terms of our belief 
and certainly from First Energy's point of view, we believe in 
an independent transmission company concept, a business 
orientation toward transmission. And we see that as being 
important because that is a vehicle whereby investment and 
people and infrastructure can best be obtained. And those 
independent transmission companies, in my mind, would continue 
to be regulated by FERC. So from the standpoint of the role of 
the regulatory authorities, those types of entities would, in 
fact, still be under FERC jurisdiction.
    Mr. Hall. What would the participants be doing now 
differently than they are doing now that might improve 
transmission service or legislation?
    Mr. Szwed. Clearly in today's industry, there are a number 
of activities that are under way to work toward ensuring 
reliability. We have heard from Mr. Nevius about the activities 
of NERC, and myself, and many of my colleagues have been 
actively involved in ensuring that there are standardized 
practices and rules with respect to reliability, a lot of that 
going on to set the rules of the road. The second thing is 
there are, and have been, as we have seen in the development of 
RTOs and some of the ISOs that are in operation, that there are 
entities that have been put in place, many of them coming about 
from the restructured power pools and so forth. But you also 
have a lot of entities that are working toward pursuing 
regional organizations on a voluntary basis, and my feeling is 
that will continue.
    Mr. Hall. In your testimony on page 6--I am reading from 
it--FERC has endorsed the functional separation of vertically 
integrated electric utilities. While you don't endorse 
mandatory divestiture of utility assets as a general policy, 
you say the voluntary divestiture of generation assets in many 
States has helped remedy a number of issues, and you show some, 
including the valuation of stranded costs which is a biggie 
here and concerns about the vertical market power.
    You say it may be appropriate to give FERC the authority to 
order partial asset divestiture as a response to the illicit 
exercising of market power. Where do you draw the line there?
    Ms. Utter. It is a tough question, Mr. Hall. I think the 
biggest problem we have today is a number of parties have one 
foot in and one foot out of the regulated environment. And the 
suggestion that we have is that the limited amount of 
divestiture should be used only when there is a proven event of 
market power abuse. I would suggest today that a very large 
percent of the number of utilities in the U.S. are not abusing 
their market power and even the ones who are are doing it not 
because they are evil but because they just, frankly, have an 
economic incentive to do so; and where they are abusing that 
economic incentive, we believe that a limited level of 
divestiture ordering should be allowed for FERC to have the 
authority to prevent these kind of abuses. Again, as I said 
earlier in my remarks, if we don't have these kinds of problems 
out of the way now, long term we are not going to have a 
competitive market.
    Mr. Hall. Do you think everybody can get together on what 
that standard ought to be where we can translate it into some 
type of legislative form?
    Ms. Utter. It is awfully tough to legislate it. It is kind 
of like the old saying I will know it when I see it. It is a 
situation of where there are proven abuses; and I think that 
should be a high standard frankly. I think there should be a 
high standard; but where you have utilities that do things like 
denying transmission service in favor of their own native load 
requirements in violation of FERC rules, those are the kinds of 
things where there should be a clear ability for FERC to 
penalize them through a divestiture or order a divestiture as a 
way to prevent their market power or expansion of their market 
power. Again, I believe that authority should be very limited, 
but it has to be effective.
    Mr. Hall. Thank you.
    Mr. Stearns. I thank the gentleman. The gentleman from 
Oklahoma, Mr. Largent.
    Mr. Largent. Thank you, Mr. Chairman. Mr. Szwed, I was 
looking at your testimony and listening to your remarks this 
morning. And you had five points that you made, and you began 
with allowing market-driven solutions, continue to allow market 
to determine certain aspects and then the last one you said was 
uniform rules of transmission. It almost seems like those are 
opposed to one another. You are asking for market-driven 
solutions but uniform rules. The only way you get to uniform 
rules is with Federal regulation, is it not?
    Mr. Szwed. That was point number 5 in my testimony, in my 
remarks, uniform rules for all owners of transmission. And 
that, in our mind, is putting all of the players under the same 
jurisdictional base where today that isn't necessarily the 
case. There are different transmission providers like we have 
discussed here that aren't subject to cost regulation today and 
that type of thing. And in order to ensure an evenness, if you 
will, across all of that, that it would be important for the 
various public power authorities to perhaps be part of the same 
kind of considerations that we as all of the other investor 
owners are today.
    Mr. Largent. But that is not really a market-driven 
solution then, is it, if we are having uniform rules?
    Mr. Szwed. I am looking at it from the standpoint of where 
we are starting on this point. As we move and restructure into 
what the transmission businesses of the future are going to be 
in terms of regionalization, moving away from individual 
companies, smaller companies but more to a regional expansion 
of the grid today, we see the development of independent system 
operators. We see the development of regional transmission 
organizations and it is in those categories that I really think 
that we don't have necessarily the final end-state answer of 
how the ultimate structure of the business ought to be and what 
size it ought to be and that type of thing. And I believe that 
those types of entities need to evolve and to evolve based on 
the marketplace.
    Mr. Largent. In your testimony, you also talked about 
expanding geographically the territory of a regional 
transmission organization, and yet at this very time your 
company is involved in basically splitting the State of Ohio in 
half. Can you explain how that works? We are trying to get to 
that era. Can't we all just get along? And then in Ohio we have 
this situation where this very State of Ohio has been split in 
two, one side by your company.
    Mr. Szwed. I think that is an interesting question. I don't 
see the issue of Ohio being split in half or there being a 
problem in Ohio. I see there being an opportunity to have a 
number of utilities in the State of Ohio that are participating 
in an organization which we have called the Transmission 
Alliance. You also have entities in Ohio that are participating 
in another organization called the Midwest ISO. And in the 
context of allowing voluntary organizations to form that may 
have similarities but also may have differences in philosophy 
on structure or governance structure or how to move to an end 
state, I kind of view that as more of an opportunity to help 
shape what the ultimate or end state of this business for 
transmission might be. I think the ideas of both groups have 
merit, but I don't view it as a problem or as a negative. I 
view it as a means to how we are propelling the transition and 
the restructuring of the transmission.
    Mr. Largent. What we are dealing with is transmission, and 
if we are going to draw the lines of these RTOs based an 
ideological preferences as opposed to just natural geography, 
doesn't that create a whole new set of problems?
    Mr. Szwed. I am not sure that just looking at any one State 
that a one-State ISO or anything like that is a natural 
geography. The geography might actually be based on the markets 
which might span several States or parts of several States for 
which that transmission entity or that marketplace would be 
best served.
    So I don't think it is appropriate to necessarily say that 
a State boundary is the end all in terms of where the line 
should be drawn. I think as time goes on markets will develop, 
markets will evolve, and the appropriate structures for 
transmission, I believe, will follow along with that.
    Mr. Largent. How does the State of Ohio concur with your 
opinion on that?
    Mr. Szwed. I think you would have to ask them.
    Mr. Largent. What is your impression?
    Mr. Szwed. I think there have been issues raised by various 
folks in the State of Ohio; and as I said, I don't see this as 
a problem. I see it as an opportunity to craft, hopefully, the 
right kind of business structure for transmission in the 
future.
    Mr. Largent. Mr. Chairman, if I could ask one additional 
question of Mr. McCoy.
    Mr. Stearns. Go ahead.
    Mr. Largent. Mr. McCoy, in forming transcos, how do you see 
that evolving when you have got different type of transmission 
owners? In other words, you have got IOUs that own 
transmission. You have municipalities. You have some co-ops. 
You know, then you have got the Federal Government that owns 
transmission lines. How do you see them coming together and 
forming a transco in that kind of alliance? Doesn't that create 
some peculiar problems?
    Mr. McCoy. It does create peculiar problems. As I mentioned 
earlier, it will take some business engineering, but there are 
some business models, especially through the use of limited 
liability companies, leveraged partnerships where obviously a 
public entity with assets in the public realm can't sell those 
assets, offer to merge them with private assets, but they can 
contribute the assets to the management pool under which a 
limited liability company manages and in so doing they have a 
say in how that company is run. Perhaps not as great a say as 
someone who has contributed the actual assets, but certainly a 
say. There are workable models, I believe, if people sit down 
and put their heads to it.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Stearns. The gentleman from Ohio, Mr. Sawyer.
    Mr. Sawyer. Thank you, Mr. Chairman. Let me just do a 
couple of follow-ups on what Mr. Largent was asking about. Mr. 
Szwed, Mr. McCoy has been asked twice the question about mixed 
ownership. The ownership structure that you envision is a 
little bit different. How do you respond with regard to the 
same kind of problems in the structure you propose?
    Mr. Szwed. We have a group of utilities called the 
Transmission Alliance that has, in fact, been trying to deal 
with that very structure, where there are utilities that 
perhaps are interested in divesting their assets and beginnings 
of the formation of an independent transmission company and 
there are others who perhaps would just like to see the 
operations of their systems be handed over to an independent 
entity. We have devised a structure with that group of 
utilities to provide for that kind of a structure and an 
opportunity for those who choose not to divest on day one an 
opportunity to divest down the road.
    The second thing is if it isn't a divestiture, perhaps 
another way from a financial standpoint to allow for a public 
authority or another entity to be part of that might be a 
consideration of transferring control of operation of assets, 
but it could be through some financial lease arrangement as 
well where the assets are leased to that transmission company 
entity and put under their control. I agree with Mr. McCoy. 
There are financial vehicles and ways to accommodate those kind 
of things as we move down the road.
    Mr. Sawyer. Is it fair to say then when you talk about the 
financial structure or an end state for all of this, you may 
not be talking about a singularity; you may be talking about a 
variety of different approaches that work depending--would work 
better or less well depending on the circumstances and the 
nature of the markets they seek to serve?
    Mr. Szwed. I don't think any of us know exactly what that 
end state is going to be, but I do think there are some 
fundamentals necessary to continue to make transmission in 
whatever structure that is viable and that is appropriateness 
in terms of pricing and so forth and the right kind of signals 
to investors to attract necessary capital for future investment 
as well as people and other aspects of infrastructure to make 
it a viable business and to continue to provide for reliability 
and the robustness of our power markets, particularly as we 
move into more and more competition.
    Mr. Sawyer. You mentioned in the same breath the ability to 
attract capital and the critical question of reliability. And 
perhaps Mr. Nevius can join in in this or others. But I am 
particularly interested in what your sense of the needs of the 
transmission system are, what in terms of size and cost and 
then your sense of the ability of different structures to 
attract interest, Wall Street interest, investor interest, at a 
time when the margin may be substantially less than other 
components of this industry or other kinds of investments in 
general. It seems to me that has critical implications both for 
governance structures and for reliability. Could you comment on 
that?
    Mr. Szwed. Different systems obviously have different 
needs. I know from our system, from our own First Energy system 
standpoint, we, every year continue to put our significant 
capital dollars into various equipment to replace aging 
equipment or to provide for enhanced reliability and customer 
service.
    Mr. Sawyer. But you do that with an obligation to serve. 
You do that in an environment where you have an obligation to 
serve. We are talking about a very different kind of 
environment.
    Mr. Szwed. In terms of an independent transmission company, 
there is no question that there is going to be competition for 
investors' dollars. So from the standpoint of attracting 
investment, competitive returns need to be there, the right 
kind of pricing to provide an opportunity to earn. Rational 
returns that would attract investment is important and 
something that needs to be considered as we continue this 
dialog on transmission.
    Mr. Sawyer. Mr. McCoy? Mr. Nevius?
    Mr. Nevius. From the standpoint of reliability, regardless 
of the structure, competition, the financing of these regional 
organizations, what we are looking to do is see that there is a 
common set of rules by which they are operated, the rules of 
the road which Mr. Largent referred to earlier, and that those 
be enforced even-handedly, fairly, no matter who is 
participating in that regional transmission organization. If 
the transmission system for whatever reason is not capable of 
handling all of the commercial trade that would like to take 
place, then the rules will specify who gets to use or how much 
trade can be accommodated safely, but it won't jeopardize the 
reliability of the grid. This is where you need to make a 
distinction between the adequacy of the transmission system, 
are there enough wires, whether they be superconducting or more 
traditional wires, and how those existing wires are used within 
their safe operating limits which is the security of the grid.
    Mr. Yurek. If I could put perhaps another angle on this, 
the question about how does private sector get involved. Think 
of Corning Glass who started investing in the development of 
optical fibers in 1967, built up plants in North Carolina by 
the end of the 1970's, no customers. And then the deregulation 
of the telecommunications industry happened in the early 
1980's. 1982 a new company called MCI showed up at Corning 
Glassworks in North Carolina and said can we order a hundred 
thousand kilometers of optical fiber. And the rest is history. 
So you had a convergence of new technologies, new environment.
    I am not a policy expert so I can't tell you what policies 
work best or not but that is a good place to look in terms of 
new technology. In terms of reliability, many different 
technologies, one I mentioned already superconducting magnetic 
energy storage.
    We are going to be putting our SMES units on large scale 
transmission grids throughout the United States and by just 
injecting some real and reactive power in a distributed fashion 
through a transmission grid, you bring up two things. One is 
the increase in reliability instantly. Another one is increase 
in transfer capability of those grids. So whether it is 
superconductor technology or other technologies--and I think 
there are many different ways to play this--let us give it a 
chance and that convergence of new technologies and a 
deregulated open environment has to win. It has won before. It 
can win again.
    Mr. Sawyer. Mr. Chairman, thank you for your flexibility. I 
am just wondering if there is anyone else who would have 
comment on that question of physical needs and the ability to 
attract capital to meet that.
    Mr. McCoy. I will make a brief comment, Mr. Sawyer. I think 
what Mr. Nevius said is critically important. In a capital 
intensive industry like the transmission business, I think 
airlines are in the same boat. What's happening now in ComEd 
isn't exactly this position. We make the necessary investments 
in the transmission assets that our obligation to serve 
requirements dictate.
    But we are not making speculative investments because the 
rules, quite frankly, are unknown. I think there would be more 
willingness to make outfront investments like Mr. Yurek 
described in fiber optics if, indeed, the rules were very well 
codified, standardized, and backed up by law.
    Mr. Sawyer. Thank you. Those are all helpful responses. I 
appreciate that.
    Mr. Stearns. Thank you. The gentleman from Florida, Mr. 
Bilirakis.
    Mr. Bilirakis. Thank you, Mr. Chairman. I have a couple of 
generic questions; but before I go into those, I just wanted to 
hitchhike on Mr. Sawyer's question. Regarding the exciting 
technology having a profound impact on the transmission of 
power, are there Federal barriers that prevent the widespread 
use of new transmission and distribution technologies? And if 
there are, maybe very briefly, because I do want to get into 
some of the other things, if there are, can you share them with 
us.
    Mr. Yurek. Again, I am not a policy expert so it is hard 
for me to identify what those barriers might be, but generally 
speaking in that regulated environment that we are dealing with 
here, where's the MCI of power? How does the MCI of power come 
into being? In this regulated environment, it doesn't. So if 
there is an ability to buy power from one region and take it 
through a direct current electricity pipeline to another region 
and make money in that process, that can come into existence if 
we peel away some of the regulations that exist today. So I 
would reverse it, I think, a little bit from----
    Mr. Bilirakis. Regulations that exist today could be 
barriers, and constraints. Can you share with the committee in 
writing some of those particular problems? We have got to know 
the adverse effects, if you will, of our past and present.
    Mr. Yurek. We will do that.
    Mr. Bilirakis. Thank you. How many of you believe that 
Congress should pass in some form electricity deregulation? All 
of you? From the eyes of transmission, from the eyes of 
reliability, you still feel that we should do it?
    Ms. Utter. Yes.
    Mr. Bilirakis. Do all of you feel that way? Show of hands.
    Mr. McCoy. I'm not sure what the question is.
    Mr. Bilirakis. Deregulation. Electricity restructuring. 
Well, I guess it is a yes or no at this point.
    Mr. Schmidt. The answer, I think, Congressman, is not 
whether it is yes or no for deregulation, but for different 
components of it. I think it is important to look at the 
comprehensive issue, but I don't think Congress needs to act to 
deregulate the industry. That is occurring throughout the 
country on a State basis.
    Mr. Bilirakis. Well, do the rest of you who put up your 
hands disagree with that statement? Yes, sir?
    Mr. McCoy. I would agree with that statement.
    Ms. Utter. I disagree somewhat. I disagree from the extent 
that the States doing this piecemeal is the wrong way to do it 
if you are trying to approach this business as we are from a 
national market perspective. And so we believe that some parts 
of the business as was expressed earlier absolutely need to 
stay regulated and don't need to be deregulated. But there are 
some additional steps that need to be taken.
    As I said earlier, I believe FERC is capable of doing that; 
but I think their authority needs to be clarified and in some 
limited cases expanded to further deregulate, but we believe 
that because generation is still somewhat regulated and 
somewhat deregulated, we are not developing as fast as we could 
be to a competitive market because liquidity isn't being 
created. There isn't production being put into a liquid 
commodity market right now because the vast majority of it is 
still under regulation.
    Mr. Bilirakis. Would we be holding this hearing on 
reliability and particularly as it involves transmission if we 
were not, you know, really concerned these days with 
deregulation, with electricity restructuring? In other words, 
if we weren't--if we weren't even concerned with electricity 
restructuring and deregulation, are there still adequate 
reliability problems out there? Does existing statutory 
authority exist to ensure continued reliability of the 
transmission system, et cetera, for the panel?
    Mr. Nevius. My answer would be yes because of what is 
happening on the system.
    Mr. Bilirakis. Yes, that we still would need this kind of 
hearing, but not yes that existing----
    Mr. Nevius. Yes, that we need this hearing and we need to 
be addressing the question of legislation to give FERC 
authority to accredit and oversee a self-regulating reliability 
organization. As I mentioned in my remarks earlier, what we 
have been doing for 30 years on a voluntary peer pressure basis 
is not sustainable.
    Mr. Bilirakis. So existing statutory authority is 
inadequate to ensure.
    Mr. Nevius. Yes.
    Mr. Bilirakis. Regardless of whether we were talking about 
deregulation or not.
    Mr. Nevius. Yes.
    Mr. Bilirakis. Mr. Iannucci, do you agree with that?
    Mr. Iannucci. Not quite. Since most of the reliability 
problems really come from the distribution side, I think we 
could solve 100 percent of the transmission reliability 
problems and still have 90 percent of the problem. So whatever 
we can do to make it easier to put in distributed resources if 
they truly can help, the reliability at the customer level from 
the customers perspective, which I think is what we should be 
doing, whatever we can do there to help to get regulations into 
place that will allow easier interconnection, more equitable 
standby fees, exit charges, things like that will help the 
reliability from the customer's standpoint.
    Mr. Bilirakis. I am not the chairman, nor am I sitting-in 
chairman today, but I think it is very important that we hear 
varying perspectives. Forgive me Mr. Chairman, if I have taken 
advantage here, but our State of Florida, is very limited in 
terms of transmission capability and so much of the answer 
might be distribution, local distribution. And so if you could, 
in writing, share your ideas, Mr. Iannucci and the rest of you 
in that regard, it would be very, very helpful. Thank you very 
much.
    Mr. Iannucci. I would be happy to.
    Mr. Stearns. I thank the gentleman. The gentleman from 
Massachusetts, Mr. Markey, is recognized.
    Mr. Markey. Thank you. Mr. Yurek, if I may, because I am so 
proud that you are headquartered up in Massachusetts, you have 
been developing superconductive wires that, as you noted in 
your testimony, are capable of carrying 100 times as much power 
as conventional copper wire.
    To what extent could a transmission owner alleviate 
constraints in its transmission system by replacing its old 
copper wires with your new superconducting wires?
    Mr. Yurek. Well, the use of these wires in a cable for 
transmission purposes means that you can increase the power 
capacity of existing rights-of-way by at least three to five 
times, so that you have the ability now to transfer a lot more 
power through that given right-of-way. Getting siting rights 
for new rights-of-way takes a long time and maybe you will 
never get them.
    So here is a capability to increase power capacity of 
existing corridors, and, quite frankly, those corridors might 
not be the existing transmission lines. They might be gas 
pipelines through which one can pass a large quantity of power 
to relieve congestion. So if you have that open environment, 
now you have the opportunity to bring this technology to bear.
    Mr. Markey. If you could hold up the two wires that you 
have here, can you give us a comparison of the amount of power 
lost over a conventional copper transmission, your blue wire 
that you have there, distribution wire, compared to your new 
superconducting wire? What is the difference in terms of how 
much energy is lost just going out of the wires as it is being 
transmitted?
    Mr. Yurek. Well, for the transmission distribution system 
altogether, about 8 percent of all the electricity that comes 
from the generator is lost to resistance.
    Mr. Markey. Through the wires.
    Mr. Yurek. Through the wires, the transformers, and other 
parts of the transmission and distribution system. We can 
reduce that almost to nothing with the superconducting wires 
because they have no resistance. If we use direct current, that 
is absolutely zero resistance. With alternating current that is 
typically used, there is some loss, but we are very, very low 
in those losses. So we have an extra benefit in terms of energy 
savings.
    Mr. Markey. So in the future, if we had those new wires 
that were laid by the utilities, it would reduce by 8 percent, 
to begin with, the number of new generating facilities that had 
to be constructed from whatever the given number of new 
megawatts that had to be constructed in our country. We would 
know that there was 8 percent less loss over the wires; is that 
correct?
    Mr. Yurek. If you go to the full-scaled implementation, 
that would be the case, of course. But somewhere in between. 
You are still talking about very large numbers, and the 
Department of Energy has documented those numbers. So there is 
certainly the tremendous potential for energy savings.
    Mr. Markey. Now, in your prepared statements, you urge 
Congress to employ technology-neutral incentives to encourage 
new investment in the grid, such as power quality standards, 
streamline procedures for low environmental impact transmission 
technologies, and incentives for multiple demonstrations of new 
technologies to speed their commercial acceptance.
    Can you walk through each of these proposals and explain to 
us what exactly you would recommend that Congress include in 
our legislation?
    Mr. Yurek. In terms of power quality standards, we know 
that in the U.S. alone, the Department of Energy, Electric 
Power Research Institute numbers, put the losses due to 
industrial downtime because of glitches in the delivered power, 
at tens of billions of dollars per year. So there are huge 
losses there. There are no power quality standards that are in 
existence. I think we ought to take a look at that and put 
those standards in place.
    You can pay higher prices for your electricity and get 
premium power. If you are not interested in that, you can pay a 
lower rate. But a clean power signal is the key here.
    The siting of interstate transmission lines, again, I think 
in the open environment, where we can create an MCI of power, 
whatever regulations or legislation would be required to do 
that, I think we ought to be looking at that pretty carefully.
    Then new technologies, whether is distributed generation or 
distributed SMES in other technologies, fuel cells, we need to 
give them a chance. If there is an environment that promotes 
that, let us get those demonstrations under way.
    Mr. Markey. Mr. Chairman, could I say that back in 1981-82 
on this committee, when we were debating breaking up AT&T, 
while they had won many Nobel Prizes for basic research, they 
really weren't that good in applied. The truth of the matter is 
that once AT&T was broken up and Sprint had their commercials, 
you remember with the pin dropping, because they had a fiber 
optic network, at that point AT&T had yet to purchase their 
first square foot of fiber optic wire, because they were a 
monopoly. They didn't have to change. They didn't have to 
adapt. They didn't have to include the new technologies.
    Once we broke them up, though, and there was real 
competition, they had to move because Sprint and MCI and others 
were moving ahead. Much the same things are possible here. The 
more competitive the environment, the more paranoia you build 
into the older companies, the more they are forced to adopt the 
new wires and technologies that make the whole system more 
efficient.
    That would be my one hope out of all of this, that we could 
create the understanding of the analogy between ultimately, you 
know, telephone, cable, and electricity, the three wires. It is 
a tale of three wires going into homes. They are the best of 
wires and the worst of wires, you know.
    What we have to do is ensure that we construct the dynamic 
by which we upgrade these wires to the maximum efficiency for 
consumers. I thank you for having the hearing and yield back 
the balance of my time.
    Mr. Sawyer. Mr. Chairman, it is a far, far better thing we 
do today than we have ever done before.
    Mr. Stearns. I think we have exhausted our questions. We 
want to thank very much the panel. We know how busy you are. We 
appreciate hearing from experts.
    The subcommittee is adjourned.
    [Whereupon, at 1:04 p.m., the subcommittee was adjourned.]
    [The following was received for the record:]

               Federal Energy Regulatory Commission
                                     Office of the Chairman
                                                      June 11, 1999
The Honorable John D. Dingell
Ranking Member
Committee on Commerce
U.S. House of Representatives
Washington, D.C. 20515-6115
    Dear Congressman Dingell: Thank you for your letter of May 18, 
1999, regarding my testimony at the April 22, 1999, Subcommittee on 
Energy and Power hearing on reliability and transmission in competitive 
electricity markets.
    Enclosed are my responses to the questions you submitted.
    I hope this information is helpful. If I can be of further 
assistance in this or any other Commission matter, please let me know.
            Sincerely,
                                           James J. Hoecker
                                                           Chairman
Enclosure
          responses to questions from congressman john dingell
    Question No. 1: Your testimony for the April 22, 1999 hearing on 
reliability and transmission issues states that ``despite the successes 
of Order No. 888 in fostering competition, not all potential market 
problems have been addressed.''
    The first category of impediments you identify are ``engineering 
and economic inefficiencies inherent in current operation and expansion 
of the grid, inefficiencies that are hindering fully competitive power 
markets and imposing unnecessary costs on electric consumers.''
    Please provide specific examples of these engineering and economic 
inefficiencies, and describe their effects on electricity markets.
    Answer: About three weeks after I testified before your 
subcommittee, the commission unanimously approved the Notice of 
Proposed Rulemaking (NOPR) on Regional Transmission organizations 
(RTOs). The NOPR (copy attached) was motivated, in part, by a growing 
commission concern that the continued existence of certain major 
``engineering and economic inefficiencies'' could hinder FERC's ability 
to promote reliable grid operations and competitive bulk power markets 
throughout the country. These. inefficiencies include: developments 
that threaten reliability under emerging competitive conditions in the 
bulk power market; inaccurate determinations of available transmission 
capability (ATC); inefficient management of transmission congestion; 
inefficient or inadequate planning and expansion of new transmission 
facilities; and pancaking of transmission access charges. Order No. 888 
does not purport to address these issues in any direct way. I will 
discuss each of these sources of inefficiency in turn.
    Reliability. As the industry moves to competitive power markets, we 
are seeing the entry of many new market participants, dramatic 
increases in unbundled power sales and shifts in electrical flows. As a 
result, the nation's bulk power system is being stressed in ways that 
have never been experienced before. Such stresses have always existed 
to some extent, but in the past they could be more readily accommodated 
through voluntary ad hoc agreements because there were fewer industry 
participants and they generally did not compete against each other in 
any significant way.
    At present, the industry's ability to maintain reliable grid 
operation is affected, and often impeded, by two factors. One is the 
existence of many separate commercial entities that use the grid and 
directly or indirectly affect its operation or expansion. These 
entities frequently have differing interests in how reliability 
standards are developed and administered. Unfortunately, there is no 
single institution with authority to ensure mandatory compliance with 
reliability standards. The second factor is an increasing ``reluctance 
on the part of market participants to share operational real-time and 
operational planning data with TPs [transmission providers].'' \1\ This 
is not surprising because information that is needed for reliability 
purposes will often have commercial significance.
---------------------------------------------------------------------------
    \1\ NERC, Reliability Assessment 1998-2007, p. 39.
---------------------------------------------------------------------------
    The industry is working hard to grapple with these emerging 
reliability issues and, as I stated in my testimony, the commission is 
supporting these efforts despite a lack of clear legal responsibilities 
in this area. In the past year we have dealt with the Western System 
Security Council's proposal for contractual enforcement of reliability 
rules (see Western Systems Security Council, 87 FERC para. 61,060 
(1999)), NERC's tagging requirements for keeping track of information 
about transactions (see Coalition Against Private Tariffs and Western 
Resources, Inc., 83 FERC para. 61,015 (1998), order on reh'g, 84 FERC 
para. 61,059 (1998)), and NERC's efforts to develop fair and efficient 
methods for relieving overloaded transmission facilities in the Eastern 
Interconnection (see North American Electric Reliability Council, 85 
FERC para. 61,353 (1998), order on reh'g, 87 FERC para. 61,161 (1999)). 
However, each of these cases illustrates the need for a better scheme 
for the private development of reliability requirements and the 
limitations on the Commission's jurisdiction with respect to 
reliability issues. To the extent institutions that ensure reliability 
do not change to keep up with developments in the increasingly 
competitive electric industry, I fear that reliability or competition 
will be compromised.
    Available Transmission Capability. A second source of inefficiency 
in grid operation involves the calculation of available transmission 
capability (ATC). A transmission provider needs to be able to tell 
potential customers how much of the commodity it can carry, and 
potential customers must be able to rely upon that information. 
However, there are three factors hindering accurate ATC calculations. 
One is the lack of the necessary information. ATC is calculated by 
individual system operators, but the transfer capability on each 
utility system is affected by transactions on neighboring integrated 
systems. Transmission providers may post ATC numbers on OASIS only to 
find that transmission capability that they assumed would be available 
actually does not exist because of scheduling decisions taken by other 
transmission providers elsewhere on the grid. It is almost impossible 
for an individual transmission owner to calculate reliable ATC numbers 
when it operates only one part of a larger interconnected grid. A 
second factor that complicates ATC calculation is the amount of 
transfer capability that a transmission provider can legitimately 
reserve to back up generation capacity in its service territory. This 
is referred to as Capacity Benefit Margin (CBM). The Commission 
recently decided a case where it found that a transmission provider 
improperly denied a request for transmission service on the grounds 
that its CBM requirement eliminated ATC, i.e. the ability to provide 
transmission service at a certain level, on its system. (See El Paso 
Electric Company, 87 FERC para. 61,202 (1999)). The third factor is 
discrimination. Since the issuance of Order No. 888, we have received 
numerous formal and informal complaints from non-affiliated 
transmission customers who allege that transmission providers 
discriminate in favor of their own merchant operations when calculating 
and posting ATC numbers. These are described more fully in the answer 
to Question No. 5. I believe that the development of the competitive 
market and the delivery of associated consumer benefits will be slowed 
until more efficient and accurate methods are in place for determining 
ATC.
    Congestion management. The way transmission congestion is managed 
is a third source of inefficient grid operation. With the exception of 
the three operational ISOs, curtailment decisions in the Eastern 
Interconnection are made primarily through transmission loading relief 
(TLR) procedures. The TLR procedures are a set of administrative (i.e., 
non-market) protocols designed to relieve congestion on overloaded 
transmission facilities. The combination of shifting flow patterns and 
TLR protocols has led to a dramatic increase in the number of required 
curtailments. For example, NERC has reported that its TLR procedures 
were invoked 329 times between July 1997 and October 1998 on the 
Eastern Interconnection.\2\ Curtailments understandably generate 
commercial disputes and may be inefficient.
---------------------------------------------------------------------------
    \2\ North American Electricity Reliability Council, Interim Market 
Interface Committee, Minutes of Jan. 12 and 13, 1999 meeting, Exhibit 
D.
---------------------------------------------------------------------------
    Effective congestion management depends on operating the system 
with the needs of broad regional markets in mind. The lack of regional 
approaches consequently causes inefficiency. It is difficult for one 
transmission owner to identify and implement redispatch options when 
the physical limitations and cost effective options for relief exist on 
other transmission systems that are beyond their reach.\3\ 
Additionally, with multiple and independent operators of the grid, 
individual users and owners have unclear and conflicting rights to the 
grid. This makes it difficult to establish congestion markets which, 
like any other markets, cannot develop in the absence of clear and 
enforceable rights.
---------------------------------------------------------------------------
    \3\ Commonwealth Edison, Interim Report on Non-Firm Redispatch, 
Docket No. ER98-2279, December 17, 1998, at 4, 10.
---------------------------------------------------------------------------
    I believe that current TLR procedures are cumbersome, inefficient, 
and disruptive to bulk power markets because they rely exclusively on 
physical measures of flows with no attempt to assess the relative costs 
of different congestion management options. Moreover, when (as is often 
the case) TLR actions are taken by a transmission provider that has an 
affiliated power market participant, the suspicion is that the action 
is motivated by competitive rather than reliability concerns. For these 
reasons, while we have encouraged NERC to move beyond TLR, we also 
recognize that there are limits to NERC's ability to replace the non-
market TLR procedures with a more efficient, market-based approach to 
congestion management in the absence of viable regional organizations.
    Transmission planning and expansion. The existing process for 
transmission planning and expansion is a fourth source of grid 
inefficiencies. While the factors involved in transmission planning 
have historically made grid expansion difficult, the level of 
uncertainty about where and how much to expand facilities has increased 
with the increasing number and complexity of unbundled transactions and 
the shifts in generation dispatch patterns. Uncertainty has also 
increased because generation developers are reluctant to disclose their 
plans for future capacity additions and utilities are reluctant to 
speculate on whom or where their suppliers might be. This all makes 
modeling of potential transactions and flows for transmission analysis 
virtually impossible.\4\
---------------------------------------------------------------------------
    \4\ NERC, ``Reliability Assessment, 1998-2007,'' September 1998, at 
39.
---------------------------------------------------------------------------
    One troubling consequence of this uncertainty has been a noticeable 
decline in planned transmission investments. NERC recently reported 
that the level of planned transmission additions is significantly lower 
than five years ago despite an overall increase in load growth and 
unbundled transmission service.\5\ While this could simply reflect 
better utilization of the existing grid or the fact that new generation 
is locating closer to load, I am concerned that it may also reflect an 
incompatibility of existing planning institutions with the new market 
realities and that the existing approach to transmission pricing may 
not sufficiently encourage the investments needed to improve the 
reliability and efficiency of the grid. Inadequate investment also 
could be a major impediment to the development of regional bulk power 
markets.
---------------------------------------------------------------------------
    \5\ Id. at 7.
---------------------------------------------------------------------------
    Pancaked transmission rates. The pancaking of transmission access 
charges is a fifth (and major) source of inefficiency in grid 
operation. Transmission customers have generally paid an access charge 
to each transmission provider along the contract path of a transaction, 
resulting in multiple transmission charges across several transmission 
systems. This raises the cost of power transactions and makes it 
difficult to create region-wide power markets. As a result, the 
geographic scope of power markets is restricted and market 
concentration is unnecessarily high. I believe that competition and 
economic efficiency would be clearly enhanced if all buyers and sellers 
of power were able to access each other over the geographically wide 
transmission systems that exist today but which are balkanized by 
current rate structures. This would require eliminating the current 
system of additive transmission access charges and replacing it with a 
single access charge that gives transmission customers access to the 
entire regional grid.
    Question No. 2: The testimony also states that ``Changes in trade 
patterns and industry structure have made it more difficult to maintain 
reliable grid operations, manage transmission congestion, and plan for 
expansion of transmission facilities.'' Please describe these changes 
and the resulting difficulties, and give examples.
    Answer: The U.S. electricity industry has recently experienced 
major structural changes. For example, since August 1997, approximately 
50,000 MW of generating capacity have been sold (or are under contract 
to be sold) by utilities, and an additional 30,000 MW is currently for 
sale. This represents about 10 percent of U.S. generating capacity. 
These divestitures are typically part of state ordered retail 
competition programs. As retail competition spreads to more states, I 
expect to see more of these plant divestitures.
    Almost all the major developments in the industry are traceable 
directly or indirectly to technological advances in natural gas turbine 
technology and to new generation of plants that are being developed and 
operated by firms other than traditional utilities. It is competition 
among all sources of generation that the Commission wishes to 
facilitate through its bulk power policies. Such developments reflect 
the strategic decisions of some companies to functionally disaggregate 
their operations, to concentrate their activities in one area of the 
business, or to reallocate resources to new enterprises such as energy 
services.
    Order No. 888 and the associated restructuring have helped to spur 
a dramatic growth in the volume of trading in the wholesale electricity 
market. In the first quarter of 1995, there were 8 power marketers 
(either independent or affiliated with traditional utilities) with 
total quarterly sales of 1.8 million MWH. By 1998, there were 491 power 
marketers. By the second quarter of 1998, 108 active trading power 
marketers had total quarterly sales of 513 million MWH.
    Entry of new participants and dramatic increases in the volume of 
unbundled power flows has lead to significant shifts in the pattern of 
flows on the Nation's high voltage grid. In its 1998 summer assessment 
of bulk power reliability, NERC observed that:
        Throughout the Regions, parallel path flows from increased 
        electricity transfers are stressing the transmission systems. 
        These flows are at magnitudes and in directions not anticipated 
        at the time the systems were designed . . . The transmission 
        system will be required to operate under unprecedented, and 
        sometimes unstudied, conditions.\6\
---------------------------------------------------------------------------
    \6\ NERC, ``1998 Summer Assessment: Reliability of Bulk Electricity 
Supply in North America,'' May 1998, at 2-3.
---------------------------------------------------------------------------
    These changes have exacerbated the operational and economic 
inefficiencies already described in response to Question 1. Reliability 
is more challenging in the face of unstudied new conditions, congestion 
management is more difficult as the transmission grid is used in new 
and increased ways, ATC is more difficult to calculate due to increased 
demand and varying regional flows, and planning is made more difficult.
    Question No. 3: Your testimony also states ``Without further 
reform, traditional pricing and traditional transmission practices will 
likely hinder the further development of competitive and efficient bulk 
power markets.'' You cite as examples ``the `pancaking' of transmission 
access charges from one system to the next, the absence of clear and 
tradeable transmission property rights, and the virtual absence of a 
secondary market in transmission service.''
    Please explain these problems and their effects on the electric 
markets, and how you believe these problems can best be remedied.
    Answer: As discussed in response to Question 1, transmission 
customers have generally paid an access charge to each transmission 
provider along the contract path of a power trade, resulting in 
multiple transmission charges across several transmission systems. This 
makes it difficult to create region-wide power markets in which new 
competitors can enter in hopes of serving customers at lower cost. As a 
result of such economic barriers to entry, the geographic scope of 
power markets is restricted and market concentration is unnecessarily 
high. I believe that competition is clearly enhanced if all 
transmission customers are able to access larger numbers of generators 
over a wide geographic region. This requires eliminating the current 
system of additive transmission charges and replacing it with a single 
access charge that gives transmission customers access to the entire 
regional grid. To date, non-pancaked transmission access charges have 
been a feature of all five ISOs that the Commission has approved. In 
the NOPR, the Commission proposed that all RTOs offer a single, non-
pancaked access charge.
    A secondary market for transmission capacity is also important. The 
resale of rights to use essential facilities has promoted greater 
efficiency and higher utilization in other industries such as 
railroads, gas pipelines and telecommunications. Secondary markets help 
reduce the risk of market participation by providing a vehicle for 
reselling transmission rights, for example when capacity is not needed 
or power transactions go sour. Secondary markets also provide a means 
of helping to ensure that scarce capacity is allocated to its highest 
valued uses. Secondary markets, however, require well-defined tradeable 
property rights to a regional grid. These do not exist in the current 
regime of network and point-to-point transmission service on utility 
specific transmission facilities.
    Question No. 4: For questions one (1) through three (3), please 
explain the extent to which the Commission has attempted to address 
these problems under its current statutory authority. Please 
specifically address the extent to which the Commission can use its 
authority under section 211 of the Energy Policy Act of 1992 (EPACT) 
and Order 888 to address these concerns. If you believe the Commission 
needs additional statutory authority, please explain what now authority 
is needed and how it would improve the commission's ability to address 
these problems.
    Answer: The Commission has taken several actions to improve the 
engineering and economic efficiency of the transmission grid. In 1993, 
the Commission issued a policy statement encouraging the formation of 
regional transmission groups (RTGs), which were defined as a voluntary 
organizations of transmission owners, users, and other entities 
interested in coordinating transmission planning (and expansion), 
operation and use on a regional and inter-regional basis. (Policy 
Statement Regarding Regional Transmission Groups, FERC Stats. & Regs. 
para. 30,976 (1993)) The commission summarized the benefits of such 
entities as enabling the market for electric power to operate in a more 
competitive and thus more efficient manner; providing coordinated 
regional planning of the transmission system to assure that system 
capabilities are adequate to meet system demands; decreasing the delays 
that are inherent in the regulatory process, resulting in a more 
market-responsive industry; and resolving technical transmission issues 
(e.g., loop flow). The Commission has approved five RTG proposals, 
although their limited role may now be overtaken by industry and 
regulatory developments.
    In 1994, the Commission issued a transmission pricing policy 
statement which encouraged RTGs to address transmission pricing and 
offered to provide more latitude to RTGs than to individual utilities 
for innovative pricing proposals, and which recognized that issues such 
as loop flow required a regional approach. (Inquiry Concerning the 
Commission's Pricing Policy for Transmission Services Provided by 
Public Utilities Under the Federal Power Act, 59 F.R. 55031 (November 
3, 1994), FERC Stats. & Regs., Regulations Preambles para. 31,005) 
Then, two years later in Order No. 888, the commission encouraged the 
industry to consider the formation of independent system operators 
(ISOs), and gave specific guidance on characteristics and functions in 
the form of 11 principles. The Commission has issued orders approving 
or conditionally approving five ISOs.
    Most recently, the Commission has issued its RTO NOPR. In this 
NOPR, the Commission proposes to encourage all transmission providers 
to participate in independent regional transmission institutions. I 
believe that such institutions can facilitate improved reliability, 
more accurate determinations of ATC, more efficient congestion 
management, more efficient planning and expansion decisions, and a 
reduction in pancaking of transmission access charges.
    In acting on the ISO proposals that have been filed, the Commission 
has used its basic authorities under sections 205 and 206 of the 
Federal Power Act (FPA) to address some of the problems discussed, 
e.g., congestion management and rate pancaking. However, it is the 
existence of the regional institution itself, i.e., the structural 
change in the industry through the formation of an ISO or other type of 
RTO, that permits the identified problems to be addressed most 
effectively, and thus far formation of these institutions has been 
voluntary. As I stated in previous testimony, it would be helpful for 
the Congress to clarify the Commission's authority under sections 205 
and 206 of the FPA to order public utilities to participate in an RTO. 
As I further testified, Congress should also give the commission 
authority to regulate the transmission facilities of non-public 
utilities (e.g., the power marketing administrations (PMAs), public 
power and electric cooperatives) in the same way it regulates the 
transmission facilities of public utilities. This would include 
authority to order non-public utilities to participate in RTOs.
    With respect to section 211 of the FPA, the Commission can and has 
used this authority to require transmission providers to provide 
transmission service. while section 211 applies to public utilities as 
well as non-public utilities that own and operate transmission 
facilities, it can be used only on a case-by-case basis in response to 
an application by an entity (or entities) seeking specific transmission 
service. Because of its focus on transmission applications, Section 211 
is not an efficient authority to rely upon for the Commission to remove 
industry-wide engineering and economic inefficiencies that are regional 
in nature.
    Additional statutory authority would be useful in at least three 
specific areas. First, as noted above, it would be helpful to clarify 
the Commission's authority to order public utilities to participate in 
RTOs. Second, as also noted above, additional statutory authority is 
needed to make all transmission system owners subject to the same rules 
for the provision of transmission services. Efficient markets in 
network industries generally require that all service providers be 
subject to the same rules. Currently, approximately one-third of the 
Nation's integrated transmission grid is beyond the reach of Order No. 
888's open access requirements. Third, additional statutory authority 
is needed to make compliance with reliability standards mandatory. 
Currently, the industry operates under a system of voluntary standards 
that have worked well in the past. However, with increasing numbers of 
competitive transactions taking place, the reliability of the Nation's 
electric system requires an enforceable set of reliability standards.
    Question No. 5: Your testimony describes a second category of 
``impediments'' consisting of ``continuing opportunities for 
transmission owners to unduly discriminate in the operation of their 
transmission systems so as to favor their own or their affiliates' 
power marketing activities.'' The testimony also states that ``In the 
wake of Order No. 888, however, many market participants continue to 
allege, and the Commission has in some cases confirmed, that 
transmission service problems related to discriminatory conduct 
remain.''
    Please describe these cases and the actions the Commission has 
taken to rectify such problems.
    Answer: In the Commission's recent RTO NOPR, these cases and the 
commission's response are discussed in detail(see RTO NOPR, pp 58-85). 
The Commission is aware of allegations of unduly discriminatory 
behavior through formal complaints that are filed with the Commission, 
informal complaints that are made by telephone to the Commission 
staff's enforcement hotline, and assertions that are made in other 
public forums, such as comments in response to technical conferences we 
have held or in pleadings filed in cases before us. Although the 
Commission's staff attempts to help the parties resolve informal 
complaints, only formally filed complaints receive an official 
Commission response.
    The allegations fall into several categories: the calculation and 
posting of the available transmission capability in a way that is 
favorable to the transmission provider's electric merchant functions 
and unfavorable to competitors; improper information sharing between 
the transmission provider and its affiliated merchant functions in ways 
that favor the merchant function over competitors, in violation of the 
Commission's standards of conduct; favoritism toward the transmission 
provider's merchant function during times of transmission congestion 
and constraints; and transmission providers who do not maintain 
accurate and useful electronic information (OASIS) sites, which tends 
to disadvantage competing marketers wishing to have access to the 
transmission system.
    Upon receiving a formal complaint, the Commission investigates and 
makes findings. In cases where it has identified unduly discriminatory 
behavior, it takes appropriate action under sections 205 or 206 of the 
Federal Power Act. For example, in one case (Washington Water Power 
Company, 83 FERC para. 61,282 (1998)), the Commission found that a 
transmission provider had offered its power marketing affiliate a 
transmission service that was not generally available to everybody. The 
Commission ordered that the transmission provider's marketing affiliate 
forego any profit it made on the transaction for which it obtained 
unduly preferential service and not to engage in any market-based rate 
sales over the transmission provider's system for 180 days. In another 
case involving two public utilities, the Commission found that the 
transmission providers had improperly withheld transmission capacity 
for the benefit of their merchant functions. The Commission ordered the 
recalculation of available transmission capability and offering that 
capacity in a non-discriminatory manner. Wisconsin Public Power Inc. 
System v. Wisconsin Public Service Corporation, et al., 83 FERC para. 
61,198 (1998).
    In addition to acting in response to specific complaints, the 
Commission has taken other actions to address opportunities for undue 
discrimination. In Order No. 888, the Commission imposed certain 
standards of conduct requirements to ensure that transmission owners do 
not preferentially favor their power marketing affiliates (i.e., do not 
unduly discriminate against competitors). The Commission has also 
recently held a public conference on the Capacity Benefit Margin issue, 
which some parties have alleged is being used in an unduly 
discriminatory manner in the calculation of available transmission 
capability. Finally, the Commission recently issued its RTO NOPR which 
is intended to encourage all public utilities to transfer control of 
their transmission system to an independent Regional Transmission 
organization, which would eliminate the opportunity for discriminatory 
conduct.
    Question No. 6: The testimony also states that ``Allegations relate 
to standards of conduct violations and manipulations of the operation 
of transmission systems to frustrate power marketing competitors, for 
example by the imposition of transmission curtailments on congested 
lines.''
    Does the Commission agree or disagree with such allegations? What 
has the Commission done in response to such complaints? Please provide 
specific examples.
    Answer: The Commission can only agree or disagree with specific 
allegations to the extent they are brought to us in a formal complaint 
and we have conducted an investigation. The Commission has found 
standard of conduct violations with respect to at least four public 
utilities. (For a more detailed discussion, see the RTO NOPR, pp. 77-
80). I am aware of many additional allegations made informally. While 
these additional allegations have not been substantiated through a 
formal process, I believe that it is reasonable to assume that such 
practices are more prevalent than reflected in formal complaint 
filings.
    Question No. 7: Your testimony also states ``there is a great, deal 
of mistrust among market participants with respect to fairness of the 
system.''
    Is this statement based on specific complaints filed with the 
Commission? If so, how has the Commission responded?
    Answer: In this newly competitive environment, where substantial 
capital is at risk in developing new electric generation and competing 
for market share, the reliable, open, and non-discriminatory operation 
of the transmission system takes on unprecedented significance. The 
Commission had repeatedly been urged to ensure that all users of the 
system receive fair and comparable treatment from the transmission 
owners. Many market participants do not take this for granted. My 
statement is based upon many sources of information available to the 
Commission, and they are discussed in detail in the RTO NOPR. (see 
pages 58-83). Specifically, the Commission has received formal and 
informal complaints, written and oral comments in the course of public 
proceedings such as technical conferences (Docket No. RM95-9-003) and 
our ISO Inquiry (Docket No. PL98-5-000), and petitions for rulemaking 
(such as filed in Docket No. RM98-5-000) and other pleadings filed with 
us. The number of assertions we have heard indicates a perception by 
many market participants that transmission providers who also have 
electric merchant functions can and do find ways to favor their 
merchant functions and disadvantage market competitors.
    The Commission has responded by trying to ensure strict compliance 
with the functional unbundling requirements of Order No. 888. As 
discussed with respect to questions above, the commission has expended 
considerable efforts reviewing and issuing orders with respect to the 
standards of conduct filed by public utilities. The Commission has also 
taken strong action in response to formal findings of violations of the 
functional unbundling requirements. Most recently, the Commission has 
issued its RTO NOPR which encourages organizational separation of 
transmission and merchant functions, which is probably the most 
effective step that could be taken to reduce mistrust.
    Question No. 8: For questions five (5) through seven (7), please 
explain the extent to which the Commission has attempted to address 
these problems under its current statutory authority. Please 
specifically address the extent to which the Commission can use its 
authority under section 211 of the Energy Policy Act of 1992 (EPACT) 
and Order 888 to address these concerns. If you believe the Commission 
needs additional statutory authority, please explain what new authority 
is needed and how it would improve the Commission's ability to address 
these problems.
    Answer: The Commission has used its authority under sections 205 
and 206 of the FPA to remedy instances of undue discrimination and 
undue preference that it has found. Most prominently, the Commission 
used its authority under sections 205 and 206 of the FPA to remedy 
undue discrimination as the basis for requiring all public utilities to 
provide open access transmission and to functionally unbundle their 
generation and transmission services. Section 205-206 authority, 
however, does not apply to public power, the PMAs, and most electric 
cooperatives.
    In addition to sections 205 and 206, the commission in the RTO NOPR 
relied in part upon section 202(a) of the FPA, which was recently 
delegated to the Commission by the Secretary of Energy. While section 
202(a) applies to public utilities as well as non-public utilities, it 
is primarily a provision for voluntary coordination of utility 
facilities.
    With respect to section 211 of the FPA, the Commission can and has 
used this authority to require transmission providers to provide 
transmission service. However, there are at least two difficulties in 
relying upon section 211 as a remedy for the remaining opportunities 
for undue discrimination identified in response to Questions 5-7 above. 
First, the instances of undue discrimination that are now complained of 
do not usually involve an outright denial of transmission service, or 
arguments about rates, terms or conditions of the service to be 
provided; rather they are more likely to involve more subtle sharing 
and manipulation of transmission availability information by the 
transmission provider, or curtailment of existing transmission service, 
that disadvantages marketers competing for sales. Second, section 211 
can be used only in response to specific applications for transmission 
service and it requires a time-consuming procedural process--an 
application for an order under section 211 may not be made until 60 
days after the applicant has made a request to the transmission 
provider and the Commission must issue a proposed order prior to 
issuing a final order. Many transactions today are done on a short-term 
basis and the opportunities are lost unless transmission can be secured 
quickly.
    Additional statutory authority would be useful to clarify the 
Commission's authority to require all public utility transmission 
owners to participate in RTOs as defined in our recent NOPR. The 
complete separation of the transmission and generation operations of 
utilities is the best, and perhaps the only, way to remove the 
opportunities and incentives for transmission owners to favor their 
generation interests, and to allow all market participants to trust in 
the fairness of the system. our recent RTO NOPR attempts to encourage 
RTO participation through voluntary efforts. If this approach is not 
successful, however, it would be beneficial to have clarified FERC's 
authority to require such participation.
    In addition, Congress also should give the commission authority to 
regulate the transmission facilities of non-public utilities (e.g., the 
power marketing administrations (PMAs), public power and electric 
cooperatives) in the same way it regulates the transmission facilities 
of public utilities. This would include authority to order non-public 
utilities to participate in RTOs.


                    MARKET POWER, MERGERS, AND PUHCA

                              ----------                              


                         THURSDAY, MAY 6, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                     Washington, DC
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Stearns, Largent, 
Burr, Whitfield, Norwood, Coburn, Rogan, Shimkus, Pickering, 
Fossella, Bryant, Bliley (ex officio), Hall, McCarthy, Sawyer, 
Markey, Pallone, Rush, and Strickland.
    Staff present: Catherine Van Way, majority counsel; Joseph 
Kelliher, majority counsel; Jeffrey Krilla, majority counsel; 
Ramsen Betfarhad, economic adviser; Donn Salvosa, legislative 
clerk; Sue D. Sheridan, minority counsel; Consuela M. 
Washington, minority counsel; and Rick Kessler, minority 
counsel.
    Mr. Barton. The hearing on electricity competition with 
special emphasis on market power, mergers and PUHCA by the 
Commerce Committee's Subcommittee on the Energy and Power will 
come to order. This is the third in a series of hearings that 
we are holding on the electricity industry in this country.
    At this time, I would recognize the distinguished full 
committee chairman, the Honorable Tom Bliley of Virginia, for 
an opening statement.
    Chairman Bliley. Thank you, Mr. Chairman. And I want to 
commend you for holding this hearing on mergers, market power 
and PUHCA. Under your leadership today, this subcommittee is 
examining some of the most complex and difficult issues arising 
from the electricity power markets transition and regulation to 
competition.
    Our Nation's resolve to protect competitive markets from 
anticompetitive practices is alive and well on this panel. For 
over a century antitrust laws have been a bulwark against 
anticompetitive practices that may tempt market participants to 
seek a profit at the cost of distorting markets. In order that 
the benefits of competition and the electricity power market go 
directly to consumers, the electricity power market must be 
open, robust and competitive.
    Enforcement of antitrust laws will ensure that. Yet on the 
road to fuller competitive electricity, market power 
considerations, especially during the transition period, 
require careful examination. Today many utilities have either 
vertical or horizontal market power or both.
    That market power is sanctioned by the regulatory regime 
under which the utilities have historically operated. Vigilance 
in a review of mitigating policies to ensure that market power 
is not abused during the transition are required. The first 
Federal role enacted, addressing market power abuses in the 
electric power industry exclusively, was PUHCA in 1935.
    I have heard some good arguments that the time has come for 
PUHCA repeal. I have said it before, and I will say it again, I 
do not view a stand-alone PUHCA legislation bill as an answer. 
The committee has addressed PUHCA repeal as but one piece of a 
greater effort for the comprehensive restructuring of the 
industry. I will be interested in what our witnesses have to 
say about that today.
    And, again, Mr. Chairman, I thank you for holding this 
hearing. I look forward to hearing the testimony of the 
witnesses.
    Thank you very much.
    Mr. Barton. Thank you, Chairman Bliley.
    We would now ask the gentleman from Ohio, Mr. Sawyer, would 
you like an opening statement?
    You are going to yield to Mr. Pallone of New Jersey.
    The distinguished gentleman from New Jersey is recognized 
for an opening statement.
    Mr. Pallone. Thank you, Mr. Chairman. Mr. Chairman, I just 
wanted to raise, initially, a process concern. I agree that it 
is time to move the restructuring debate forward, and I think 
we have to do so in a sound manner. But I hope that future 
hearings will not lump together substantial and complex issues 
such as the ones being discussed today.
    I think our hearing record has to be updated because this 
is a rapidly changing industry, but we also have to be 
comprehensive. And for this reason, I don't understand why 
market power and PUHCA are being discussed in the same hearing. 
It also forces 12 witnesses to be digested in one sitting.
    As you know, there is also another hearing going on 
upstairs on MTBE, which makes it difficult to, you know, 
actually sit through both hearings because we have them at the 
same time. So I would hope that in the future we could separate 
these topics and shorten the witness list and try to spend more 
time, if you will, on individual aspects rather than lump them 
all together as today, particularly when we have another 
hearing at the same time.
    I wanted to say that I do look forward to hearing from our 
witnesses whether they think PUHCA should be repealed 
immediately as a stand-alone provision or whether it should be 
part of a comprehensive package. I also would like to know 
whether today's witnesses believe that PUHCA utilities are 
turning to investments abroad, which I keep hearing, whether 
domestic investments are simultaneously declining, and whether 
these conditions could be due to barriers created by an 
outdated PUHCA.
    Further, I would like to know from our witnesses whether 
they believe that the industry will consolidate along the lines 
of generation, transmission and distribution companies, and if 
so, what types of effects this might have on consumers as well.
    In terms of market power, I would like to know from our 
witnesses whether the basis for review of market power would be 
better placed with the Justice Department or with the FERC, the 
Federal Energy Regulatory Commission.
    I have some questions I would like to submit for the record 
and would ask that official responses also be submitted for the 
record, Mr. Chairman. And I will, unfortunately, be going back 
and forth between these two hearings that we are having today. 
Thank you.
    Mr. Barton. Thank you, Mr. Pallone. Let me simply say, 
before I give my opening statement on your process concern, I 
understand the frustration about being on two subcommittees at 
one time. I understand that. I understand that we have a large 
number of witnesses collectively and individually on the panel. 
I understand that.
    Our problem is that we have had short workweeks.
    On this particular hearing, we postponed it and rescheduled 
it from last week, because we turned out not to have votes on 
Friday, and it was both the majority and minority members' 
request that we postpone it. We also had several requests for 
additional witnesses from both side of the aisle, so that is 
why we have such a large panel.
    It is my intention to have a fairly aggressive schedule of 
hearings. In fact, I hope to have at least one a week, and we 
may try to do two a week if we can find a subcommittee hearing 
room.
    We have also started a supplemental process. Congressman 
Pickering is going to chair a working group where people can 
come in and address both members and staffs on both side of the 
aisle, in addition to the formal hearing process. We are going 
to try to give every view an opportunity to be heard and give, 
as you put it, a comprehensive record, have that be developed.
    So I share that. But just the mechanics of doing some of 
these things, sometimes we have to compress and do things in an 
imperfect way, but there is no intent to prevent any member on 
either side from making sure that they are fully educated and 
their members and their staffs, and also that all sides of the 
issues are heard.
    Mr. Pallone. Thank you.
    Mr. Barton. Okay?
    The Chair would recognize himself now for an opening 
statement. As I just told the gentleman from New Jersey, this 
is the third, but certainly not the last, of a number of 
hearings that we are going to hold on the issue of electricity 
deregulation and electricity restructuring. It is my intention 
to have at least one formal hearing a week on this issue. We 
may be able, in some weeks, to do two. We do want to move 
forward in an aggressive fashion with an aggressive schedule.
    I want all the members of the committee on both sides of 
the aisle to be as informed as possible about the subject of 
restructuring. And we are going to work very cooperatively with 
staffs on both sides to make sure that the topics are relevant 
and the witness lists are comprehensive.
    On the other hand, we don't want to be repetitive, and if 
possible, we don't want to have the hearings be so long that 
people won't attend in the latter parts of the hearing.
    With that in mind, our next hearing is going to be on the 
role of the Federal electric utilities, with emphasis on the 
Tennessee Valley Authority. We have announced that hearing for 
next week.
    We intend to have at least 4 more days of hearings, and in 
those hearings we intend to address the issues of public 
utilities--the Public Utility Regulatory Policy Act, 
environmental concerns that members on both sides have raised, 
the issue of stranded costs, the issue of consumer protection, 
and the status of restructuring the various States that have 
begun to move forward.
    We also hope to take a look at the some of the innovations 
that are occurring in the electricity generation transmission 
and distribution sector of the economy. And at the minority's 
request, which I fully support, we intend to hold a hearing on 
the administration's bill that has been introduced as a 
courtesy in the House by Chairman Bliley and former Chairman 
Dingell.
    Today's topic, market power, is a very good topic that 
needs to be addressed. I personally believe that all consumers 
should be allowed to purchase goods and services in the 
electricity sector of the economy in a competitive environment. 
I think that is preferable to having to purchase them as we do 
today in a regulated environment only.
    With competition, consumers can vote with their feet, so to 
speak. If their utility company charges too much or they are 
unhappy with the service or products offered in a truly 
competitive market, they can move to a competing supplier or a 
competing service officer. However, consumers will not be able 
to fully exercise their rights if electricity suppliers are 
able to and in fact do exert what we know as ``market power.''
    It will come as a surprise to no one today that I believe 
in free markets. It is my understanding and my hope that most 
members of the subcommittee also believe in free markets. I 
personally believe that government should be as uninvolved as 
possible in our day-to-day decisions. In that vein, when 
considering deregulating the electricity market, I believe that 
we have to establish fair rules under which competition can 
flourish; and then, as with most governments, it is the 
government that governs the least that governs the best. We 
should get out of the way and let the market operate.
    The key is getting the rules right to begin with and making 
sure during the transition period, from regulation to full-
blown competition, that consumers are not harmed. I might say 
as an aside that that is a very, very difficult proposition to 
legislate in a statutory fashion.
    My goal is for all consumers in the United States to be 
able to reap the full benefits of market competition. With that 
in mind, I am going to be very interested to hear what our 
witnesses today have to say, especially if they have--if they 
believe that existing antitrust and merger authority under 
Federal law, as it is today, is sufficient to protect consumers 
during the transition period. Perhaps they may tell us that we 
need to amend those laws; perhaps they may tell us that we need 
additional statutory authority.
    Finally, today, we are going to hear about the Public 
Utility Holding Company Act. It is not as vibrant as it once 
was, but it still provides some important consumer and investor 
protection. I don't believe it should be repealed in its 
entirety without first giving consumers the greatest protection 
of all, the ability in an open market to choose their power 
supplier.
    I appreciate the testimony that we are about to hear. I 
appreciate the hard work that the staffs on both sides have put 
into making this hearing possible. And I appreciate the 
witnesses that have agreed to voluntarily testify before us.
    I would now like to recognize the distinguished ranking 
member, Mr. Hall, for an opening statement.
    Mr. Hall. Mr. Chairman, thank you. You have covered it very 
adequately. And sometimes I think we have had so many of these 
hearings that I will just say opening statement Number 47 or 
Number 46, and in this computerized day, they can just pick it 
up and put it in the record and go on.
    I just want briefly to thank you for building a full and 
complete record; it is very important that we do so. While 
these hearings may seem like they are a little time-consuming 
and a nuisance sometimes to those of us who sit here and 
participate in them and have to sit here and listen.
    We are eternally grateful to you men and women who have to 
prepare for these and have to set aside some time for us. Many 
of you have to travel for these hearings, and each one of these 
is not a new experience to you, but they are a continuation of 
what this panel sits through and hears.
    But that is the way you do it, and it is very important for 
Federal and State regulators that we have these hearings, and 
for the courts as they try to discern the intent of Congress. 
We owe it to our constituents as customers, to the men and the 
women in the electricity business to be as thorough as 
possible, and that is what we are trying to do.
    I thank you, Mr. Chairman, and I yield back my time.
    Mr. Barton. Thank you, Congressman Hall.
    We would like to recognize the gentleman from Kentucky, Mr. 
Whitfield, for an opening statement.
    Mr. Whitfield. Mr. Chairman, I am going to waive my opening 
statement.
    Mr. Barton. Okay. Does the gentleman Ohio, Mr. Sawyer, wish 
an opening statement at this time?
    Mr. Sawyer. If I could, please, Mr. Chairman. I don't 
intend to read a long statement.
    I just wanted, first, to associate myself with the 
discomfort that the gentleman from New Jersey expressed, but to 
offer an appreciation for the logistical difficulties that you 
face, Mr. Chairman.
    I want to disagree with the gentleman from Texas only 
insofar as, while these may seem like they are time-consuming, 
I think the timing is enormously worthwhile. And that while the 
work that goes on on the Federal level, by comparison to the 
work that is going on within the States may not look as 
complicated, it is indeed every bit as complicated, because we 
have the responsibility to try to bring together in large 
regional markets effective competition within a flexible 
framework that recognizes the enormous differences that we are 
going to hear about in detail next week when we talk about the 
Federal utilities.
    I am particularly interested today in the topics that you 
have brought together in terms of market power and mergers and 
PUHCA. They may not overlap so much with one another as they 
abut end to end, and they do affect one another in ways that go 
directly to the question of whether or not real competition is 
actually possible.
    In that sense, my continuing interest in transmission as 
the framework within which a Federal action is appropriate, 
recognizing that transmission is the key to vigorous markets 
and reliable service and real and effective competition. 
Without that kind of useful interconnection, competition indeed 
could suffer.
    In that sense, it is probably the single most important and 
connecting focus among the topics that have taken place so far 
and that you have planned for at least the immediate future.
    Let me just say in closing that it is a pleasure to have 
here on our panel an old friend, Ike Hunt, a Securities and 
Exchange Commissioner. He comes to those responsibilities from 
the deanship of the University of Akron Law School and a 
distinguished career in addition to that.
    We are pleased to have him here.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you.
    We would recognize Mr. Rogan of California for an opening 
statement.
    Mr. Rogan. Mr. Chairman, thank you. Thank you for calling 
this hearing.
    Mr. Chairman, I ask unanimous consent that my opening 
statement be made a part of the record.
    Mr. Barton. Without objection.
    Mr. Rogan. Mr. Chairman, further, in my opening statement, 
I make reference to two letters sent by members of the 
California delegation to Chairman Bliley. And may I also ask 
unanimous consent that those be included as part of the record?
    Mr. Barton. Without objection. We will have to show those 
to the minority. But I don't think they will object.
    Mr. Rogan. In that they are signed by all the Democrats as 
well as Republican members, I trust that there won't be 
objection.
    Pending no objection, Mr. Chairman, I am happy to yield 
back the balance of my time.
    [The prepared statement of Hon. James E. Rogan follows:]
Prepared Statement of Hon. James E. Rogan, a Representative in Congress 
                      from the State of California
    I thank the Chairman. Mr. Chairman, today we begin the complex 
discussion of how to infuse a greater level of competition into our 
utility industries. The greatest aspect of any electricity 
restructuring package must empower consumers by providing them with 
market-based options in the electricity industry.
    As in any market, consumer protections in the electricity industry 
must be established. However, as we examine existing and future utility 
regulations, we must evaluate at what point federal industry 
regulations actually inhibit consumers. A clear example of excessive 
market limitation is the Public Utility Holding Company Act. PUHCA was 
created 65 years ago to mitigate the concentrated control of vast 
utility empires in a few hands. In 1935, there was a need for PUHCA, as 
utility rates skyrocketed and state regulations were powerless to 
prevent further harm to consumers. PUHCA limited the ability of large 
holding companies to cross-subsidize or establish vertical market 
power.
    While PUHCA may have been effective in the past, this archaic law 
was not designed with competitive markets in mind. As we seek methods 
for sound free-market principles to drive our electricity companies, 
PUHCA may impede entry into electric generation by the very businesses 
that would invigorate the industry.
    Mr. Chairman, Presidents Reagan, Bush, and Clinton all have been 
concerned that PUHCA would effectively prevent nationwide retail 
electric competition by limiting new market entrants. I share these 
concerns, and look forward to learning how we can change our current 
policies so that real competition can be infused into our electricity 
market.
    Mr. Chairman, I would now like to focus my comments on an issue 
vital to the state of California. As you know, California has begun its 
four-year plan to transition the state's electricity market into a 
free-market system.
     This plan, A.B. 1890, was designed to protect the reliability of 
electricity services and the interests of large and small consumers. 
Further, it will enhance the ability of participants to transfer into 
the new market in a way that would keep rates consistent. As Majority 
Leader of the California State Assembly at the time A.B. 1890 was 
crafted, I am pleased to note that both houses of the California 
Legislature passed this bill with no dissenting votes.
    Last year, I worked to garner the signature of every Member of the 
California House delegation on a letter to Commerce Committee Chairman 
Bliley. This letter, dated March 20, 1997, urged that any federal 
electricity reform legislation would not preclude California from fully 
implementing the electricity restructuring plan laid out in AB 1890. 
Our delegation was unified in its desire to keep AB 1890 intact.
    A few things have changed in our delegation since this letter was 
written. However, one thing remains clear: the delegation still fully 
supports AB 1890. I request unanimous consent to insert into the record 
another letter to Chairman Bliley dated April 26, 1999, which is signed 
by every new Member of the California House delegation. This letter 
affirms their support for A.B. 1890 as well.
    I thank the Chairman, and look forward to working with my 
colleagues to provide competition in the electricity market in 
California and in every state.
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    Mr. Barton. The gentleman from Massachusetts is recognized 
for an opening statement.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    In the year 1776, Adam Smith published his classic defense 
of free market economies, The Wealth of Nations, and in that 
work is contained a passage which I think quite aptly describes 
the situation that this subcommittee faces as we consider the 
issues of electricity competition, utility market power and 
mergers.
    Adam Smith warned, ``Were the officers of the Army to 
oppose with the same zeal and unanimity any reduction in the 
numbers of forces with which master manufacturers set 
themselves against every law that is likely to increase the 
number of their rivals in the home market; were the former to 
animate their soldiers in the same manner as the latter inflame 
their workmen to attack with violence and outrage the proposers 
of any such regulation, to attempt to reduce the Army would be 
as dangerous as it has now become to attempt to diminish in any 
respect the monopoly which our manufacturers have obtained 
against us.
    ``This monopoly has so much increased the number of some 
particular tribes of them that, like an overgrown standing 
Army, they have become formidable to the government, and upon 
many occasions intimidate the legislature. The member of 
parliament who supports every proposal for strengthening this 
monopoly is sure to acquire not only the reputation of 
understanding trade, but great popularity and influence with an 
order of men whose number and wealth render them of great 
importance.
    ``If he oppose them, on the contrary, and still more if he 
has authority enough to be able to thwart them, neither the 
most--neither the most acknowledged probity, nor the highest 
rank, nor the greatest public services can protect him from the 
most infamous abuse and detraction, from personal insults, nor 
sometimes from real danger, arising from the insolent outrage 
of furious and disappointed monopolists.''
    More than 200 years after those words were penned, Adam 
Smith's warning still rings true. We sit here today surrounded 
by the standing armies of the utility monopolists, who stand 
ready to battle with great zeal any effort to increase the 
numbers of their competitors. And they will heap praise and 
other rewards on those members of parliament who are willing to 
support their proposals for strengthening or maintaining their 
monopoly and react with insolent outrage to any attempt to 
disappoint their schemes for perpetuating their monopoly.
    And so that is the central challenge before this 
subcommittee today. Do we believe in Adam Smith's vision of 
free markets and competition or do we stand with legions of the 
monopolists?
    In my view, any Federal electricity restructuring 
legislation must address the prospect that electric utility 
mergers, excessive utility market power or untrammeled utility 
diversification into new lines of business might harm 
electricity consumers, harm competition and energy or other 
markets or undermine the emergence of a fully competitive 
electricity market.
    While much has changed since the 1930's when the Public 
Utility Holding Company Act was enacted to curb the outrageous 
abuses associated with the large multistate utility holding 
company monopolies of that era, we still need to address the 
potential for market power abuses as we make the transition to 
a competitive generation market.
    Without proper protections, utilities who control 
generation, transmission and distribution assets easily could 
be attempted to engage in self-dealing transactions with their 
affiliates, cross-subsidize unregulated business ventures at 
the expense of the captive consumers in their monopoly 
transmission or distribution businesses or exploit their 
continued market dominance to impede the growth of effective 
competition.
    Already the accelerating pace of utility mergers raise the 
specter of giant mega-utilities that could control electricity 
in gas markets and effectively bar new market entrants from 
vying for customers. We, therefore, need to give the FERC the 
tools to address the potential for anticompetitive actions by 
utilities.
    While our antitrust agencies can do much to address some of 
the potential problems that we may face as we move to 
competition, we must recognize that the utility industry is 
just beginning to move from a government-sanctioned monopoly 
toward a competitive market, and that even in the new 
competitive environment, there are still going to be some 
aspects of the business, such as transmission and distribution, 
that remain regulated monopolies.
    We, therefore, need the expert regulatory agency for the 
electric utility industry, the FERC, to be involved in 
addressing these market power issues. And in the last Congress 
Republican Majority Whip Tom Delay and I introduced legislation 
aimed at giving FERC the powers needed to address market power 
and anticompetitive mergers.
    In addition to this legislation, we also clearly need to 
assure that the State regulators have access to books and 
records and other information they will need to supplement 
Federal actions in this area.
    I thank you, Mr. Chairman for allowing me to make my 
opening statement. I yield back the balance of my time.
    Mr. Barton. We thank the gentleman from Massachusetts. And 
we are glad that he has read The Wealth of Nations; that is 
good to know.
    We would recognize the gentleman from Tennessee, Mr. 
Bryant, for an opening statement.
    Mr. Bryant. Thank you, Mr. Chairman. I would waive my 
opening statement.
    Mr. Barton. We would recognize the distinguished gentleman 
from Oklahoma, Mr. Largent, who, rumor has it, is about to 
introduce a very good piece of legislation for an opening 
statement.
    Mr. Largent. Washington is full of rumors.
    Thank you, Mr. Chairman. This really is an important 
hearing. I think of all the issues that we look at as we study 
electricity restructuring, market power may be one of the most 
critical. We are going to hear about creating competition, 
level playing fields, divestitures, vertical, horizontal, 
cartel-like market power. But the real key for Congress to--the 
goal should be--in terms of market power is striking balance, 
balance between government regulation and allowing the free 
market to work.
    And, of course, if you are coming from the side of limited 
government, we want to hear from the FTC, we want to hear from 
the Justice Department, how do the current antitrust laws stand 
up in a free market world, in a competitive electricity market.
    And so, Mr. Chairman, I am anxiously awaiting the 
testimony, and will yield back the balance of my time.
    Mr. Barton. I thank the gentleman from Oklahoma.
    The gentleman from North Carolina is recognized for an 
opening statement, if he so wishes.
    Mr. Burr. The gentleman would only thank the chairman for 
the continuation of these hearings and, hopefully, for their 
conclusion in the not-too-distant future. And I yield back.
    Mr. Barton. Okay. Seeing no other members present, all 
members not present who wish to put an opening statement in the 
record, by unanimous consent that will be ordered.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Cliff Stearns, a Representative in Congress 
                       from the State of Florida
    Thank you very much, Mr. Chairman. I am pleased to have the 
opportunity to hold this hearing and listen to our distinguished panel. 
In this hearing, we will examine the issues related to market power, 
mergers, and PUHCA. Consideration of the energy deregulation question 
demands that we consider market power issues. These considerations are 
of great significance during our current transition from reliance on 
regulation to increased reliance on competition.
    Before we begin, I would first like to welcome a member from our 
second panel, Mr. Michael Kurtz, General Manager of Gainesville 
Regional Utilities, in Gainesville, Florida. Today he is testifying as 
a representative public power entities, particularly in Northern 
Florida. I look forward to his testimony.
    As most of us know, market power is the ability of a firm or a 
coordinated group of firms to profitably price above the competitive 
level for an extended period of time. This power can be accumulated or 
abused through both vertical and horizontal arrangements (including 
mergers.) Market power can result in higher prices, inefficient 
allocations of scarce resources, and distortions of consumer choices.
    While States regulators have taken a variety of approaches to 
address market power, today we will primarily concern ourselves with 
Federal authority to address market power. Does Congress need to pass 
legislation giving Federal or State regulators additional authority to 
address utility market power? I hope our panelists can shed some light 
on this question.
    The Public Utility Holding Company Act of 1935 was enacted to 
simplify utility holding company systems. PUHCA's approach was to 
reform the industry structure by creating many more non-affiliated 
utilities, limiting the ability of large holding companies to recreate 
themselves, and establishing new regulatory rules to prevent the 
remaining holding companies from evading regulation.
    PUHCA was not designed with competitive markets in mind. I question 
the need for it. The past three Administrations have proposed PUHCA 
repeal. In fact, Mr. Chairman, my comprehensive electric restructuring 
legislation, the Electric Energy Empowerment Act of 1999, repeals 
PUHCA. I look forward to our panelists' opinions on the need for PUHCA 
repeal.
    Again, I appreciate the opportunity to hear from our witnesses on 
these important issues of market power, mergers, and PUHCA. Thank you, 
Mr. Chairman.
                                 ______
                                 
    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan
    Today's hearing attempts to cover a lot of ground concerning 
matters of central importance to the electric restructuring debate. 
Protecting consumers from the raw exercise of market power has always 
been a concern of the Congress, and it is an appropriate focus for the 
Subcommittee.
    During the 1920's and '30's, Congress carefully studied the 
expansion of the utility industry and the quality of service it 
provided to consumers. After years of investigations, Congress enacted 
two statutes--the Federal Power Act and the Public Utility Holding 
Company Act of 1935--to protect consumers and shareholders, and to 
ensure that no company could manipulate the marketplace.
    The concerns Congress responded to then--affiliate abuses, self-
dealing, cross-subsidization, and exploitation of captive consumers--
are the same concerns we must be wary of today. In addition, in states 
which have opened up their retail markets, market power can be used to 
undermine competition, producing the worst of all worlds--unregulated 
markets dominated by one or more companies in a position to manipulate 
markets to their own advantage and to the consumer's detriment.
    At the Subcommittee's last hearing, Chairman Hoecker of the Federal 
Energy Regulatory Commission suggested that, in light of changes in the 
marketplace, Congress needs to provide the Commission with new 
authorities to remedy discriminatory practices. The Administration bill 
contains several amendments to the Federal Power Act which are very 
interesting. Although I am not necessarily opposed to these, I would 
observe that some of the suggestions--authority to order divestiture 
and to mandate participation in transmission organizations--are of a 
profound nature. We should not enact such changes on the basis of 
economic theory or conjecture, but only on the basis of a thorough 
record clearly describing the nature and extent of market abuses, and 
the resulting need for such far-reaching ``reforms.'' The Federal Power 
Act and PUHCA were not lightly undertaken, and any proposal to 
significantly amend these laws should be equally well founded.
    Finally, I would like to say a few words about PUHCA. I have a 
passing interest in this statute, which is little understood and 
perhaps insufficiently appreciated. If I ran a registered holding 
company, I'm sure I would chafe at the Act's restrictions--and it may 
be that PUHCA deserves reexamination in light of current market 
conditions. Congress has carefully crafted several limited exemptions 
from the Act in recent years, based on a thorough understanding of both 
the purpose and the likely effect of such changes. To date, these 
exemptions seem to be working well, and I am not opposed to further 
discussion of the Act's role in today's markets.
    However, it is inappropriate to consider major changes to PUHCA on 
the basis of a hope and a prayer that competition will automatically 
replace its consumer protections. It is also the case that PUHCA has 
important implications for the securities markets and for shareholder 
protection, and this is proper subject for the Subcommittee on Finance 
and Hazardous Materials.
    I commend the Chairman for beginning to address these important 
issues today, and look forward to the witnesses' testimony.

    Mr. Barton. We want to welcome our first panel today. The 
first panel is a group of distinguished members of the 
administration, we have Mr. Douglas Melamed, who is the 
Principal Deputy Attorney General of the Antitrust Division of 
the U.S. Department of Justice. We have the Honorable Mozelle 
Thompson, who is a Commissioner of the Federal Trade 
Commission. We have the Honorable Isaac C. Hunt, who is a 
Commissioner of the Securities and Exchange Commission. And 
last, but not least, we have Mr. Douglas W. Smith, the General 
Counsel of the Federal Energy Regulation Commission.
    Welcome, gentlemen. Your statements are going to be entered 
into the record in their entirety. We are going to start with 
Mr. Melamed, and give you approximately 5 minutes. But if you 
take a little bit longer, that is acceptable. And we will just 
go right down the line.
    So, Mr. Melamed, you are recognized for 5 minutes.

  STATEMENTS OF A. DOUGLAS MELAMED, PRINCIPAL DEPUTY ATTORNEY 
   GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE; HON. 
 MOZELLE W. THOMPSON, COMMISSIONER, FEDERAL TRADE COMMISSION; 
HON. ISAAC C. HUNT, JR., COMMISSIONER, SECURITIES AND EXCHANGE 
  COMMISSION; AND DOUGLAS W. SMITH, GENERAL COUNSEL, FEDERAL 
                  ENERGY REGULATORY COMMISSION

    Mr. Melamed. Thank you, Mr. Chairman.
    Good morning, members of the subcommittee. I appreciate----
    Mr. Barton. You need to put the microphone very close to 
you.
    The gentleman from Massachusetts.
    Mr. Markey. I was just going to make that request.
    Mr. Melamed. I appreciate the opportunity to speak to you 
about some of the issues relating to market power in the 
electric power industry.
    Mr. Barton. You actually need to speak into the microphone. 
You need it close and you need to speak into it.
    Mr. Melamed. I will keep working at it.
    With sales totaling more than $200 billion annually in the 
United States, it would be hard to overstate the importance of 
the electric power industry to the American economy and to 
American families. All of us have a stake in eliminating 
obstacles to efficient and economical generation and 
transmission of electricity.
    It has become possible, with improved technology, to 
generate electric power efficiently with much smaller 
generating plants than those typically relied upon in the past. 
There is, thus, a growing consensus that the generation segment 
of electric power supply could become more efficient and 
economical under competitive market forces.
    The transmission and distribution segments, on the other 
hand, will likely retain their natural monopoly characteristics 
for the foreseeable future. The challenge, thus, is to foster 
vigorously competitive generation markets within the context of 
regulated transmission and distribution monopolies.
    Many States are moving to open their retail markets to 
competition. It is thus important that Congress consider the 
need for Federal legislation to address possible market power 
problems that could impede the efforts to increase competition 
in this industry. The key to retail competition in the electric 
power industry is a well-functioning wholesale market, and 
because wholesale markets are regional in nature and subject to 
Federal regulation, legislation to remove impediments to 
competition in wholesale markets must be undertaken at the 
Federal level.
    Let me now outline the views of the Department of Justice 
about the basic components of such legislation. Because of the 
existing structure of the electric power industry, there are 
likely to remain significant market power problems in the 
transmission and generation of electricity, even as the 
industry is restructured to increase the role of competitive 
market forces.
    The antitrust laws do not prohibit the mere possession of 
monopoly or market power that is the result of skill, accident, 
or a previous regulatory regime. I think this point responds to 
some of the concerns that were raised earlier this morning by 
both Chairman Barton and Congressman Pallone.
    Antitrust remedies are thus not well-suited to address 
problems of market power in the electric power industry that 
result from existing higher levels of concentration and 
generation or from existing vertical integration. We believe, 
therefore, that regulators--FERC, in particular--should be 
given additional tools to remedy market power problems that are 
found to exist.
    The provisions that would give FERC clear authority to 
remedy possible market power problems are an important part of 
the administration's recently unveiled Comprehensive 
Electricity Competition Act. Let me explain why.
    Owners of electric power transmission facilities in the 
U.S. commonly also own generation facilities, and their control 
over transmission gives them the ability to thwart competition 
in generation. Owners of transmission have the incentive and 
the ability to favor their own generation facilities and to 
restrict access to transmission facilities by the generation 
facilities of competitors.
    FERC took a historic step toward addressing this problem in 
1996 by enacting Order 888, which requires that all utilities 
over which FERC has jurisdiction provide open and 
nondiscriminatory access to transmission facilities for 
wholesale buyers and sellers. Monitoring and enforcing 
compliance with regulations against discrimination are 
particularly difficult, however, when quality of service is as 
time-sensitive as it is in electric power.
    Because power is sold on an hourly basis, market dynamics, 
and thus the incentive and ability to exploit market power, can 
shift over the course of each day making it virtually 
impossible to intervene before conditions have changed. There 
is thus no way to ensure that a transmission owner will not 
operate its transmission assets in a manner that favors its own 
generation and thereby impairs competition.
    Regional system operators are a promising solution to this 
problem. The administration proposal calls for amending the 
Federal Power Act to make clear that FERC has the authority to 
acquire transmission utilities, to turn over operational 
control of those facilities to a regional, independent system 
operator. Such a structural remedy can eliminate the ability of 
the owner of monopoly transmission facilities to act 
anticompetitively by ensuring that transmission services are 
provided by a neutral entity that has no stake in any 
particular generation facility and thus has no incentive to 
discriminate against competitors.
    It is critical that ISOs be large enough to operate the 
transmission system efficiently and reliably. The provision in 
the administration proposal authorizing FERC to establish 
minimal criteria for the approval of ISOs would allow FERC to 
reject those that are too small to operate the transmission 
system reliably and efficiently.
    High concentrations of ownership or generation capacity may 
allow the exercise of market power in another way, even if 
competition is permitted in wholesale and retail markets. The 
administration bill would give FERC the authority to mitigate 
such market power in wholesale markets, as well as backup 
authority to remedy market power in retail markets upon 
requests from a State if the State determines that it lacks the 
authority to remedy a retail market power problem.
    Consistent with the Department's strong preference for 
structural remedies for competitive problems--responding, I 
might add, to Congressman Largent's comment a moment ago--FERC 
would be given express authority to order divestiture of 
generation facilities to the extent necessary to mitigate 
market power after consultation with the department and the 
Federal Trade Commission.
    Let me conclude my testimony by briefly discussing possible 
reform of the Public Utility Holding Company Act of 1935. The 
administration opposes stand-alone repeal of the act. In our 
review, the interlocking nature of the system of Federal laws 
regarding utility regulation, including PUHCA and the Federal 
Power Act, makes it preferable that those statutes be amended 
either as part of comprehensive restructuring legislation, or 
concurrently with such legislation, rather than on a piecemeal 
basis.
    The administration's restructuring legislation includes a 
repeal of PUHCA, but the bill also includes several other 
measures designed to protect consumers from potential holding 
company abuses.
    In closing, we are confident that truly competitive 
electricity generation will surpass regulation in efficiently 
allocating resources and maximizing consumer welfare. And we 
look forward to continuing to work with the subcommittee on the 
important issue of market power.
    I will be pleased to answer whatever questions you may 
have. Thank you.
    [The prepared statement of A. Douglas Melamed follows:]
 Prepared Statement of A. Douglas Melamed, Principal Deputy Assistant 
      Attorney General, Antitrust Division, Department of Justice
    Good morning, Mr. Chairman and Members of the Subcommittee. I 
appreciate the opportunity to speak to you about some of the issues 
relating to market power in the electric power industry.
    With sales totaling more than $200 billion annually in the U.S., it 
would be hard to overstate the importance of the electric power 
industry to the American economy and to American families. All of us 
have a stake in eliminating obstacles to efficient and economical 
generation and transmission of electricity.
    The electric power industry developed historically from a patchwork 
of isolated and vertically integrated electric utilities, each 
generating and distributing electric energy to consumers in relatively 
compact service areas. Advances in technology over time made power 
generation more efficient on a larger scale and made transmission of 
electric energy possible over long distances. These advances encouraged 
interconnection among utility transmission networks, initially for 
enhanced reliability and then for improved economy of service.
    More recently, it has become possible, with improved technology, to 
generate electric power at efficient cost levels with much smaller 
generating plants. There is now a growing consensus that the generation 
segment of electric power supply could become more efficient and 
economical under competitive market forces. The transmission and 
distribution segments, on the other hand, will likely retain their 
natural monopoly characteristics for the foreseeable future. The 
challenge, then, is to foster vigorously competitive generation markets 
within the context of regulated transmission and distribution 
monopolies. It is in pursuit of the goal of promoting competitive 
generation markets that the Administration submitted its comprehensive 
electricity restructuring bill to Congress last month.
    In thinking about restructuring, it is important to remember that 
the electric power industry has a number of unique characteristics that 
distinguish it not only from basic manufactured goods markets, but also 
from other network industries such as telecommunications. The product--
electric energy--cannot be stored; and consumer demand for it varies 
widely from season to season, from day to day, and from hour to hour. 
Actual quantities generated must continuously and instantaneously match 
widely varying consumer demand.
    In addition, the flow of energy over an electric power network 
cannot economically be directed through switches to follow a particular 
path, so in the power grid of today and the immediate future, energy 
will flow along the path of least resistance. Therefore, the actual 
physical delivery patterns for electricity may not match the 
contractual arrangements for sale of electricity, and successful 
transmission will depend on the relative output levels of all 
generators on the power grid.
    Many states are moving to open their retail markets to competition. 
It is thus important that Congress consider the need for federal 
legislation to address possible market power problems that could impede 
the efforts to increase competition in the electric power industry. We 
believe that the bill that the Administration submitted to Congress 
comprehensively and adequately addresses the market power issues about 
which we are all concerned.
    The keys to retail competition in the electric power industry are 
well-functioning wholesale markets. Although much progress has been 
made in this regard, there is more to be done. Because power markets 
are regional in nature, federal legislation to remove impediments to 
competition in these markets is necessary.
    In what follows, I will outline the views of the Department of 
Justice about the basic components of such legislation. I will first 
give a brief overview of enforcement activity by the Department in the 
electricity industry. I will then discuss some of the market power 
problems facing the industry and legislative proposals that we believe 
are necessary to address them. And I will conclude by discussing 
possible reform of the Public Utility Holding Company Act of 1935.
Enforcement Activity of the Antitrust Division
    The Antitrust Division has long played an important role in 
protecting and promoting free and open markets in the electric power 
industry. A seminal antitrust case in this industry was an enforcement 
action brought by the Antitrust Division under the Sherman Act to stop 
the Otter Tail Power Company from monopolizing the retail distribution 
of electric power in its service area in Minnesota, North Dakota, and 
South Dakota. Otter Tail owned the transmission lines in its service 
area, and one of the means it employed to monopolize the market was to 
refuse to transmit, or ``wheel,'' power over its lines to municipal 
utilities competing with it for local distribution. In 1973, the 
Supreme Court upheld a lower court order requiring Otter Tail to wheel 
power to the municipal utilities, ruling that the electric power 
industry was subject to the antitrust laws even though it was also 
subject to regulation by the Federal Power Commission.
    The Division has brought two recent enforcement actions involving 
the electricity industry. The first was an action against Rochester Gas 
and Electric (``RG&E'') concerning a contract between RG&E and the 
University of Rochester in which RG&E promised to sell electricity to 
the University at reduced rates in exchange for the University's 
promise not to compete against RG&E in the sale of electricity to 
consumers.
    The case had its origin in the very high regulated electricity 
rates in New York in the early 1990s. In response, the New York Public 
Service Commission opened a proceeding to permit utilities to set 
prices through individual negotiations with certain customers rather 
than according to a tariff filed with the state.
    In the meantime, the University of Rochester, a major industrial 
customer of RG&E, was examining ways to reduce its energy costs. The 
University had a decades-old facility that produced steam for heating 
and cooling campus buildings. The University determined that it could 
build a more efficient plant to meet its steam needs and also produce--
or cogenerate--more electricity than it needed as a byproduct. New York 
State law expressly permitted the University to sell the plant's excess 
electricity to other users, in competition with RG&E.
    The new plant was never built. Instead, RG&E and the University 
entered into an agreement. In part, the agreement resembled a simple--
and legal--requirements contract, under which RG&E agreed to supply the 
University with electricity at discounted rates and the University 
agreed to ``remain a customer of RG&E for all of its power needs' for 
seven years. But the agreement did not stop there. It also contained a 
seven-year restriction, unrelated to RG&E's sale and the University's 
purchase of electricity, pursuant to which the University promised 
``not to solicit or join with any other customers of RG&E to . . . 
provide them with electric power . . . from any source other than 
RG&E.''
    The Division brought an action under the Sherman Act against RG&E, 
challenging the agreement not to compete between RG&E and the 
University. This action was resolved by a consent decree that prohibits 
RG&E from entering into agreements not to compete, with certain limited 
exceptions (for example, contracts to sell a business).
    The second action was a challenge of the merger of Pacific 
Enterprises (``Pacific''), a California natural gas utility, and Enova 
Corporation (``Enova''), a California electric utility. The Department 
was concerned that, as a result of the merger, the combined Pacific/
Enova would have the incentive and ability to use its natural gas 
transportation monopoly to withhold gas or gas transportation from 
competing gas-fired electric plants that competed with Enova. Gas-fired 
plants are generally the most costly to operate, and they set the price 
for all electricity sold during times, such as summer, when electricity 
demand is at its highest. The complaint alleged that Pacific/Enova 
would, by restricting the access to natural gas of certain competing 
gas-fired plants, be able to raise their costs and thereby to increase 
electricity prices to California consumers. The complaint further 
alleged that Pacific/Enova would have an incentive to do so because it 
is a low-cost producer of electricity and would therefore stand to 
profit from any increase in the price of electricity.
     The settlement requires Enova to divest its largest low-cost 
electricity plants. Once this is accomplished, the merger will no 
longer create incentives for Enova to raise electricity prices. Enova 
is also required to provide notice to and obtain the approval of the 
Department should it wish to acquire or manage certain California 
electric power facilities in the future.
Market Power
    Let me now turn to the issue of market power. Because of the 
existing structure of the electric power industry, there are likely to 
remain significant market power problems in the transmission and 
generation of electricity, even as the industry is restructured to 
increase the role of competitive market forces.
    The authority of the Department of Justice to enforce the antitrust 
laws with respect to the electric power industry does not sufficiently 
address the ability of electric utilities to exercise market power that 
can thwart free competition within the industry. The antitrust laws do 
not outlaw the mere possession of monopoly power that is the result of 
skill, accident, or a previous regulatory regime. Antitrust remedies 
are thus not well-suited to address problems of market power in the 
electric power industry that result from existing high levels of 
concentration in generation or vertical integration. In the 
Administration's electricity bill we have, therefore, granted 
regulators the tools to remedy market power problems that may be found 
to exist.
    The provisions that would give FERC clear authority to remedy 
possible market power problems are an important part of the 
Administration's recently unveiled Comprehensive Electricity 
Competition Act. Let me explain why.
Transmission Access
    Owners of electric power transmission facilities in the U.S. 
commonly also own generation facilities, and their control over 
transmission gives them the ability to thwart competition in 
generation. Owners of transmission have the incentive and the ability 
to favor their own generation facilities and otherwise to restrict the 
access to transmission facilities by the generation facilities of 
competitors. Such discrimination can take the form of denying 
competitors in electricity generation access to the transmission 
monopolist's services or offering less favorable terms than those 
provided to its own generation facilities. The FERC took an historic 
step toward addressing this problem by enacting Order 888, which 
requires that all utilities over which FERC has jurisdiction provide 
open and nondiscriminatory access to transmission facilities for 
wholesale buyers and sellers.
    Monitoring and enforcing compliance with regulations against 
discrimination are particularly difficult, however, when quality of 
service is as time-sensitive as it is in electric power. Because power 
is sold on an hourly basis, market dynamics--and thus the incentive and 
ability to exploit market power--can shift over the course of each day, 
making it virtually impossible to intervene before conditions have 
changed. There is thus no way to ensure that a transmission owner will 
not operate its transmission assets in a manner that favors its own 
generation.
    Independent Regional System Operators (``RSOs'') are a promising 
solution to this problem. RSOs are entities that operate the 
transmission grid independent of the interests of the owners of the 
generation facilities. The Administration proposal calls for amending 
the Federal Power Act to clarify that FERC has the authority to require 
transmission utilities to turn over operational control of transmission 
facilities to a regional independent system operator. FERC would also 
be given the authority to set other requirements pertaining to RSOs as 
needed to serve the public interest. Such a structural remedy can 
eliminate the incentive and ability of the owner of monopoly 
transmission facilities to act anticompetitively by ensuring that 
transmission services are provided to competitors by a neutral entity 
which has no stake in any particular generation facility and thus has 
no incentive to discriminate.
    It is critical that RSOs be large enough to operate the 
transmission system efficiently and reliably. The provision in the 
Administration proposal authorizing FERC to establish minimum criteria 
for the approval of RSOs would allow FERC to reject RSOs that may be 
improvements over the status quo but are too small to operate the 
transmission system reliably and efficiently.
    Optimally-sized RSOs can also help to mitigate market power that is 
the result of high concentrations of ownership of generation assets. 
RSOs can do so by eliminating transmission rate pancaking and thereby 
enlarging geographic markets. Rate pancaking occurs when a transmission 
customer is forced to pay separate rates for a transaction that crosses 
multiple transmission systems, even though the total costs of the 
systems would produce a rate, if the systems were treated as one, that 
is lower than the sum of the ``pancaked'' rates. Pancaking results in 
total transmission prices that do not accurately reflect the actual 
cost associated with a particular transaction. It thus distorts 
competition both by increasing transmission prices and by tending to 
insulate nearby generation facilities from what might otherwise be more 
vigorous competition from more distant facilities.
    Large regional RSOs can also internalize certain transaction costs, 
such as those associated with loop flows, as well as play an important 
role in the control and management of constrained transmission 
interfaces, particularly those which significantly impact competition 
in regional power markets. Poorly managed, competitively significant 
constraints can hinder transactions across the interface and invite 
anticompetitive manipulations of the interface. We fear that, without 
independent operation of the transmission grid, regulators will be 
unable to address adequately the almost certain flood of complaints of 
self-dealing that will undoubtedly allege manipulations of posted 
available transmission capacity and abuses of the native load 
preference that is granted utilities under Order 888.
    Some transmission owners may decline voluntarily to turn over 
control of their transmission facilities to an ISO. Given the 
importance of ensuring that the transmission system operates in a 
nondiscriminatory and efficient manner, it is critical to competition 
in the electricity industry that legislation clarify FERC's authority 
to order transmission owners to join FERC-approved RSOs.
Generation Market Power
    High concentrations of ownership of generation may allow the 
exercise of market power, even if there is competition in wholesale and 
retail markets. The Administration bill would give FERC the authority 
to mitigate market power in wholesale markets, as well as backup 
authority to remedy market power in retail markets upon request from a 
state if the state, in the course of implementing a retail competition 
plan, determines that it has insufficient authority to remedy a retail 
market power problem. Consistent with the Department's strong 
preference for structural remedies for competitive problems, FERC would 
be given express authority to order divestiture of generation 
facilities to the extent necessary to mitigate market power, in 
consultation with the Department and the Federal Trade Commission. The 
authority would be implemented by requiring generators with market 
power to submit a mitigation plan, which FERC could approve with or 
without modification.
    Giving FERC the necessary tools to remedy market power in 
generation is critical because vertically integrated electric utilities 
have typically had market power in their distribution areas, and 
significant pockets of market power may remain after wholesale and 
retail competition are widely introduced. We do not know the extent to 
which this will be the case after restructuring occurs, but if it turns 
out that there are significant post-restructuring market power 
problems, FERC must be given the necessary tools to address them.
PUHCA Reform
    I would like to conclude my testimony by briefly discussing 
possible reform of the Public Utility Holding Company Act of 1935 
(``PUHCA''). During the Great Depression, a handful of large multi-
state corporations that controlled a significant amount of electricity 
generation and transmission collapsed. Congress responded by enacting 
PUHCA. This legislation split up the companies and imposed certain 
restrictions on utilities operating in more than one state. The result 
has been an industry dominated by vertically integrated utilities 
regulated by state commissions.
    The Administration opposes standalone repeal of PUHCA. In our view, 
the interlocking nature of the system of federal laws regarding utility 
regulation, including PUHCA and the Federal Power Act, makes it 
preferable that these statutes be amended either as part of 
comprehensive restructuring legislation or concurrently with such 
legislation, rather than on a piecemeal basis.
    The Administration's restructuring legislation includes a repeal of 
PUHCA. However, the bill also includes several measures designed to 
protect consumers from the potential for holding company abuses such as 
cross-subsidization. These measures should include enhanced merger 
review by FERC, additional state and federal access to holding company 
data, and the market power provisions I discussed earlier. The 
Administration believes that it is important to approach electricity 
restructuring issues comprehensively in order for Congress to be able 
to evaluate the context in which changes in PUHCA are to take place.
Conclusion
    We are confident that truly competitive electricity generation will 
surpass regulation in efficiently allocating resources and maximizing 
consumer welfare. Moreover, we believe that the Administration's 
electricity bill comprehensively addresses the competitive issues that 
will arise in a restructured market, and establishes the framework 
through which truly competitive markets can thrive. We look forward to 
continuing to work with the Subcommittee on the important issue of 
market power.

    Mr. Barton. Thank you, Mr. Melamed.
    Before I recognize Mr. Thompson, I actually have The Wealth 
of Nations here. And I hope people can see that it has been 
used. I have actually read it. I want to quote from a little 
bit different part. I want to quote from chapter 2 for my good 
friend, Mr. Markey, because I think it goes to the purpose of 
this hearing today.
    It says, ``Man has almost constant occasion for the help of 
his brethren, and it is in vain for him to expect it from their 
benevolence only. He will be far more likely to prevail if he 
can interest their self-love in his favor and show them that it 
is for their own advantage to do for him what he requires of 
them.
    ``Whoever offers to another a bargain of any kind proposes 
to do this. Give me that which I want and you shall have that 
which you want is the meaning of every such offer, and it is in 
this manner that we obtain from another the far greater part of 
those good offices which we stand in need of. It is not from 
the benevolence of the butcher, the brewer or the baker that we 
expect our dinner, but from their regard to their own self-
interest.''
    That is why we are here, to see if we can get an open 
market. And copies of this book are available. They can be 
purchased.
    All right. With that, I would welcome Mr. Thompson. We are 
going to set the clock at about 7 minutes, because it is really 
not fair to ask you gentlemen, I think, to summarize in 5 
minutes.
    So, Mr. Thompson.

             STATEMENT OF HON. MOZELLE W. THOMPSON

    Mr. Thompson. Thank you. And good morning Chairman Barton 
and members of the committee. I am pleased to appear before you 
today to present testimony concerning the important topic of 
deregulation in competition in the electric power industry.
    We have submitted the Commission's full prepared statement 
for the record, but I am compelled to say that my testimony 
today in response to questions is my own and doesn't 
necessarily represent the views of the Commission or any other 
commissioner. The staff of the Commission has, in the past, 
commented to the FERC on the importance of wholesale 
competition and on the appropriate analytical framework for 
evaluating mergers.
    The Commission has also provided comments to a number of 
States on the importance of considering the impact of market 
power as they introduce retail competition in the electric 
power industry. Consistent with that role, on September 13 and 
14 of this year, the Commission will further assist States and 
localities by holding a public workshop on market power and 
consumer protection considerations in the electric power 
industry.
    Now, my colleague from the Department of Justice has 
described numerous enforcement actions in this area in his 
written testimony, so I won't discuss the FTC's own activities. 
But I can state that the FTC's experience shows that vigorous 
market competition provides consumers with the benefits of low 
prices, good products, and greater innovation.
    In principle, these benefits should be available to 
electric power consumers as a century of regulation gives way 
to competition; however, these benefits will not be achieved 
without appropriate action to alleviate market power impacts.
    The starting point for competition in the electric power 
industry is not the level playing field of a newly developed 
market. Instead, we are starting with what are essentially 
regulated monopolies; ensuring that consumers receive the 
benefit of deregulation, they would be greatly affected by the 
ability of the energy market to move toward a more open and 
competitive stance.
    How that occurs is largely dependent on factors presented 
in each case, but in all cases, a recognition of market power 
issues is critical to achieving competitive benefit.
    While the Federal antitrust laws are not a panacea for all 
competitive concerns, their application can help in this 
transition by making sure that mergers don't aggravate market 
power problems or shield incumbent companies from new 
competition. The antitrust laws can also help by preventing the 
use of anticompetitive acts and practices such as predation, 
raising rivals' costs and discrimination in granting access to 
essential facilities by companies seeking to inhibit 
competition from new entrants or suppliers.
    It is important to note, however, that current antitrust 
laws do not directly address the conditions present in the 
energy market where market dominance results from decades of 
regulation and is not accompanied by the above-described unfair 
tactics. To address these conditions, the administration 
proposes to give FERC authority to address existing market 
power and remedy it in the wholesale power markets.
    We agree that FERC, in consultation with the antitrust 
agencies, should have available the array of potential 
antitrust remedies, including ordering companies, to divest 
generation assets to several buyers in order to decrease the 
company's market dominance.
    However, remedying existing market power in the retail 
segment is more problematic. Anticompetitive conduct would be a 
predicate for antitrust action against retail market power, yet 
local distribution monopolies may be able to exercise their 
power to the detriment of consumers without having to engage in 
clearly anticompetitive behavior.
    At present, the proposed energy reform efforts would leave 
States with substantial regulatory responsibilities for local 
energy distribution. Yet regulating retail competition will 
likely entail reviewing the distribution and marketing power of 
companies across State lines in regional markets. It is 
unlikely that most States are well equipped to protect 
competition in these types of situations. Federal antitrust 
agencies, working in consultation with FERC, can help by 
contributing assessments of market power and the methods and 
principles that we use to analyze mergers and unfair methods of 
competition.
    The remedies applied to these cases can also be applied to 
alleviate the market power problem. The Federal antitrust 
agencies can contribute to ensuring that newly deregulated 
energy markets are open and competitive.
    Now, the two types of market power that are of antitrust 
concern as we move to retail electric competition are, first, 
horizontal market power, permitting prices to be raised above 
competitive levels for an extended period; and second, vertical 
market power that could easily be exercised through 
discriminatory access to transmission which today largely 
remains a monopoly.
    The final market power issue concerns mergers. For example, 
mergers between generating firms may create market power that 
could be exercised by withholding capacity in order to drive up 
rates; while mergers at the retail level between electric 
utilities, or between utilities and independent retail 
marketers, could harm existing or potential competition.
    Deregulation in a number of industries has shown us that it 
can provide substantial benefits to consumers. And while we 
have similar hopes in the electric power industry where market 
forces have had an effect on firms long accustomed to the 
slower, sheltered pace of regulated life, the potential for 
consumer savings and increased choice is not guaranteed.
    Vigorous antitrust enforcement will be an essential tool 
for ensuring competition, especially in the formative years as 
the regulatory grasp is loosening. In particular, strong merger 
enforcement will be necessary to ensure that deregulation does 
not result in the accumulation and abuse of private market 
power.
    The Commission stands ready to meet its enforcement 
responsibilities and looks forward to working cooperatively 
with the FERC and the Department of Justice to protect the 
consumer gains that should follow the introduction of market 
forces to the electric power industry.
    Thank you.
    [The prepared statement of Hon. Mozelle W. Thompson 
follows:]
 Prepared Statement of Mozelle W. Thompson,1 Commissioner, 
                        Federal Trade Commission
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    \1\ This written statement represents the views of the Federal 
Trade Commission. My oral presentation and responses to questions are 
my own, and do not necessarily represent the views of the Commission or 
any other Commissioner.
---------------------------------------------------------------------------
                            i. introduction
    Mr. Chairman and members of the Committee, the Federal Trade 
Commission is pleased to appear before you today to present testimony 
concerning the important topic of deregulation and competition in the 
electric power industry, and how deregulation may raise issues of 
market power. We will also discuss the issue of mergers in an industry 
undergoing deregulation. The staff of the Commission has in the past 
commented to the Federal Energy Regulatory Commission (``FERC'') on the 
importance of wholesale competition 2 and on the appropriate 
analytical framework for evaluating mergers.3 The Commission 
has also provided comments to a number of states on the importance of 
considering the impact of market power as they introduce retail 
competition in the electric power industry.4 To further 
assist states and localities in examining these issues, on September 
13th and 14th of this year, the Commission will hold a public workshop 
on market power and consumer protection considerations in the electric 
power industry.
---------------------------------------------------------------------------
    \2\ See Comment of the Staff of the Bureau of Economics, Federal 
Trade Commission, ``Promoting Wholesale Competition Through Open Access 
Non-discriminatory Transmission Services by Public Utilities, Recovery 
of Stranded Costs by Public Utilities and Transmitting Utilities,'' 
Dkt. No. RM96-6-000 9 (Aug. 7, 1995) (``BE/FERC I'').
    \3\ See Comment of the Staff of the Bureau of Economics, Federal 
Trade Commission, ``Inquiry Concerning Commission's Merger Policy Under 
the Federal Power Act,'' Dkt. Nos. RM95-8-000 and RM94-7-001 (May 7, 
1996) (``BE/FERC II'').
    \4\ For the Commission's most recent state comment, see Comment of 
the Staff of the Bureau of Economics of the Federal Trade Commission 
Before the Alabama Public Service Commission, Dkt. No. 26427, 
Restructuring in the Electricity Utility Industry (Jan. 8, 1999). Other 
recent comments have been submitted to the Louisiana Public Service 
Commission, Dkt. No. U-21453 (affiliate transactions) (Oct. 30, 1998); 
the Public Utility Commission of Nevada, PUCN Dkt. No. 97-5034 
(affiliate transactions) (Sept. 22, 1998); the Mississippi Public 
Service Commission, Dkt. No. 96-UA-389 (Transco proposal) (Aug. 28, 
1998).
---------------------------------------------------------------------------
    The FTC is a law enforcement agency whose statutory authority 
covers a broad spectrum of the American economy, including the electric 
power industry. The Commission enforces, among other statutes, the FTC 
Act 5 and the Clayton Act, 6 sharing with the 
Department of Justice authority under Section 7 of the Clayton Act to 
prohibit mergers or acquisitions that may ``substantially lessen 
competition or tend to create a monopoly.'' 7 In addition, 
Section 5 of the FTC Act prohibits ``unfair methods of competition'' 
and ``unfair or deceptive acts or practices,'' thus giving the 
Commission responsibilities in both the antitrust and consumer 
protection areas. The Commission also provides advice and guidance on 
competition issues, based upon its substantial experience in applying 
antitrust principles across many different industries.
---------------------------------------------------------------------------
    \5\ 15 U.S.C. Sec. Sec. 41-58.
    \6\ 15 U.S.C. Sec. Sec. 12-27.
    \7\ 15 U.S.C. Sec. 18.
---------------------------------------------------------------------------
    The FTC's experience has taught the Commission that competition 
between market participants will ordinarily provide consumers with the 
benefits of low prices, good products, and greater innovation. In 
principle, these benefits should be provided in the electric power 
industry as a century of regulation gives way to competition. However, 
these benefits will not be achieved without appropriate action to 
alleviate market power impacts.
    There are huge resources at stake in this industry. Total industry 
revenues are estimated at $200 billion a year, and total industry 
capital investment is around $700 billion, or almost 10% of total U. S. 
capital investment. If the levels of cost savings and technological 
improvements in this industry approach those attained in other 
previously deregulated industries, many consumers likely will be 
substantially better off in terms of lower prices and increased 
choices.8 But these potential savings and innovations will 
not appear automatically. Proper application of antitrust principles 
and enforcement should ensure that the benefits of competition reach 
consumers.
---------------------------------------------------------------------------
    \8\ See R. Crandall and J. Ellig, Economic Deregulation and 
Customer Choice: Lessons for the Electric Industry, Center for Market 
Processes at 2-3 (1996) (within 10 years of substantial deregulation, 
prices in the natural gas, long distance telecommunications, airlines, 
trucking, and railroad industries decreased between 25 and 50 percent 
while quality of service improved). Of course, these benefits were not 
spread evenly among all consumers, and some previously subsidized 
service may have been negatively impacted.
---------------------------------------------------------------------------
        ii. regulatory background in the electric power industry
    In order to evaluate the impact of market power issues in the 
electric power industry and to better understand the role of the 
antitrust agencies in addressing market power, it is important to 
review the unique history of this industry. For most of this century, 
the electric power industry has been heavily regulated because the 
industry was perceived to be a natural monopoly. In an effort to 
minimize costs, the industry was organized as a series of local, 
vertically integrated monopolies. For the most part, the power company 
owned the generation, transmission, storage, and distribution systems. 
Each of these local monopolies had market power, but it was market 
power that was controlled by federal and state regulatory bodies. 
Mergers were allowed to take place without regard to market power 
because regulation prevented market power abuse, and many of these 
mergers would have been prohibited in a nonregulated industry.
    Technical and organizational innovations in the last decade may 
have made room for competition in the generation and sale of electric 
power. However, the starting point for competition in the electric 
power industry is not the level playing field characteristic of a newly 
developing market. Instead, we are starting with regulated monopolies. 
Ensuring that consumers receive the benefits of deregulation may be 
greatly affected by the ability of the energy market to move to an open 
and competitive stance rather than one dominated by newly unregulated 
monopolies. How that occurs is largely dependent on the factors present 
in each case. In some instances, for example, there may be no 
transition problem because easy entry at the generation and 
transmission levels will eliminate most market power. In other 
instances, however, competitive constraints on existing market power 
may be only modest at best. In all cases, however, a recognition of 
market power issues is critical to achieving the benefits of 
competition.
    While Federal antitrust laws are not a panacea for all competitive 
concerns, their application can help in this transition to competition 
by making sure that mergers do not aggravate market power problems or 
shield incumbent companies from new competition. The antitrust laws can 
also help by preventing the use of anticompetitive acts and practices 
such as predation, raising rivals' costs, and discrimination in 
granting access to essential facilities, by companies seeking to 
inhibit competition from new entrants or suppliers.
    It is important to note, however, that current antitrust laws do 
not directly address the current conditions in the energy market where 
market dominance resulting from decades of regulation are not 
accompanied by the above-described unfair methods of competition. To 
address these conditions, the administration proposes to give FERC 
authority to assess existing market power and remedy it in wholesale 
power markets. The array of potential remedies could include ordering 
companies to divest generation assets to several buyers in order to 
decrease the companies' market dominance. However, remedying existing 
market power in the retail segment is more problematic.
    Anticompetitive conduct would be a predicate for antitrust 
enforcement against retail market power, yet the local distribution 
monopolies may be able to exercise their power to the detriment of 
consumers without having to engage in clearly anticompetitive behavior. 
At present, all proposed energy reform efforts would leave states with 
substantial regulatory responsibilities for local energy distribution. 
Yet regulating retail competition will entail reviewing the 
distribution and marketing of electric power across state lines in 
regional markets. It is unlikely that states will be well-suited to 
protect competition in these types of markets.
    The federal antitrust agencies, working in consultation with FERC, 
can significantly contribute to an assessment of existing market power, 
even though our current enforcement activities do not directly address 
this issue. First, the analytical methods and principles that we use to 
analyze mergers and unfair methods of competition are equally 
applicable to an existing market power problem in a wholesale or retail 
electric market. Second, the remedies applied to merger and non-merger 
cases can also be applied to alleviate existing market power. In sum, 
concerns about existing market power in this formerly monopolistic 
industry are appropriate. The federal antitrust agencies can contribute 
to ensuring that newly deregulated energy markets are open and 
competitive. The Commission looks forward to working in consultation 
with FERC, along with the Department of Justice, to address market 
power issues.
                      iii. some specific concerns
    Economic theory and experience with other industries tell us that 
the transition from regulated monopolies to competition is not an 
automatic process `` doing it right requires actively promoting 
competition and guarding against practices that stifle competition. For 
several reasons, the previous accumulation and potential abuse of 
market power may blunt the competitive potential of deregulatory 
efforts.
    First, because industry participants have become used to a 
regulatory environment, some may attempt to protect or duplicate many 
of the comfortable aspects of that environment. Where they are 
accustomed to being a local monopoly and using the regulatory process 
to bar or disadvantage new entry, industry members may attempt to use 
monopolistic or cartel behavior (such as information-sharing) to 
protect their entrenched positions after deregulation. A monopolist 
will not ordinarily welcome new entry, and issues of access or 
structural realignment designed to promote access will have to be 
considered with those incentives in mind.
    Second, the transition from regulation to competition is never 
instantaneous or complete. Market participants may find themselves 
subject to inconsistent requirements. Some participants may become 
subject to market forces while others remain regulated, or different 
participants may be subject to different regulations. It may be 
inefficient and unfair to have different regulatory rules apply to 
direct competitors. In the electric power industry, for example, 
potential anticompetitive behavior may be monitored by FERC, state 
public utility commissions, or the federal antitrust agencies, 
depending on the pace and mix of deregulatory efforts. In a 
deregulatory environment, it is important to provide consistent 
competitive analysis and review.
    Third, regulatory bodies may have policy goals other than 
competition that warrant consideration in the transition to a 
competitive environment. In the electric power industry, for example, 
universal lifeline service 9 at low cost is an important 
public policy goal. Another important policy goal in the electric power 
industry is environmental protection. These considerations usually fall 
outside the scope of traditional antitrust analysis. Accordingly, some 
continuing regulation or other special provisions may be needed to 
ensure that other policy goals are taken into account.
---------------------------------------------------------------------------
    \9\ In the electric power and telephone industries, regulatory 
agencies require providers to offer basic, low-cost service that may be 
subsidized by consumers who purchase additional services.
---------------------------------------------------------------------------
    Fourth, removing entry and capital expenditure controls from an 
industry subject to a long period of regulation will unleash pent-up 
demand for corporate restructuring. Resulting consolidations may be 
procompetitive or competitively neutral, or they may instead be an 
illegal attempt to acquire market power.
    These four conditions imply that the antitrust laws will have to be 
applied flexibly to address the issues that arise in transitional, or 
formerly regulated, industries. Regulatory regimes are usually 
established in response to some market failure, perceived or actual, 
that makes market forces inadequate to protect consumers and promote 
efficiency. Even if a consensus exists that the existing regulatory 
schemes are unresponsive or ineffective, or that technology obviates 
the need for regulation, the impact of regulation on the industry 
structure, incentives, and expectations requires that the antitrust 
agencies be especially sensitive in applying antitrust rules while 
market forces regain primacy.
    Applying antitrust rules with special care does not, however, mean 
a ``hands off'' approach. The consumer and efficiency gains from 
deregulation could be jeopardized without appropriate antitrust 
enforcement during and after deregulation. The goal is to see 
regulation replaced with competition, not with collusion or dominant 
firm behavior. Here, the antitrust laws' flexibility is a major 
advantage. Antitrust jurisprudence unfolds on a case-by-case approach, 
constantly adapting to new information and new experiences. Where, as 
here, the deregulated world will be significantly different from the 
experience of most industry participants, it is difficult to know in 
advance what oversight will work best. The difficulty of predicting how 
the industry will look in the future suggests that fixing government 
oversight policy in concrete at an early stage could be 
counterproductive. In this type of uncertain environment, flexible 
antitrust enforcement may be particularly important.
    Although the decision about how to proceed has potentially 
substantial economic consequences for consumers, we will not comment on 
the method and scope of regulatory reform, but will state that strong 
antitrust oversight of the industry will and should remain vital no 
matter what course of deregulation is chosen.
                        iv. market power issues
    As previously stated, no matter how deregulation proceeds, market 
power issues must be addressed if the benefits are to accrue to 
consumers. Two kinds of market power are of antitrust concern as we 
move to retail electric competition. The first is horizontal market 
power, permitting prices to be raised above competitive levels for an 
extended period, and the second is vertical market power that could be 
exercised through discriminatory access to transmission, which today 
largely remains a monopoly.10
---------------------------------------------------------------------------
    \10\ As previously noted, in addition to already-existing market 
power, market power can be acquired through merger.
---------------------------------------------------------------------------
A. Horizontal Market Power
    Horizontal market power in this context refers to the ability of 
one or more electric generating or retailing firms to raise prices 
above competitive levels for an extended period of time. Horizontal 
market power results in higher prices, inefficient allocations of 
scarce resources, and distortions of consumer choices. Concerns about 
horizontal market power in generation during deregulation have been 
heightened by the pioneering British deregulatory experience, as well 
as experience with the initial efforts in the United States. Following 
the implementation of electric industry restructuring in the United 
Kingdom, researchers determined that the two private generating firms 
that dominated the industry were exercising market power.11 
These findings prompted subsequent orders for divestiture of generation 
capacity. Very recent evidence from the initial deregulatory efforts in 
California indicates that market power problems in generation also 
exist there.12
---------------------------------------------------------------------------
    \11\ Green, R. J. and Newbery, D., ``Competition in the British 
Electricity Spot Market,'' 100 J. Pol. Econ. 929 (1995). See also Alex 
Henney, ``The Mega-NOPR: A Brit Crosses the Pond to Explain What's 
Happening at FERC,'' Pub. Utils. Fort., July 1, 1995 at 29; ``U.K.'s 
National Power, Powergen Must Sell Off Up to 6000 MW, Lower Rates,'' 
Elec. Util. Wk., Feb. 21, 1994.
    \12\ The Market Monitoring Committee of the California Power 
Exchange, Second Report on Market Issues in the California Power 
Exchange Energy Markets, at 67 (March 9, 1999) (``there is evidence 
that some generators were successfully exercising their market power 
during high-demand hours'').
---------------------------------------------------------------------------
B. Vertical Market Power
    In addition to horizontal market power, effective antitrust 
oversight will require close examination of the incentives and ability 
of a vertically integrated transmission monopolist, whose rate of 
return is regulated, to evade the regulatory constraint in order to 
earn a higher profit. Its participation in an unregulated market may 
give it the means to do so, either by discriminating against its 
competitors in the unregulated market or by shifting costs between the 
regulated and unregulated markets.13
---------------------------------------------------------------------------
    \13\ See Brennan, T., ``Why Regulated Firms Should Be Kept Out of 
Unregulated Markets: Understanding the Divestiture in United States v. 
AT&T,'' 32 Antitrust Bull. 741 (1987), and ``Cross Subsidization and 
Cost Misallocation by Regulated Monopolists,'' 2 J. Reg. Econ. 37 
(1990).
---------------------------------------------------------------------------
    The vertical relationships in this industry are different from 
those in almost all other industries that have not experienced long 
periods of pervasive regulation. The important issue this industry 
structure raises is how to ensure that the benefits of new competition 
in power generation actually reach the consumer. A key to effective 
competition is to provide open access 14 for independent 
generators to vertically integrated transmission and distribution 
systems so that lower prices in generation are passed on to consumers. 
The problem is that a vertically integrated transmission monopolist 
ordinarily would have an incentive to discriminate against independent 
generators. As a result, consumers might be deprived of the benefits of 
an independent generator's lower costs. While one solution could be 
requiring vertically integrated companies to be split up so that 
transmission entities would not be controlled by generating companies, 
large scale forced divestiture could prove costly in terms of complex 
legal liability issues for existing contracts and the sacrifice of 
potentially important economies of scope and vertical 
integration.15 Consequently, the method chosen by both the 
states and FERC to assure open access and efficient pricing in the 
transmission and distribution grids is to require that products be 
unbundled and to require that the pricing decisions of the vertically 
integrated firms be transparent.16 If correctly done, this 
unbundling should prevent a monopolist from discriminating against 
independent power generators and from shifting costs to the regulated 
portion of its business.17
---------------------------------------------------------------------------
    \14\ Open access refers to the principle that a monopoly owner of 
transmission or distribution assets must make them available to 
independent generators at price and service levels equal to those 
provided to its owned generators. FERC has focused on behavioral rules 
for open access and on developing mandatory common information sources 
concerning supply and transmission conditions. See BE/FERC I at 15-16.
    \15\ A number of utilities have followed a path of voluntary 
divestiture in order to compete more effectively in the deregulated 
climate. See Comments of Pacific Gas and Electric Company on 
Divestiture of Generation Facilities, ``Order Instituting Rulemaking on 
the Commission's Proposed Policies Governing Restructuring California's 
Electric Services Industry and Reforming Regulation,'' Dkt. No. R.94-
04-031 (Mar. 19, 1996).
    \16\ See FERC Order 888, Dkt. RM958-000.
    \17\ Brennan, T., ``Cross Subsidization and Cost Misallocation by 
Regulated Monopolists,'' 2 J. Reg. Econ. 37 (1990).
---------------------------------------------------------------------------
    Two methods of unbundling currently are being used by regulators in 
the electric power industry. For wholesale sales of interstate 
transmission of electricity, FERC requires ``functional'' unbundling, 
whereby it orders a transmission monopolist to grant open access and 
charge the same prices to independent generators that it charges 
internally to its own generator plants. A number of states (with 
concurrence from FERC), on the other hand, have opted for what the FTC 
staff has termed ``operational'' unbundling, in which an independent 
system operator is established to operate the transmission and 
distribution grids to insure open access and transparent pricing while 
the monopolist retains ownership of the physical assets.18 
The operational unbundling plan may work to preserve economies of 
vertical integration, internalize loop flow externalities, and assure 
transparent investment signals for potential investors 19 
while eliminating the strategic opportunities of the monopolist 
20 to favor subtly its own generating capacity.21
---------------------------------------------------------------------------
    \18\ See BE/FERC I at 3.
    \19\ Operation of a transmission system by an independent system 
operator should assist investors in distinguishing between high 
transmission prices caused by physical bottlenecks at peak demand 
periods and high prices caused by the exercise of market power.
    \20\ Because supply and demand for electricity are so time-
sensitive, even the slightest delay in transmission can have a serious 
impact on the reliability of any generator. A regulatory agency might 
find it very difficult to implement functional unbundling because of 
the difficulty of monitoring the numerous individual transactions 
nationwide to prevent degradations of contracts between independent 
generators and wholesale purchasers. See BE/FERC I at 5-9.
    \21\ A third possibility considered by some states is to create a 
``Transco,'' a for-profit, independent transmission company affiliate 
that would operate the transmission grid (which would continue to be 
owned by the transmission company) and would be subject to 
nondiscrimination rules. In comments to the state of Mississippi, supra 
n.4, staff noted that Transcos may present particularly difficult 
governance questions, are likely to be biased against remedies to 
transmission congestion that involve new generation, and may not 
provide greater operating efficiencies than independent system 
operators.
---------------------------------------------------------------------------
    Consistent with economic theory regarding potential competition 
concerns of this nature, numerous independent producers and large 
industrial users have alleged discriminatory conduct in the operation 
of transmission facilities.22 The FTC staff has commented on 
some of these issues in the past, 23 and stands ready to 
provide further assistance if called upon.
---------------------------------------------------------------------------
    \22\ See, e.g., ``Petition for a Rulemaking on Electric Power 
Industry Structure and Commercial Practices and Motion to Clarify and 
Reconsider Certain Open-Access Commercial Practices,'' filed with FERC 
by Altra Energy Technologies, Inc. and others on March 25, 1998. Aside 
from the question of compliance with FERC Order 888, there is a 
question about the breadth of its application. While FERC orders 
generally apply broadly to all energy sales involving interstate 
commerce, Order 888 does not apply to transmission by traditional 
vertically integrated utilities to accommodate ``native'' load. 
Transmission to accommodate native load accounts for a large portion of 
total transmission. Order No. 888, 61 Fed. Reg. at 21552.
    \23\ BE/FERC I.
---------------------------------------------------------------------------
C. Mergers
    As previously noted, the final market power issue concerns mergers. 
For example, mergers between generating firms may create market power 
that could be exercised by withholding capacity in order to drive up 
rates, while mergers at the retail level, between electric utilities or 
between electric utilities and independent retail marketers, could harm 
existing or potential competition.
    Following deregulation, horizontal mergers are more likely than 
vertical mergers in the electric power industry, given the current high 
level of vertical integration.24 Our merger analysis is not 
industry specific; it is designed to apply across all industries. 
Nonetheless, this industry, like all industries, has certain unique 
features that would require that the analysis be applied in a flexible 
manner. Using the analysis described in the Horizontal Merger 
Guidelines, jointly developed by the Commission and the Department of 
Justice, 25 the enforcement agencies assess whether the 
proposed transaction would harm consumers of any relevant product or 
service through increased prices, lower quantity, quality or service 
levels, or reduced technological innovation.
---------------------------------------------------------------------------
    \24\ Vertical mergers with fuel suppliers are a prominent 
exception. The Commission's recent settlements in CMS and PacifiCorp 
addressed concerns with raising rivals' costs. See CMS Energy Corp., 
FTC File No. 991 0046 (consent agreement accepted for public comment, 
Mar. 18,1999); PacifiCorp, FTC File No. 971 0091 (consent agreement 
accepted for public comment, Feb. 17, 1999). The proposed consent order 
in PacifiCorp was withdrawn when the acquisition was abandoned.
    \25\ U.S. Department of Justice and Federal Trade Commission, 
Horizontal Merger Guidelines, 4 Trade Reg. Rep. (CCH) para. 13,104 
(Apr. 2, 1992), as amended, April 8, 1997. FERC announced that it would 
follow the principles in the Guidelines in its own analysis of utility 
consolidations. See Inquiry Concerning the Commission's Merger Policy 
under the Federal Power Act, RM96-6-000, 61 Fed. Reg. 68,595 (Dec. 18, 
1996).
---------------------------------------------------------------------------
    Defining the relevant product and geographic markets is the first 
step in determining where any potential anticompetitive effects will be 
felt. A relevant product market is one in which consumers of the 
product would not switch to an alternative product in numbers 
sufficient to make a small but significant increase in price 
unprofitable.26 Similarly, a relevant geographic market 
comprises the locations of all of the alternative suppliers to which 
customers would likely turn if prices of the relevant product rose by a 
small but significant amount.
---------------------------------------------------------------------------
    \26\ Specifically, the markets are defined by asking whether a 
hypothetical monopolist could raise prices by a ``small but significant 
and nontransitory'' amount, such that not enough buyers would switch to 
alternatives to make the price increases unprofitable. If the price 
increases would not be profitable, the relevant market is too narrowly 
defined. See Merger Guidelines Sec. 1.11.
---------------------------------------------------------------------------
    In many industries, the more distinctive and important inquiry 
concerns the relevant product market, where the consumers' substitutes 
are determined. In the electric power industry, both product and 
geographic markets may prove difficult to define with absolute 
precision. Within the overall electricity market, discrete electricity 
product markets will need to be defined, taking into account, among 
other things, time, reliability, and interruptibility. The more 
difficult issue in this industry may be defining the relevant 
geographic market. As open access to the transmission and distribution 
grids becomes the norm, consumers will be able to turn to ever more 
distant sources of electricity. The geographic market is unlikely to be 
national in scope, but may include parts of Canada or Mexico during 
some periods. But establishing the relevant markets may be more 
complicated because changes in the definition of the product market 
also change the scope of the geographic market.27
---------------------------------------------------------------------------
    \27\ Electricity cannot be stored in any measurable quantities; it 
must be generated as it is consumed. Also, demand varies substantially 
not only seasonally but by time of day. Thus, the substitute sellers of 
electricity to any given consumer may be a number of firms offering 
subtly different products. Some consumers may want guaranteed 
reliability, while others may opt for interruptible power at lower 
prices. Some consumers may choose to defer power consumption to off-
peak hours in return for lower prices. Each of these consumer decisions 
affects the definition of the relevant product market and may affect 
the number of potential suppliers in that market.
---------------------------------------------------------------------------
    Once markets have been determined, the participants and their 
market shares must be identified. A market that is divided evenly among 
many participants will rarely have the potential for abuse of market 
power.28 The Merger Guidelines use a measure of market share 
distribution called the Herfindahl-Hirschman Index to determine the 
concentration of firms in the industry. In this industry, as in others, 
however, antitrust analysis goes significantly beyond the mere 
calculation of market shares. Certain economic characteristics may make 
this industry susceptible to cartel behavior at a level of 
concentration different from the point at which we would otherwise be 
concerned. A careful and thorough analysis of each transaction must 
therefore be undertaken once the relevant markets and market shares 
have been determined. If experience suggests that this industry is 
particularly subject to cartel behavior, or that mergers indirectly 
promote cartel behavior, then threshold levels of concern indicated by 
market shares may need to be adjusted.
---------------------------------------------------------------------------
    \28\ Other things being equal, an acquiring firm will find it more 
difficult to engage in anticompetitive conduct, either unilaterally or 
in conjunction with others, in an unconcentrated than in a concentrated 
market. See Merger Guidelines Sec. 2.0.
---------------------------------------------------------------------------
    Entry and efficiencies are factors that are given considerable 
emphasis in the Guidelines. If entry into a market is easy, post-merger 
market participants likely will be unable profitably to increase prices 
above the pre-merger level. Entry analysis in the electric power 
industry poses a number of difficulties. The size of an efficient 
generating plant has decreased significantly but it still may take 
longer than the Guidelines benchmark of two years to enter at that 
level. Siting and environmental problems may complicate and delay entry 
at any level. Excess capacity and the decommissioning costs of nuclear 
power plants are important factors to consider. The ease of entry in 
this industry may vary from case to case as relevant markets change. 
For instance, available sites for new building may be more abundant in 
some areas than in others, making entry quicker and less costly.
    The potential for anticompetitive effects does not end the inquiry 
in a typical merger investigation. Where the potential for 
anticompetitive effects is a close question, the potential efficiencies 
generated by the merger must be considered. Cognizable efficiencies may 
include economies of scale, integration of production facilities, plant 
specialization, and lower transportation costs.
    The antitrust agencies have long considered efficiencies as 
relevant to the exercise of their prosecutorial discretion when 
deciding whether to challenge a transaction. In a close case, an agency 
may refrain from challenging a merger if it appears that the merger 
would generate substantial efficiencies. After a series of Commission 
hearings on Competition Policy in the New High-Tech, Global Marketplace 
indicated concern with how the antitrust agencies consider efficiencies 
in evaluating mergers, the Commission and the Department of Justice 
published a revised efficiency section for the Guidelines.29
---------------------------------------------------------------------------
    \29\ U.S. Department of Justice and Federal Trade Commission, 
Revised Section 4 of the Horizontal Merger Guidelines (Apr. 8, 1997).
---------------------------------------------------------------------------
    Efficiencies may have particular significance for the electric 
power industry. In an industry that has been pervasively regulated for 
many years, efficiencies are likely to play an enhanced role in 
motivating restructuring after deregulation. Where capital mobility was 
once circumscribed by regulators, firms will now be able to pursue the 
most efficient, market-determined structure.30
---------------------------------------------------------------------------
    \30\ For instance, independent generators that have acted as 
maverick firms may be able to acquire additional capacity quickly, thus 
enhancing their ability and incentive to lower prices. Firms with an 
inefficient mix of generating plants for their markets (e. g., more low 
cost coal fired plants and fewer flexible natural gas fired plants in a 
market with highly volatile time of day demand peaks) may be able to 
alleviate this inefficiency by adjusting their capacity to the demand.
---------------------------------------------------------------------------
                             v. conclusion
    Deregulation in a number of industries has proven to be beneficial 
to many consumers and the competitive process. The deregulated 
industries generally exhibit lower prices, increased quality and 
quantity of goods and services, and heightened innovation. The electric 
power industry is currently experiencing substantial deregulation. 
While it is unclear whether that process will be driven by the states 
or by the federal government, the outcome in either case should be that 
market forces will have an effect on firms long accustomed to the 
slower, sheltered pace of regulated life.
    The potential for consumer savings and increased choice is 
enormous, but it is certainly not guaranteed. Vigilant antitrust 
enforcement is an essential component of a market economy, especially 
in the formative years after the regulatory grasp is loosened. In 
particular, strong merger enforcement is necessary to ensure that the 
inevitable restructuring does not result in the accumulation and abuse 
of private market power. The Commission stands ready to meet its 
enforcement responsibilities to protect the consumer gains that should 
follow the introduction of market forces to the electric power 
industry.

    Mr. Barton. Thank you Mr. Thompson.
    We would now like to hear from the Honorable Isaac Hunt, 
who is a Commissioner with the SEC. Mr. Hunt, your statement is 
in the record in its entirety. We would ask you to attempt to 
summarize it in 7 minutes.

              STATEMENT OF HON. ISAAC C. HUNT, JR.

    Mr. Hunt. Yes, sir. Thank you. Chairman Barton----
    Mr. Barton. And speak--you know, those microphones really 
are very directional.
    Mr. Hunt. Sorry.
    Mr. Barton. Thank you.
    Mr. Hunt. I am pleased to have this opportunity to testify 
before you this morning on behalf of the SEC regarding the 
Public Utility Holding Company Act of 1935. The Commission 
continues to support efforts to repeal the 1935 act and replace 
it with legislation that preserves certain important consumer 
protections.
    In the first quarter of this century, the electric and gas 
utility industry had developed serious problems through the 
misuse of the holding company structure. The 1935 act was 
passed by Congress to address these problems. Reorganization 
and simplification of existing public utility holding companies 
in order to eliminate those abuses was a major part of the 
SEC's work in the years following passage of the 1935 act.
    By the early 1980's, the SEC concluded that the 1935 act 
had accomplished its basic purpose and that its remaining 
provisions to a large extent either duplicated other State or 
Federal regulations or otherwise were no longer necessary to 
prevent the recurrence of the abuses that lead to its 
enactment.
    The SEC concluded that 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. In addition, institutional investors 
such as pension funds and insurance companies had become more 
sophisticated and demanded more detailed information from all 
issuers of securities than was previously available.
    Also changes in the accounting profession and the 
investment banking industry had provided investors and 
consumers with a range of protections unforeseen in 1935; 
therefore, the SEC unanimously recommended that Congress repeal 
the statute.
    Because the potential for abuse through the use of 
multistate holding company structures and related concerns 
about consumer protection continued to exist and because of the 
lack of consensus for change, repeal legislation was not 
enacted in the early 1980's. Since that time, however, the SEC 
has continued its effort to administer the 1935 act flexibly to 
accommodate developments in the industry while adhering to the 
basic purpose of the statute. In addition, Congress has created 
a number of statutory exceptions to the regulatory framework of 
the 1935 act.
    In the summer of 1994, in light of regulatory and other 
changes taking place in the utility industry, the SEC staff, at 
the direction of Chairman Arthur Levitt, undertook a study of 
regulation of public utility companies that culminated in a 
June 1995 report. Based on the report, the SEC has recommended 
that Congress consider three legislative options for 
eliminating unnecessary regulatory burdens.
    The preferred option is repeal of the 1935 act accompanied 
by the creation of additional authority at the State and 
Federal level to permit the continued protection of consumers.
    The Federal Energy Regulatory Commission should have the 
authority to exercise jurisdiction over transactions among 
holding company affiliates. The FERC and State utility 
commissions should be able to review these transactions by 
having access to books and records. This course of action will 
achieve the economic benefits of unconditional repeal and also 
protect consumers.
    The SEC, of course, is aware that the proposals of 
comprehensive reform of energy legislation are under 
consideration by Congress. Representative Stearns and Burr of 
this committee introduced two of these proposals, H.R. 1587 and 
H.R. 662. Repeal of the 1935 act could also be accomplished as 
a part of this overall reform. The SEC respectively defers to 
the judgment of Congress as to whether the public interest is 
better served by separate repeal of the 1935 act or repeal as 
part of a larger legislative initiative.
    The continuing efforts to restructure the utility industry 
raise major competitive issues relating to the market power of 
utilities. The 1935 act was intended to address, among other 
things, the concentration of control of ownership of the public 
utility industry.
    These issues were considered by the SEC staff report. The 
act requires the SEC to disapprove the utility acquisition if 
it will tend toward concentrated control of public utility 
companies in a manner detrimental to the public interest or to 
the interest of investors or consumers.
    Traditionally, the SEC's analysis of utility acquisitions 
includes consideration of Federal antitrust policies. However, 
the SEC is not the only agency that reviews the potential 
anticompetitive effects of utility acquisitions. In many 
instances, proposed utility acquisitions are subject to FERC 
and State approval.
    Like the SEC, the FERC must consider antitrust implications 
of matters before it. The potential anticompetitive effects are 
also reviewed by the Department of Justice and the Federal 
Trade Commission. In recent years, the SEC has looked to all of 
these regulators for their expertise in certain operational 
issues, including the competition issues. In particular, the 
SEC has looked to these regulators in matters where the 
combined entity resulting from a merger would have control of 
key transmission facilities and of surplus power.
    Although the SEC does independently assess the transaction 
under the standards of the 1935 act, we have generally relied 
upon and ``watchfully deferred'' to the FERC's greater 
expertise regarding issues related to utility competition; 
therefore, repeal of the 1935 act is unlikely to affect how 
market power issues are reviewed at the Federal level.
    While the 1935 act provides an additional layer of 
regulatory approval for certain utility mergers, the 
Commission's reliance, where appropriate, on other regulators 
for the key market power determination, makes its review of 
market power issues largely redundant.
    I would be pleased to answer your questions, Mr. Chairman. 
Thank you.
    [The prepared statement of Isaac C. Hunt, Jr. follows:]
Prepared Statement of Isaac C. Hunt, Jr., Commissioner, Securities and 
                          Exchange Commission
    Chairman Barton, Ranking Member Hall, 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''). The 
SEC continues to support repeal of the Public Utility Holding Company 
Act of 1935 (``1935 Act''). Repeal should be done in a manner that 
eliminates duplicative regulation while also preserving important 
protections for customers of utility companies in multistate holding 
company systems.
                            i. introduction
    The electric and gas utility industry had developed serious 
problems in the first quarter of the century through the misuse of the 
holding company structure.1 The 1935 Act was enacted to 
address these problems. Reorganization and simplification of existing 
public utility holding companies in order to eliminate those abuses was 
a major part of the SEC's work in the years following passage of the 
1935 Act.
---------------------------------------------------------------------------
    \1\ 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. 
See 1935 Act section 1(b), 15 U.S.C. Sec. 79a(b).
---------------------------------------------------------------------------
    In the early 1980's, the SEC unanimously recommended that Congress 
repeal the statute.2 The SEC concluded that the 1935 Act had 
accomplished its basic purpose and that its remaining provisions, to a 
large extent, either duplicated other state or federal regulation or 
otherwise were no longer necessary to prevent recurrence of the abuses 
that led to its enactment. Many aspects of 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. In addition, 
institutional investors such as pension funds and insurance companies 
had become more sophisticated and demanded more detailed information 
from all issuers of securities than was previously available. Changes 
in the accounting profession and the investment banking industry also 
had provided investors and consumers with a range of protections 
unforeseen in 1935.
---------------------------------------------------------------------------
    \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 (1982) (statement of SEC).
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    Because the potential for abuse through the use of multistate 
holding company structures, and related concerns about consumer 
protection, continued to exist, and because of a lack of consensus for 
change, repeal legislation was not enacted in the early 1980s. Since 
that time, however, the SEC has continued its efforts to administer the 
1935 Act flexibly to accommodate developments in the industry while 
adhering to the basic purpose of the statute. In addition, Congress has 
created a number of statutory exceptions to the regulatory framework of 
the 1935 Act.3
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    \3\ Most recently, Congress enacted the Telecommunications Act of 
1996. Pub. L. 104-104, 110 Stat. 56 (1996). The Telecommunications Act 
permits registered holding companies, without prior SEC approval under 
the 1935 Act, to acquire and retain interests in companies engaged in a 
broad range of telecommunications activities.
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                          ii. the sec's study
    In response to continuing changes in the utility industry in recent 
years, and the accelerated pace of those changes, Chairman Arthur 
Levitt directed the SEC's Division of Investment Management in 1994 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. Its purpose was to identify unnecessary and overlapping 
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.4
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    \4\ The study focused primarily on registered holding company 
systems, of which there are currently nineteen. 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 more than one hundred, 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 December 31, 1998, the nineteen 
registered holding companies owned more than $170 billion of electric 
utility assets, approximately 25 percent of all assets owned by 
investor-owned electric utilities. Electric utilities owned by 
registered holding companies served 26.4 million customers, or 
approximately 22% of all electric 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. Based on these 
findings, the SEC has recommended, and continues to recommend, that 
Congress repeal the 1935 Act. At the same time, however, the SEC also 
recommends enactment of legislation to provide necessary authority to 
the Federal Energy Regulatory Commission (``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.
    There are several reasons why the SEC supports conditional repeal 
of the 1935 Act. As the Report indicates, portions of the 1935 Act, 
such as those governing issuance of securities, acquisition of other 
utilities, and acquisition of nonutility businesses by registered 
holding companies, largely duplicate other existing regulation and 
controls imposed by the market. Nevertheless, there is a continuing 
need to ensure the protection of consumers.
    Electric and gas utilities have historically functioned as rate-
regulated monopolies, and 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 (``cross-subsidization''). So 
long as electric and gas companies continue to function as monopolies, 
the need to protect against the cross-subsidization of nonutility 
businesses will remain. The best means of guarding against cross-
subsidization is likely to be audits of books and records and federal 
oversight of affiliate transactions.
    Utility rates are regulated by state authorities, and some 
regulators subject these rates to stricter scrutiny than others. A 
survey of state regulation, undertaken in conjunction with the study, 
revealed that the states may not have adequate authority to perform 
audit and review functions with respect to multistate holding 
companies. The provisions of the 1935 Act provide significant 
assistance to these states in their effort to protect utility 
consumers. Earlier efforts to repeal the 1935 Act may have failed 
because they did not address this potential ``regulatory gap'' in 
consumer protection.
                 iii. proposals to repeal the 1935 act
    Repeal of the 1935 Act may be accomplished either separately or as 
part of a more comprehensive package of energy reform legislation. Four 
bills have been introduced in both Houses of Congress that provide for 
the repeal of the 1935 Act, either as part of comprehensive energy 
restructuring or on a stand-alone basis. H.R. 1587, introduced by 
Congressman Stearns on April 27, 1999, and H.R. 667, introduced by 
Congressman Burr on February 10, 1999 (collectively, the ``House 
Bills''), would repeal the 1935 Act as part of broader energy-related 
legislation.5 For example, the House Bills would provide the 
FERC with the right to examine books and records of registered holding 
companies and their affiliates that are relevant to costs incurred by 
associated utility companies, in order to protect ratepayers. The House 
Bills would also provide an interested state commission with access to 
such books and records (subject to protection for confidential 
information), if they are relevant to costs incurred by utility 
companies subject to the state commission's jurisdiction and are needed 
for the effective discharge of the state commission's responsibilities 
in connection with a pending proceeding. Finally, the House Bills would 
provide a transition period in which states, utilities and other 
parties affected by the change in the regulatory regime could prepare 
for the new regime. The House Bills accomplish many of the goals of the 
conditional repeal contemplated by the SEC.
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    \5\ S.516, which was introduced in the Senate on March 3, 1999, 
would also repeal the 1935 Act as part of broader energy-related 
legislation. S.313, which was introduced in the Senate on January 27, 
1999, would repeal the 1935 Act on a stand-alone basis. The 1935 Act 
repeal provisions in the Senate and House bills are, in substance, the 
same, except that H.R. 1587, among other things, would exempt from its 
provisions holding companies currently exempt from registration under 
the 1935 Act. These differences may require further analysis.
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    As the SEC has stated in testimony on bills introduced in the last 
Congress to repeal the 1935 Act, the House Bills do not give the FERC 
the authority it needs to oversee transactions among affiliates in 
holding company systems and, in this respect, do not reflect the SEC's 
preferred legislative option.6 Provisions granting access to 
books and records provide the FERC and the state commissions with the 
authority they need to identify affiliate transactions and their terms 
and effects on utility costs and rates. However, the potential for 
cross-subsidization and consequent detriment to consumers remain, and 
the SEC believes that it is important for the FERC to have the 
flexibility to engage in more extensive regulation, if necessary. As a 
result, the SEC continues to support a broader grant of authority to 
the FERC to oversee these transactions, including, if the FERC deems it 
appropriate, prior review and approval of affiliate transactions.
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    \6\ See The Public Utility Holding Company Act of 1997: Hearings on 
S. 621 Before the Senate Comm. on Banking, Housing, and Urban Affairs, 
105th Cong., 1st Sess. (1997) (testimony of Isaac C. Hunt, Jr. 
Commissioner, SEC); and Regarding Repeal of the Public Utility Holding 
Company Act of 1935: Hearings on S. 621 Before the Senate Comm. on 
Energy and Natural Resources, 105th Cong., 1st Sess. (1997) (testimony 
of Barry Barbash, Director, Div. of Investment Management, SEC).
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    The SEC notes that the Report recommended a transition period of at 
least one year in duration. The National Association of Regulatory 
Utility Commissioners has since suggested that a longer period is 
necessary, in view of the fact that many state legislatures only meet 
biennially. The SEC would have no objection to a longer transition 
period.
                       iv. other recommendations
    Two other legislative options were recommended by the SEC staff 
Report: complete repeal of the 1935 Act and a grant of broader 
exemptive authority under the 1935 Act to the SEC.
    The SEC believes that complete repeal, the second legislative 
option, is premature, because the monopoly power of the industry has 
not yet been completely erased and because of the inconsistent pattern 
of state regulation described above. Some commentators contend, 
however, that the states have the ability, if they choose to exercise 
it, to create regulatory structures that will protect utility consumers 
in holding company systems to the same extent as they are protected by 
the 1935 Act. Complete repeal, like conditional repeal, would require a 
reasonable transition period. As noted above, some states may need a 
period of at least two years to enact new legislation or to add 
resources to meet the additional regulatory burden that would accompany 
unconditional repeal of the 1935 Act.
    The third option is to provide the SEC with more authority to 
exempt holding company systems from the requirements of the 1935 
Act.7 An expansion of exemptive authority would not, of 
course, achieve the economic benefits of conditional or unconditional 
repeal of the 1935 Act, or simplify the federal regulatory 
structure.8 Further, this option would continue to enmesh 
the SEC in difficult issues of energy policy.
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    \7\ The SEC's current exemptive authority is considerably narrower 
than the exemptive authority under other federal securities laws. A 
model of broader exemptive authority is contained in section 6(c) of 
the Investment Company Act of 1940, 15 U.S.C. Sec. 80a-6(c), which 
grants the SEC the authority by rule or order to exempt any person or 
transaction from any provision or rule if the exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors. See also section 206A of the Investment Advisers Act of 
1940, 15 U.S.C. Sec. 80b-6a; and section 36 of the Securities and 
Exchange Act of 1934, as recently amended by the National Securities 
Markets Improvement Act of 1996, 15 U.S.C. Sec. 78mm (same).
    \8\ In the past, the SEC has testified before Congress with respect 
to concerns that arose after the decision by the U.S. Court of Appeals 
for the District of Columbia Circuit in Ohio Power v. FERC, 954 F.2d 
779 (D.C. Cir.), cert. denied, 113 S.Ct. 483 (1992). See Registered 
Holding Company Transactions: Hearing on the 1992 Ohio Power Decision 
Before the Subcomm. on Energy and Power of the House of Representatives 
Comm. on Energy and Commerce, 103d Cong., 2d Sess. 35-48 (1994) 
(testimony of Richard Y. Roberts, Commissioner, SEC). The legislative 
repeal options discussed above would eliminate the problem of 
conflicting SEC and FERC decisions that were the subject of that 
decision.
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    The SEC understands that many believe that repeal of the 1935 Act 
should be accomplished as part of a more comprehensive package of 
energy reform legislation. Repeal of the 1935 Act could also be 
considered as part of this overall reform. The SEC respectfully defers 
to the judgment of Congress as to whether the public interest is better 
served by separate repeal of the 1935 Act or repeal as part of a larger 
legislative initiative.
                         v. market power issues
    The continuing efforts to restructure the utility industry raise 
major competitive issues related to the ``market power'' of utilities. 
The 1935 Act was intended to address, among other things, the 
concentration of control of ownership of the public-utility industry. 
These issues were considered by the SEC's staff in the Report.
    Section 10(b)(1) of the Act requires the SEC to disapprove a 
utility acquisition if it will tend toward concentrated control of 
public-utility companies in a manner detrimental to the public interest 
or the interest of investors or consumers.9 Traditionally, 
the SEC's analysis of utility acquisitions under section 10(b)(1) 
includes consideration of federal antitrust policies.10 More 
specifically, the anticompetitive ramifications of an acquisition have 
traditionally been considered in light of the fact that public 
utilities are regulated monopolies subject to the ratemaking authority 
of federal and state administrative bodies.11
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    \9\ The SEC must also consider whether the purchase price is 
reasonable; whether the purchase will unduly complicate the 
capitalization of the resulting system; and whether the transaction 
will serve the public interest by tending toward the economic and 
efficient development of an integrated public-utility system.
    \10\ Municipal Electric Association v. SEC, 413 F.2d 1052, 1056-07 
(D.C. Cir. 1969) (section 10(b)(1) analysis ``must take significant 
content'' from ``the federal anti-trust policies''), cited in City of 
Holyoke v. SEC, 972 F.2d 358, 363; Environmental Action, Inc. v. SEC, 
895 F.2d 1255, 1260 (9th Cir. 1990) (``Federal antitrust policies are 
to inform the SEC's interpretation of section 10(b)(1)'').
    \11\ Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 
1993), citing Northeast Utilities, Holding Co. Act Release No. 25221, 
request for reconsideration denied, Holding Co. Act Release No. 26037 
(Apr. 28, 1994), remanded sub nom. Cajun Electric Power Cooperative, 
Inc. v. SEC, 1994 WL 704047 (D.C. Cir. Nov. 16, 1994).
---------------------------------------------------------------------------
    However, the SEC is not the only agency that reviews the potential 
anticompetitive effects of utility acquisitions. In many instances, 
proposed utility acquisitions are subject to FERC and state approval. 
Like the SEC, the FERC must consider antitrust implications of matters 
before it.12 In addition, the potential anticompetitive 
effects are also reviewed by the Department of Justice or the Federal 
Trade Commission.
---------------------------------------------------------------------------
    \12\ See Gulf States Utilities Co., v. FPC, 411 U.S. 747 (1973).
---------------------------------------------------------------------------
    In recent years, the SEC has looked to all these regulators for 
their expertise in certain operational issues, including competitive 
issues. In particular, in matters where the combined entity resulting 
from a merger would have control of key transmission facilities and of 
surplus power. Although the SEC does independently assess the 
transaction under the standard of the 1935 Act, we have generally 
relied upon the FERC's greater expertise regarding issues related to 
utility competition. The Court of Appeals for the District of Columbia 
Circuit has stated that ``when the SEC and another regulatory agency 
both have jurisdiction over a particular transaction, the SEC may 
`watchfully defer' to the proceedings held before--and the result 
reached by--that other agency.'' 13
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    \13\ Madison Gas and Electric Company v. SEC, 168 F.3d 1337, (D.C. 
Cir. 1999); City of Holyoke v. SEC, supra note 10, citing Wisconsin's 
Environmental Decade, Inc. v. SEC, 882 F.2d 523 (D.C. Cir. 1989).
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    Therefore, repeal of the 1935 Act is unlikely to effect how market 
power issues are reviewed at the federal level. While the 1935 Act 
provides an additional layer of regulatory approval for certain utility 
mergers, the Commission's reliance, where appropriate, on other 
regulators for the key market power determination, make its review of 
market power issues largely redundant.
                       vi. administrative action
    The SEC continues to support a comprehensive approach to reform of 
the 1935 Act. The SEC has implemented many of the numerous 
administrative initiatives that were recommended in the Report to 
streamline regulation.14 Despite the effects of these 
initiatives, changes in the utility industry are resulting in increased 
activity under the 1935 Act, especially in the area of mergers and 
acquisitions, diversification and affiliate transactions. Hence, 
continuation of the 1935 Act in its present form will require 
additional resources. Moreover, during 1998, mergers resulted in the 
formation of three new registered holding companies. The options of 
conditional repeal or an expansion of the SEC's exemptive authority 
also raise the issue of resources. At present, sixteen full-time 
professional SEC employees are employed in the administration of the 
1935 Act. Their work includes (1) analysis and disposition of various 
transactions for which the 1935 Act requires prior SEC authorization, 
(2) status issues under the 1935 Act, (3) audits of holding company 
systems and related companies, and (4) drafting and implementation of 
rulemaking proposals to reflect changes in the utility industry and in 
financial regulation. Repeal of the 1935 Act would not achieve 
significant cost savings for the federal government, particularly if 
some of these responsibilities were carried out by the FERC. Expanded 
exemptive authority, on the other hand, could require greater 
resources, in view of the need to evaluate and implement broad requests 
for exemptive relief.
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    \14\ 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. 26313 (June 20, 1995), 60 
FR 33642 (June 28, 1995) (proposing rule 58) and No. 26667 (Feb. 14, 
1997), 62 FR 7900 (Feb. 20, 1997) (adopting rule 58)). In addition, the 
Report recommended changes in administration of the Act that would 
permit a ``shelf'' approach for approval of financing transactions, 
relax constraints on utility acquisitions and streamline the approval 
process for such transactions. 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.
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    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 Hunt.
    We would now like to welcome Mr. Douglas Smith, who is the 
General Counsel for the Federal Energy Regulatory Commission. 
Again, your statement is in the record in its entirety, and we 
would ask you to try and summarize in 7 minutes.

                 STATEMENT OF DOUGLAS W. SMITH

    Mr. Smith. Thank you. Good morning, Mr. Chairman and 
members of the subcommittee. My name is Douglas Smith, and I am 
the General Counsel for the Federal Energy Regulatory 
Commission. I am here today as a Commission staff witness and 
do not speak for the Commission as a whole or for individual 
members of the Commission.
    I appreciate the opportunity to discuss with you today the 
important matter of competition policy in the electric 
industry, and particularly, the issues of market power, 
mergers, and the Public Utility Holding Company Act.
    The traditional regulatory approach in this industry was to 
accept that electric utilities were natural monopolies and to 
address market power and protect ratepayer interests primarily 
by relying on cost-of-service rate regulation. In recent years, 
however, we have recognized that generation is not a natural 
monopoly. In the Energy Policy Act of 1992, Congress strongly 
endorsed competition in wholesale power markets with amendments 
to the Federal Power Act and the Holding Company Act.
    The Commission shares this overarching goal of promoting 
competition in wholesale electricity markets, having concluded 
that vigorous competition, as opposed to traditional forms of 
price regulation, can best protect the interests of ratepayers. 
The Commission has pursued procompetitive goals by ordering 
open access to transmission facilities in Order Number 888 and 
in its policies on mergers and market-based wholesale rates.
    Competition in bulk power markets can be frustrated, 
however, by the exercise of market power. Market power may take 
many forms including, most notably, control of access to 
transmission facilities necessary to deliver electricity, 
concentration in generation markets, or control of inputs to 
generation such as fuel.
    Market power considerations related to ownership and 
control of transmission facilities are at the core of Order 
Number 888's open access transmission policies. Fair and open 
access to reliable transmission service is an essential 
predicate to competition in bulk power markets. Effective 
regulation of the relatively small transmission sector enables 
competition, with its consequent ratepayer benefits, in a much 
larger generation sector.
    The Commission is seeking further improvements in the 
transmission arena to support fully competitive wholesale power 
markets. Of particular importance, it is exploring how it might 
promote the formation of regional transmission organizations 
that have operational control over a region's transmission grid 
and are independent of the financial interests of power market 
participants. Such regional transmission organizations can 
enhance competition by reducing rate pancaking, eliminating 
opportunities for bias in transmission operations and allowing 
for more efficient and reliable operation and planning of the 
transmission grid.
    The Commission also considers market power issues in 
reviewing applications for mergers or other jurisdictional 
transactions. In assessing whether a proposed merger is 
consistent with the public interest, the Commission considers 
factors including the effect of the merger on competition and 
the effect of the merger on rates. If a merger would create or 
enhance market power, the Commission has authority to condition 
approval of a merger so as to mitigate any anticompetitive 
effects.
    As Congress considers legislative reforms relating to the 
electric industry, it should consider whether regulators will 
have the range of tools necessary to address market power 
problems that may threaten competition. With respect to 
transmission, for instance, FERC Chairman Jim Hoecker recently 
testified before this subcommittee in favor of extending open 
access requirements to all transmitting utilities in the lower 
48 States, clarifying FERC authority to provide for independent 
regional management of the transmission grid, and establishing 
a fair and effective program of mandatory reliability 
standards.
    Let me turn briefly to the Holding Company Act. As a 
general matter, as you have heard, the Securities and Exchange 
Commission regulates registered utility holding companies, 
while the FERC regulates the operating electric utility and gas 
pipeline subsidiaries of the registered holding companies. The 
DC Circuit's Ohio Power decision limiting FERC review of the 
prudence of interaffiliate contracts left a gap in FERC's rate 
regulation of electric utilities. The result is that utility 
customers served by registered holding companies have less rate 
protection than customers served by nonregistered systems.
    Any legislation to reform or repeal the Holding Company Act 
should ensure that FERC and the States have adequate authority 
to examine the books and records of all companies in a holding 
company system that are relevant to reviewing the costs 
incurred by an affiliated electric utility.
    As we continue to move toward bulk power markets in which 
price is set predominantly by the market rather than by 
regulators, we must ensure effective regulation of essential 
transmission facilities and the mitigation of market power. 
These issues require careful attention from Congress, FERC, the 
antitrust agencies and our State counterparts. The Federal 
statutory regime should protect customers by combining 
procompetitive policies with the regulatory tools necessary to 
constrain market power effectively.
    Thank you. I would be glad to take any questions.
    [The prepared statement of Douglas W. Smith follows:]
Prepared Statement of Douglas W. Smith, General Counsel, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: Good morning. My name 
is Douglas Smith, and I am the General Counsel for the Federal Energy 
Regulatory Commission. I am here today as a Commission staff witness, 
and do not speak for the Commission itself or for individual members of 
the Commission. Thank you for the opportunity to appear before you 
today to discuss competition policy in the electric industry, and 
particularly the issues of market power, mergers and the Public Utility 
Holding Company Act of 1935 (PUHCA).
    One of the Commission's overarching goals is to promote competition 
in wholesale power markets, having concluded that effective 
competition, as opposed to traditional forms of price regulation, can 
best protect the interests of ratepayers. Market power, however, can be 
exercised to the detriment of effective competition and consumers. 
Thus, the Commission regulates transmission service, mergers, and 
wholesale power rates so as to prevent the exercise of market power in 
bulk power markets. As Congress considers electricity legislation, it 
will be important to ensure that appropriate and effective tools are 
available to address market power issues if competition is to continue 
to grow in the bulk power markets.
                            i. market power
    In enacting Part II of the Federal Power Act (FPA) in 1935, one of 
the primary Congressional goals was to protect electric ratepayers from 
abuses of market power. In furtherance of this goal, Congress directed 
the Commission to oversee sales for resale and transmission service 
provided by public utilities in interstate commerce. Under sections 205 
and 206, the Commission must ensure that the rates, terms and 
conditions of these services are just, reasonable, and not unduly 
discriminatory or preferential. Under section 203, the Commission must 
review proposed mergers, acquisitions and dispositions of 
jurisdictional facilities by public utilities, if the value of the 
facilities exceeds $50,000, and must approve such transactions if they 
are consistent with the public interest. The Commission's regulation 
under these sections applies only to ``public utilities,'' which mainly 
include investor-owned utilities and exclude the federal power 
marketing administrations, municipal utilities, and most rural electric 
cooperatives.
    The traditional regulatory approach was to accept that electric 
utilities were natural monopolies, and to address market power and 
protect ratepayer interests primarily by relying on cost-of-service 
rate regulation.
    In the 1980s and early 1990s, industry developments indicated that 
the interests of ratepayers could be better protected by competition in 
generation markets than by cost-based regulation for wholesale sales. 
The benefits of competition in place of traditional regulation were 
increasingly evident in other industries, such as trucking, railroads, 
telecommunications and natural gas. Also, prompted by a range of 
economic, legislative and technological factors, some competition among 
generators already had begun developing in the electric industry. One 
key factor was the Public Utility Regulatory Policies Act of 1978 
(PURPA), which opened the door for non-utility generators.
    In the Energy Policy Act of 1992, Congress strongly endorsed 
competition in wholesale power markets with amendments to the FPA and 
PUHCA. The Commission has pursued this pro-competition focus by 
ordering open access to transmission facilities in Order No. 888, and 
in its merger and wholesale rate policies. The Commission's primary 
focus has shifted from cost-based ratemaking to creating the conditions 
for robust competition. This transition has required the Commission to 
pay increasing attention to issues of market structure, market power 
and market monitoring.
    Competition in bulk power markets can be diminished or blocked by 
the exercise of market power. Market power may take many forms, 
including control of access to transmission facilities necessary to 
deliver electricity, concentration in generation markets, or control of 
inputs to generation such as fuel.
    Market power problems can result in higher prices to customers. For 
example, absent regulation, a vertically-integrated utility could 
prevent its competitors in wholesale power markets from using its 
transmission facilities to deliver power to buyers. Buyers then would 
have fewer competitive options and, as a result, may have to pay higher 
prices. Similarly, a utility with a large enough share of the 
generating capacity in a market can raise prices by withholding supply 
from the market. A utility that controls enough of an input to power 
production (such as pipeline capacity for delivering natural gas to 
power plants) can achieve the same result.
    Market power can be created or enhanced by mergers. Mergers can 
eliminate a competitor from the market and concentrate control of 
generating assets. Mergers can also enhance vertical market power, by 
giving the merged company a new or increased ability and incentive to 
restrict inputs to power production.
    Discussed below are five key market power issues: transmission 
market power; market-based rates for sales of power; mergers of public 
utility facilities; State regulation of market power; and possible 
legislative reforms.
A. Transmission Market Power
    Market power considerations related to ownership and control of 
transmission facilities are at the core of the Commission's open access 
transmission policies. Fair and open access to reliable transmission 
service is an essential predicate to competition in bulk power markets. 
Effective regulation of the relatively small transmission sector (which 
accounts for 10% of overall utility costs) enables competition, with 
its consequent ratepayer benefits, in the much larger generation sector 
(which accounts for 60% of total utility costs).
    In the Energy Policy Act of 1992, Congress broadened the 
Commission's authority under section 211 of the FPA to require 
transmission service on a case-by-case basis. This legislation, as 
implemented by the Commission, helped to expand the trading 
opportunities of wholesale sellers and buyers. However, the Commission 
concluded that competition in wholesale markets still was being 
inhibited by the lack of non-discriminatory access to transmission 
facilities. Generation sellers owning transmission facilities were 
stifling competition by discriminating against competing sellers that 
sought to use their transmission facilities, either by denying or 
delaying transmission service or by imposing discriminatory rates, 
terms and conditions for service. The Commission recognized that it 
needed to act generically to provide for open access transmission if it 
was to meet the Congressional goal of developing competitive wholesale 
markets.
    Consequently, the Commission in 1996, through a major rulemaking 
called Order No. 888, ordered open (non-discriminatory) access to the 
transmission facilities of public utilities. Order No. 888 allows 
transmission customers to obtain service that they could not previously 
obtain, and to secure those services more quickly and with more 
certainty about rates, terms and conditions. This open access 
obligation prohibits public utilities from discriminating against 
competitors' transactions in favor of their own wholesale sales of 
power.
    In Order No. 888, the Commission also encouraged, but did not 
require, the formation of independent system operators (ISOs) to 
promote broader, regional power markets and provide greater assurance 
of non-discrimination. Since then, six ISOs have been established (in 
California, the mid-Atlantic states, New England, New York, the Midwest 
and Texas), and four of these are currently operational.
    The Commission is seeking further improvements in transmission 
access and grid operation to support fully competitive wholesale power 
markets. Of particular importance, it is exploring how it might promote 
the formation of regional transmission organizations (RTOs) such as 
ISOs and independent companies that own and operate transmission 
facilities (transcos). An RTO that covers an appropriately configured 
region, has adequate operational control over the transmission grid, 
and is independent of the financial interests of power market 
participants, can address obstacles to competition by reducing rate 
pancaking, eliminating opportunities for bias in transmission 
operations, and allowing for more efficient and reliable operation and 
planning of the transmission grid.
    As FERC's Chairman Hoecker testified before this Subcommittee two 
weeks ago, legislation on transmission issues is needed to ensure the 
full development of wholesale competition and maintain our high 
standard of reliability. Specifically, Chairman Hoecker recommended 
legislation that would: bring all transmission facilities in the lower 
48 states within the Commission's open access transmission rules; 
clarify the Commission's authority to promote regional management of 
the transmission grid through regional transmission organizations; and, 
establish a fair and effective program to protect bulk power 
reliability. Addressing these transmission-related issues should be a 
priority in any legislative reform agenda.
B. Market-Based Rate Review
    To promote competition, the Commission allows market-based rates 
for wholesale sales of electricity when an applicant shows that it and 
its affiliates lack or have mitigated market power. In evaluating 
horizontal market power for these purposes, the Commission 
distinguishes between new generating facilities and existing 
facilities. For sales from new generating facilities, the Commission 
applies a rebuttable presumption that the applicant lacks generation 
market power, but intervenors may present specific evidence to the 
contrary. For sales from existing generating facilities, the Commission 
uses a case-specific analysis of whether the applicant and its 
affiliates control a significant share of the total generation capacity 
that can be accessed by the utilities directly interconnected to the 
applicant or its affiliates. The Commission's general benchmark for 
concern is a market share of 20 percent or more.
    In evaluating vertical market power for these purposes, the 
Commission considers the extent of the applicant's control of any 
inputs to power production. Most applicants for market-based rates lack 
significant control of such inputs and thus present no vertical market 
power concerns. The Commission analyzes the control of transmission 
facilities separately from other sources of vertical market power and, 
for purposes of market-based rates, currently accepts compliance with 
Order No. 888's open access requirements as adequate mitigation of 
transmission market power.
    If an applicant or its affiliates appear to have market power that 
has not been mitigated, the Commission generally will deny market-based 
rates. Alternatively, the Commission may preclude the use of an 
applicant's market-based rates in specific geographic areas in which 
the applicant fails to demonstrate a lack of market power, or may 
impose other appropriate conditions on the use of market-based rates.
    Should the Commission identify market power problems after market-
based rates have been authorized, it can revoke market-based rates and 
return to cost-of-service regulation. This remedy does not eliminate 
the underlying market power but, instead, relies on price regulation to 
mitigate the potential for its exercise.
C. Merger Review
    The Commission considers market power issues in reviewing 
applications for mergers or other jurisdictional acquisitions or 
dispositions of assets. In a merger policy statement issued in December 
1996, the Commission stated that, in assessing whether a proposed 
merger was in the public interest, it would consider the effects of the 
merger on competition, on rates and on regulation. The Commission 
sought to streamline its merger review process and to reduce filing 
burdens on merger applicants by adopting the Department of Justice/
Federal Trade Commission merger guidelines as the framework for 
analyzing a merger's horizontal effects on competition. These 
guidelines set out five steps for analyzing mergers, based on: (1) 
whether the merger would significantly increase market concentration; 
(2) whether the merger would result in adverse competitive effects; (3) 
whether entry would mitigate the merger's adverse effects; (4) whether 
the merger would result in efficiency gains not achievable by other 
means; and (5) whether, absent the merger, either party would likely 
fail.
    The Commission's merger policy statement also described a 
conservative analytical screen for quickly identifying mergers unlikely 
to raise horizontal market power concerns. The screen analysis focuses 
on the first step identified in the DOJ/FTC guidelines, i.e., whether 
the merger would significantly increase concentration. The screen 
analysis relies on a ``delivered price'' test to define relevant 
markets and the suppliers that can deliver power to affected customers 
at competitive prices. If the screen analysis shows that the proposed 
merger will not increase market concentration by more than 100 HHI 
points in a moderately concentrated post-merger market (defined as 
1,000 to 1,800 HHI points) or 50 HHI points in a highly concentrated 
post-merger market (defined as exceeding 1,800 HHI points), the 
Commission will not set the matter for hearing to further consider 
competitive effects.
    The Commission's analysis of vertical market power concerns is 
similar. A vertical merger is unlikely to harm competition unless the 
merged company has the incentive and the ability to affect prices or 
quantities in the upstream (input) market and the downstream 
(electricity) market. For example, a company must be able, and have an 
incentive, to restrict service or raise prices for an input such as 
natural gas pipeline capacity and, as a result, restrict service or 
raise prices in supplying wholesale power.
    If a merger will create market power or enhance the applicants' 
market power significantly, mitigation of these effects is required in 
order to ensure that the merger is consistent with the public interest. 
Section 203 of the FPA gives the Commission authority to approve a 
merger conditionally, i.e., subject to ``such terms and conditions as 
it finds necessary or appropriate to secure the maintenance of adequate 
service and the coordination in the public interest of facilities 
subject to the jurisdiction of the Commission.'' In order to mitigate 
merger-enhanced market power, the Commission has conditioned merger 
approvals on measures such as providing others with access to the 
merged company's constrained transmission facilities, and restricting a 
fuel-supplying affiliate from giving information to its power-selling 
affiliates about fuel deliveries to competing power sellers.
    The Commission's jurisdiction over mergers and acquisitions is 
limited in certain ways. First, the Commission has no direct 
jurisdiction over transfers of generation facilities. It can review 
transactions involving a public utility only when they involve other 
facilities that are jurisdictional (such as transmission facilities or 
contracts for wholesale sales). Thus, although concentration of 
generation assets may directly affect competition in wholesale markets, 
transactions involving only generation assets may not be subject to FPA 
review.
    Second, the Commission lacks direct jurisdiction over mergers of 
public utility holding companies. While the Commission has considered 
such mergers to involve jurisdictional indirect mergers of public 
utility subsidiaries of the holding companies, or changes in control 
over the jurisdictional facilities of the public utility subsidiaries, 
the FPA is not explicit on this point.
    These jurisdictional gaps could be usefully addressed in the course 
of legislative reform.
D. State Issues
    Chairman Barton's letter of invitation for this hearing asked that 
I address the states' ability to effectively address market power 
issues. The states are well aware of the potential harm caused by 
market power. To wit, the National Association of Regulatory Utility 
Commissioners (NARUC) has issued a resolution on market power in a 
restructured electric power industry which finds that market power 
abuses ``can diminish the economic gains to consumers from a 
restructured electric power industry, in which long-term consumer 
interests require that neither incumbents nor new entrants gain or 
retain unfair market advantage.'' The resolution also concluded that 
``after-the-fact antitrust enforcement may not be sufficient to protect 
against market power abuses in the transition from monopoly to 
competitive markets.''
    As States address market power issues in the context of, for 
instance, merger reviews and retail competition initiatives, certain 
limits on their ability to protect against market power abuses may 
become significant. The extent of this concern is best explored with 
witnesses testifying on behalf of the States. However, I will briefly 
mention three issues. First, electricity markets are becoming larger, 
regional markets, and individual states may find themselves 
geographically limited in their ability to identify and remedy market 
power problems. Second, state regulators may lack the state law 
authority or resources needed to tackle new and challenging market 
power issues. Third, transmission and wholesale sales in interstate 
commerce may affect retail competition but are within exclusive Federal 
jurisdiction.
    In such circumstances, the States may seek Federal assistance in 
addressing market power problems in regional electricity markets. The 
Commission, to the extent of its existing authority, can serve as a 
backstop for States in circumstances where a State lacks adequate 
authority and seeks FERC's assistance. For example, FERC has stated its 
willingness to assess a merger's effects on retail competition if asked 
by an affected state commission lacking adequate authority under state 
law. However, in this example, there may be insufficient authority--
State or Federal--to address market power in retail markets.
E. Legislative Reforms on Market Power
    As we seek to rely primarily on competition as opposed to 
traditional price regulation to protect the interests of ratepayers, 
regulators must have the range of tools necessary to address market 
power problems that may threaten competition. Reforms to the Federal 
statutory scheme are appropriate to permit regulators to keep up with 
the new market power challenges.
    The Administration's newly-proposed bill addresses a number of 
market power issues. With respect to transmission, the bill would 
permit the Commission to extend its open access requirements to non-
public utilities in the lower 48 States, would clarify the Commission's 
authority to promote regional management of the transmission grid 
through RTOs, and would establish a fair and effective program of 
mandatory reliability standards. Chairman Hoecker testified recently in 
favor of such changes.
    The Administration's bill also would close the gap in the 
Commission's jurisdiction over mergers involving only generation 
facilities, and would clarify that holding companies with electric 
utility subsidiaries cannot merge without Commission review. The bill 
would further allow FERC to address market power in retail markets, if 
asked by a state commission lacking adequate authority to address the 
problem, and would give the Commission explicit authority to address 
market power in wholesale markets by requiring a public utility to file 
and implement a mitigation plan. Each of these reforms also deserves 
careful consideration as you consider legislation to promote 
competitive electricity markets.
                 ii. public utility holding company act
    As a general matter, the Securities and Exchange Commission (SEC) 
regulates registered utility holding companies while FERC regulates the 
operating electric utility and gas pipeline subsidiaries of the 
registered holding companies. The agencies often have responsibility to 
evaluate the same general matter, but from the perspective of different 
members of the holding company system and for different purposes. FERC 
focuses primarily on a transaction's effect on utility ratepayers. The 
SEC focuses primarily on a transaction's effect on corporate structure 
and investors.
    Under section 32 of PUHCA (added by the Energy Policy Act of 1992), 
FERC must determine whether an applicant meets the definition of an 
exempt wholesale generator and thus is exempt from PUHCA. With minor 
exceptions, the SEC continues to make PUHCA exemption determinations 
under other provisions of PUHCA.
    In the area of utility rates, the SEC must approve service, sales 
and construction contracts among members of a registered holding 
company system. FERC must approve wholesale rates reflecting the 
reasonable costs incurred by a public utility under such contracts.
    This last example of overlapping jurisdiction has been a subject of 
concern. In 1992, the United States Court of Appeals for the District 
of Columbia Circuit held, in Ohio Power Company v. FERC, 954 F.2d 779 
(D.C. Cir. 1992) (Ohio Power), that if a public utility subsidiary of a 
registered holding company enters into a service, sales or construction 
contract with an affiliate company, the costs incurred under that 
affiliate contract cannot be reviewed by FERC. The SEC has to approve 
the contract before it is entered into. However, FERC cannot examine 
the reasonableness or prudence of the costs incurred under that 
contract. FERC must allow those costs to be recovered in wholesale 
electric rates, even if the utility could have obtained comparable 
goods or services at a lower price from a non-affiliate.
    The Ohio Power decision has left a significant gap in rate 
regulation of electric utilities. The result is that utility customers 
served by registered holding companies have less rate protection than 
customers served by non-registered systems. If the contract approval 
provisions of PUHCA are retained, this regulatory gap should be closed 
to restore FERC's ability to regulate the rates of utilities that are 
members of registered holding company systems.
    Setting aside the Ohio Power issue, let me address PUHCA more 
broadly. PUHCA was not crafted with competitive electricity markets in 
mind. For example, acquisitions by registered holding companies 
generally must tend toward the development of an ``integrated public-
utility system.'' To meet this requirement, the holding company's 
system must be ``physically interconnected or capable of physical 
interconnection'' and ``confined in its operations to a single area or 
region.'' This requirement tends to encourage geographic concentrations 
of generation ownership. Similarly, although the 1992 amendments 
providing for exempt wholesale generators removed regulatory obstacles 
to new entrants in the wholesale generation market, these new 
generators cannot compete, under the current exemption, for retail 
sales in markets where States have provided retail competition.
    Any legislation to reform or repeal PUHCA, however, should ensure 
that the Commission and the States have adequate authority to examine 
the books and records of all companies in a holding company system that 
are relevant to costs incurred by an affiliated utility. This type of 
authority will provide a new, effective tool to protect against 
affiliate abuse and ensure that remaining captive consumers do not 
cross-subsidize entrepreneurial ventures.
                            iii. conclusion
    Competition in electricity markets will not effectively protect 
ratepayers if some market participants can exercise market power. Thus, 
as we continue to move toward more competitive power markets and remove 
regulatory controls over sales of power, we must ensure effective 
regulation of essential transmission facilities and the mitigation of 
market power. These issues require careful attention by Congress, FERC, 
the antitrust agencies and our State counterparts. The Federal 
statutory regime should protect consumers by combining pro-competitive 
policies with the regulatory tools necessary to constrain market power 
effectively.
    Thank you again for the opportunity to offer my views here this 
morning. I would be pleased to answer any questions you may have.

    Mr. Barton. Thank you, Mr. Smith.
    The Chair recognizes himself for the first 5 minutes of 
questions.
    I didn't hear your verbal statements, however, I did scan 
your written testimony last evening, but I won't swear that I 
read them verbatim. I didn't see this definition of market 
power.
    Can any of you gentlemen define for me the area that we 
would have under consideration when trying to determine if 
there is a market power violation and what the variables are 
that would be considered in trying to determine whether 
something should be done to lower market power?
    That is the easy question.
    Mr. Melamed. That is the right one for me then.
    Chairman Barton, I think the concept of market power that 
would be appropriate here is the same as the concept ordinarily 
used in antitrust enforcement, and that is market power is 
defined as the power of an individual firm to raise prices--
profitably to raise and maintain prices above competitive 
levels.
    As a practical matter, a likely condition of market power 
is that the firm is not subject to sufficient checks by rivals, 
by alternatives vying for the patronage of its customers, to 
discipline its price and require that its price be at 
competitive levels.
    Mr. Barton. Does anybody else want to take a crack at that? 
Okay.
    Mr. Smith. I would just note that there are a number of 
different kinds of market power that we need to be concerned 
about. One, in this industry, is control over essential 
transmission facilities. This has been at the core of a lot of 
the Commission's activities in recent years, with the 
Commission making sure that there is open access to the 
essential facilities needed to participate in competitive 
markets.
    The second obviously is concentration in generation 
markets, where the issue is whether the markets are 
sufficiently concentrated that players could withhold 
generation and raise prices.
    Mr. Barton. Well, by definition, under current situations 
in most localities with 100 percent market power, you only have 
one electric supplier to your home or your business. And the 
whole goal of this operation is to give people choices so that 
there are multiple suppliers for each home; and I think 
transmission access is key to trying to have true competition.
    But I don't think that we can adopt a deregulation bill 
with a definition of market power that is similar to what the 
Supreme Court had for pornography: They don't know how to 
define it, but they know it when they see it. I mean, that 
tends to put the onus on the market, and if we take the first 
gentleman, his definition, he seemed to allude to kind of an 
activity test that you have to determine what the average 
market price should be, and then make some determination if for 
some reason it is higher than that. So I know that is a very 
difficult question.
    But I would really appreciate it if you would set some of 
the best minds in your Commissions to working on it, and for 
the written record, give us a little bit more definition.
    Mr. Thompson, did you want to say something before I ask my 
second question?
    Mr. Thompson. I appreciate your caveat, but I think what is 
important to recognize: You are right, we are in a situation 
where you already have essentially monopolies on a regional or 
a local basis. The real question is, how do they move toward 
competition, and do they move toward it in a timely fashion in 
a way that also permits other competitors to come in.
    So you are right in noting where we are right now. The 
reason that we talked about the importance of the tools that 
are used to mitigate the impacts of market power is how other 
competitors come into the market and how you level the playing 
field so that they can get access not only to essential 
facilities, but also provide the array of services and price 
that consumers want to see.
    Mr. Barton. So you want more of an openness, ease of entry, 
availability to the market?
    Mr. Thompson. I think that is going to be an important 
feature. But it is also important to recognize--and what is 
hard to deal with in this issue is that I recognize that in 
various parts of the country, you have different situations, 
depending on each region. So you are going to have to provide 
some flexibility in order to adjust to the given conditions and 
the particular monopoly that is in existence.
    Mr. Barton. My time has expired. I want to ask one question 
and again this may be something you want to submit for the 
record. But I think the General Counsel from FERC hit on 
something about there has to be transmission access. And I am 
toying with the concept, and if we get to a situation where we 
are able to draft a comprehensive bill, that we should put in 
some sort of a petition process so that there can be a petition 
made to the relevant Federal agency that existing transmission 
capacity is insufficient to allow true competition, that the 
Federal Energy Regulatory Commission, the Federal Trade 
Commission or whatever Federal agency has jurisdiction would 
certify that there is a need for additional transmission 
capacity, and leave it up to the States to go through the 
siting process and the allocation process.
    Is that concept of trying to give additional expedited 
access in terms of additional transmission--is that something 
that you gentlemen think could be a part of a comprehensive 
bill?
    I have never seen such distinguished witnesses seem to be 
at a loss for words for such simple questions.
    Mr. Smith. I will pipe in.
    Clearly, physical facility-related transmission constraints 
are a restraint on competition. And in some places, as I am 
sure you are aware, the issues about the role of the States and 
the role of the Federal Government in transmission siting are 
complex and politically complicated.
    One thing I would mention is that the Commission is hopeful 
that, with the growth of regional transmission organizations as 
independent operators and planners for the transmission system 
in a region, these organizations will have the credibility to 
make the kinds of findings that you are talking about. They 
would make an independent judgment about whether particular 
transmission facilities are necessary for either reliability 
reasons or market efficiency reasons. Having an independent 
regional judgment about that might have the same kind of effect 
I think you are talking about--giving some impetus to the 
States to proceed with projects that might not be in the sole 
interest of that State, but would be in the interest of 
competition more generally.
    Mr. Barton. Well, my concept is to let the Federal level 
make a determination based on a petition that there is a need, 
but then let the State or regional officials do the siting and 
the capacity allocation so that you don't impinge on State's 
rights and the regionality that you talked about.
    If you all want to give some additional thought to that. 
Would you like to say something, Mr. Melamed, before I 
recognize Mr. Hall?
    Mr. Melamed. If I could briefly, Chairman Barton.
    You are quite right that access to transmission is the key, 
the critical element here if there is going to be real 
competition at retail or in generation. One approach is a 
regulatory approach such as FERC Order 888, and elaborated on 
the way that you suggested; and to the extent that that is 
necessary to enhance access, that would be a desirable step.
    But the administration's position and the Antitrust 
Division's position would be that it would be preferable to try 
to do structural remedies wherever possible to avoid the need 
for increasingly intrusive regulation. And therefore, giving 
FERC the authority to turn operational control of transmission 
over to the independent regional system operators and thereby 
removing centers for obstructions to access, we think, would be 
an important and valuable alternative to regulation and a 
superior one to regulation to achieve that same objective.
    Mr. Barton. My only point is you may need additional 
capacity. It may not just be a legal constraint. It may 
actually be a physical constraint.
    Mr. Melamed. I agree with that.
    Mr. Barton. The gentleman from Texas, Mr. Hall, is 
recognized for 5 minutes.
    Mr. Hall. Thank you, Mr. Chairman. I guess I direct my 
question either to Mr. Smith or Mr. Melamed.
    The administration bill authorizes FERC to order 
divestiture of utility assets if they are requested to do so by 
a State. And I think you all seem to support that. How would 
this work in case of a multistate utility, where various State 
commissions might have differing opinions about, say, for the--
even the need for divesture; and do they all have to agree, or 
can one ask for divesture and they get it? How does that work?
    I might ask Mr. Smith of the FERC if you would answer.
    Mr. Smith. It depends whether the administration bill is 
written to preempt the State role in that decision. And I 
honestly don't know whether it is written that way or not. One 
could write it either way so that one needed to get concurrent 
approvals from the States in order to make the divestiture 
happen or that the Federal Government could order divestiture 
notwithstanding the views of the States.
    I don't know which way it is written, but I suspect it is 
intended to be preemptive. But I don't know that.
    Mr. Hall. You don't have any opinion on that or any 
suggested wording for amendments that might bring it into an 
area that would be a little easier and more understandable? If 
you do, give them--submit them for the record.
    Mr. Hunt, you state in your testimony on page 4 that the 
best means of guarding against cross-subsidization is likely to 
be audits of books and records and Federal oversight of 
affiliation transactions. Tell me why this can't be 
accomplished by State regulatory authority. Can it, and if it 
can't, why can't it?
    Mr. Hunt. Well, we think that as an overall Federal policy 
matter, giving the audit power and books and records and 
inspection power to the Federal Energy Regulatory Commission 
makes sense. It would make for a more uniform examination of 
the books and records and perhaps a more uniform determination 
of the issues that arise in acquisitions and other things than 
if a multi-state holding company were only overseen on a State 
by State basis.
    Mr. Hall. You do that in the name of uniformity?
    Mr. Hunt. I think so, yes, sir. I think the Commission 
thinks there is still a role for Federal regulatory activity in 
the whole area of utility production and regulation, although 
we clearly believe that the role for the SEC is probably a day 
that has come and passed, but that the FERC and the Department 
of Justice and the Federal Trade Commission in terms of 
anticompetitive aspects and the FERC in terms of regulating 
transmissions still have a significant role to play.
    Mr. Hall. Any other opinions on that?
    Mr. Smith. I would just comment from the FERC perspective--
--
    Mr. Hall. Yes.
    Mr. Smith. [continuing] from the FERC perspective, and I 
would assume that the State issues parallel our issues.
    We have many utilities in this country that have market-
based rate authority, but many of them also still have cost-
based rates that we regulate. And in order to effectively 
assess the prudence of costs that utilities are seeking to 
include in cost-based rates when they are engaging in 
transactions with holding company affiliates, which are not 
arm's length transactions, we feel that we would need access to 
the books of the affiliates.
    Right now, from FERC's perspective, it is the electric 
utility itself and not its affiliates that are jurisdictional. 
So the idea is to make sure that we can get the books and 
records from the affiliate to assess whether the costs are 
prudently incurred and should be included in cost-based rates.
    I think the States have the same kind of concern about 
their ability to reach the books and records of affiliates.
    Mr. Hall. Okay. I thank you. I yield back my time.
    Mr. Barton. The gentleman from Texas yields back his time.
    The gentleman from Oklahoma, Mr. Largent, is recognized for 
5 minutes for questions only.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Smith, what current authority, regulatory authority, 
does FERC have over generation?
    Mr. Smith. We regulate wholesale power rates and we 
regulate jurisdictional mergers and dispositions of assets. We 
don't directly regulate generation; States regulate generation 
facilities.
    Mr. Largent. Can you give me an example of either a 
horizontal or a vertical power, market power exercised legally, 
that would fall outside of current antitrust laws?
    Mr. Smith. Do you mean Federal Power Act review or the 
antitrust laws more broadly?
    Mr. Largent. More broadly. The antitrust laws, yes.
    Mr. Smith. I would defer to Mr. Melamed. But I think the 
antitrust laws would apply to all of these transactions, the 
way they do to the transactions in the economy generally.
    Mr. Largent. Mr. Melamed, if you want to comment on that. I 
am trying to find out--give me an example of a vertical or 
horizontal market power being exercised legally that would fall 
outside of antitrust laws that are currently on the books.
    Mr. Melamed. Okay. Leaving aside the question of whatever 
regulatory constraints there might be, if a monopoly generation 
facility increased prices and exercised market power, or a 
monopoly transmission facility increased prices, or under some 
circumstances, sought to favor its own generation facility in 
transmission, those forms of conduct that simply reflect the 
ordinary exercise of lawfully existing market power that is 
created today, lawfully----
    Mr. Largent. Wait a minute. We are talking about a 
competitive market so you have got somebody exercising market 
power by raising their prices at a time that they have got 
competitors in there that are competing with them on a price 
basis.
    So why--I mean, how would that work? I don't even 
understand, in a free market situation, how that would be an 
exercise of market power, how that would even be logical to do.
    Mr. Melamed. What you are suggesting, Congressman, is that 
it may be that if--that once competition is permitted, there 
will be sufficient competitive constraints, there won't be 
market power--no firm will have it because it will be 
constrained by competition.
    Mr. Largent. No, what I am saying is, there could be market 
power exercised vertically or horizontally, but not legally, 
that would fall outside of the bounds of what we already have 
on the books that could be approached by your department as an 
antitrust behavior.
    Mr. Melamed. Let us imagine that we permit competition, we 
deregulate the wholesale market, and it so happens that there 
is only one major generation facility capable of serving a 
particular set of customers----
    Mr. Largent. Wait. That is not even rationale, because the 
whole idea is the reason that we can go to a retail competitive 
market is because we can wheel power from other generators that 
are outside a geographic area.
    Mr. Melamed. If the transmission facilities are 
sufficiently open and the technology----
    Mr. Largent. Which is what every bill--which is what we are 
all about. I mean, this whole issue is about open access, so 
assume open access.
    Mr. Melamed. If we have adequate open access and the 
technology is sufficiently robust, then it is the case that 
there should not be market power because the generation 
facilities will be subject to competitive constraints from 
other generation facilities, and we wouldn't have an exercise 
of market power.
    I thought your question was imagining, what if there were 
market power, could it be exercised in a way that could not be 
reached or prohibited by the antitrust laws. And the answer to 
that question is, yes. If there is--if there is existing market 
power, by reason of an industry structure that arose lawfully 
in the past, the antitrust laws don't prohibit increasing 
prices or otherwise merely exercising market power.
    Mr. Largent. I heard several people testify, well, if they 
have all of the generation facilities and they can kind of 
collude and raise prices or lower generation in an effort to 
raise prices, that clearly is antitrust behavior; or if you 
have somebody that has a vertically integrated system so they 
own generation transmission and distribution, and they can just 
say, well, we control this area, so we will limit access. That, 
again, would clearly be antitrust behavior, especially in a 
restructured environment that is illegal currently.
    So what I am trying to drive at, why do we need to have or 
grant FERC authority and generation where they have very 
limited authority today; why do we need to grant FERC authority 
to order divesture in a competitive market? That is my 
question.
    Mr. Melamed. Well, the authority is needed, I believe, 
because if there are circumstances in which some of your 
assumptions don't apply, if there is a situation which because 
of technological or perhaps unregulatable problems in the 
transmission network, there are generation facilities that have 
market power, there is no way the antitrust laws can eliminate 
that market power.
    Similarly, we believe FERC should be given authority to 
require turning over control of transmission facilities to 
regional operators because that should be superior to 
regulatory access requirements as a means of ensuring that the 
transmission facilities will not be used in a way so as to 
perpetuate market power.
    Mr. Barton. We are going to have to reclaim the time. We 
have a floor vote on the House floor, the adoption of the rule 
on the Kosovo supplemental. I have sent Congressman Stearns to 
vote. And we intend to continue the hearing without taking a 
break.
    The Chair would recognize Mr. Sawyer for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman. Unless Mr. Stearns is 
going to vote for me, I have to take a break myself as well.
    Mr. Barton. I think we can get your 5 minutes in.
    Mr. Sawyer. Okay. Thank you.
    Let me just ask generally, transmission, per se, is clearly 
at the heart of much of what we are talking about here, 
particularly with regard to the last question. A lot of 
different kinds of structures for ownership and governance of 
transmission entities have been proposed, ranging from those 
where separate transmission companies with separate ownership 
would be established, and the divesture that you are talking 
about, and others where there would continue to be shared 
ownership.
    Can you comment on your sense of whether or not one is 
better than another, whether the differences across the country 
would suggest different structures in different places, and how 
you would propose to establish, if not regulation, then 
oversight of those kinds of structures.
    Mr. Smith. Sure.
    The Commission has undertaken a series of 11 public 
meetings around the country over the course of the last year on 
the general topic of regional transmission organizations and 
independent system operators. And there are a variety of views 
about whether one form, one corporate form, or one governance 
form, is preferable to another.
    I think where I would come out personally--and this is 
something where the Commission is still working through its 
policy development--is that there are three key issues. One is 
that the organization have operational control over the 
transmission facilities. They can also own them. I don't think 
they need to own them, but they need to have sufficient 
operational control so that you could be confident that there 
isn't a bias issue, and you are getting the regional benefits.
    Second is that the organization needs to be independent of 
the people buying and selling in the electricity market, so 
that you don't have the reality or even the perception of bias 
in the operation of the transmission system.
    And the third is that it needs to be of a sufficient 
regional scope that you get the regional benefits, addressing 
issues such as rate pancaking, reliability issues, and loop 
flows. The larger the area, typically, the more benefit you get 
from the organization.
    So I think those are the three pillars on which our 
policies are going to develop, and we will have to wait and see 
where we come out on the details.
    Mr. Sawyer. You have seen the kind of reliability standards 
that the so-called consensus standards that have come forward. 
Are those sufficient by themselves? Are they sufficiently 
flexible to adapt to changing circumstances or do you think 
voluntary standards are sufficient?
    Mr. Smith. I think we have switched topics slightly.
    Mr. Sawyer. Yes, we have.
    Mr. Smith. I just wanted to make sure.
    Mr. Barton. It is allowed by a member to switch topics.
    Mr. Smith. Okay.
    Mr. Sawyer. And your use of the word ``slightly'' was very 
generous.
    Mr. Smith. Chairman Hoecker, when he was here a couple of 
weeks ago, testified in favor of the general approach, that has 
been approved by the North American Electric Reliability 
Council and that has been endorsed in the administration's bill 
of establishing a system for developing and enforcing mandatory 
reliability standards. I think that is an essential element to 
making the transmission system reliable and making these 
markets work.
    Mr. Sawyer. Let me go back to the chairman's question, 
because it really is where those two questions that I was 
asking about link up, and that is, the question of State 
regulatory authority and the question of whether the States 
have sufficient disinterest and interest in the broader system 
to undertake the difficult matter of siting and expenditures 
necessary to build a strong and reliable and interactive 
transmission system.
    I have taken the view that it probably makes more sense to 
do that in a way that crosses those State jurisdictions and 
recognizes the central role that the transmission plays in 
building regional markets.
    Could you comment on that?
    Mr. Smith. I have two comments: One is that, as I mentioned 
earlier, I think the Commission is hopeful that as these 
regional transmission organizations grow, they will have a role 
in disinterested, neutral multistate planning for transmission 
expansion; and not that they would get to preempt States, but 
that that would be a useful input to State decisionmaking on 
whether they should proceed with transmission siting and the 
State regulatory approvals.
    The other thing I would mention is that the 
administration's bill has in it a provision with regard to 
interstate regional compacts, which is another way of trying to 
get the States to work together on difficult transmission 
siting issues.
    Mr. Sawyer. If I can just have one more question.
    Mr. Barton. I don't see anybody here to object, so----
    Mr. Sawyer. You could.
    Mr. Barton. No. You are asking very good questions.
    Mr. Sawyer. Let me ask you whether you have concerns about 
the opposite side, not bringing together transmission 
facilities, but the places where there are gaps in sufficient 
transmission in order to serve as isolated markets.
    Do you see that as a problem, the potential for isolated 
markets and, perhaps, even to atrophy economically for lack of 
sufficient transmission service and sufficient competition to 
make that real? Does that make sense?
    Mr. Smith. Yes. There is a real concern about what get 
referred to as ``load pockets,'' which are areas where, because 
of the configuration of generation and transmission, there are 
very few generators or owners of generation that can serve a 
particular load--either all the time or during peak conditions 
or during some significant period of time.
    There are a variety of kinds of solutions to that problem. 
One is additional transmission facilities that essentially 
expand the market so that power can flow in and out of what 
used to be a load pocket more freely. The second might be 
additional generation within the load pocket. And the third 
might be divestiture of the existing generation within the load 
pocket.
    For instance, if there was only one owner within the load 
pocket that had traditionally been subject to cost of service 
regulation and, for instance, a State wanted to move to retail 
competition, one approach might be to require divestiture of 
the generation within the load pocket to 3 or 4 or 5 companies 
that could compete with each other within the load pocket, so 
you would be less concerned about whether or not it was 
interconnected with the larger region.
    Mr. Sawyer. Mr. Chairman, I am going to have to go, or I am 
going to miss my vote. Let me just say, I have a couple of 
other questions I am interested in: the role of FERC in terms 
of mergers; and the duplicative roles with other agencies and 
whether or not that might be better served by limiting the 
number of agencies that operate in that way; and finally, I 
really was interested in the sense that Mr. Thompson talked 
about, how distribution facilities can yield specific kinds of 
market power without direct anticompetitive practices and how 
you would propose to address those.
    But I don't have time to sit here and listen to the answer, 
or I am going to miss my vote.
    Mr. Chairman, if I might submit those questions later. I 
would appreciate the opportunity to do that.
    Mr. Stearns [presiding.] Without objection.
    Mr. Sawyer. Thank you.
    Mr. Stearns. Normally we recess, but we wanted to continue 
since we have a full schedule here; and so I am standing in for 
the chairman, Mr. Barton. And I will get my questions, and 
hopefully other members will come back and we can continue 
here.
    Let me give you a hypothetical question here. Utility X 
controls 80 percent of the generation in a State; that State 
opens its retail markets to competition and ceases retail rate 
regulation. There are barriers to entry. Transmission is 
constrained, and siting merchant plants is difficult. Utility X 
starts to set retail prices at levels above the market levels. 
All it does is, it raises its prices--no exclusionary behavior, 
no attempt to gain 100 percent of the market, no unfair trade 
practices.
    Under current law, what can your agency do to stop utility 
X from charging high prices?
    Mr. Thompson.
    Mr. Thompson. This is similar to the question that--I 
regret that Congressman Largent left, because you are exactly 
pointing out one of the problems and one of the reasons why you 
need to be able to address market power in a little bit broader 
way than you would under normal antitrust law. Because right 
now, in those circumstances, if--let us say they don't raise 
the problem prices, but keep the prices the same, affecting 
prices from dropping, then right now one of the problems that 
you have is that absent any real action, there is probably a 
hole in the antitrust law.
    Mr. Stearns. There is a hole in the antitrust law?
    Mr. Thompson. We can't necessarily get to that problem 
because there is not a predatory practice in and of itself or 
any other unlawful conduct.
    The problem that you have within the industry is that you 
have these essentially regulated monopolies that are going to 
be unregulated, and they can more or less sit there because 
they have--they have reached this critical mass; and by the 
fact that they have such a large share of what there is right 
now, it provides a disincentive for other competitors to come 
in.
    So even through things like legitimate contracts, through 
the power of reasonable rates that--they can delay the ability 
of other competitors to come in, that is going to be 
significant, and that is why FERC needs--I think it would be 
helpful to have them be able to address market power to create 
the appropriate climate for competition in the event that there 
is inability for others to enter simply because of the 
dominance of one or two within a given market.
    Mr. Stearns. Let me ask the counsel. Mr. Smith, what would 
your response be?
    Mr. Smith. Well, under current law, the Federal Energy 
Regulatory Commission wouldn't have any authority over that 
issue, because I assume you are talking about sales at retail, 
which are not subject to Federal Power Act review.
    I would just note that under the bill that the 
administration has proposed, I think it is a two-step process. 
The first step would be for the State itself to identify the 
problem and take whatever action it had the authority to take 
to remedy that problem, which could include things like 
requiring divestiture of the generation assets so that there 
would be multiple people competing in that region.
    Mr. Stearns. Without the State asking, nothing would 
happen?
    Mr. Smith. Even under the administration bill, I believe 
that is right. The trigger for FERC being able to step into a 
retail market problem would be the State identifying a market 
power problem that it didn't have the authority to remedy.
    Mr. Stearns. Okay.
    Mr. Melamed, do you have something that you would like to 
add?
    Mr. Melamed. No, I think the answers thus far have been 
correct.
    I might want to amend an implication that one might draw 
from the way Commissioner Thompson phrased the answer. I think 
the term ``hole in the antitrust laws,'' to the extent it 
suggests an inadequacy of those laws or a problem with them, I 
would disagree with. I think there are very good reasons why 
the antitrust laws wouldn't reach the hypothetical that you 
pose, and that is why I think the administration's bill 
properly puts remedial authority in the FERC.
    But, otherwise, I agree with what was said.
    Mr. Stearns. You don't think there is a hole in the 
antitrust law?
    Mr. Melamed. Not if that is not meant to be a criticism of 
the antitrust laws.
    Mr. Thompson. I stand corrected there in his 
characterization.
    Mr. Stearns. One proposed Federal remedy for mitigating 
market power is reimposition of rate regulation by FERC. If 
FERC is granted that authority, should it be able to set retail 
rates as well as wholesale rates? Would merely regulating 
wholesale rates be an effective remedy?
    Why don't we start with Mr. Commissioner Hunt, maybe if you 
would like to, or we can go to the General Counsel.
    Mr. Hunt. Well, sir, when you are talking about market--
first of all, the Commission really regulates the activities of 
the holding companies rather than the operating affiliates.
    Mr. Stearns. Okay.
    Mr. Hunt. That is FERC. And as to the anticompetitive 
aspects, it is probably DOJ and the Federal Trade Commission.
    Mr. Stearns. Mr. Melamed.
    Mr. Hunt. What we really look at has been the security 
issuances of the holding company and how those affected either 
consumers or investors, but in terms of the rates and the 
structures of the operating facilities, we really don't have 
much to do with that.
    Mr. Stearns. Thank you.
    Mr. Melamed.
    Mr. Melamed. Frankly, Congressman Stearns, I think that 
question is best addressed to Mr. Smith.
    The Justice Department's perspective on this is principally 
a concern with ensuring that there are structural measures 
taken to maximize the likelihood of competition, and thereby to 
minimize the need for ongoing rate regulation.
    Mr. Stearns. Mr. Smith, would you like to comment?
    Mr. Smith. Sure. I think there will be authority for FERC 
at the wholesale level and States at the retail level to 
reimpose cost-of-service-based price regulation, if they find 
market power. The question is whether that sort of policy is 
the direction we want to go. The question is, do we want to go 
back to a cost-of-service regime, or is the policy goal really 
to have competition without market power.
    Mr. Burr. Would the gentleman yield for one quick question?
    Mr. Stearns. Surely.
    Mr. Burr. Is it FERC's opinion that they have the power to 
do that on retail today?
    Mr. Smith. No.
    Mr. Burr. Do you have the power on retail today to set a 
rate?
    Mr. Smith. No.
    Mr. Burr. Thank you.
    Mr. Stearns. There has been some question about generation 
and transmission entry. So this is a question I think, Mr. 
Smith, that you can help me with. Do you believe entry into 
generation and transmission is easy; or are there significant 
barriers to entry, and what can Congress do to eliminate 
barriers to entry and generation--barriers to entry into 
generation and transmission?
    Mr. Smith. Clearly, I think the most important barrier to 
entry for new generators is the issue of transmission access. 
And the Congress has established and then the Commission has 
followed up on an aggressive policy of bringing open access to 
transmission regulation.
    I wouldn't say that eliminates all barriers to entry. One 
of the issues we heard when we went around the country to talk 
about regional transmission organizations, for instance, was 
whether new entrants were confident that they were going to get 
an entirely fair deal from transmission owners who were also 
competitors in the generation market. And I think one of the 
benefits of moving to independent regional transmission 
organizations is that you deal with that confidence issue that 
will encourage people to enter.
    Mr. Stearns. I thank you. My time has expired.
    The gentleman from Massachusetts is recognized for 5 
minutes.
    Mr. Markey. Thank you.
    Mr. Melamed, if the Justice Department's ability to bring 
an antitrust case in the Microsoft situation was dependent upon 
a request from the attorney general of the State of Washington 
to request that you begin it, because he or she did not believe 
that they had the capacity to bring the case, how long do you 
think you would have waited for the attorney general in the 
State of Washington to make that request against them?
    Mr. Melamed. Well, I can't literally answer that question, 
but I understand the thrust of it.
    I think there may be one important difference, Congressman 
Markey, though, between the kind of situation that you have in 
mind and the issue in the administration's proposed bill with 
respect to FERC's authority--I take it you are addressing 
FERC's authority to require mitigation of market power to solve 
a retail problem. The difference is this.
    In the energy situation, we would be talking about the 
question of whether FERC should exercise Federal authority to 
solve a retail problem that takes place in an individual State, 
and that raises a question of whether the State might have, in 
effect, an opportunity first to decide whether to request that.
    In a case like the Microsoft case, and obviously many 
others, the concern is with national or regional or sometimes 
global markets, rather than simply a retail problem in an 
individual State; and naturally the appropriate role for the 
States in the case of larger markets, I think would be less 
than it might be in this situation.
    Mr. Markey. But the situation would be the same; that is, 
that the biggest utility would also be the biggest employer in 
the State, the same that Microsoft is the biggest employer in 
Washington State? And so waiting for the political dynamic 
whereby any particular attorney general has the ability--has 
the gumption, the nerve, to risk his career by knowing you are 
taking on the most powerful company is sometimes problematic. 
That is my only point.
    Let me ask this--an unlikely, too, from my own personal 
experience. It is counterintuitive for politicians to take on 
the biggest employers in their State; it happens occasionally, 
but rarely.
    Mr. Smith, in your testimony, you note that the FERC lacks 
jurisdiction over transfers of generation facilities and other 
mergers of public utility holding companies. Take Mr. Largent's 
question, and then take this generation issue, and take New 
England or take some region and explain how a company might be 
able, through control of its generating--of the generating 
capacity to block competition within a region.
    What would the dynamics be that would make that possible?
    Mr. Smith. I am not sure I exactly understand the question. 
But let me take a crack at it, and tell me if I am getting it 
right.
    Mr. Markey. If there were other generators inside of a 
region or outside of a region, seeking to get in, but there was 
a powerful generating monopoly, we would say for this purpose, 
what would that monopoly look like that would make it 
impossible or difficult for other generators to reach their 
ultimate customers?
    Mr. Smith. Well, I guess most importantly I would say, if 
it owned transmission as well as generation, it would at least 
potentially have the ability to bias transmission access.
    Mr. Markey. What if they did not own transmission?
    Mr. Smith. Well, if they don't own transmission, then I 
think the issue is a facilities-related issue which is, is 
there a dominant generator within the area that can be served 
on the existing transmission grid to serve whatever customer or 
customers you are worried about?
    If----
    Mr. Markey. Again--let me ask the question further. So if 
they don't own the means of transmission, but they just are 
still the dominant generator, is there a case that could be 
made that there would still be monopoly power?
    Mr. Smith. Yes.
    Mr. Markey. How is that created?
    Mr. Smith. It may be concentration that already exists.
    Mr. Markey. But I say if other generators can reach their 
ultimate customers over independently owned transmission lines, 
isn't there a marketplace which is created that--that wouldn't 
lead to lower prices and a collapse of the dominant position of 
the generator? Or would you argue that there is another 
scenario where the independent generator would not be able--the 
smaller generator would not be able to reach customers?
    Mr. Smith. I wouldn't argue that. I think the key issue is 
access to the market for people that want to compete with a 
dominant generator.
    Mr. Markey. Is that a transmission question or a generation 
question?
    Mr. Smith. I think it is a transmission question.
    Mr. Markey. But not necessarily--so that would satisfy--so 
you are saying that you would need the power, the FERC would 
need the power to come in where there was a concentration of 
generation and transmission power in a single regional company, 
but not if that did not exist?
    Mr. Smith. To state the extreme case, if there were no 
transmission constraints and you had a dominant generator and 
one generator that owned all the plants in New England, but 
people from New York and PJM and Chicago could reach customers 
in New England, I don't think you would have a problem.
    That is not the real fact pattern. The fact is, you have 
some combination of transmission facilities with their own 
constraints and generation ownership within the markets defined 
by those transmission constraints, and there may or may not be 
dominance.
    Mr. Markey. So might divestiture of generation be needed to 
address transmission market power questions?
    Mr. Smith. I think our view is probably not. I mean that 
one can address transmission market power by requiring open 
access and making sure that it is effective.
    Mr. Markey. But that would probably be the power FERC would 
have to--is that correct, as a backstop incapable of 
accomplishing that goal?
    Mr. Smith. Yes, I guess what I would say is that the 
strongest case for authority to order divestiture of generation 
is that in areas where transmission is constrained in, to take 
an example, a load pocket, if there is concentration within the 
load pocket, there are two cures. One is make sure it is not a 
load pocket, by building new transmission so other people can 
get there; or by requiring divestiture of the generation owners 
so there are multiple people competing within the load pocket.
    Mr. Markey. So you could deal with it by using either 
alternative, but one or the other would have to be exercised in 
order to ensure that the other generator----
    Mr. Stearns. The gentleman's time has expired.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Stearns. Mr. Whitfield, the gentleman from Kentucky, is 
recognized for 5 minutes.
    Mr. Whitfield. Thank you very much, Mr. Chairman. I just 
have a couple of questions.
    As you all know, the public utility companies, like TVA and 
Bonneville Power and others, are not subject to antitrust laws, 
nor are they really regulated by FERC. And I am just wondering 
if you had any opinion on that as it relates to deregulation.
    Mr. Smith. I will give you our views.
    Our chairman testified before this subcommittee several 
weeks ago in favor of legislation that would bring all of the 
transmission facilities in the lower 48 States under FERC 
jurisdiction for purposes of ensuring open access, and that 
would include the transmission facilities owned by the 
federally owned utilities.
    Mr. Whitfield. Any views on the antitrust laws?
    Mr. Melamed. Generally speaking, we believe that the 
antitrust laws should be applied uniformly throughout 
industries and to all industries, and therefore, support the 
administration proposal for a conditional repeal of PUHCA. But, 
of course, as I stated in my prior testimony, that shouldn't be 
done piecemeal; it should be done only if the other regulatory 
changes, particularly enhancement of FERC's authority, are also 
enacted so that we don't leave a regulatory gap.
    Mr. Whitfield. Thank you very much.
    I would like to yield to the gentleman from North Carolina.
    Mr. Burr. I thank the gentleman from Kentucky.
    Let me ask you, Mr. Smith, you just went through a scenario 
with Mr. Markey and you basically said there were two options 
as it related to making sure that market power didn't exist as 
you opened up potentially a monopoly.
    Let me ask you, is there a third option that you can think 
of? You mentioned two; can there be a third?
    Mr. Smith. Give me a hint.
    Mr. Burr. Well, is it possible that if you successfully 
created level competition, an outside concern might look at 
building a new generation facility within the same territory 
that you have defined as a market power situation, that could 
only be addressed through a regulatory means?
    Mr. Smith. Yes. I would say that is right. Fundamentally, 
the issue is you need to have more competitors than you have 
now. That can be done by eliminating transmission constraints 
or----
    Mr. Burr. We know as soon as we open it up, we take every 
monopoly that is out there, and they are now competing against 
each other; and that is not counting the people who weren't in 
it before because it was a monopoly who could get in the 
business of owning and operating a generation facility, 
correct?
    Mr. Smith. Certainly, you could have new entrants.
    Mr. Burr. Out of the three choices, how long would you give 
the competition creating a new generating facility before you 
would look toward a regulatory fix or an enforcement fix?
    Mr. Smith. I think that building new generation facilities 
within a load pocket has potential, but there are a couple of 
issues. One is, because you need to build a new plant, there is 
some time required just to build it. Second, often load pockets 
are in urban areas, and there may be other kinds of constraints 
on building new facilities, like, for instance, air pollution.
    Mr. Burr. I think--the last natural gas facility I heard 
about I think the construction time was down to 6 months. Is 
that about right?
    Mr. Smith. I don't know. But they are getting simpler, so 
you can build them faster and faster.
    Mr. Burr. Mr. Chairman, may I ask, am I also next in line 
or----
    Mr. Stearns. That is correct, Mr. Burr, you are next in 
line after Mr. Whitfield.
    Mr. Burr. I will just continue on if you would watch the 
clock for a minute.
    Mr. Melamed, I want to compliment you on your testimony. It 
was one of the most thorough and best I have ever heard. Did 
you write it?
    Mr. Melamed. Did I write it? Well, Milton Marquis, sitting 
over there, and I wrote it, yes.
    Mr. Burr. Let me ask you, who had to review that testimony 
before you gave it?
    Mr. Melamed. It was reviewed through an interagency 
process. I don't know exactly.
    Mr. Burr. Was it reviewed by any other agency?
    Mr. Melamed. Yes.
    Mr. Burr. What? Which?
    Mr. Melamed. I don't know which ones, but others interested 
in this matter.
    Mr. Burr. I think you probably have a pretty good idea. 
Could you guess for us?
    Mr. Melamed. I think the Department of Energy, the NEC, 
maybe FERC. I don't know, but--I literally don't know, I didn't 
participate in that aspect.
    Mr. Burr. Have you ever visited a generation facility?
    Mr. Melamed. On business? No.
    Mr. Burr. Have you ever gone to a transmission center where 
they----
    Mr. Melamed. No.
    Mr. Burr. [continuing] move power and account for it?
    Mr. Melamed. No.
    Mr. Burr. How about any of the other panelists? Mr. Hunt?
    Mr. Hunt. Yes, sir.
    Mr. Burr. Transmission, generation or both?
    Mr. Hunt. Generation.
    Mr. Burr. Mr. Smith?
    Mr. Smith. Generation.
    Mr. Barton. Mr. Burr, I have been to all of those.
    Mr. Burr. And I feel like you will have the opportunity 
again, Mr. Chairman.
    Commissioner Thompson.
    Mr. Thompson. I have never visited, but I have had--I spent 
a lot of time financing them.
    Mr. Burr. I do too. It is called a monthly bill. That is 
one of the reasons I am somewhat passionate about finding a new 
way to bring competition into it.
    Let me ask you, Mr. Smith, since Order 888, how many times 
has FERC regulated the wholesale price?
    Mr. Smith. I am not sure exactly what you mean. We----
    Mr. Burr. I wasn't sure what you meant when you said FERC 
had the ability to set pricing.
    Mr. Smith. We continue to do cost-based regulation on a 
significant fraction of wholesale sales.
    Mr. Burr. But FERC is not out there, nor do you anticipate 
that you have the ability to set the wholesale price; am I 
correct?
    Mr. Smith. Well, we set cost-based rates for some wholesale 
sales.
    Mr. Burr. Okay.
    Mr. Melamed, you mentioned a couple times the dominant, 
market dominant company. Could you name one for me? Out of all 
of the monopolies that are out there today, could you name a 
company that you, as the Department of Justice, looking at the 
antitrust laws--if we were to open this up, name one company 
that you would consider to be a market dominant company the day 
we opened.
    Mr. Melamed. Obviously you are referring to this industry?
    Mr. Burr. Well, yes, the electric industry.
    Mr. Melamed. Right. Well, how about Rochester Gas and 
Electric? We brought an antitrust case against them on the 
premise they were a monopoly.
    Mr. Burr. I understand that. But do they--under your 
definition of a market dominant company that you described very 
passionately, would that define Rochester Gas?
    Mr. Melamed. Well, frankly, I don't recall that I used the 
term ``market dominant.'' I may have used ``market power'' or 
``monopoly.'' Those have precise meanings in antitrust and 
economics, and the answer is yes.
    Mr. Burr. Let me rephrase the question. Do you see any 
company out there today that, if we were to open up, create an 
open market for retail sales, that would be so dominant that 
the Department of Justice would be concerned about their 
existence in its current form?
    Mr. Melamed. We see--to the extent we have been involved in 
this industry, a number of local electricity producers and 
transmission companies that appear at the moment to be 
monopolies.
    Mr. Burr. We are only talking about generation now.
    Mr. Melamed. Okay.
    Mr. Burr. Transmission is still going to be a regulated 
entity of FERC. We are going to assume, like Mr. Largent did, 
that FERC is going to do such a wonderful job that, in fact, 
the lines are going to be open. If you and I wanted to sell 
power, we could do it.
    Mr. Melamed. Right. The question then is, what will the 
world look like, assuming that there is deregulatory 
legislation passed and legal barriers to competition have 
relaxed, for which we don't have a complete answer. One of the 
things that is a fundamental underpinning of antitrust 
enforcement is, it depends on very careful case-by-case 
scrutiny of the facts.
    Our point is that we don't know enough yet as a Federal 
Government agency, frankly, to be able to say with assurance 
there will be no problems in transmission, there will be no 
problems in generation, and therefore, that there will be no 
market power problems to worry about. That is why we believe 
FERC should have the authority in the event that after 
deregulation, upon investigation, it turns out that there are 
individual problems of market power or monopoly power that 
can't be remedied without some kind of a further effort to 
mitigate market power.
    Mr. Burr. So the only entity that can give us the assurance 
that the retail marketplace will operate correctly is a Federal 
entity versus the marketplace?
    Mr. Melamed. No, no, no, I don't believe I said that.
    The administration bill, as I am sure you know, provides 
FERC with specific authority with respect to concerns about 
residual market power at the generation level affecting 
competition at retail. FERC's authority to require mitigation 
will be dependent upon a request from a State, after the State 
had determined that it did not have adequate resources to deal 
with the problems. At the wholesale level, across the State 
lines, which are regional in nature, FERC, we believe, should 
be given that authority without depending on awaiting a State 
referral.
    Mr. Burr. I thank the witnesses. I yield back.
    Mr. Stearns. The gentleman's time has expired.
    Mr. Strickland is recognized for----
    Mr. Strickland. No questions.
    Mr. Stearns. No questions.
    Mr. Pickering is recognized for 5 minutes.
    Mr. Pickering. Thank you, Mr. Chairman.
    And I would like to follow up on some of the questions that 
both Mr. Largent and Mr. Burr had concerning possible or 
potential concentration and generation.
    Mr. Smith, do you have any type of market test, that you 
would say would be a threshold trigger as to a percentage of 
generation capacity in a given market, that would cause you to 
have concern that would then possibly kick in a divestiture 
requirement?
    Mr. Smith. It is a compound question. We do have some 
standards, some policies, with regard to assessing whether 
generators or utilities have market power. We have one that we 
apply for the purpose of determining whether a generator should 
be allowed to use market-based rates, as opposed to cost-based 
rates. And we have one that we use in assessing mergers that 
will involve concentration of generation.
    We have adopted the DOJ-FTC merger guidelines as the basis 
for doing the merger review. We have a significantly simpler 
analysis that we use for purposes of market-based rates.
    Mr. Pickering. Which is? What is that test?
    Mr. Smith. It is called the ``hub-and-spoke test.'' You 
essentially figure out the market share of the applicant within 
the area defined by the service territory of the applicant 
itself and all of the utilities that abut the utility. And I 
think the market-share test for worrying about market power is 
20 percent in that region.
    Mr. Pickering. Okay. If you have open access--and I believe 
that there is somewhat of a consensus among the panel that open 
access requirements in a competitive world with new legislation 
should address most of the market power questions, is that 
correct, without having to go to the additional step of having 
divestiture; is that a correct assumption of the panel's views?
    Mr. Smith. It is an oversimplification of my views.
    I would say that there----
    Mr. Pickering. You want maximum power; is that correct?
    Mr. Smith. No. But I think, as I said----
    Mr. Pickering. Or flexibility?
    Mr. Smith. [continuing] in my testimony, we need enough 
authority to deal with the range of problems that we would 
encounter.
    Let me give you a specific example, which is where there is 
open access, but there aren't sufficient transmission 
facilities. Going back to the example of load pockets, there 
are areas--and it has come up already in California and New 
York City both at wholesale and at retail--where there are one 
or only a few generators within an area that can be effectively 
served because of transmission constraints in those areas. What 
we have done in California for the so-called ``must-run units'' 
is to retain cost-based rates.
    As I understand it, in New York City, there was a State 
concern about market power in the city of New York itself. They 
wanted to go to retail competition, and they required 
divestiture of Con Ed facilities within the city so that there 
would be multiple parties competing within the load pocket.
    Mr. Pickering. Let me follow up by asking, if open access 
is one of the primary tools, the other tool that the 
administration seems to be proposing on both the transmission 
and generation side would be an RTO organization.
    Walk me through how an RTO would work and address market 
power issues as the administration or you see it.
    Mr. Smith. As we talked about a little bit earlier, there 
can be a variety of forms of an RTO, but the essential 
characteristics are that, either by transferring ownership to a 
new organization or by transferring operational control of 
transmission facilities to a regional organization, you would 
have one regional operator of a transmission system, and that 
one of the essential purposes of this is to make sure that the 
operation of the transmission system is independent of the 
interests of the people who are selling power in that market.
    Mr. Pickering. Now, would a transco, would it be sufficient 
if you had a transco within that structure that would be 
structurally separated--nondiscriminatory open access? Could 
you have the safeguards sufficient that you could go with a 
transco approach?
    Mr. Smith. If what you mean by a transco, which is the 
commonly accepted usage, is that you transfer both operational 
control and ownership to the new organization and you could 
meet the other tests of independence and sufficient regional 
scope, then, yes, I would say that would satisfy that test.
    Mr. Pickering. If you don't transfer ownership.
    Mr. Smith. Then it looks more like what we have called, to 
date, ``independent system operators.'' And we think both of 
those models are certainly in play. To date, the Commission in 
Order 888 set forth 11 principles on ISOs, and we have acted on 
five ISO proposals.
    We have one pending transco proposal.
    Mr. Stearns. The gentleman's time has expired.
    We will just conclude. The chairman of the subcommittee has 
a few questions.
    Mr. Barton.
    Mr. Barton. I just have two questions, but I want to thank 
you all first for your attendance.
    Mr. Hunt, you have gone strangely unasked about your 
testimony.
    Mr. Hunt. Yes, sir.
    Mr. Barton. And I thought you gave an excellent statement, 
a very strong statement about PUHCA repeal with appropriate 
safeguards in terms of regulatory authority. You said that it 
reflects the unanimous support of the SEC commission.
    Does it also reflect the unanimous support of the Clinton, 
administration more broadly?
    Mr. Hunt. I don't think so, Mr. Chairman. I think the 
administration's view is that PUHCA repeal ought to be 
considered as part of an overall energy legislative reform, 
rather than on a stand-alone basis. It is our view at the 
Commission that, with the proper safeguards and the appropriate 
additional powers given to FERC and to the States, stand-alone 
repeal would not harm investors or consumers at all. But we 
perfectly understand the other point of view that it ought to 
be part of an overall energy legislative reform package.
    Mr. Barton. Okay, thank you. And we do have a 
representative of the FERC here, so this question is to the 
other three gentlemen, if you care to comment.
    FERC Order 888, if you listened to our good commissioners, 
they seem to be very proud of that and they go out of their way 
to comment on how excellent a regulatory order it is. Do you 
other gentlemen think that in and of itself that that is all 
that needs to be done in the area of vertical interaction and 
transmission access, or are there other statutory steps that 
should be taken as we look at comprehensive review?
    Mr. Hunt. I think that is going to have to depend on where 
the technology goes and what the industry looks like as we try 
to deregulate. I think--as I understand 888, it is a great 
order. But I think that the industry is evolving so fast that 
it is going to be hard to know where we ought to go in the long 
term.
    Mr. Barton. You would say on behalf of the SEC, it could be 
improved upon in legislation?
    Mr. Hunt. Well, I wouldn't presume to say it could be 
improved upon, but it could be seriously looked at and maybe 
improved.
    Mr. Barton. Don't you assume that if we seriously look at 
it, we are going to improve it?
    Mr. Hunt. I assume in the wisdom of Congress everything can 
be improved that you look at.
    Mr. Barton. That is good.
    Does either of you other two gentlemen wish to comment on 
FERC 888?
    Mr. Melamed. Just, I guess, to repeat really what I may 
have attempted to say earlier. That order is a regulatory order 
that seeks by regulation to require open access to 
transmission. It is always difficult to, by regulation, ensure 
that access is truly nondiscriminatory and truly open to 
competitors, and that is why we support the administration's 
proposal to give FERC the authority to require the transfer of 
control of a transmission facility to independent operators, 
because that is structural change that we think might in some 
cases be necessary to improve on a mere regulatory approach.
    Mr. Barton. Mr. Thompson?
    Mr. Thompson. I would agree with that in the sense that it 
is important to recognize there are a couple of things that are 
happening within this market. We don't know where it is going 
to go, but I think it is important while you are addressing 
what could happen right now that you provide sufficient tools 
to address the possible problems that we already begin to see.
    As I already mentioned, we have already received questions 
from States about how to open up markets, what are the 
antitrust issues, and what kind of remedies should be 
available.
    That is why it is important at this stage, while you are 
taking a comprehensive look at this, to provide the maximum 
amount of tools. It is possible that the open access, that open 
access may do a lot. But I would also caution not to 
underestimate the weight of inertia; and second, that if the 
importance of deregulation is to provide consumers with the 
benefits of competition, we should do what we can to make sure 
that those benefits come on sooner rather than later.
    And what I am concerned about is that if we are not careful 
and we don't provide adequate tools, then the degree of inertia 
and even some of what appear to be legitimate practices, but 
under the context of market power, could go unaddressed for a 
long period of time.
    Mr. Barton. Thank you. And I don't want my friends at FERC 
to think we are not supportive of FERC 888. It is a good rule. 
But I think it can be improved upon, and I think it needs to be 
statutorily.
    Thank you, Mr. Chairman.
    Mr. Stearns. I thank the chairman.
    Does anyone else have concluding comments?
    Mr. Burr is recognized.
    Mr. Burr. Just a couple of quick questions, Mr. Chairman, 
since mergers were included, and I feel mergers are somewhat of 
a catalyst for competition in many cases. Let me ask you, 
Commissioner Thompson, is there an average number of days that 
the FTC--for the normal merger process, do you know what the 
average days are that it takes for mergers to move through the 
process at the FTC?
    Mr. Thompson. I don't want to give you an answer off the 
top of my head, because it depends on the circumstance; but we 
do have rules about when the timeframes are triggered. But some 
transactions are a lot more complicated than others, and we 
work with the parties to try to alleviate the concerns that we 
have.
    Mr. Burr. One of the debates that we will have throughout 
the formation of a bill is, what do we do with the merger 
responsibility? Is it shared, is it concentrated at FERC, 
exactly what do we do, and though FERC has gotten better, I 
think one of the last ones was that it took 14 months just to 
put together the hearings for the mergers.
    And I guess my question would be to you, Mr. Thompson, 
given your position with the Federal Trade Commission, mergers 
that take that long for the hearing process, what do they do to 
stimulate that level of competition?
    Mr. Thompson. I guess I am reluctant to comment on FERC's 
process, because I don't know it well enough, but what I would 
say is the following: that I think it is in everyone's interest 
when you are looking at a merger that has strong potential 
consumer benefits of competition, that we try to provide those 
benefits as quickly as possible.
    And what I would also say is that we have developed and we 
expect to continue our close relationship with FERC and DOJ so 
that we can provide the appropriate guidance and the process 
moves along smoothly.
    Mr. Burr. Is that a process that you would feel 
comfortable, focusing just at the Department of Justice and the 
Federal Trade Commission, given the high degree of expertise 
with mergers of companies throughout this country?
    Mr. Thompson. Well, I do know that there is--I believe the 
administration proposal provides that we have a consultative 
role with FERC.
    Mr. Burr. I am asking if you and the Department of Justice 
have a primary and sole role for merger decisions, what is your 
comfort level with that?
    Mr. Thompson. I think at this stage that what is important 
is that FERC has 60 years of experience in dealing with the 
complicated policy issues in energy. And I think, working 
together will ensure that consumers benefit. What I would hate 
to see is a circumstance where, because anyone is compelled to 
reinvent the wheel, that we wouldn't have the benefits of both 
of our expertise.
    Mr. Burr. I am confident that the Federal Trade Commission 
and the Department of Justice would consult with every expert 
in the field on a merger. And I am sure that that is a practice 
that you utilize today.
    The question is, where should the primary jurisdiction for 
the decision and who should be the engine for driving the 
process? And I guess my question is, since the Federal Trade 
Commission does that regularly, do you feel comfortable doing 
it in the electricity industry in the future?
    Mr. Thompson. Well, I can say that we are supportive of 
FERC's primary role here.
    Mr. Burr. I thank you. And I thank the chairman and yield 
back.
    Mr. Stearns. I thank the member.
    Mr. Pickering is recognized briefly.
    Mr. Pickering. Thank you, Mr. Chairman.
    Just to follow up quickly with Mr. Smith on merger and 
acquisition authority. One thing that we are seeing in 
telecommunications with mergers and acquisitions when we go to 
competition is the unpredictability, the uncertainty, the 
delays, sometimes extortion of companies involved on 
noncompetitive grounds.
    Would you support FERC having timetables, by which they 
would have to approve or disapprove mergers and acquisitions--
let us say, 120 to 180 days, that would give certainty as we go 
into a competitive marketplace?
    Mr. Smith. The Commission adopted timetables to address 
precisely the kinds of concerns you are talking about in a 
merger policy statement in December 1996.
    Mr. Pickering. Do you follow those timetables on a regular 
basis?
    Mr. Smith. Yes, we have had, I think, 23 merger 
applications since the issuance of the policy statement which 
was 2\1/2\ years ago. The timing that it provided for was that 
we would act on merger applications that did not require a 
hearing within 5 months. We have a few cases that have just 
come in, so the 5 months hasn't run, but all of the cases that 
we have acted on, we have acted on within that 5-month 
timeframe.
    And I believe in 2 or 3 of those cases, the merger raised 
complicated competition issues and, therefore, was referred to 
hearing.
    Mr. Pickering. So since you have an internal policy of 
timetables, you would not object to statutory deadlines in a 
legislative approach at the same time that would conform and be 
consistent with your principles that you set out internally?
    Mr. Smith. Well, I would be worried about such timetables 
if the result was that mergers would be approved at the end of 
the timeframe if no action had been taken. I think that 
addressing market power issues explicitly in the context of 
mergers is an important enough requirement that you wouldn't 
want failure to act within a statutory timeframe to be deemed 
as approval of the merger.
    Mr. Pickering. And the last and quick question. Again, 
going back to generation and possible divestiture, you 
mentioned the issue of load pockets as an example where you may 
have a problem with market power and concentration. If we 
limited your ability to look at divestiture of generation to 
where load pockets exist, would that be an appropriate 
limitation?
    Mr. Smith. It would be hard to write that legislation, 
because ``load pockets'' isn't a very precise term, and I think 
the notion of having authority where there is market power in 
essence takes into account the definition of the market itself. 
So if you have a little geographic market with few players, you 
are more likely to find market power. If you had a big market 
and a lot of players, you would be very unlikely to find market 
power.
    Mr. Pickering. Thank you, Mr. Chairman.
    Mr. Stearns. The gentleman's time has expired.
    Mr. Sawyer, do you have a brief comment?
    Mr. Sawyer. Just a brief comment.
    Mr. Stearns. Sure.
    Mr. Sawyer. I want to return to Chairman Barton's question 
about the sufficiency of who could repeal with safeguards. It 
seems to me that PUHCA's central role today is the product of, 
now, 60 years of policy and practice and law on both Federal 
and State levels that interact in very complex ways.
    And, Commissioner Hunt, your answer to the chairman in that 
PUHCA repeal with sufficient safeguards could stand alone, I 
take it is largely from the SEC point of view and not from the 
point of view of the way in which PUHCA, over the last 60 days, 
has been interwoven with a lot of other precedent practice law 
and so forth on every level?
    Mr. Hunt. Well, Congressman Sawyer, we think that first, 
yes, that is the SEC's position growing out of our 60 years of 
administering the statute. But, I think what we have found in 
the last 10, 15 years in administering the statute is that, 
with the change in the industry and the way the power can be 
generated and transmitted now, some of the definitions in the 
statute no longer make no sense, such as the definition of an 
``integrated power system.''
    So those things lead to some difficult interpretation on 
the part of our staff in terms of how we administer the statute 
in light of the present facts and circumstances.
    Again, what we are trying to do is administer the act so 
that the regulated holding companies, and there are about 19 of 
them, can compete on a level playing field with the 
nonregulated, mostly interstate holding companies, in the area 
of new activities and new acquisitions.
    Mr. Sawyer. Thank you very much.
    Mr. Stearns. I thank my colleagues. And I thank very much 
the first panel got the time and the energy. We appreciate very 
much your bearing with all of our questions and now we will 
call up the second panel.
    Mr. Stearns. Good morning and--afternoon now. May I have 
your attention? We are going to start the second panel. Before 
we do, of course, I would like to welcome a member from the 
second panel, Mr. Michael Kurtz, General Manager of the 
Gainesville Regional Utilities, in Gainesville, Florida. I 
represented Gainesville in Congress for 4 years. And he, of 
course, is testifying as a representative of public power 
entities, particularly in northern Florida. And so I look 
forward to his testimony.
    I want to welcome Mr. James Rogers, the Vice President and 
Chief--Vice Chairman and President and Chief Executive Officer, 
Mr. Chris King, Ms. Mary Elizabeth Tighe, Mr. Marty Kanner, Mr. 
Joshua Kahn, and Mr. Kenneth Rose and Mr. Kenneth Gordon.
    I want to welcome all of you. And I appreciate your 
patience as we got through the first panel. So let me have all 
of you start with your opening statement, and we might just 
start with--the full statement will be part of a record. Since 
we have eight of you, we would appreciate if you would 
summarize what your opening statement is; then we can move 
forward with our questions.
    Mr. Rogers, we will start with you.

  STATEMENTS OF JAMES E. ROGERS, VICE CHAIRMAN, PRESIDENT AND 
CHIEF EXECUTIVE OFFICER, CINERGY CORPORATION; CHRIS KING, CHIEF 
   EXECUTIVE OFFICER, UTILITY.COM; MICHAEL L. KURTZ, GENERAL 
MANAGER, GAINESVILLE REGIONAL UTILITIES; MARY ELIZABETH TIGHE, 
 VICE PRESIDENT, STATOIL ENERGY, INC.; MARTY KANNER, COALITION 
 COORDINATOR, CONSUMERS FOR FAIR COMPETITION; JOSHUA A. KAHN, 
  KAHN MECHANICAL CONTRACTORS; KENNETH ROSE, SENIOR INSTITUTE 
 ECONOMIST, NATIONAL REGULATORY INSTITUTE; AND KENNETH GORDON, 
  SENIOR VICE PRESIDENT, NATIONAL ECONOMIC RESEARCH ASSOCIATES

    Mr. Rogers. Thank you very much. Good morning. Mr. Chairman 
and members of the subcommittee, I am Jim Rogers, President and 
CEO of Cinergy Corp., an investor-owned public utility holding 
company based in Cincinnati. We serve about 1.4 million 
electric and 450,000 gas customers in Indiana, Ohio and 
Kentucky. We are a wholesale marketer and trader of gas and 
electricity in the emerging national commodity markets for 
those commodities.
    We are also one of the lowest-cost suppliers in the 
country, being the second lowest production cost of our 
generation, the 25 largest companies in the country. I want to 
thank you for giving me the opportunity to appear here today to 
share my views on issues concerning market power, mergers and 
the Public Utility Holding Company Act.
    As you know, I have testified before this subcommittee on 
several occasions on the tremendous benefits that customer 
choice and competition will bring to the consumers of electric 
power in the U.S. Cinergy has been and is today an enthusiastic 
supporter of increased competition in the industry, and we look 
forward to the day when all consumers are free to pick their 
energy supplier.
    We have been, as you all know, a pioneer in our advocacy 
and actions. We were one of the first companies in the country 
to voluntarily open up our transmission grid to give equal 
access to all who want to ship across it. And we have been an 
advocate for customer choice in our home States. I have lived 
in Texas long enough to know and learn the west Texas rule, and 
that is where pioneers get the areas, often the settlers get 
the land.
    And so I am here today to testify to make sure that all 
people in this industry and new entrants have an equal 
opportunity to get the land. Although my testimony addresses 
all issues, I am only going to focus on the Public Utility 
Holding Company Act.
    But a quick note on market power. We are an advocate of 
ISOs. We are a member of the Midwest ISO. We believe that 
regional transmission organizations facilitate robust, 
efficient, reliable wholesale markets and are critical to the 
robustness of those markets. And it is very consistent with the 
goals of the Energy Policy Act of 1992, and in my judgment will 
alleviate most of the market power concerns if all companies 
are participating in RTOs in this country.
    Now, let me quickly turn to PUHCA. It was enacted 64 years 
ago when the utility industry was in its infancy. Congress 
sought to reform the industry by limiting registered holding 
companies to integrated systems. The Chairman of the SEC--and I 
think his words say it best--noted that, except in time of war, 
the Federal Government has never imposed such total control 
over any industry as that imposed on the electric utilities by 
PUHCA.
    As you all heard this morning from SEC Commissioner Hunt, 
the SEC completed its review of PUHCA in 1981, and it conducted 
a second study of the statute in 1995. Both of these studies 
found that the statute had become obsolete, and recommended to 
Congress that PUHCA be repealed. These are bipartisan 
conclusions that PUHCA is duplicative of existing State and 
Federal protection for investors, as well as consumers.
    The bottom line is that PUHCA has not only outlived its 
usefulness, but also imposes unnecessary delays in 
decisionmaking, increases operating costs, limits competition, 
and prevents utilities from offering new products and services 
to the market. In other words, it is both anticonsumer and 
antishareholder. Those are strong words.
    Those are strong words, and there is certainly no ambiguity 
in that statement, but let me say it is based on my experience 
as a former consumer advocate at the State level and a former 
Federal regulator and my past 10 years' experience as a CEO of 
a Fortune 500 energy company. It is anticonsumer and 
antishareholder.
    The most urgent reason for repeal of PUHCA in my opinion is 
the inherent impediment and outright prohibition of new 
competitors into the emerging energy markets in stark contrast 
with the Policy Act of 1992. Let me give you three quick 
examples.
    PUHCA's retained earnings limitations have impeded 
Cinergy's ability to bid on generation.
    Mr. Stearns. We just have eight people, so I need you to 
keep within the 5 minutes. If you'd be so kind just to 
summarize your remaining statement.
    Mr. Rogers. I will be delighted to do that. I have been 
around long enough to know how to follow instructions. In 
conclusion, Cinergy supports a legislative clarification of the 
FERC's authority to promote RTOs as a means to alleviate market 
power.
    We also call on you to repeal PUHCA. We believe it should 
either be part of a comprehensive reform or a separate piece of 
legislation such as Senate Bill 313 which was reported out of 
the Senate Banking Committee of February on a bipartisan basis.
    Clearly, companies like ours are precluded from 
participating in generation sales. We are precluded because of 
the limitations for participating in privatization efforts 
around the world. We are limited in our ability to increase 
shareholder value, and we are limited in our ability to grow.
    I don't believe we can afford to wait indefinitely on 
moving any aspect of electric deregulation, however necessary 
and compelling it may be, until everyone agrees on all 
components of a comprehensive bill.
    The Energy Policy Act of 1992 was a step in the right 
direction to a robust, wholesale market. It wasn't 
comprehensive. We should take the next step now to create 
competitive markets, and my only cautionary last remark would 
be, we should not let the quest for perfection become the enemy 
of progress in 1999.
    Thank you.
    [The prepared statement of James E. Rogers follows:]
  Prepared Statement of James E. Rogers, Vice Chairman, President and 
                 Chief Executive Officer, Cinergy Corp.
    Chairman Barton and members of the Subcommittee, I am Jim Rogers, 
Vice Chairman, President, and Chief Executive Officer of Cinergy Corp., 
an investor-owned public utility holding company based in Cincinnati, 
serving about 1.4 million electric and 450,000 gas customers in 
Indiana, Ohio and Kentucky. I want to thank you for giving me the 
opportunity to appear here this morning to share my views on issues 
concerning market power, mergers, and the Public Utility Holding 
Company Act (PUHCA). As you know, I have testified before this 
Subcommittee on several occasions on the tremendous benefits that open 
competition will bring to the consumers of electric power in the United 
States. Cinergy is an enthusiastic supporter of increased competition 
in our industry and we look forward to the day when we can compete for 
retail customers everywhere in the country.
    However, meaningful competition will require federal legislation in 
two key areas: (1) legislation to promote Regional Transmission 
Organizations (RTOs), which will alleviate most, if not all, market 
power concerns presented by the restructuring of the nation's electric 
industry; and (2) legislation to repeal PUHCA, which is a barrier to 
the efficient consolidation of the industry and otherwise a barrier to 
entry in the newly emerging merchant generation and marketing business. 
I will discuss each of these items in the context of addressing the 
issues you have raised today.
                              market power
    Mr. Chairman, three markets are affected by a traditionally 
vertically integrated electric utility: the generation of electricity, 
the transmission of electricity and the distribution of electricity to 
its ultimate consumer. Since the rates, terms and conditions of 
transmission will remain jurisdictional to the FERC, and distribution 
will remain under the jurisdiction of the state Public Utility 
Commissions, the potential for abuse of vertical market power (the 
ability to use dominance in one market to manipulate prices in a linked 
market) in a restructured electric industry is limited to the 
generation of electricity.
    Mr. Chairman, the move to a more competitive wholesale and retail 
market in the generation of electricity will require a fundamental 
restructuring of the operation of traditional, vertically integrated 
utilities in this country. Specifically, to appropriately address 
legitimate concerns of vertical market power by incumbent utilities, 
regulatory policy must provide for separation of control of 
transmission of electricity from control of generation of electricity.
    Separation of control of transmission from generation is effected 
when an incumbent utility's transmission assets are placed under the 
operation and control of an RTO. Cinergy is accomplishing this 
separation through the formation of, and its participation in, the 
Midwest ISO, which is the only FERC approved RTO in our region. While 
Cinergy recognizes that there may be a certain amount of disagreement 
among utilities on the appropriate structure of an RTO, we believe that 
the FERC is the appropriate forum to determine issues concerning 
interstate transmission of electricity. To the extent existing federal 
law leaves any uncertainty with respect to FERC's authority to promote 
the creation of RTOs, we urge Congress to act now to eliminate such 
uncertainty and to make it clear that FERC is authorized to take the 
necessary steps to facilitate creation of appropriate RTOs.
    Cinergy does not believe that horizontal market power--the ability 
to control prices over a substantial period--exists with respect to the 
wholesale electric market in the Midwest. The substantial dollar losses 
suffered by some utilities last June constitute strong evidence that 
those utilities lacked the ability to control wholesale prices at that 
time. We further believe that the reduction of transmission rate 
pancaking, that will occur when appropriate RTOs are in place, will 
make the generation market even more competitive by improving the 
ability of many sources of generation to compete in areas now dominated 
by a single large utility. At this time, absent barriers to entry or an 
ability to sustain changes in pricing, Cinergy believes that efforts by 
the government to specifically allocate market shares would be 
premature.
    Further, Cinergy supports measures taken at the FERC, and by many 
state commissions, to institute codes of conduct to ensure that market 
knowledge from the regulated operations are not used to unfairly 
advantage non-regulated affiliated marketing companies. Cinergy 
believes that these behavioral prohibitions, along with an aggressive 
FERC complaint procedure, can ensure a fair and open market for 
generation among all suppliers including utility affiliated marketing 
companies.
                         mergers/consolidations
    Cinergy's 1994 merger, which has been very beneficial to customers 
and shareholders alike, took approximately two years to receive all 
government approvals. How many other industries, regulated or 
otherwise, are delayed or prevented from achieving the synergies and 
cost benefits from consolidation because of such a cumbersome 
regulatory review process? As the industry is restructured, serious 
consideration must be given to removing some of the layers of 
duplicative merger reviews and allow a quicker, more streamlined 
process. To do otherwise is to deprive consumers and shareholders of 
the benefits of mergers and consolidations. As we discuss below, repeal 
of PUHCA can go a long way toward facilitating the more efficient 
development and consolidation of our industry.
                            repeal of puhca
    Mr. Chairman, as you know PUHCA was enacted 64 years ago when the 
utility industry, as we know it today, was in its infancy. Congress 
sought to reform the industry by limiting registered holding companies 
to ``integrated'' systems and by requiring holding companies to file 
extensive financial information with the SEC and secure Commission 
approval before engaging in a variety of transactions. In practice, the 
integration requirement limits registered holding companies to 
operating in geographically proximate states. The Chairman of the SEC, 
Arthur Levitt, has noted the observation that, except in time of war, 
the Federal government has never imposed such total control over any 
industry as that imposed on electric utilities by PUHCA.
    Of course, much has changed in the financial structure, technology 
and capability of the electric utility industry since PUHCA was enacted 
over half a century ago. In the last 20 years, there have been a series 
of studies undertaken on PUHCA and its effects on both providers and 
customers in a rapidly evolving utility industry. In 1977, in response 
to an inquiry by the then Chairman of this Subcommittee, John Dingell, 
the General Accounting Office (GAO) found that the objectives of the 
statute had been achieved and that the financial problems associated 
with the structure of the utility industry had been rectified. The GAO 
recommended that the SEC undertake a more comprehensive examination of 
PUHCA to determine if Congress needed to reform the statute.
    The SEC completed its review of PUHCA in 1981 and conducted a 
second study of the statute in 1995. Both of these studies found that 
the statute had become obsolete and recommended to Congress that PUHCA 
be repealed. The 1995 SEC Report found that the regulatory system 
imposed by PUHCA ``imposes significant costs, in direct administrative 
charges and forgone economies of scale and scope, that often cannot be 
justified in terms of benefits to utility investors.'' The SEC 
concluded that the effects of PUHCA on the current electric utility 
system ``are truly detrimental to both investors and consumers.''
    The bottom line is that PUHCA has not only outlived its usefulness, 
but also imposes unnecessary delay in decision-making, increases 
operating costs, limits competition, and prevents utilities from 
offering new products and services to the public. In other words, it is 
both anti-consumer and anti-shareholder.
    Mr. Chairman, the most urgent reason for repeal of PUHCA is the 
inherent impediment and outright prohibition of new competitors into 
the emerging energy markets. Several concrete examples are worth 
noting.
    First, as illustrated in the attached materials, PUHCA's retained 
earnings limitations have impeded Cinergy's ability to bid on 
generation opportunities that are priced beyond our retained earnings 
cap. Many states have authorized their utilities to sell off 
generation. The disaggregation of generation creates opportunities to 
bring in new market entrants, with increased competition and more 
choices for consumers in a commodity deregulation environment. This 
PUHCA restriction prevents consumers from receiving the lower prices 
which would result from increased competition in the newly emerging 
merchant generation business.
    Second, as also illustrated in the attachment, many international 
acquisitions are beyond our reach because of the retained earnings cap. 
Missed investment opportunities include the ability for Cinergy to 
participate in the privatization of other country's energy markets. We 
believe this bar unfairly impacts on Cinergy because other companies 
are able to make these acquisitions. In addition, Cinergy is unable in 
some instances to promote the international energy development policies 
favored by the United States government.
    Third, because of PUHCA's requirement that all registered holding 
companies operate in a close geographic proximity, Cinergy is limited 
in its ability to compete with foreign companies for domestic 
acquisitions. Consequently, while PUHCA's requirement would bar Cinergy 
from merging with, or acquiring, PacifiCorp, a foreign company such as 
Scotish Power, not subject to PUHCA, could acquire PacifiCorp or even 
Cinergy without violating the PUHCA restrictions.
    Finally, PUHCA restricts holding companies from many internal 
investments in generation, gas and electric transmission and 
distribution. Certainly, this is the only industry that so stifles 
global competition and investment under rules over 60 years old. 
Moreover, PUHCA also means regulated companies must spend an inordinate 
amount of money on paperwork and personnel to comply with the statute's 
burdensome provisions which the SEC has long ago determined to be 
outdated, ineffective, and unnecessary.
    Over time the ongoing damage imposed on registered companies by 
PUHCA can affect their ability to compete in the market place and 
expand their business. For example, at the end of 1994, when Cincinnati 
Gas & Electric and PSI Energy merged to form Cinergy, the combined 
company had a market value of $3.6 billion while the top five energy 
companies had an average value of $9 billion. Four years later, 
Cinergy's value had grown to $5.8 billion while the big five's value 
had grown to an average of $17.4 billion. Despite our growth, the gap 
between Cinergy and the top five energy companies has gone from $5.4 
billion to $11.2 billion.
    One of the most enduring myths associated with PUHCA is that the 
statute somehow prevents utilities from exercising undue market power. 
However, in reality, PUHCA actually requires market concentration and 
thereby produces market power. The statute's integration requirements 
and geographic restrictions prevent utilities from entering other 
markets and competing against local utilities. FERC Chairman Hoecker 
has testified that ``in some instances it (PUHCA) encourages the very 
concentrations of generation that are anathema to competitive power 
markets and discourages asset combinations that could be pro-
competitive.'' The Administration's Statement which accompanied the 
release of its Comprehensive Electricity Competition Act last month 
agrees that many of PUHCA's requirements, such as the requirement that 
a holding company operate a single integrated system, ``are not 
compatible with a more competitive electricity market.''
    It should be remembered that PUHCA essentially was created to 
address investor abuses and was never intended to provide rate 
protections for electric consumers. PUHCA cannot be realistically 
deemed a consumer protection statute for the utility industry when, out 
of approximately 3,000 electric and gas utilities, only 18 of these are 
registered holding companies subject to PUHCA. In today's electric 
utility market, a wide variety of other government entities such as the 
Federal Trade Commission, the Department of Justice Antitrust Division, 
the FERC's assessment of market power issues during its merger and 
acquisition review, as well as state public utility commission 
proceedings, are in place and have adequate power and authority to 
address any market power or anticompetitive concerns that may arise. 
The repeal of PUHCA merely removes an outdated and unnecessary 
statutory bar to certain mergers by registered holding companies and 
thus allows them to seek governmental approval for mergers on the same 
basis as other utilities.
                               conclusion
    In summary, Mr. Chairman, Cinergy supports a legislative 
clarification of the FERC's authority to promote RTOs as a means to 
alleviate market power concerns, as well as the repeal of PUHCA in a 
manner generally consistent with the SEC's 1995 recommendation. We 
believe this repeal should either be part of a comprehensive reform or 
a separate piece of legislation, such as S.313, as reported out of the 
Senate Banking Committee in February on a bipartisan basis.
    As you know, Cinergy has long supported a choice of electricity 
suppliers for all consumers and we continue to do so. However, I don't 
believe we can afford to wait indefinitely on moving any aspect of 
electric deregulation, however necessary and compelling, until everyone 
agrees on all components of a comprehensive bill. We should not let the 
quest for perfection become the enemy of progress. Repeal of PUHCA, and 
clarification of FERC's authority to promote RTOs, should happen 
immediately.
    Thank you for your consideration.
                              Attachments

                 Largest Merchant Plant Acquisitions Have Been Beyond Cinergy's ``PUHCA Reach''
----------------------------------------------------------------------------------------------------------------
                                                                                                        Project
                                                                  Total Cost               Retained    Cost as a
                 Acquirer/Developer                       MW          ($        Percent    Earnings      % of
                                                                   millions)    Equity        ($       Retained
                                                                                          thousands)   Earnings
----------------------------------------------------------------------------------------------------------------
Edison Mission......................................       1,896      $1,800         100      $2,882          62
Sithe...............................................       4,117       1,720         100       3,967          43
U.S. Gen Co. (PG&E).................................       4,009       1,590         100       2,531          63
PP&L................................................       2,614       1,586         100         323         491
Enron...............................................       1,037       1,100         100       2,138          51
AES.................................................       1,424         950         100         798         119
FPL Group...........................................       1,185         846         100       2,116          40
Southern............................................       3,065         801         100       4,164          19
AES.................................................       3,956         781         100         581         134
Keyspan.............................................       2,168         597         100         722          83
----------------------------------------------------------------------------------------------------------------


                 Largest Merchant Plant Acquisitions Have Been Beyond Cinergy's ``PUHCA Reach''
----------------------------------------------------------------------------------------------------------------
                                                                                                        Project
                                                                  Total Cost               Retained    Cost as a
                 Acquirer/Developer                       MW          ($        Percent    Earnings      % of
                                                                   millions)    Equity        ($       Retained
                                                                                           millions)   Earnings
----------------------------------------------------------------------------------------------------------------
Sithe...............................................       1,983        $536         100      $3,950          14
NRG (NSP subsidiary)................................       1,456         505         100       1,399          36
Duke................................................       2,645         501         100       3,256          15
Southern............................................       1,776         480         100       4,164          12
Southern............................................         984         462         100       4,164          11
Dynergy (DYN & NRG JV)..............................         951         356          50         106         168
NRG (DYN & NRG JV)..................................         951         356          50       1,399          13
NRG.................................................       1,360         355         100       1,399          25
----------------------------------------------------------------------------------------------------------------


                    Largest Independent Power Projects Have Been Beyond Cinergy's PUHCA Reach
----------------------------------------------------------------------------------------------------------------
                                                        Project                              1997        1998
              Developer/Project/Country                 Cost ($     Percent      Total      Credit      Credit
                                                       millions)    Equity     Megawatts    Rating      Rating
----------------------------------------------------------------------------------------------------------------
GE Capital/Paiton/Indonesia.........................      $2,600          13       1,230  ..........         AAA
Edison Mission/Paiton/Indonesia.....................       2,600          40       1,230          P1          P1
AES/Yangcheng/China.................................       1,800          25       2,100        Baa3        Baa3
Siemens/Jawa Power/Indonesia........................       1,700          50       1,220  ..........         AA1
CMS/Ennore/India....................................       1,600         100       1,886         Ba3         Ba3
CMS/Jorf Lasfar/Turkey..............................       1,500          50         696         Ba3         Ba3
Southern/Pilillipines...............................       1,400          92       1,200        Baa1        Baa1
Enron/Sarlux/Italy..................................       1,350          45         551        Baa2        Baa2
Southern/Hin Krut/Thailand..........................       1,300          28       1,400        Baa1        Baa1
Edison Mission/SAB Energy/Sicily....................       1,300          49         512          P1          P1
Sithe/San Roque/Phillipines.........................       1,100          43         345  ..........  ..........
Siemens/Hanfebg/China...............................       1,050          40        1320  ..........         AA1
Sithe Energies/Everett, MA/USA......................       1,000         100       2,800  ..........  ..........
InterGen/Mauben/Phillipines.........................         812          46         812  ..........  ..........
Edison Mission/Bo Nok/Thailand......................         800          40         367          P1          P1
Entergy/Saltend/UK..................................         800         100       1,175        Baa3        Baa3
InterGen/Meizhou Wan/China..........................         755          70         724  ..........  ..........
Texaco Global Gas & Power/API Energia/Italy.........         750          24         276  ..........  ..........
AES/Puerto Rico.....................................         700         100         454        Baa3        Baa3
AES/India...........................................         633         100         420        Baa3        Baa3
Constellation Power (BGE)/High Desert/U.S. (Cal.)...         600          50         700          A1          A1
----------------------------------------------------------------------------------------------------------------


  Electric T&D Privatization--Largest International Acquisitions By U.S. Utilities--All Beyond Cinergy's Reach
----------------------------------------------------------------------------------------------------------------
                                                                                           Rating--      Most
       Acquirer/Project/Country           Yr.       Cost ($      Ownership   Equity Paid    year of     Recent
                                          Acq.     billions)    Percentage                 Purchase     Rating
----------------------------------------------------------------------------------------------------------------
GPU/Midlands/UK.......................     1996          2.6          50           $500M        Baa2        Baa2
Cinergy/Midlands/UK...................     1996          2.6          50           $500M        Baa2        Baa2
CSW/SEEBOARD/UK.......................     1996          2.5         100           $827M          P2          P2
AEP/Yorkshire Elec./UK................     1997          2.4          50           $360M          P2        Baa2
PSC Colorado/Yorkshire Electricity/UK.     1997          2.4          50           $360M          A3          A3
Dominion Resources/East Midlands/UK...     1996          2.2         100     ...........     (P)Baa1     (P)Baa1
Entergy/London Electricity/UK.........     1997          2.1         100           $400M  ..........        Baa2
Reliant (H.I.)/Electropaulo                1998          1.8          11.75        $245M          A3        Baa1
 Metropolitana/Brazil.................
AES/Electropaulo Metropolitana/Brazil.     1998          1.8          11.37  ...........        Baa3        Baa3
Southern/SWEB/UK......................     1995          1.7          49     ...........        Baa1        Baa1
PacifiCorp/PowerCor/Australia.........     1995          1.6         100     ...........          A2          A2
Texas Utilities/Eastern Energy/            1995          1.6         100       $500-600M          P1      P(Ba1)
 Australia............................
PSEG/Rio Grande Energia/Brazil........     1997          1.5          33           $498M          A3        Baa2
Reliant (H.I.)/Corelca/Columbia.......     1998          1.3          32.5         $146M          A3        Baa1
Enron/Elektro Elec./Brazil............     1998          1.27        100     ...........        Baa2        Baa1
Entergy/Citipower/Australia...........     1996          1.2         100           $294M        Baa2        Baa2
Southern/BEWAG/Germany................     1997          1.2          26           $335M        Baa1        Baa1
Utilicorp/United Energy/Australia.....     1995          1.2          50     ...........        Baa3        Baa3
----------------------------------------------------------------------------------------------------------------


    Mr. Stearns. Thank you. Mr. King, you are recognized for 5 
minutes.

                    STATEMENT OF CHRIS KING

    Mr. King. Thank you. Good morning, Mr. Chairman and 
committee Members. My name is Chris King. I am CEO of a new 
company in California called Utility.com. I'd like to introduce 
you to it briefly.
    We are the first utility company based entirely on the 
Internet and we are formed in a partnership with idealab which 
started eToys. We offer deregulated power at a discount of up 
to 15 percent to about 10 million residents and small 
businesses in California today, advertizing and signing them 
up, providing customer service and everything else over the 
Internet. Customers can do their bills there. They can pick the 
day of the month they get their bill. They can pay 
electronically with e-mail and other innovations.
    I appreciate your invitation today. First, I would like to 
urge you to do what you can to promote the availability of 
Americans throughout the country to choose their electric 
company. Energy is typically the third highest household 
expense, and other than water, the only one remaining where 
consumers can't choose their provider. According to the Federal 
reserve, every day we delay electric competition costs 
Americans over $100 million.
    Before we can count those savings, we need to address some 
of these market power issues. Just as we have an unusual 
perspective on how to sell power, we have some unique 
perspectives on market power. I am not going to talk about 
transmission, for example, but I would like to talk briefly 
about two other forms.
    The first is the power of incumbency. The reason this issue 
is important because consumers won't see the projected savings 
and other benefits of competition if competition doesn't 
happen. The success of our economy comes from the crucible of 
competition, and in that truly competitive environment, any 
company that doesn't use every opportunity at its means to 
reduce cost or improve importance each and every day is at real 
risk of losing customers. If you don't have that risk of 
customer loss, you're not going to make those changes.
    The other market power issue is that of one group market 
participants over another. This is like a cartel where, for 
example, oil producing countries withhold production that 
causes gasoline prices to rise. In electricity, power producers 
in partially competitive markets have this power over end 
consumers. This occurs during the peak hours of the summer and 
raises prices to as much as a hundred times their normal summer 
level.
    The reason is simple. Typical consumers pay the same price 
for power no matter when they use it. So producers can raise 
the price as high as they want during those system peaks. That 
is because existing electricity meters record only total use. 
Consumers then have to pay the average rates, including those 
high prices, whether they use that peak energy or not.
    In concluding, I would like to propose two solutions to 
these two issues. Regarding the first, the power of incumbency, 
it is essential that policymakers create an absolutely level 
playing field. Consumers have to have total freedom of choice, 
and no company should be permitted to use regulated assets to 
compete for providing competitive services.
    The second, regarding the cartel power of generators, is a 
solution that clearly lies in technology. Via the Internet, 
companies like ourselves can provide technological tools that 
enable consumers rather than generators to set electricity 
prices, even at those times of system peak.
    They can offer new electronic meters, replacing those that 
were originally designed about the same time PUHCA was 
originally enacted, and there are other technologies coming 
out, including one we offer which is a thermostat that 
customers can control over the Internet to deal with those peak 
prices.
    This is important. The California Power Exchange did a 
recent study where they found that if consumers reduce peak 
energy use by only 3 percent on the hottest days of the summer 
they would save over $8 million a day.
    So to sum up, we would urge you to promote the availability 
of electric choice; second, to propose model rules for an 
absolutely level, competitive playing field; and, third, ensure 
that consumers have unfettered access to new technologies to 
take advantage of the benefits of this market.
    Thank you.
    [The prepared statement of Chris King follows:]
 Prepared Statement of Chris King, Chief Executive Officer, utility.com
    Utility.com is pleased to offer the following testimony regarding 
market power issues in restructuring of the electric industry. Our 
testimony focuses on defining market power, the risks to consumers 
inherent in market power, mitigation steps the States have taken, the 
role of the Federal Government in preventing the abuse of market power, 
and, of particular note, the capabilities of modern technologies, 
including the Internet and advanced metering, and how those 
technologies are a critical tool for consumers in their ability to 
combat market power.
Background
    Utility.com is an Energy Service Provider registered with the 
California Public Utilities Commission. The company is one of only 
three competitive providers actively marketing to small business and 
residential consumers throughout California. It is also the first 
company to apply for licensing in Nevada's competitive electricity 
market. Utility.com has been an active participant in regulatory 
proceedings throughout the U.S., contributing expertise on technical 
and economic issues associated with providing meaningful electricity 
choices to small consumers.
    To begin, Utility.com strongly supports the principle of customer 
choice. Customer choice will result in consumer savings that have been 
projected to be as high as 40 percent (U.S. Federal Reserve and 
Citizens for a Sound Economy Foundation), as well as consumer access to 
a host of new and innovative energy-related products and services.
                        i. defining market power
    Market power, generally, is that situation in which market 
participants are able to earn ``excess profits'' as a result of market 
inefficiencies. Two generic types of market power occur in the electric 
industry: vertical and horizontal. A third type, similar to that 
enjoyed by a commodity cartel, is caused by the limitations of today's 
installed information technology; this type allows power generators, as 
a class of market participants, to earn excess profits at times of 
system peaks by taking advantage of the lack of demand response by 
consumers--which, in turn, is a result of the lack of information. The 
information consumers need to exercise the demand side of the supply 
and demand equation is greater detail on usage--such as how much is 
during peak times--and on pricing--such as how much more expensive is 
power at those times.
    Vertical market power results when a single participant, generally 
the incumbent utility, controls all or most elements of the electricity 
value chain in a way that prevents economically efficient consumer 
decisions. This value chain starts with power production, extends 
through transmission and distribution, and concludes with revenue cycle 
services, including billing, metering, and customer service. By owning 
all elements of the value chain, a single market participant can raise 
prices above competitive levels. That participant can also exert market 
power by controlling a single, scarce element, such as transmission or 
distribution wires, or even detailed energy usage information.
    Horizontal market power results from the geographical or breadth of 
services scope of a market participant that provides that participant 
with certain competitive advantages. A common example is leveraging 
resources deployed for one service to reduce the costs of entry for 
another. In electricity, for example, a utility could use its service 
trucks and personnel to support services similar to but unrelated to 
the distribution of electricity, such as appliance maintenance. Since 
other companies do not have the same opportunity--i.e. an appliance 
repair company cannot use its trucks and personnel to perform 
electricity system maintenance--the utility's horizontal market power 
gives it a competitive advantage.
    Cartel-like market power differs from vertical and horizontal 
market power in the sense that, instead of being a situation in which a 
single company has market power, it is one in which a group of 
companies have market power as compared to consumers. Electricity is 
unique in two respects that result in this cartel-like market power. 
First, power cannot be stored; with few meaningful exceptions 
1, power production and use must be balanced every four 
seconds. Accordingly, during the peak hours of the year, almost all the 
power plants in an area are running, and very few plants are available 
to serve the last few kilowatts of demand. Second, even though this 
lack of producers results in very high power costs, consumers have no 
reason to reduce their usage, since they pay a price that is averaged 
over the year. Thus, generators can charge as much as 75 times the 
normal rate for energy.2 Moreover, all producers are paid 
these high, marginal clearing prices in those markets, such as 
California or the U.K., where most (California) or all (U.K.) power 
must flow through the officially-approved exchange.3
---------------------------------------------------------------------------
    \1\ Power can be stored in very limited amounts in batteries and in 
a small number of ``pumped-storage'' hydroelectric facilities; 
together, these account for less than one percent of U.S. electricity 
requirements.
    \2\ According to the Staff Report to the Federal Energy Regulatory 
Commission on the Causes of Wholesale Electric Pricing Abnormalities in 
the Midwest During June 1998, prices reached $7,500 per MWh in summer 
1998, compared to typical peak hour prices of $100 per MWh.
    \3\ In California, all power served by the regulated utilities must 
be purchased from the California Power Exchange, which now accounts for 
approximately 88 percent of all power used in the service areas of the 
regulated utilities; in the U.K., all power must flow through the 
Electricity Pool of England and Wales (``the Pool'').
---------------------------------------------------------------------------
    Economics professors Frank Wolak of Stanford University and Robert 
Patrick of Rutgers University studied such market power in the U.K. and 
found that the lack of price signaling to power users enables 
generators to manipulate market prices for energy and capacity, 
resulting in excess profits.4 They found that the lack of 
price signals provided via time-of-use or hourly (half-hourly in the 
U.K.) metering has resulted in serious market inefficiencies in the 
U.K., including forcing consumers to pay high market prices--sometimes 
exceeding $1,500 per MWh --during peak periods:
---------------------------------------------------------------------------
    \4\ The Impact of Market Rules and Market Structure on the Price 
Determination Process in the England and Wales Electricity Market, 
Frank Wolak and Robert H. Patrick, June 1996
---------------------------------------------------------------------------
        One of the problems in the United Kingdom is that most 
        electricity consumers, including all residential customers, pay 
        a price for electricity to their retailer that does not change 
        in response to half-hourly variations in the market-clearing 
        price of electricity. Consequently, under the current system a 
        very high market price brings about little, if any, demand 
        reduction, because the final consumer of electricity does not 
        pay this price for its electricity.5
---------------------------------------------------------------------------
    \5\ Press Statement, Stanford Center for Economic Policy Research, 
Professor Frank Wolak, January 17, 1997.
---------------------------------------------------------------------------
             ii. consumer risks resulting from market power
    Throughout human history, open competitive markets have 
consistently delivered lower prices and greater innovation than 
regulated monopolies. The success of such markets motivates the current 
trend in the States toward adopting retail electricity competition. 
Market power, if not mitigated, presents two dangers. First, in the 
absence of effective competition, the desired price and innovation 
benefits of competition will not materialize. Consumers will not 
exercise choice, or their choices will not be economically efficient. 
Second, with the restraints of regulation removed, companies with 
market power could charge even higher prices and earn excess profits if 
consumers have no effective tools to combat that market power.
    Three examples of market power in electric competition are of 
particular import. The first is the vertical market power of companies 
who own all the major elements of the electricity value chain in a 
limited geographic region, including generation, transmission, 
distribution, and revenue cycle services. Such vertical market power 
has been addressed extensively in electric restructuring proceedings in 
the States and at the Federal level, with consensus that generation, 
transmission, and distribution must be unbundled from one another, with 
or without divestiture requirements. Without equal and non-
discriminatory access to transmission and distribution systems, the 
jurisdictions have agreed, there can be no effective competition 
between power generators.
    The second important example is horizontal market power in which 
regulated and competitive utility functions are cross-subsidized, 
intentionally or not, and which results in anti-competitive effects. 
One such situation is the provision of standard offer or default 
service where some or all of the costs, such as revenue cycle services, 
are embedded in regulated distribution rates. In this situation, 
competitive suppliers are at a major disadvantage; they must recover 
all of their revenue cycle service costs from competitively provided 
services, while the competitively provided energy--standard offer 
service--does not include those costs.
    Another such situation of horizontal market power is the sale of 
competitive services such as advanced metering or any other competitive 
service, where the sale uses the regulated utility's name. In this 
case, the brand equity inherent in the name, and the association of 
that name with electricity services, reduces the company's cost of 
acquiring a new customer or selling a new service to an existing 
customer. Because the customer places a value on this brand equity, the 
customer is willing to pay more for service. For example, in 
Pennsylvania, all small businesses and residential customers would save 
10 percent on their electricity by switching to a wide range of 
competitive suppliers, yet over 80 percent of these customers have not 
switched suppliers. On average, these non-switching customers are 
paying approximately $100 per year for name brand and other incumbency 
equity. Naturally, customers should be allowed to choose freely to pay 
extra for brand equity and do so in almost all competitive markets. The 
difference is that, in those other markets, customers are not required, 
by government-regulated monopoly, to take a portion of their service 
(electricity distribution and, so far, at least some revenue cycle 
services) from the named entity.
    One actual customer story illustrates the strength of this brand 
equity. A friend of utility.com suggested to his brother-in-law that 
the latter sign up for service from utility.com to obtain savings on 
his electric bill. By way of background, the brother-in-law is very 
bright; in fact, he was a Rhodes scholar and was well aware of the 
California Public Utility Commission's educational efforts regarding 
deregulation. The friend explained that, under the rules of electric 
competition, the regulated utility is still responsible for repairing 
service after outages and ensuring reliability. Nevertheless, the 
Rhodes scholar mistakenly believed that his service might somehow be 
less reliable if he switched to utility.com.
    The States have developed varying approaches to mitigating such 
horizontal market power of incumbency and brand equity. One approach is 
to allow utilities to use their names for unregulated competitive 
affiliates, provided they disclose clearly that those affiliates are 
not the same as the regulated utility, operate completely 
independently, keep entirely separate accounts, and obtain no financial 
benefits from the regulated entity, including credit--a key requirement 
in wholesale electricity markets. In the spirit of compromise, 
utility.com does not oppose the ability of utilities to continue to use 
their names under these conditions.
    Utility.com believes the more important issue is to prevent any 
cross subsidies and ensure meaningful customer choice. Simply put, 100 
percent of the costs of any competitive service provided by a regulated 
utility should be allocated to that competitive service and, 
conversely, to the extent a customer chooses not to take a competitive 
service from the regulated utility--for example standard offer 
service--that customer should not have to pay any of the costs 
associated with providing that service, including all power acquisition 
costs and all revenue cycle service costs (to the extent the 
competitive supplier provides any revenue cycle services). The 
principle is straightforward: customers should pay for all of what they 
buy from a regulated utility and should not have to pay for anything 
they do not buy from a regulated utility. In addition, to the extent 
possible, customers need to be educated that the reliability of their 
service will be exactly the same, regardless of their electricity 
provider.
    The third important example of market power is that of the cartel-
like market power of power generators. In this case, during times of 
system peak, consumers are forced to pay excess prices because there is 
no demand response in spite of excessive wholesale power prices. This 
occurs because, except for the less than one percent of customers that 
have time-of-use or hourly meters, consumers have no awareness that 
wholesale prices are so high. These small consumers simply pay the 
same, averaged price throughout the year--including the very high costs 
incurred during the system peak hours. A similar effect occurs with 
respect to the cost of reliability, which is the price that grid 
operators must pay for backup reserve energy and other ancillary 
services (functions regulated by the FERC). As with electric 
competition as a whole, where more offerings are made to large 
electricity users, small consumers are the ones who suffer from not 
having the advanced metering that allows them to respond to price 
signals and--if they so choose--to avoid paying the high costs of on-
peak power.
    The result of this lack of price signals is that consumers pay very 
high prices for very inefficient use of capital invested in power 
plants. Electric generating plants are among the least efficiently-used 
capital in the country, operating on average only 46 percent of the 
time.6 This low figure compares to average industrial 
capacity utilization in the U.S. of about 83 percent. Improving this 
efficiency represents one of the most important sources of savings in 
the deregulated electric industry. History shows that price signals 
will accomplish this result. For example, following deregulation the 
U.S. airline industry increased its capacity use from 48 percent to 73 
percent, over a 50 percent improvement.7
---------------------------------------------------------------------------
    \6\ Financial Statistics of Investor-Owned Utilities, Energy 
Information Administration, 1996.
    \7\ Statistical Yearbooks, 1980 and 1996, U.S. Department of 
Commerce, supplemented by data from InsideFlyer magazine, a periodical 
focused on airline frequent flier programs.
---------------------------------------------------------------------------
          iii. mitigating market power through new technology
    Fortunately, new technology enables competitive electricity 
suppliers such as utility.com to deliver, and consumers to take 
advantage of, capabilities that can help combat market power. The first 
of these, the Internet, enables very low cost information sharing and 
data exchange. The second, low cost advanced metering, enables 
consumers to respond to high peak power costs and, should they choose, 
just say no to paying for those costs by reducing energy consumption at 
those times.
    Internet: Utility.com has pioneered the use of the Internet in 
retail electricity sales and customer service. Via the Internet, 
utility.com can recruit, sign up, serve, bill, and support customers at 
costs that are as much as 90 percent lower than traditional utility 
customer service costs. Utility.com collects information that enables 
it to forecast peak power consumption and offer savings commensurate 
with those estimates. Via its website, utility.com educates its 
customers regarding the use of energy and peak energy and how those 
customers can reduce such usage.
    Innovative metering: Utility.com also works with CellNet Data 
Systems, Inc. (``CellNet'') in offering innovative metering technology 
to its customers. CellNet is a wireless data services company with 
facilities in several states. CellNet provides metering and 
communications services using wireless and other networks in eight 
states to all sizes of utility customer. At a cost as low as one to two 
dollars per month, CellNet's advanced metering services are affordable 
to even the smallest energy users.
    Wireless technology also enables many other data services, 
including smart, communicating thermostats. These devices are the 
homeowner's equivalent of a building energy management system, but at a 
cost and level of simplicity suited for the small consumer.
    This technology exists and is being deployed in scale today. Over 
two million residential, commercial, and industrial energy users now 
have their meters read remotely via radio technology as often as every 
five minutes. With their meters on line, these customers now have the 
technology in place to receive several new services, some of which are 
already being offered to them by utility.com.
    These energy consumers can now receive detailed energy usage 
information to help them better manage their bills. Utility.com gives 
them the choice of which day of the month they receive their bills, 
perhaps the first of the month for Social Security recipients. They 
could receive an energy budget, updated daily. In some cases, they no 
longer have to call the utility to report an outage--and, after an 
outage, the utility knows for sure that the customer's power is back 
on. Utility.com customers receive off-peak discounts for charging 
electric vehicles and just to use energy more efficiently. Utility.com 
even prepares an analysis that shows them how much energy each of their 
major appliances uses.
    Utility.com believes that mitigating market power and making new 
technologies available are two of the most important ways for customers 
to realize the full benefits of competition. It enables customers to 
reduce costs and increases the number of choices utility.com can offer 
them. For example, utility.com's ``ModernMeterTM'' records consumption 
by time-of-use and collects additional information.
    Savings: Utility.com's ModernMeter enables customers to respond to 
changing power market prices and to reduce costs by shifting load. This 
important opportunity to realize savings is not available to customers 
who do not have time-of-use or hourly meters. Even though market energy 
prices change hourly, those customers without ModernMeters are charged 
the same price per kilowatthour regardless of their time of use. The 
customer whose usage peaks at 6:00 a.m. pay the same price as the 
customer whose usage peaks at 6:00 p.m. However, with ModernMeters, 
utility.com customers are saving as much as several hundred dollars per 
year (typical savings are approximately $100 per year).
    Choice: ModernMeters enable utility.com's customers to take 
advantage of innovative rate options, such as time-of-use pricing. 
Indeed, choice of pricing scheme is one of the few meaningful choices--
increasing customer savings by up to 15 percent as compared to averaged 
rate pricing. Unlike with other products, electricity customers are not 
able to choose based on product quality or performance. The ability to 
choose a pricing scheme that best suits their pattern of use is one of 
the most useful choices a customer has. Without advanced metering, 
these choices are not available.
          iv. mitigating market power through demand response
    Consumer demand response has great potential as a tool to mitigate 
wholesale price spikes. Such spikes typically occur during critical 
peak times when systems reserve margins are reduced. Regarding the 
Midwest wholesale price spikes in June 1998, a demand reduction of ``as 
little as five percent could have reduced wholesale prices by 80 to 90 
percent.'' 8 California's competitive wholesale market, the 
Power Exchange (``PX''), has exhibited similar price responsiveness to 
customer demand; on July 28, 1998, for example, wholesale prices 
increased by 83 percent from noon to 1 p.m., even though demand 
increased by less than two percent.9 In an internal study, 
the PX found that as little as a three percent reduction in peak demand 
could save almost $8 million per day during the summer critical peak 
period.10
---------------------------------------------------------------------------
    \8\ Robert Levin, Senior Vice President, New York Mercantile 
Exchange; testimony before the House Commerce Energy and Power 
Subcommittee, July 15, 1998.
    \9\ California Power Exchange, Historical Hourly Energy Prices, 
www.calpx.com, July 28, 1998.
    \10\ Analysis of Prices on August 3, 1998, internal study by the 
California Power Exchange, March 1999.
---------------------------------------------------------------------------
    Significantly, wholesale price spikes--in the absence of demand 
response--are not an isolated problem confined to events in the 
Midwest; deregulating markets around the world, including the United 
Kingdom and Australia, have experienced such wholesale price 
spikes.11 Importantly, such price spikes are not any 
different from the regulated past; they simply allocate the cost of the 
peaking power plants--many are used less than 100 hours per year--to 
the hours in which they are used (under regulation, those costs are 
averaged over the year and paid by all customers, regardless of whether 
they are using energy at times of system peak). Moreover, every 
customer benefits from reductions in hourly wholesale prices, even 
though the peak demand reductions are provided by only a subset of 
customers.
---------------------------------------------------------------------------
    \11\ The Impact of Market Rules and Market Structure on the Price 
Determination Process in the England and Wales Electricity Market, 
Frank Wolak and Robert H. Patrick, June 1996
---------------------------------------------------------------------------
    Demand response has great potential to mitigate price spikes in the 
ancillary services markets as well. In California, such prices have 
reached $9,999 per MWh.12 Utilities have always called on 
customer load reductions during critical peak times through curtailable 
and interruptible rates, resulting in thousands of megawatts of 
additional peaking power in the U.S.13 Until recently 
regulators have placed little emphasis on demand-side bidding for 
ancillary services. However, the Office of Electricity Regulation 
(``OFFER'') in the U.K. recently introduced proposed market changes 
that include making it easier for customers to bid ancillary services 
into the wholesale market. OFFER found that such bidding could improve 
market efficiency. Similarly, the Market Surveillance Committee of 
California's Independent System Operator has called for increased 
ability for market participants to bid into the ancillary services 
market;14 demand-side bidding would be a simple and cost-
effective source of ancillary services bidders.
---------------------------------------------------------------------------
    \12\ Preliminary Report On the Operation of the Ancillary Services 
Markets of the California, Independent System Operator (ISO), Market 
Surveillance Committee of the California ISO, August 19, 1998.
    \13\ Impact of Demand-Side Management on Future Customer 
Electricity Demand: An Update, Electric Power Research Institute, 
September 1990.
    \14\ Op. cit., Executive Summary Recommendations.
---------------------------------------------------------------------------
    Federal agencies have already called for further emphasis on 
demand-side activities as an important tool to mitigate market power. 
For example, the Deparment of Justice and Federal Trade Commission 
advocate time-of-use rates as one of the two most important ways of 
combating anti-trust issues and market power--the other being open 
transmission access.15
---------------------------------------------------------------------------
    \15\ Statement of A. Douglas Melamed, Principal Deputy Assistant 
Attorney General, Antitrust Division, U.S. Department of Justice, 
before Judiciary Committee, U.S. House of Representatives, June 4, 
1996; Comments of the Federal Trade Commission, Texas Public Utilities 
Commissions, Summer 1998.
---------------------------------------------------------------------------
    Customer Response to Price Signals: In contrast to some common 
beliefs, customers do change their demand for electricity depending on 
its price, just as they do for other products--making it an effective 
tool to mitigate the cartel-like market power of generators. Such price 
responses have been documented in a wide range of studies going back to 
the early 1980's. For example, Pacific Gas & Electric (``PG&E'') 
conducted a series of studies of customer load shifting under voluntary 
time-of-use rates for all customer classes over several years beginning 
in 1983. All of these studies demonstrated significant load reductions 
during peak periods. Of particular note is the study of such rates for 
residential customers, where PG&E found an average 21 percent reduction 
in peak use among program participants.16 This reduction is 
much larger than the amounts needed to influence significantly 
wholesale price spikes, which usage must be in the two to five percent 
price range to yield significant savings. EPRI surveyed scores of time-
of-use pricing studies conducted during the 1980's; these studies found 
consistently that customers shift load to off-peak time periods in 
response to higher peak prices, with residential customers having the 
greatest inclination to shift load.17 Now, with retail 
competition, competitive suppliers such as utility.com have the 
opportunity to promote such pricing to consumers.18
---------------------------------------------------------------------------
    \16\ Load Shifting Under Voluntary Residential Time-of-Use Rates, 
Douglas Caves et al., The Energy Journal, October 1989, p. 84.
    \17\ Op. cit.
    \18\ Many utilities have offered time-of-use prices to consumers, 
but the utilities have had little or no incentive to sign-up such 
customers as their profits were not affected either way. Retail 
competitors have the profit motive to seek out and educate customers.
---------------------------------------------------------------------------
    Studies of real-time pricing have revealed similar and equally 
compelling results. Studies of large commerical and industrial 
customers found price elasticities as high as 0.35 (that is, a 3.5 
percent decrease in consumption for every 10 percent increase in 
price).19 Virginia Power found in its study that large 
commercial and industrial customers, ``reduced their on-peak load 
during the `critical' days by approximately 40%''! 20
---------------------------------------------------------------------------
    \19\ Customer Response to Real-Time Pricing in Great Britain, Kathy 
King and Peter Shatrawka.
    \20\ Variable Pricing Simplified, John F. Caskey and Kurt W. 
Swanson, Proceedings of the Annual International Distribution 
Automation/Demand Side Management Conference, January 1992.
---------------------------------------------------------------------------
    As noted above, residential customers are especially price 
sensitive. Fewer, but some, real-time pricing studies have been 
conducted on these customers. The results are consistent with studies 
of time-of-use pricing for residential customers and real-time pricing 
for commercial customers. An example is American Electric Power's 
(``AEP'') study. AEP used technology that automatically responded to 
price signals, making it as simple as possible for customers to benefit 
from real-time prices. An example is automatic adjustment of the 
thermostat in summer: 72 degrees for low electricity prices, 74 for 
medium, 76 for high, and 80 for critical peak prices. Peak demand 
reductions were dramatic: between 50 and 60 percent during peak times--
and savings even more so: customers in the program saw bill savings of 
approximately $175 per year.21
---------------------------------------------------------------------------
    \21\ AEP Giving the Customer Control of the Meter, Quad Report, 
Consumer Energy Council of America Research Foundation, April/May 1994.
---------------------------------------------------------------------------
              vi. federal role in mitigating market power
    Regarding the role of the Federal government, utility.com supports 
a balanced approach. The States have made a good start in implementing 
retail competition. It is in the national interest, and therefore 
appropriate for Federal intervention, to ensure that all Americans have 
access to choice of electric supplier and that such choice is available 
in a free and open market; that there is a level competitive playing 
field. To balance the roles of the States and Federal government, 
utility.com supports the following:

1) Allow the States to continue to exercise local jurisdiction 
        regarding the implementation of retail competition.
2) Provide the States with guidance regarding market power and other 
        issues, including ``model regulations'' that ensure the 
        mitigation outcomes described above. Even without legislation, 
        the Federal Energy Regulatory Commission (``FERC'') should 
        develop model regulations for the separation of utility 
        functions, the proper allocation of costs between competitive 
        and regulated functions, low-cost and open access to detailed 
        usage and pricing information by consumers, and adequate 
        consumer protections, which model regulations the States could 
        then use in their own deliberations.
3) Immediately address one of the critical cost barriers faced by 
        competitive suppliers, which is the high transaction costs that 
        are caused by the use of differing data formats and data 
        transport mechanisms in each distribution utility service area. 
        The States are already beginning to converge on the use of the 
        Electronic Data Interchange formats of the Utility Industry 
        Group. By adopting these formats, the FERC would provide 
        additional leadership in achieving nationwide standards and, 
        thus, reducing transaction costs. This would be similar to the 
        leadership FERC showed in adopting the Gas Industry Standards 
        Board (``GISB'') and Open Access Same-time Information System 
        (``OASIS'') standards. Adopting such standards would also 
        result in greater access to information by consumers.
4) Encourage the States through financial and other incentives to, 
        first, provide consumers with the ability to choose their 
        electric suppler and to, second, adopt regulations that 
        mitigate market power and ensure a level competitive playing 
        field. One such incentive would be a reciprocity rule for 
        participation by regulated entities in the competitive markets 
        of other states. Another would be preferred access to Federal 
        renewable energy and energy research funding for those states 
        allowing competition and implementing ``level playing field'' 
        competition rules.
                            vii. conclusion
    Electric deregulation has great promise, as it has in other 
industries, for reducing prices and unleashing markets to develop 
innovative products and services. Market power--vertical, horizontal, 
and the cartel-like market power of power generators in the absence of 
demand response--threatens to reduce or eliminate the great potential 
for the benefits of competition. Utility.com urges the Federal 
Government to work closely with the states on model regulations, the 
promotion of advanced metering, and other methods to combat and 
mitigate market power.
    Utility.com greatly appreciates the opportunity to comment.

    Mr. Stearns. Thank you, gentleman. Mr. Kurtz, welcome.

                 STATEMENT OF MICHAEL L. KURTZ

    Mr. Kurtz. Mr. Chairman, thank you very much for your kind 
comments today. For the other Members of the committee, I am 
Michael Kurtz. I am the general manager for Gainesville 
Regional Utilities in Gainesville, Florida, a municipally owned 
utility.
    I am here today on behalf of the American Public Power 
Association, representing the interests of over 2,000 public 
power systems serving one out of every seven electric consumers 
in the United States.
    My remarks today summarize what is contained in our written 
testimony that has been submitted for the record. A discussion 
about market power is really a discussion of how to develop an 
effectively competitive marketplace.
    As public power utilities purchase nearly 70 percent of the 
power to serve their ultimate customers, which is roughly 40 
million people in the United States, the competitive future of 
the electric power industry is critical to us.
    The conditions for competition in any market include the 
existence of many buyers and many sellers, freedom of entry and 
exit for competitors and access to available market 
information. However, when market power exists, none of these 
criteria can be fulfilled; and it will be difficult, if not 
impossible, to develop vigorous, competitive markets sustained 
over time. Yet high levels of market power are exactly what we 
have in our industry today.
    The electric utility industry in the United States is 
dominated by private, vertically integrated, regulated 
monopolies with approximately 80 percent of the Nation's 
generation resources controlled by incumbent utilities and 
their affiliates. These same investor-owned utilities also own 
about 70 percent of the high voltage transmission lines for 
transmitting power throughout the United States.
    Some have said that Congress and regulators should let the 
market determine the future structure. What these folks really 
mean when they say this is let the monopolies determine the 
market structure. We disagree. Competitive markets do not 
require heavy regulatory or antitrust scrutiny. But electricity 
is not a competitive market, at least not yet.
    Some States that have taken steps toward addressing market 
power within their borders by requiring divestiture of 
generation by vertically integrated, industrial-owned utilities 
for example. While such actions are very important, there is 
still a clear Federal role in fostering competition that 
extends far beyond what individual States can accomplish.
    Congress should address issues that are necessary for 
retail competition to work but which cannot be completely 
resolved by a single State or even a group of States. We need 
new, federally implemented market power protections because we 
are talking about transforming an industry made up of 
monopolies into an industry with many competing sellers and 
buyers.
    In the case of electricity, the monopoly exists now, and 
the first requirement we have is to eliminate the monopoly 
structure to creation of a competitive market.
    Addressing market power issues in this industry presents 
unique challenges. We believe FERC is best positioned to deal 
with these challenges. The first step that must be taken is to 
strengthen FERC's merger review process.
    We believe mergers are a defense against the advent of 
competition, and today's merger mania is a direct conflict with 
the objective of creating competitive generation markets out of 
a highly concentrated industry.
    If competition is the goal, then mergers need to be 
considered in a way that prevents them from setting back the 
emergence of competition. Newly proposed mergers should be 
denied unless the benefits to consumers can be shown to 
outweigh the adverse impact of eliminating a potential 
competitor from the marketplace.
    Enhanced merger review authority would address further 
concentration of control of the Nation's generation resources. 
However, much must be done to address the existing market power 
problems that we have today. Those who control the market today 
will seek to maintain their control at the expense of potential 
competitors. That is why there must be strong structural 
remedies to guard against both new and existing market 
concentration. This includes FERC authority to intervene on 
their own initiative where market power develops and requires 
the divestiture of generation facilities when essential to 
address the abuse of existing market power.
    In addition, FERC should be able to prevent increased 
concentration in power markets when generators are sold by one 
utility and acquired by another.
    Controlling transmission market power is equally important. 
Private utilities that control vast amounts of the Nation's 
transmission systems have a long history of anticompetitive 
practices, despite congressional and regulatory actions to open 
up the Nation's transmission grid and produce a competitive 
bulk power supply market by the transmission owners to instill 
exercise control over their facilities in a way that favors 
their own generation resources, placing power generators and 
bulk power purchasers at a competitive disadvantage.
    The only way to ensure that the Nation's transmission 
assets are managed in a way that facilitates the development of 
retail competition----
    Mr. Stearns. Mr. Kurtz, we just need you to wrap it up, if 
you would.
    Mr. Kurtz. Yes, Mr. Chairman--facilitates the development 
of retail competition is to insure that the entire transmission 
system is in the hands of truly neutral entities that will 
treat all competitors the same.
    It is important to understand that public power utilities 
will be restricted from participation in future independent 
transmission organizations, which we believe are important to 
have, unless Congress enacts legislation to address private use 
restrictions.
    The Bond Fairness and Protection Act, a bill introduced in 
the House as H.R. 721 by Representatives Hayworth and Matsui, 
and in the Senate, Senate 386, by Senators Gorton and Kerrey, 
is a fair and reasonable solution to the private use problem.
    While this is not an issue within the committee's 
jurisdiction, we would welcome your support in seeing that it 
is resolved in a way that is fair to industry participants.
    Mr. Stearns. All the written statements will be part of the 
record, so I just urge the witnesses just to summarize if they 
could.
    Mr. Kurtz. Mr. Chairman, I guess as a final comment, based 
on prior discussion, I do want to make sure that I state that 
APPA does support the North American Electrical Reliability 
Council consensus legislative language on reliability and urge 
Congress to incorporate that language in any restructuring 
package.
    Thank you.
    [The prepared statement of Michael L. Kurtz follows:]
 Prepared Statement of Michael L. Kurtz, General Manager, Gainesville 
 Regional Utilities On behalf of the American Public Power Association
Introduction
    Good Morning, Mr. Chairman and members of the subcommittee, I am 
Michael Kurtz, General Manager of Gainesville Regional Utilities in 
Gainesville, Florida.
    Gainesville Regional Utilities, or GRU, is a municipal utility 
located in north central Florida. As a multi-service utility owned by 
the City of Gainesville, GRU offers electric, natural gas, water, 
wastewater, and telecommunications services to over 75,000 customers. 
We have 750 employees and an annual operating budget of over $180 
million.
    I am here today on behalf of the American Public Power Association 
(APPA). APPA is the national service organization representing the 
interests of over 2,000 municipal and other state and local government-
owned utilities throughout the U.S. While APPA member utilities include 
state public power agencies, and serve many of the nation's largest 
cities, the majority of our members are located in small and medium-
sized communities in every state except Hawaii. APPA members serve 
about fourteen percent of all kilowatt-hour sales to ultimate consumers 
in the U.S.
Market Power Policies Are the Foundation of Competition
    Our association greatly appreciates the opportunity to testify 
before the subcommittee today regarding market power--an issue that is 
at the very heart of the debate over electricity industry 
restructuring. A discussion about market power policy is really a 
discussion of how to develop an effectively competitive marketplace. As 
public power utilities purchase nearly 70% of the power used to serve 
their ultimate customers--nearly 40 million people in the U.S.--the 
competitive future of the electric power industry is critical to us.
    The key ingredients for effective competition in any market include 
the existence of many buyers and sellers, freedom of entry and exit for 
competitors, and access to available market information. However, the 
presence of market power and concentration means that none of these 
criteria can be fully achieved. In fact, true competition can be 
defined as the absence of market power, for when a competitor can also 
set the rules for the game, you cannot have true competition.
    Yet, high levels of market power are exactly what we have in our 
industry today. The electric utility industry in the United States is 
dominated by private, vertically-integrated, regulated monopolies, with 
approximately 80% of our nation's generation resources controlled by 
incumbent utilities and their affiliates. These same investor-owned 
utilities also own about 70% of transmission lines of 138 KV or 
greater. Since such levels of market power and concentration are 
antithetical to competition, it is evident that we have a long way to 
go from where we are today to achieve structural competition in this 
industry.
    Some have said that Congress and regulators should let the market 
determine its future structure. What they really mean is: let the 
monopolists determine the market's structure. APPA disagrees. 
Competitive markets do not require heavy regulatory or anti-trust 
scrutiny--but electricity is not a competitive market, at least not 
yet.
    A transition from today's industry to a workably competitive 
marketplace will not just happen with the stroke of a pen signing state 
or federal restructuring legislation. As Federal Energy Regulatory 
Commission (FERC) Chairman James Hoecker has said, ``Good markets don't 
just happen, they are developed, structured, created.'' If we want to 
change the structure of this industry from monopoly to competition, the 
regulatory regime implemented by the federal government and the states 
must change as well. Not only do we need to guard against increased 
market dominance by today's incumbents, but it is also vitally 
important that we work to eliminate existing levels of market power 
that are certain to limit or inhibit the development of competition. A 
successful transition will require strong protections against market 
power abuses for consumers as well as rigorous oversight and 
enforcement that can transform the highly concentrated industry we have 
today into a vigorously competitive marketplace that offers meaningful 
benefits to electricity customers.
A Challenge for Congress
    Some states have taken steps toward addressing market power within 
their borders. For example, the State of Texas is considering 
restructuring legislation that takes an important step toward 
addressing generation market power by mandating that a power generation 
company cannot own and control more than 20 percent of the installed 
generation capacity within a qualifying power region. While such 
actions, alone, are very important, there is still a clear federal role 
in fostering competition that extends far beyond what individual states 
can accomplish.
    Ultimately, the role of federal legislation should be to facilitate 
state decisions to implement retail competition by addressing issues 
that are necessary for retail competition to work, but which cannot be 
completely resolved by a single state or even a group of states. 
Transmission in interstate commerce, for example, has been regulated by 
the federal government for decades. Regional generation markets extend 
far beyond state boundaries. As a practical matter, an individual state 
cannot regionalize the transmission grid and make it independent from 
generation, nor can states effectively address the generation market 
power of large multi-state or multi-national utilities. It is clear 
that these issues fall squarely within the purview of federal 
legislation.
Antitrust Laws Alone Are Not Enough
    Why do we need new federally-implemented market power protections 
at all? Because we are talking about transforming an industry made up 
of state-sanctioned monopolies into an industry with many competing 
sellers. Existing antitrust laws are insufficient to support this 
market transformation. The antitrust laws focus on the correction of 
abuses of a competitive market structure by those who would attempt to 
create a monopoly. In the case of electricity, the monopoly has existed 
and been sanctioned by the state, and the first need is to eliminate 
the monopoly structure through creation of a competitive market. Since 
today's vertically-integrated utility companies will bring much of 
their existing market dominance into the restructured electricity 
industry of the future, there will need to be a regulatory agency that 
can detect and deal with abuses expeditiously in order to create and 
maintain an environment where competition can develop.
    The problem of moving from a monopoly structure to a competitive 
market is made more complex by the importance and unique 
characteristics of electricity. Electricity, because of its unique 
public service element and pervasive nature is not like other 
infrastructure industries that have been deregulated. First, 
electricity is an essential service for which there is no substitute. 
Consumers need electricity at virtually all times for health and safety 
and to enable businesses to operate. Second, the provision of electric 
service is a ``real time'' business. With minor exceptions, electricity 
cannot be purchased in times of surplus and stored for times of 
potential shortage. This fact substantially increases opportunities for 
market manipulation. Third, the generation and transmission aspects of 
this industry are highly interdependent. The way in which generation 
facilities are operated can significantly affect the capacity of 
transmission lines to allow electricity to be imported into an area.
    These factors--the lack of substitute products for many, the real-
time nature of the business, and the interdependence of transmission 
and generation--combine to create numerous and difficult-to-detect 
opportunities to exercise market power at particular locations, during 
particular seasons or times of day. The fact that the transmission 
system is often controlled by the same vertically integrated utilities 
that also control substantial amounts of generation makes manipulation 
of the system virtually inevitable.
    For these reasons, addressing market power issues in the 
electricity industry presents unique challenges related to recognizing 
and addressing market power abuses that we believe FERC is best 
positioned to deal with in a new competitive environment. To succeed, 
however, FERC's authority under the Federal Power Act must be expanded. 
While the antitrust laws should remain in effect to allow for longer-
term review, FERC also needs augmented authority to prevent 
anticompetitive activities from occurring, and to deal with them as 
they develop.
    In the past, FERC has focused on regulating the prices of monopoly 
providers of wholesale electric service to protect consumers. This 
oversight was necessary because vigorous competition has not existed to 
control prices. For deregulation to work and consumers to benefit, we 
must be sure that competitive pressures will, in fact, exist. As we 
move to competitive markets, FERC's mission must change from setting 
reasonable rates to a responsibility to establish and maintain workably 
competitive electricity markets. This major change in focus will 
require clarifying the authority of FERC to take a number of actions to 
eliminate existing market power, to prevent the development of 
increased market power, and to act swiftly to prevent market power 
abuses.
Strengthened Merger Review--Consideration of the Effects on Emerging 
        Competition
    One important area where consumers need more protection relates to 
the merger review process. Rather than streamlining filing 
requirements, we should expand the scope of merger standards to ensure 
that today's mergers do not thwart tomorrow's competitive markets.
    Concentration in ownership of electric resources in this country is 
increasing at an unprecedented rate as today's utilities engage in 
mergers to assure themselves a strong position in a competitive 
marketplace. The rapid pace of this trend toward consolidation is 
clear--since 1997, 33 mergers were proposed, and 22 completed. In 
contrast, only nine were proposed during the three years prior to that, 
1994-1996.
    Mergers are a defense against the advent of competition, and 
today's merger-mania is in direct conflict with the objective of 
creating competitive generation markets out of a highly concentrated 
industry. If competition is the goal, then mergers need to be 
considered in a way that prevents them from setting back the emergence 
of competition. Toward that end, newly proposed mergers should thus be 
denied, unless the benefits for consumers not otherwise obtainable 
through other means are shown to outweigh the adverse impact of 
eliminating a potential competitor from the marketplace. Where 
significant concentration in ownership of generation already exists 
without a merger, FERC should have authority to require divestiture or 
to solve the problem by other means.
    Early last year, Joel Klein, Assistant Attorney General for the 
Antitrust Division of the U.S. Department of Justice, addressed 
concerns about the impact of the increasing trend toward mergers in a 
presentation before FERC. He noted that, ``. . . utilities may see this 
as a time when they have a window of opportunity in which to consummate 
mergers. Mergers with little immediate anticompetitive effect can 
nonetheless frustrate the emergence of competition. For example, 
incumbent dominant firms could pick off competitors in their infancy, 
or even before they become competitors . . . Missed opportunities for 
the emergence of competition at the outset of the transition are 
forever lost, with potentially substantial social costs.''
    These considerations have been echoed by FERC Chairman James 
Hoecker, who has explained, ``While the Commission has aggressively 
encouraged a more competitive industry . . . it must ensure that 
mergers are not a vehicle to enhance market power.''
    Perhaps the best and most visible example of how today's merger 
proposals can lead to anti-competitive future market dominance is the 
proposed merger of American Electric Power Company (AEP) and Central 
and Southwest Corporation (CSW). The combination of these companies 
would create one private utility serving 4.6 million customers across 
eleven states, from Virginia and Michigan to Oklahoma and Texas, in a 
swath nearly spanning the entire Eastern Interconnection. It is no 
understatement to say that this merger would have far-reaching 
structural effects on bulk power markets. The merged company would 
control 38,000 MW of generating capacity, an amount equivalent to 
nearly half of public power's entire installed capacity nationwide. 
Moreover, if approved, it may well set off a chain reaction of new 
electric utility mega-mergers as smaller competitors seek to merge to 
match or exceed the size of the AEP-CSW combined company.
    Such proposed mergers, if approved, will have the effect of 
predetermining the structure of the industry before state and federal 
regulators can implement a coordinated strategy to foster and enhance 
competition in the electric industry at the wholesale and retail 
levels. FERC and other regulatory agencies will have little power to 
turn back the clock to ensure a competitive environment, and the 
available options for defining and protecting the public interest will 
then be limited.
    Because it is difficult at times to project what the impacts of 
today's decisions will be on an unknown and still-developing future 
market structure, APPA has suggested that a temporary moratorium on the 
largest electric mergers may be in order. In the absence of such a 
moratorium, it is important at a minimum to recognize that today's 
merger decisions are integrally related to the goal of competitive 
markets-and that FERC's merger review process must begin to take this 
fact into account by fully examining the effect of proposed mergers on 
competition.
Continued Concentration in Generation Markets Will Prevent the 
        Emergence of Competition
    Enhanced merger review authority is designed to address further 
concentration of control of the nation's electric generation resources. 
However, much must be done to address the existing control over 
generation that is now largely in the hands of a relatively small 
number of privately-owned utilities.
    State policies that restrict the amount of generation that can be 
owned by a single corporate entity are a very important step in the 
right direction--but the next step has to be to ensure that the company 
that purchases the generation, a company located over state lines for 
example--does not then exercise the generation market power that the 
state statute was designed to guard against. Simply transferring 
ownership from one entity to another does not do enough to achieve the 
goal of a less concentrated market that is more conducive to effective 
competition. Because electricity markets are regional, state 
restrictions on the ownership of generation can go a long way. Yet, 
unless each state throughout the entire region enacts the same type of 
policy, ownership of generation in that market will remain highly 
concentrated, and consumers throughout that region will face limited 
choices and pay higher prices for power.
    For those who control generation now, you can be sure that the 
incentives exist to maintain this control as we move into a more 
competitive marketplace. Florida is seeing this first-hand as Florida 
Power & Light Company (FP&L) has launched a campaign to undermine 
potential competitors through strident opposition to the development of 
a new 500 MW wholesale plant that is to be jointly built by Duke Power 
Company and one of our members, New Smyrna Beach Utilities Commission. 
This plant meets widely-recognized power supply needs, was originally 
proposed back in 1997, and has been approved by the Florida Public 
Service Commission. FP&L's response to the potential competition has 
been to launch a legal strategy designed to bring the plant to a halt 
on the grounds that the power generated by the project is not needed. 
But while they are protesting that additional capacity is not needed, 
they just announced plans to expand their own generation capabilities 
by 20 percent--or 5,600 MW--over the next decade to meet projected 
future energy needs.
    In this case, we have a state commission that has acknowledged a 
need for additional capacity to meet growing needs. We have a new power 
project proposed over two years ago that has been approved by the state 
commission. Then, the incumbent came out with its own plan to add new 
generation capacity in recognition of these growing demands. It then 
undertook a legal strategy designed to kill a potential competitor's 
plan to build a much-needed new plant that will help advance the 
competitiveness of the wholesale market, and bring prices down for 
consumers by providing a much-needed alternative source of power.
    Clearly, as in this case, those who control the market today will 
seek to maintain their control at the expense of potential competitors. 
If our goal is a truly competitive marketplace, the face of today's 
monopolistic industry has to change. That is why there must be strong 
structural remedies to guard against both new and existing market 
concentration. This includes FERC authority to intervene where market 
power develops, and if needed, cause the corporate separation of 
generation from transmission when necessary to effectively address the 
abuse of market power. In addition, FERC should be able to prevent 
increased concentration in power markets when generators are sold by 
one utility and acquired by another. Without rigorous oversight-- and 
divestiture authority as a last resort--market power abuses will choke 
competition before it can get a toehold in this industry. Again, 
because these markets are regional in nature, federal regulatory 
involvement is needed to protect consumers from the anticompetitive 
effects of market concentration throughout each region.
Market Power Resulting From Vertical Integration: Transmission 
        Facilities Must Be Managed by Truly Neutral Entities
    Private utilities that control vast amounts of the nation's 
transmission systems have a long history of denying municipal utilities 
access to their systems, or providing access at highly discriminatory 
rates and unfair terms. Despite congressional and regulatory actions to 
open up the nation's transmission grid and produce a competitive bulk 
power market through enactment of the Energy Policy Act of 1992 and the 
issuance of FERC Orders 888 and 889, private transmission owners 
continue to control essential transmission facilities in ways designed 
to prevent competition. They are able to exercise control over these 
facilities to favor their own generation resources, placing power 
generators and bulk power purchasers, including public and consumer-
owned utilities, at a competitive disadvantage.
    One of the lessons of the Energy Policy Act is that the only way to 
ensure that the nations' transmission assets are managed in a way that 
facilitates the development of retail competition is to ensure that the 
entire transmission system is in the hands of truly neutral entities 
that will treat all competitors the same. Achieving this end will 
require enabling FERC to mandate that all transmission owners 
participate in an independent Regional Transmission Organization, and 
beyond that, to mandate divestiture of transmission from generation if 
necessary to prevent abuses. In fact, the Federal Trade Commission has 
proposed the latter to FERC, suggesting that transmission operations be 
separated from ownership of generating plants in order to eliminate the 
incentives that exist for transmission owners to favor their own 
economic interests and evade regulatory constraints.
    An important example of recent transmission market power abuse 
occurred in the State of Wisconsin where Wisconsin Public Service 
Corporation and Wisconsin Power and Light Company used their control of 
significant transmission resources in the area to prevent one of our 
members, Wisconsin Public Power Incorporated (WPPI) and other smaller 
utilities from importing low-cost power from outside the state. In 
doing so, Wisconsin Power and Light even disregarded an earlier FERC 
directive to more equitably recalculate its available transmission 
capacity. In the end, not only did WPPI have to incur significant costs 
to gain access to the grid, but these private utilities enjoyed the 
benefits of their unfair actions for over a year before a FERC ruling 
brought these blatantly anticompetitive practices to an end.
    Further evidence of abusive transmission practices can be seen in 
the June, 1998 price spikes in the Midwest, which caused spot market 
prices for electricity to soar from their normal level of about $25 per 
megawatt-hour to as much as $7,500 per MWh. In response, FERC Chairman 
James Hoecker later said that part of the answer to the kind of market 
confusion that occurred in the Midwest is the creation of independent 
system operators. This finding was amplified in the Ohio state 
regulators' report on this topic issued on November 19, 1998. The Ohio 
regulators contend that such price spikes are likely to recur unless 
institutions essential to a fair and competitive market are put in 
place. Large independent regional transmission organizations (RTOs), 
and separate independent power exchanges to provide real-time price 
information are the essential ingredients, they go on to explain.
    In the end, some of the clearest evidence of such abuses can be 
seen in my own State of Florida. While the Energy Policy Act and Order 
888 require that all transmission owners provide the same transmission 
service to their competitors that they provide to themselves, FP&L has 
tried to undermine wholesale competition and FERC's comparability 
requirements by refusing to provide network access to the Florida 
Municipal Power Agency, which represents 27 municipally-owned electric 
utilities in the state. Network transmission is a type of transmission 
service that provides greater flexibility than point to point service--
and is a service that FP&L has always provided for itself. In response, 
FERC ruled that FP&L, under Order 888, was prohibited from refusing 
this service, and an antitrust lawsuit is now pending.
    In terms of our transmission system, Florida is virtually an island 
unto itself with very little access to transmission capacity from 
outside the state. The majority of the transmission in our state is 
controlled by FP&L, which has been leading the opposition to statewide 
efforts to create an independent transmission administrator. Without 
FERC authority to mandate participation in independent transmission 
organizations, those who stand to gain from the status quo will 
continue to resist efforts to implement pro-competitive changes to 
allow for neutral transmission management.
    The transmission solution most in the public interest is the 
creation of truly independent system operators or other institutions 
that are controlled by the public and operated on a not-for-profit 
basis. Such entities will not just be independent from market 
participants, but just as importantly, will be responsive to the 
concerns of all stakeholder groups. Such institutions, whether they 
simply control the transmission grid or own the transmission 
facilities, would enjoy the trust and confidence of the public, act in 
the public interest to pursue the most cost-effective solutions to deal 
with transmission constraints, and provide the lowest cost for 
consumers.
    It is important to note that APPA does not support the development 
of private, investor-owned utility (IOU) affiliated or controlled 
Transcos as an answer to these problems. Despite the arguments advanced 
for private, for-profit, Transcos either affiliated or otherwise 
controlled by IOU generators, they will not achieve the desired end of 
a truly competitive, economically efficient, lower cost, fair and open 
transmission grid, and should be rejected. They will not be truly 
competitive because they will lack the requisite independence from the 
parent corporation. They will not be economically efficient because 
they will not encompass a sufficiently broad geographic area. And, they 
will not produce a fair and open transmission grid because they will 
not incorporate the transmission facilities of publicly-owned and 
consumer-owned utilities. Higher costs will occur because the IOU 
owners of transmission hope to spin off their transmission facilities 
to newly created Transco companies at market value, not at book value. 
The owners of these facilities would reap windfall profits from such 
transactions that would be paid for by all electric consumers.
    While not the optimal solution, APPA has not rejected the concept 
that large, private, for profit Transcos that have no affiliation--
absolutely none--with generation and marketing interests could resolve 
transmission access and use problems in a fair and impartial manner. 
However, even these truly independent Transcos would be natural 
monopolies that must be overseen by FERC to prevent transmission market 
power abuses.
    For all of these reasons, APPA strongly supports amendment of the 
Federal Power Act to make explicit the Commission's authority to 
mandate participation by transmitting utilities in properly structured 
RTOs. Once formed, it is equally essential that FERC have the authority 
and budgetary resources to oversee the conduct of these RTOs, and where 
necessary, modify their governance, structure and geographic scope to 
foster and sustain open, fair and competitive electric power markets.
    In addition, it is important to note that public power utilities 
will be restricted from participation in future independent 
transmission organizations unless Congress enacts legislation to 
address the private use restrictions on our bonds. Municipal electric 
utilities that have issued tax-exempt bonds to finance their facilities 
under the old regulated monopoly framework face tough and potentially 
costly options for operating in the new restructured legal environment. 
If municipal utilities enter the competitive arena and violate the 
private use restrictions, tax-exempt bond financing on facilities 
utilized by private parties becomes retroactively taxable, leading to 
immediate bondholder lawsuits. The Bond Fairness and Protection Act, a 
bill introduced in the House as H.R. 721 by Representatives Hayworth 
(R-AZ) and Matsui (D-CA), and in the Senate as S. 386 by Senators 
Gorton (R-WA) and Kerrey (D-NE), is a compromise solution to the 
private use problem. If enacted, this legislation will accomplish two 
objectives: 1) Clarify existing tax laws and regulations regarding the 
private use rules so that they will work in a new competitive 
marketplace, and; 2) Provide encouragement for public power utilities 
to open their transmission or distribution systems, thereby providing 
choice to more consumers. These bipartisan bills have gained strong 
support in Congress, garnering 25 co-sponsors in the House and 15 co-
sponsors in the Senate since introduction earlier this year. 
Congressional action in this area is urgently needed--particularly to 
address the needs of municipal systems in states that have already 
adopted restructuring plans.
Opposition to Stand-Alone PUHCA Repeal
    APPA strongly believes that future repeal of the Public Utility 
Holding Company Act (PUHCA) must take place only in the context of a 
comprehensive electricity industry restructuring bill. PUHCA was 
enacted as a companion to the Federal Power Act in 1935 to, among other 
things, plug regulatory gaps created by multi-state holding companies 
that had--and still have--the ability and incentive to manipulate their 
books. Because of the interrelatedness of these statutes-any 
legislation regarding PUHCA should be fully coordinated with changes in 
the Federal Power Act to protect consumers.
    Stand-alone repeal of the consumer protections afforded by PUHCA 
will unleash today's vast multi-state holding companies from public 
accountability before the structure of a competitive market is 
developed. It will enable today's monopolies to garner even greater 
amounts of market power through mergers and widespread diversification, 
and the existence of such significant concentrations of market power is 
sure to inhibit, if not prevent, the advent of structural competition 
in the electricity industry.
    In addition, stand-alone PUHCA repeal presents unacceptable risks 
for captive electric consumers who do not have alternative service 
options if their utility's diversification efforts fail, or worse, non-
regulated ventures are subsidized with captive ratepayer funds, and 
they are left to pay the price.
    While many argue that PUHCA is an imperfect and perhaps outdated 
statute that is in need of reform, it is clear that the statute's goals 
of preventing market power abuses and harmful utility interaffiliate 
and diversification activities have great relevance to developing 
markets today. Even though the statute is ineffectively enforced by the 
Securities and Exchange Commission (SEC), it still provides valuable 
passive restraints on the formation of holding companies that extend 
the effect of the law far beyond the 15 multi-state holding companies 
that now fall under its direct purview.
    Far from being irrelevant, PUHCA has recently provided channels 
through which to challenge the anti-competitive and anti-consumer 
effects of the proposed AEP/CSW merger. APPA and the National Rural 
Electric Cooperative Association have filed a Motion to Intervene with 
the SEC regarding the proposed merger on the grounds that it has failed 
to meet three important tests of PUHCA, which require that the merged 
company, 1) have its assets physically interconnected or capable of 
physical interconnection; 2) be confined in its operations to a single 
area or region, and; 3) not be so large as to impair the advantages of 
localized management, efficient operation and the effectiveness of 
regulation. These requirements have helped bring to light meaningful 
questions about the market dominance the merger would create, and its 
potentially devastating effects on the emergence of competition across 
several regions of the country.
Reliability
    The reliability of the integrated and interdependent electric 
system is extremely important to health and safety and the viability of 
our economy. In the monopoly paradigm of the past, reliability has been 
protected by mutual back-up arrangements among utilities, and a 
regional reliability council structure. However, this system of 
cooperation and mutual assistance lacks both clearly enforceable rules 
and sanctions and competitively neutral entities to determine and 
enforce the rules on a non-discriminatory basis. This voluntary 
approach to reliability will not work in an increasingly competitive 
market. Reliability rules and their enforcement can have significant 
competitive impacts, and it is essential that reliability be maintained 
and enhanced in the transition to competitive markets.
    APPA supports the North American Electric Reliability Council's 
(NERC's) consensus legislative language on reliability, which will 
create a self-regulating reliability organization that would be 
overseen by FERC. The mission of this new organization would be to 
ensure that reliability rules are applied equally to all electricity 
providers. APPA urges Congress to incorporate this language in any 
future restructuring package.
Market Information
    Restructuring legislation must also account for the importance of 
market information in a competitive marketplace. Private utilities' 
efforts to maintain confidential rate agreements threaten to place 
serious restrictions on the availability of market information in the 
electricity industry. Market information is necessary to guard against 
abuse of market power in the form of predatory pricing, and to ensure 
that retail customers do not pay disproportionate rates due to deals 
made to secure lucrative commercial or industrial contracts. Informed 
consumer choices depend on the availability of market information--it 
is a vital component of any competitive market.
Protections Against Anti-Competitive Affiliate Transactions
    Another role for FERC in protecting consumers should involve the 
prevention of preferential transactions between affiliates, including 
discriminatory access to essential information, below cost transfer 
pricing, or other anticompetitive arrangements.
    If there is any doubt that anti-competitive affiliate deals will 
occur with seriously anti-competitive results, consider a recent case 
where a utility instructed its power marketing affiliate to check its 
OASIS Web site the following day at a certain time. At the appointed 
time, the utility posted an offer to sell a certain quantity of 
installed capacity and energy for a specified term at a particular 
price. The utility posted the offer for thirty minutes, and its 
affiliate requested all of the megawatts posted. In response, FERC 
issued a clarification on its rules barring affiliate favoritism, and 
said, ``Such a tip is market information that a utility cannot 
selectively disclose to an affiliate.''
    New competitors will not stand a chance in a restructured 
electricity industry if the relationships between utilities and their 
affiliates are not guarded carefully.
Conclusion
    In the end, market power policy is comprised of the many elements 
that are required to create the market structure upon which competition 
can be developed and sustained. Without strengthening merger review, 
prohibiting undue concentration in the ownership of generation, 
providing for neutral management of our nation's transmission 
resources, ensuring that reliability rules are enforced fairly, 
ensuring the availability of market information, and preventing harmful 
interaffiliate transactions, we believe that federal legislation to 
provide for competition in this industry is certain to fail. The 
consequences to consumers will be severe--and the overriding goal of 
providing lower costs and more choices in the electricity industry will 
never be realized.
    APPA is a member of a broad coalition that includes organizations 
representing large and small utility consumers, small business and 
environmental interests that has been working to educate policymakers 
about the importance of market power issues in the debate over 
electricity industry restructuring. Our coalition, the Consumers for 
Fair Competition, represented here on the panel today, has developed a 
detailed proposal related to many of the issues I have raised today 
that we would be glad to share with you, Mr. Chairman, as your 
subcommittee proceeds with its review of market power issues.
    Again, thank you for the opportunity to testify before you here 
today, and allowing us to share our view that market power policy is 
the key to a successful transition to effective competition in the 
electricity industry.

    Mr. Stearns. Okay. I thank the gentleman.
    Ms. Mary Elizabeth Tighe, your opening statement for 5 
minutes.

                STATEMENT OF MARY ELIZABETH TIGHE

    Ms. Tighe. Yes, sir. Good afternoon, Mr. Chairman and 
members of the subcommittee. I am Mary Beth Tighe, vice-
president of regulatory affairs for Statoil Energy. Statoil 
Energy is one of the largest independent power marketers in the 
United States.
    We have ownership interests in existing and planned 
generating plants, and as the first company licensed to sell 
competitive electricity in the State of Pennsylvania, we serve 
retail customers in both Pennsylvania and New York.
    Statoil Energy is also a board member of the Electric Power 
Supply Association, a trade association that represents 
competitive power suppliers, both power marketers and 
developers of competitive power plants. While I am here today 
representing Statoil Energy, my statement reflects the 
consensus views of the EPSA membership.
    First, let me propose a definition: I would define a market 
as consisting of many sellers and many buyers who are trading a 
commodity that has a value to the participants. If you accept 
my definition, then you are likely to accept my proposition 
that a market does not exist if there are few sellers. Therein 
lies my biggest concern.
    If we allow unbridled market power to be exercised by any 
participant in these marketplaces, we will have created not a 
market, but rather an unregulated monopoly.
    Congressional action is critical to the development of 
truly competitive markets. If the progress toward competitive 
markets is generated by piecemeal restructuring with 
inconsistent policies and guidance, the possibility of market 
power abuses increases, and with it, the need for direct and 
intrusive regulation.
    If Congress helps create a sound framework for a 
competitive, national marketplace, you limit the likelihood of 
anticompetitive abuses and the long-term need for intensive 
regulatory intervention, and you will increase the ability of 
the market to benefit all consumers.
    In the electric power industry, market power flows from the 
electric utilities' historic position as a regulated monopoly 
with an exclusive franchise territory. The advantages of 
incumbency accrue at all levels in the chain through a control 
of key physical assets and products, control of relationships 
with customers and control of entry by new competitors.
    Some concerns will surface within the marketplace 
traditionally regulated by the FERC such as interstate 
transmission rates and access, and other issues will be 
confined to the markets that have historically come under the 
auspices of the State.
    Areas where concerns about market power are likely include 
first transmission access. Notwithstanding FERC's commitment to 
competitive markets, the incumbent utility monopolies have in 
many cases superior access terms and conditions of use of the 
transmission system than their competitors.
    The second area where market power exists is in the 
relationship between power generation and retail sales. In many 
States, the traditional patterns of ownership which have 
concentrated generation assets in a relatively few companies, 
many of which also continue to be the holders of critical 
transmission assets. This traditional pattern remains 
unchanged, and this affects the ability of competitive 
wholesale and retail marketers to secure power supplies for 
their customers.
    A third area where market power is manifest is in brand 
names and customer information. During the decades that 
government policy excluded competitors, the incumbent utility 
has had a unique opportunity to build brand name identity and 
goodwill with customers.
    Market power can also impact competitive generation 
services and retail sales. Competitive services related to the 
sale of electricity, including metering, billing, and customer 
care, are essential to establishing customer relationships and 
offering innovative services and products. These services have 
been and continue in many States to be the exclusive domain of 
the incumbent utility.
    The exercise of market power in any of these areas denies 
consumers the benefits of competition. Any effective response 
to market power must recognize the split jurisdiction of power, 
of power markets.
    FERC must have the authority to investigate and remedy 
possible market power abuses. In addition, the commission needs 
to be empowered to assist the States in circumstances where the 
States are unable to address these issues either because of 
statutory limitations or due to the fact that the root causes 
of these concerns may be interstate.
    Elements of an effective strategy at the Federal and State 
level include, first, to separate competitive and 
noncompetitive services. It is not unusual to encounter a 
utility transmission company with its competitive wholesale 
power supplier, regulated retail utility, and unregulated 
retail marketer operating from the same offices and using the 
same operating personnel and customer information systems.
    Appropriate separation and meaningful standards of conduct 
governing the relations and transactions between the monopoly 
and its competitive affiliates should be adopted and enforced.
    Second, equip the regulators with the tools to detect and 
eliminate market power. Market power does not advertize itself. 
Detection requires monitoring and monitoring requires access to 
data. Regulators should have the authority to prohibit 
participation in the market by those with market power and 
impose limitations on ownership or use of essential resources.
    Third, develop a transmission grid built around the 
principles of transparency, comparability, and independence. 
The management of the transmission system and the question of 
comparable access are critical to the development of 
competitive markets in the mitigation of market power.
    Fourth, conduct careful analysis of the impacts of mergers 
on the marketplace, including the effects on retail markets and 
the emerging markets.
    Fifth, provide incentives to encourage divestiture. While 
we do not advocate mandatory divestiture of generation assets, 
we do recognize that divestiture of some or all of the 
utility's generation assets may have benefits, and these have 
been listed in detail in my written testimony.
    We encourage the subcommittee to craft language that 
focuses on market power. We note that the administration 
proposal includes legislation specifically targeted at market 
power.
    I am wrapping up, sir.
    Mr. Stearns. Okay.
    Ms. Tighe. This language represents a strong starting 
point, and we commend it to the committee. It is, however, 
impossible to divorce this part of the legislation from other 
decisions taken with respect to restructuring. We need to deal 
with the issues related to transmission grid and reliability.
    We need to continue to believe that a competitive national 
marketplace, driven by a date certain, is a central element to 
the most effective strategy to remedy market concerns. Giving 
consumers a choice of their electricity supplier is the most 
effective and ultimate consumer protection and will go a long 
ways to dealing with market power abuses.
    Thank you.
    [The prepared statement of Mary Elizabeth Tighe follows:]
Prepared Statement of Mary Elizabeth Tighe, Vice President, Regulatory 
                     Affairs, Statoil Energy, Inc.
    Good morning, Mr. Chairman and members of the Subcommittee. I thank 
you for your kind invitation to speak to you today. My name is Mary 
Elizabeth Tighe and I am Vice President of Regulatory Affairs for 
Statoil Energy, an integrated energy company engaged in the production 
and sale of natural gas and electricity-based products and services 
throughout the United States. Through its two FERC-licensed power 
marketing subsidiaries, Statoil Energy Trading, Inc. and Statoil Energy 
Services, Inc., Statoil Energy is one of the largest wholesale power 
marketers in the United States. Statoil Energy also has ownership 
interests in existing and proposed electric generation projects. 
Statoil Energy was the first Electric Generation Supplier licensed to 
competitively sell electricity in Pennsylvania. The company serves 
retail electric customers in Pennsylvania and New York.
    Statoil Energy is also a board member company of the Electric Power 
Supply Association (EPSA), a trade association that represents 
competitive power suppliers, both marketers and developers of 
competitive power projects. While I am here today representing Statoil 
Energy, my statement reflects the consensus views held by the EPSA 
membership.
                                overview
    There is no competition without competitors. To smooth the way to 
customer choice and competitive markets, lawmakers and regulators must 
address several key transition issues. Competitive markets won't ``just 
happen.'' They demand effort and oversight. Creating effective 
competition requires regulators to be vigilant on mergers and on 
affiliate codes of conduct, and to consider incentives to encourage 
divestiture.
    Congressional action will be critical to the development of truly 
competitive markets. If the progress towards competitive markets is 
driven by piecemeal restructuring with inconsistent policies and 
guidance, the possibility of market power abuse increases, and with it, 
the need for direct and intrusive regulation. If the Congress assists 
the creation of a sound framework for a competitive national 
marketplace, you limit the likelihood of anti-competitive activities 
and the long-term need for intensive regulatory intervention.
                  addressing incumbents' market power
    Beginning in the 1980s, as a result of the Public Utility 
Regulatory Policies Act (PURPA), a new generation of power plant 
developers began competing to win the right to build generating 
facilities and supply electricity to utilities. This began the process 
of restructuring the electric utility industry, culminating today in 
the evolution of competition and more customer choice.
    The benefits of competition are simple: replacing the monopoly with 
multiple competing sellers will lower costs and increase innovation. 
But merely authorizing competition does not produce effective 
competition. Decades of government protection have given utilities the 
advantages of incumbency. If these advantages have the effect of 
excluding or discouraging competitors, the utilities will continue to 
have market power, or the ability to skew market prices.
Introduction to Market Power
    Market power exists when a firm (or a group of firms acting 
together) can control the price of its product or service for a 
sustained period, undercutting potential competitors or increasing 
profits without experiencing an unacceptable loss of sales. Courts 
often define market power as the ability to control prices or to 
exclude competition.1 Evidence of market power is evidence 
of too few competitors.
---------------------------------------------------------------------------
    \1\ See, e.g., United States v. E.I. du Pont de Nemours & Co., 351 
U.S. 377, 39192 (1956).
---------------------------------------------------------------------------
    There are two types of market power--vertical and horizontal.
    Vertical market power: Traditional utilities are the only 
``vertically integrated'' members of the electricity industry. This 
means they are involved in every aspect of the industry: generation, 
transmission, distribution and aggregation. Because two of these 
functions, transmission and distribution, remain monopolies, there is 
the risk that utilities can leverage their control over monopoly assets 
to gain advantages in competitive markets. For example, utilities that 
control the transmission and distribution highways can grant special 
access to their own competitive products to the detriment of others. 
This practice is known as the exercise of ``vertical market power,'' 
because it is facilitated by the utility's vertically integrated 
status.
    Horizontal market power: A separate problem is that in any one 
industry sector, such as generation or transmission, the utility might 
play a dominant role. In a given region, for example, a utility might 
own 80 percent of all the generation assets able to operate during a 
particular hour. This dominance might exist for innocent reasons; for 
example, the utility has had a historical obligation to build 
sufficient generation to meet its load. However, it can be detrimental 
to competition for one company to control a large share of the market. 
This control is known as ``horizontal market power'' and can enable the 
generation owner to keep prices above normal, competitive levels. Some 
people argue that, in time, the incumbent's share of the market might 
diminish as other entrants build power plants. Yet, because 
construction takes several years and the success of entry attempts is 
hard to predict, there is cause for concern.
In the Electric Utility Industry, Market Power Flows from the Utility's 
        Historic, Regulated Advantages
    The advantages of incumbency accrue at all levels: control of key 
physical assets and products, relationships with customers and entry 
barriers facing competitors.
    Transmission-derived market power: Some people argue that 
transmission owners no longer can favor their own generation facilities 
because FERC rules now require owners to share their facilities with 
competitors on a nondiscriminatory basis. This is an oversimplification 
that too often has been proven untrue. For example, the transmission 
system was designed to support generation facilities currently owned by 
utilities, rather than subsequent facilities built by generation 
competitors. Similarly, transmission facilities serving an area may be 
limited so that the entity controlling generation facilities within the 
constrained area (or load pocket) will have market power.
    Notwithstanding FERC's commitment to competitive markets, 
comparable access to the transmission grid by all market participants 
has yet to be achieved. Today, the incumbent utility monopolies have, 
in many cases, superior access, terms and conditions of use of the 
transmission system. With few exceptions, the utilities or their agents 
determine who gets access to the transmission system. The transmission 
owner can utilize the system on a more advantageous basis than their 
competitors, affording themselves greater flexibility and 
profitability. For example, the transmission utility decides who will 
be curtailed and for how long when it determines such action is needed 
for reliability. Transmission utilities determine the terms and 
conditions on which new generators may connect to the transmission 
grid.
    Power-generation and retail sales: If newcomers to the retail 
electricity sales market cannot build generation rapidly or obtain a 
contractual right to generation owned by others, they cannot compete in 
a retail market. Building plants may take a few years and will involve 
practical obstacles, such as limited access to generation sites and 
time-consuming siting requirements. During this interim period, the 
incumbent could strengthen its hold on the market.
    Regulators will have to remain wary about the concentration of 
generation ownership and the possibility of price manipulation, 
especially during periods of peak demand. In a number of states, 
competitive restructuring has been accompanied by the divestiture of 
generation assets, which has generally broadened the base of ownership. 
In many states, however, the traditional patterns of ownership, which 
have concentrated the ownership of generation assets in relatively few 
companies (many of which continue to hold the critical transmission 
assets), remain unchanged. In these circumstances, it will be essential 
for the federal and state regulators to reduce barriers to entry and 
guarantee comparable access to the grid for new market participants.
    Brand names and customer information: The risks of market power are 
not confined to the control of physical facilities. During the decades 
that government policy excluded competitors, the incumbent utility had 
an opportunity to build brand name identity and goodwill with 
customers. Moreover, the incumbent utility has acquired over the years 
an unmatched knowledge of its customers' consumption patterns.
    Competitive generation services and retail sales: Competitive 
services related to the sale of electricity (including metering, 
billing and customer care) are essential to establishing customer 
relationships and offering innovative products and services. If the 
incumbent utility controls access to the customer through monopoly 
provision of these services, the retail market cannot develop.
                 solutions to the market power problem
    It's not enough to declare that electricity markets are open and 
that certain functions such as generation are competitive. The new 
markets must be structured with rules that will assure that competition 
will be robust and work to the benefit of consumers. Solutions to 
market power are simply an effort to create, preserve or strengthen 
competition. Key solutions include:
    1) Separating competitive and noncompetitive services: In each 
market, the incumbent utility has built-in advantages. To prevent these 
built-in advantages from distorting future competition, the following 
conditions, at a minimum, should prevail:

 competitive services must be provided by an affiliate that is 
        separate from the provider of noncompetitive services, with no 
        opportunity for preferential treatment of the affiliate;
 the noncompetitive affiliate (such as the transmission or 
        distribution company) should not share essential resources 
        (e.g., personnel or equipment) with its competitive affiliate; 
        and
 the appropriate standards of conduct governing the relations 
        and transactions between the monopoly and its competitive 
        affiliates should be adopted and enforced.
    In particular, a utility should not be able to share with its 
affiliate any customer information--gathered during the decades of 
utility monopoly--unless the information is made available to all (with 
the customer's permission) on the same terms.
    2) Equipping the regulators with the tools to detect and eliminate 
market power: Like any improper activity, market power does not 
advertise itself. Detection requires monitoring, and monitoring 
requires access to data. For example, to guard against the manipulation 
of commodity prices and availability, regulators might require market 
participants to supply, on a confidential basis, information on 
transmission and generation availability during all hours of the year, 
on hourly and seasonal prices, or on buyers' bids and sellers' offering 
prices. As is the case with stock and commodity exchanges, this 
information must be readily available at a low cost to regulators and, 
where appropriate, members of the public. Finally, regulators should 
have authority to prohibit participation in the market by those with 
market power and impose limitations on ownership or use of essential 
resources.
    3) Developing a transmission grid built around the principles of 
transparency, comparability and independence: On April 22, this 
Subcommittee held a hearing on the issues of transmission management 
and reliability. As we have already stated, the management of the 
transmission system and the question of comparable access are critical 
to the development of competitive markets and the mitigation of 
possible market power. During the hearing two weeks ago, Trudy Utter 
from Tenaska Power Marketing, Inc., testified on the need for federal 
legislation and remedies to ensure full and true comparability. Rather 
than to repeat this testimony here, we commend and endorse the views 
represented by Tenaska, which is also an EPSA member, power marketer 
and competitive power plant developer.
    4) Employing a careful analysis of mergers: Once rare, utility 
mergers are becoming increasingly popular strategies to position for 
retail competition. Yet, their effect on retail competition is not well 
understood. What we do know, however, is that mergers can provide a 
unique opportunity to assess the competitive implications of industry 
consolidation on retail competition. Federal and state regulators must 
ensure that their approval of utility mergers enhances, rather than 
dampens, emerging markets.
    Regulators must pay special attention to the effect of mergers on 
new retail markets, such as the markets for retail sales, metering and 
customer service. Some mergers may result in innovative products, such 
as combined electricity, gas and telecommunications products. 
Regulators must ensure, however, that merged companies are not allowed 
to exercise the rights to government-created benefits, such as control 
of needed transmission or distribution rights-of-way, to the detriment 
of other market participants.
    5) Considering incentives to encourage divestiture of key assets: 
Divestiture means selling off some portion of a utility's assets to a 
third-party buyer. Discussions of divestiture center on separating the 
utility's competitive and noncompetitive services so that the utility 
cannot use its control of its noncompetitive assets, such as the 
transmission system, to gain undue advantages for its competitive 
assets, such as its power plants. The most intense scrutiny has focused 
on generation divestiture, in which the utility sells some or all of 
its generating assets but remains in the transmission, distribution and 
aggregation businesses. Alternatively, if a utility wants to be a 
generation services company, it would divest its transmission and 
distribution assets.
    The ownership of generation assets going forward is a key decision 
in the process of restructuring. Some states are considering an ``in 
between'' approach, in which a utility's generating plants are 
deregulated but not sold or transferred to an independent party. In 
this instance, if the utility is not restructured to separate 
competitive from non-competitive services, the utility retains a 
generating monopoly, only now one that is no longer regulated.
    While EPSA does not advocate mandatory divestiture of generation 
assets, it does recognize that divestiture, or the spin-off of some or 
all of a utility's generation assets, can offer important benefits. 
These include:

 elimination of vertical market power;
 reduction in horizontal market power by replacing a single 
        generation monopoly with multiple competing generators;
 accurate establishment of a market value for the generation 
        assets for purposes of calculating stranded costs; and
 potential collection of a sale price in excess of net book 
        value, thereby lowering stranded costs, reducing the transition 
        period and improving the customer's ability to obtain lower 
        prices for electricity services in a competitive marketplace.
    State and federal policymakers should consider the implementation 
of appropriate incentives to encourage divestiture. In addition, it may 
be appropriate to give FERC the authority to order partial asset 
divestiture as a response to the illicit exercising of market power.
                    a comment on the repeal of puhca
    In addition to the questions of market power and merger policy, the 
Subcommittee requested input with respect to the possible repeal or 
reform of the Public Utility Holding Company Act (PUHCA). Many allege, 
and we generally agree, that PUHCA is an ineffective response to the 
threat of market power from large electricity holding companies and 
that the law unnecessarily complicates the financial management and 
opportunities of a number of companies. This Subcommittee is currently 
considering a comprehensive effort to restructure the electric power 
industry. Clearly, such a bill will present an opportunity to update 
and improve the regulatory tools that ensure competitive markets. In 
such a bill, we would recommend the adoption of language that would 
reform PUHCA.
    While we agree that PUHCA reform is necessary, we do have concerns 
that reform legislation may create an unintended burden on a number of 
companies that are today largely unaffected by PUHCA's regulatory 
structure. It is important that the ``reform'' of PUHCA not 
inadvertently ensnare new companies and market participants in a web of 
unnecessary regulatory oversight. As this Subcommittee develops 
legislation, we would like the opportunity to work with you to prevent 
this outcome.
                      legislative recommendations
    As our testimony makes clear, concern over the possible abuse of 
market power is not confined to one sector of the industry or one 
aspect of the marketplace. These issues can surface at many points in 
the market path from generator to consumer. Some concerns will surface 
within the marketplace traditionally regulated by FERC (e.g., 
interstate transmission rates and access). Other issues will be 
confined to aspects of the market that have historically come under the 
control and scrutiny of the states.
    Any effective response to market power must recognize this 
jurisdictional split. FERC must have the authority to investigate and 
remedy possible market power abuses. The commission, in addition, needs 
to be empowered to assist the states in circumstances where the states 
are unable to address these issues, either because of statutory 
limitations or due to the fact that the root causes of these concerns 
may be interstate. The Administration proposal, unveiled last week, 
includes legislation specifically targeted at market power that follows 
this model. This language represents a strong starting point and we 
recommend it to the Subcommittee.
    While we encourage the Subcommittee to craft language that focuses 
on market power, it is impossible to divorce this proposal from other 
decisions taken with respect to industry structure. As mentioned 
earlier and discussed during hearing two weeks ago, reforms in the 
management of the transmission grid and grid reliability are important. 
In addition, we continue to believe that a competitive national market 
for electricity, driven by a federally authorized ``date certain,'' is 
a central element of the most effective strategy to remedy concerns 
about market power abuse. As long as there are captive customers, 
cross-subsidization and cost-shifting can occur. Give consumers a broad 
right to choose their power supplier and a whole host of problems are 
solved.
    We appreciate this opportunity to testify before the Subcommittee 
on policies related to market power, mergers and PUHCA. We look forward 
to working with the Subcommittee as you craft legislation that can 
create a robust, competitive national marketplace for electricity.

    Mr. Stearns. I thank the lady.
    Mr. Kanner, your opening statement for 5 minutes.

                    STATEMENT OF MARTY KANNER

    Mr. Kanner. Thank you, Congressman Stearns. I'd like to 
commend Chairman Barton and Chairman Bliley for their vision in 
recognizing the importance of these issues and scheduling 
today's subcommittee hearing.
    The potential benefits, both economic and consumer 
benefits, of vibrant competition in the electric utility 
industry are real and substantial, but those benefits won't be 
realized if the issues raised today are not addressed in 
Federal restructuring legislation.
    I would urge the members of the subcommittee to remember 
that the goal of restructuring legislation is not deregulation 
for its own sake but, rather, the advancement and achievement 
of effective competition. If we address the market power 
issues, then consumers can realize those benefits.
    If this were an infant industry, market forces alone might 
be sufficient to discipline anticompetitive practices, and I 
can envision that in-State where market forces are the 
sufficient check on potential anticompetitive practices, but it 
is important to remember the starting point.
    Incumbent utilities have significant advantages that accrue 
as a result of the historic regulatory system. If this were a 
race, when the starting gun sounds, we can't allow for some 
parties to start that race at the 80-yard line in a hundred-
yard sprint while others are told to start at the beginning and 
run the high hurdles.
    Concerns about market power are not hypothetical. The 
problems are real and the problems are substantial. Congressman 
Burr, you asked what quantifies a dominant player in the 
electric utility industry. I will tell you that the economists 
for California's investor-owned utilities determined that those 
companies would possess undue market power even after divesting 
themselves of 50 percent of their thermal generation within the 
State. So it depends on the level of concentration and the size 
of the market.
    Similarly, regulators in Ohio determined that last summer's 
price spikes in the Midwest were exacerbated by the lack of 
effective competition and tools to respond immediately to 
demonstrated anticompetitive behavior.
    While States can take steps to reduce the opportunities for 
market power abuses, States cannot address these issues on 
their own because power markets are regional in scope and much 
of the utilities' assets and operations are outside the scope 
of a single State review.
    If competition is the objective of restructuring 
legislation, then we must address the significant potential for 
anticompetitive practices and consumer abuses in the transition 
to a fully competitive market.
    All utility mergers should be screened for their impact on 
the emerging market. Tools must be established to mitigate 
undue market concentration. Operation of the transmission grid 
should be vested with independent bodies that have clear 
authority to control, maintain, and upgrade the system. Rules 
must be established to prevent utilities from unduly favoring 
and underwriting their unregulated affiliates, and the 
liability concerns should not be exploitable for commercial 
gain.
    On repeal of the Public Utility Holding Company Act, we do 
not believe that repeal can occur on a stand-alone basis 
because it runs counter to the agenda for restructuring 
legislation. Stand-alone repeal will have substantial 
anticompetitive and anticonsumer repercussions and retard the 
development of a vibrantly competitive market.
    However, PUHCA could be repealed in a restructuring bill if 
coupled with the market power protections that we have outlined 
in our testimony.
    The Consumers for Fair Competition has assembled provisions 
to address these concerns, and these provisions were assembled 
from previously introduced legislation. We look forward to 
working with the members of the subcommittee in incorporating 
these provisions in any restructuring bill that you move 
through the Congress.
    Thank you, Congressman Stearns, for this opportunity to 
testify.
    [The prepared statement of Marty Kanner follows:]
  Prepared Statement of Marty Kanner on Behalf of Consumers for Fair 
                              Competition
    Mr. Chairman, members of the Subcommittee, I am Marty Kanner. I am 
testifying today on behalf of the Consumers for Fair Competition, a 
coalition of small business interests, power marketers, consumer and 
investor owned utilities, small and large electric consumer 
representatives, and environmentalists.1 While the interests 
of these organizations in the broader restructuring debate are diverse, 
we are unified in the belief that consumers must be afforded 
protections against anti-competitive behavior during the transition to 
a competitive marketplace. Moreover, it is clear that effective 
competition will not emerge and be sustainable if market power issues 
are not adequately addressed.
---------------------------------------------------------------------------
    \1\ American Public Power Association, Electricity Consumers 
Resource Council (ELCON), Enron, Friends of the Earth, Madison Gas & 
Electric, Missouri River Energy Services, National Association of State 
Utility Consumer Advocates (NASUCA), Northern California Power Agency, 
Ohio Municipal Electric Association, Transmission Access Policy Study 
Group (TAPS), Wisconsin Public Power Inc., National Alliance for Fair 
Competition (members include: Air Conditioning Contractors of America, 
Air Conditioning & Refrigeration Wholesalers Association, Associated 
Builders and Contractors, Independent Electrical Contractors, Petroleum 
Marketers Association of America, Plumbing, Heating and Cooling 
Contractors--National Association, National Electrical Contractors 
Association, Sheet Metal and Air Conditioning Contractors National 
Association)
---------------------------------------------------------------------------
    Consumers for Fair Competition (CFC) was formed to advance policies 
necessary to promote effective competition and to provide the intended 
consumer benefits of lower rates, increases in efficiencies and 
innovation, and diversity of supply options. The coalition believes 
that the intended benefits of competition will not reach consumers if 
steps are not taken to address the market dominance of incumbent 
utilities. The coalition commends you, Mr. Chairman, for recognizing 
the importance of these issues and scheduling today's subcommittee 
hearing.
    Since its inception, the coalition has focused only on market power 
issues. CFC developed a core set of market power principles by which 
the group would judge any restructuring proposal (the principles are 
attached as Appendix A). In addition, CFC has mobilized support against 
stand-alone repeal of the Public Utility Holding Company Act (PUHCA), 
testified before the Senate on PUHCA repealed, and worked with members 
of Congress to craft solutions to potential market power abuse.
    Over the past six months, members of CFC have worked to assemble 
model legislation on market power issues. The coalition turned to 
existing legislation for the many good solutions to market power 
problems that are already in the public domain. I have attached this 
model legislation to my testimony, and encourage its consideration by 
the subcommittee.
Fostering Competition
    Some in the restructuring debate argue that any action to address 
market power concerns is unneeded and inappropriate--that you shouldn't 
re-regulate in deregulation legislation. They assert that market power 
problems do not exist in the electric utility, or that market forces 
will resolve them if they do exist.
    First, it should be remembered that, given the continued monopoly 
status of transmission and distribution, continue regulation is 
necessary. Second, I would urge you to remember that the goal of 
restructuring legislation is not deregulation, but rather effective 
competition. Market forces cannot mitigate anti-competitive practices 
if a dominant player can block or discriminate against new market 
entrants. Competition in the electric utility industry will not occur 
simply by declaration. As noted by Federal Energy Regulatory Commission 
(FERC) Chairman Hoecker: ``Good markets don't just happen, they are 
developed, structured, created.''
    Incumbent utilities did not earn their market advantages through 
innovation, efficiency and market savvy. Rather, these advantages are 
an outgrowth of the historic regulatory system. As you know, 
historically the vertically integrated industry was considered a 
natural monopoly and regulated as such. Consequently, levels of market 
concentration and corporate behavior that would raise concerns in other 
industries were accepted as outgrowths of this ``natural monopoly.'' 
Utilities received exclusive retail monopoly franchises, and vertical 
integration--with a single company serving as the sole provider of all 
three functions of the electric utility industry (generation, 
transmission and distribution)--was accepted and encouraged.
    If this were an infant industry, market forces alone might be 
sufficient to discipline anti-competitive practices. However, the 
starting point is vitally important. The historic structure of the 
electric utility industry provides incumbent electric utilities with 
unearned advantages that are inconsistent with, and contrary to, the 
creation and continuation of an effectively competitive market. If 
competition is the objective of restructuring, then any restructuring 
legislation must address the significant potential for anti-competitive 
practices and consumer abuses in the transition to a fully competitive 
market.
    As noted economist Alfred Kahn put it: ``what is the best possible 
mix of inevitably imperfect regulation and inevitably imperfect 
competition?''
Anti-Competitive Impacts of Market Power
    Given the structure and operations of the electric utility 
industry, the opportunities for market power abuse are pervasive--and 
often subtle.
    In the electric generation market, market boundaries are determined 
largely by transmission constraints--physical limitations on transfer 
capabilities. Within these boundaries, it is common for an incumbent 
utility to own more than 40 percent of the generating capacity--a 
concentration level at which economists assume an ability of a dominant 
firm to set and control prices above what would occur in a truly 
competitive market.
    It is not simply total installed generation capacity that is 
important. Because of the physical nature of system operations, some 
generation assets hold disproportionate strategic value--their 
operation may increase the carrying capacity of a vital transmission 
link, provide peaking capacity that largely sets market prices, or 
provide ``high-value'' ancillary services. Ownership of these 
facilities provides opportunities for anti-competitive behavior in a 
sub-market of the industry. Thus, while a generating company may 
possess a small percentage of total generation in a given geographic 
market, it may dominate a particular product sub-market within the 
region.
    Despite a significant increase over the past few years in the 
construction of non-utility generation, such facilities still represent 
a comparatively small fraction of total generation. Moreover, potential 
developers of such facilities often face a diverse set of entry 
barriers. Frequently, incumbent utilities own the prime real estate for 
plant location (often adjacent to existing plants). In addition, in 
many states, only utilities themselves can request and receive the 
necessary regulatory permits.
    The vertical integration of most utilities provides another set of 
opportunities for anti-competitive practices. Despite enactment of the 
Energy Policy Act of 1992 and subsequent issuance of FERC Orders 888 
and 889, incumbent utilities can manipulate their ownership and control 
of transmission facilities to favor their own generation, block power 
sales by other entities, reduce total supply of generation (and thereby 
increase prices) and even block development of new generation. This 
becomes particularly acute at the growing number of constrained 
transmission interfaces.
    Incumbent utilities are also able to leverage their regulated 
operations to advantage their unregulated affiliates. Proprietary 
information on customer load patterns and energy needs can be 
transferred exclusively to affiliate power suppliers. Similarly, 
utilities can refer customers to their affiliates for installation and 
maintenance of HVAC equipment and other demand-side measures. Finally, 
utilities can cross-subsidize their unregulated affiliates through the 
market value of using the utility's name, logo or personnel, or by 
misallocating overhead expenses from the affiliate to the regulated 
utility.
    These are not hypothetical concerns. The problems are real and 
pervasive:

 Economists for California's investor-owned utilities 
        determined that those companies would possess undue market 
        power even after divesting 50 percent of their thermal 
        generation within the state.
 Last summer's price spikes in the Midwest were exacerbated by 
        the lack of effective competition and the lack of tools 
        available for immediate response to demonstrated anti-
        competitive behavior, according to a study done by the Public 
        Utility Commission of Ohio.
 Price spikes of 3500% in California's ancillary services 
        market were caused by undue market power according to filings 
        by two California investor-owned utilities.
 Rules for the PJM-ISO on governing how power plants tie into 
        the grid discriminate against new market entrants, include 
        unreasonable delays and are seen as a significant barrier to 
        entry.
 ISO-New England's congestion management system was approved by 
        a governance structure that the FERC has rejected as 
        inequitable.
 The independent governing board for the PJM-ISO complained to 
        FERC that the utility-controlled operating committee was 
        allowing the transmission system to be manipulated for anti-
        competitive purposes.
 Utilities have been cited for disclosing critical market 
        information to affiliates--in violation of ``Chinese walls'' 
        required by FERC.
 Utility commissions, small businesses and new market entrants 
        have uncovered instances in which utilities have unfairly 
        cross-subsidized their affiliates.
 Power marketers, new market entrants, utilities and others 
        argue that transmission owners have gained competitive 
        advantages by withholding transmission capacity for the stated 
        purpose of native load service or reliability.
    Some cite the public disclosure of such abuses as ``proof'' that 
the current regulatory system adequately policies the market. However, 
many market participants and observers believe these instances are 
simply the, albeit sizable, tip of the iceberg--with multiple 
undetected anti-competitive practices occurring for each uncovered or 
acknowledged infraction.
States Cannot Adequately Address Market Power Issues
    If it is accepted that steps are needed to assure the transition to 
a competitive market, it is important to ask: Can these problems be 
addressed by state regulators?
    CFC believes that a thorough analysis of this question concludes 
that state action alone is not adequate to assure the development and 
continuation of a competitive market.
    While states can play an important role in addressing potential 
anti-competitive and anti-consumer behavior, states alone cannot 
prevent competitive abuses:

 Power markets are regional in scope. The party engaging in 
        anti-competitive actions in state X, may be located in state 
        Y--outside the legal authority of state X's regulatory 
        commission.
 States that have adopted retail competition have generally 
        relinquished regulatory control over generation within the 
        state. If problems later emerge in the operation of in-state 
        generation, the commission may have no authority to address the 
        problem.
 Many utility operations span multiple states. Often state 
        regulators have limited access to the books and records of out-
        of-state operations of these utilities.
 Control and operation of the nation's transmission network is 
        largely outside the scope of state regulation. While states can 
        mandate or encourage in-state utilities to join regional 
        transmission organizations, states cannot approve or oversee 
        such entities--only FERC can.
 Several states have encouraged utility divestiture of 
        generation, but such action is usually done as a means of 
        valuing assets for stranded cost determinations--not for market 
        power mitigation (in fact, such divestitures have largely left 
        intact the same level of generation market power). Once 
        divested, the state has no control over the operation of the 
        divested generation.
 States can have a parochial interest in protecting an in-state 
        company--even if such action is contrary to the interests of a 
        competitive regional market.
    As you know, the restructuring bill pending in Texas includes 
several provisions intended to address market power. However, while 
that action is noteworthy, the situation in Texas is unique--because of 
ERCOT--and cannot be easily replicated in other states for the reasons 
cited above.
Federal Action Needed to Facilitate Competitive Markets
    Concluding that state authorities are insufficient to address 
market abuses does not in itself justify new federal authorities. An 
affirmative answer to that question must be based on a rigorous 
assessment of existing federal statutes.
    First, it must be remembered that the current federal regulatory 
structure--like state utility regulation--was established for the old 
regulated monopoly framework. Actions are needed to adapt that system 
to the desired competitive end-state.
    Today, FERC can deny a merger request or market-based rate 
application, or find that a utility fails to meet the ``just and 
reasonable'' test. However, the conditions that FERC can impose are not 
expressly delineated. Moreover, the Commission does not have clear 
policy guidance--other than vague ``public interest'' language--in 
determining what outcomes and objectives should be promoted.
    Consumers for Fair Competition has identified several areas where 
FERC's regulatory mission and authorities must be altered to promote 
effective competition.
    1. Mergers--As you know, utilities are merging at an unprecedented 
rate. Since the mid-1990's, 24 utility mergers have been completed, and 
12 additional mergers are pending at FERC. While mergers can bring 
efficiencies of size and scope, improved efficiencies and reduced rates 
are frequently not the result. According to a recent report by Anderson 
Consulting, less than half of the energy utility mergers over a 10 year 
period were profitable for shareholders. More troubling for the future 
of the competitive market, these mergers are often a mechanism for 
further consolidation of resources that potentially increases anti-
competitive opportunities.
    Under the Federal Power Act, FERC has clear authority to review and 
condition proposed utility mergers. In addition, the Department of 
Justice and Federal Trade Commission can review utility mergers under 
the anti-trust statutes. However, these agencies have largely deferred 
to the FERC in reviewing mergers.
    CFC does not believe that FERC merger review authority should be 
eliminated, with utility mergers left exclusively to Justice and FTC. 
The complexities of the electric utility industry argue for merger 
review by a regulatory organization intimately familiar with the 
industry. If FERC review were eliminated, that expertise (and staffing) 
would need to be added to the anti-trust agencies. Second, mergers 
often include conditions that require on-going regulatory oversight. 
The anti-trust agencies are not regulators capable of such on-going 
review.
    For these reasons, CFC believes that, along with FTC and Department 
of Justice authorities left intact, continued FERC merger review is 
essential. Moreover, CFC believes that FERC's merger authority should 
be revised in several ways. First, the FERC standard for reviewing 
mergers should be expressly expanded to make competitive impacts the 
primary ``screen.'' If a merger advances competition--either on its own 
or through FERC-imposed conditions--it should be approved; if it 
potentially frustrates competition, it should be rejected. Second, 
certain types of utility mergers and acquisitions--``convergence'' 
mergers between electric and gas utilities and mergers between utility 
holding companies--can be structured to escape FERC review. These 
regulatory gaps should be closed. Third, mergers should be scrutinized 
to ensure that they will produce continuing net consumer benefits, not 
simply advance company empires and egos.
    CFC has coupled provisions from the Bumpers-Gorton and 
Administration bills to accomplish these objectives.
    2. Market Concentration--As noted above, as a result of the 
regulatory structure of the past, some incumbent utilities unduly 
dominate their regional energy market. But this problem goes beyond 
``incumbent'' utilities. As a result of some utility asset divestiture 
plans, some non-utilities have acquired the market dominance once held 
by the utilities. In New England, a non-utility acquired all the 
generation assets of the largest regional utility. The price spikes in 
California cited above were due to market power exerted by the new 
owners of the incumbent utilities' divested assets. While the general 
energy market in California may not be unduly concentrated, many of 
these sub-markets--which in turn set the price for the general energy 
market--are overly concentrated.
    If the market is unduly concentrated, market discipline cannot 
check anti-competitive behavior, the dominant market player can exact 
excessive profits, and consumers will suffer.
    Economists have long established that regulation is needed as a 
substitute where competition does not or cannot exist. The question is 
what form of regulation is most appropriate to redress undue market 
concentration and restore competitive equilibrium?
    Some have argued that continued application of the anti-trust laws 
is sufficient. Consumers for Fair Competition disagrees. While 
continued application of the anti-trust laws is appropriate, the short-
comings of this approach must be recognized:

 Anti-trust laws address explicit anti-competitive behavior; 
        not existing structures that are inconsistent with competition
 Anti-trust actions occur after competitive harm has occurred,
 Actions under the anti-trust laws are time-consuming and 
        costly. For new market entrants, the delay of relief can be a 
        prescription for business failure.
    We cannot wait for market failure to take the steps needed to 
foster competition.
    Various policy options exist to address undue market concentration. 
Consumers for Fair Competition supports the approach taken last 
Congress by Representatives DeLay and Markey. In that legislation, FERC 
is given the authority and direction to mitigate undue market power. 
When FERC finds such anti-competitive concentration, it is authorized 
in clear terms to reimpose rate regulation and deny the dominant market 
player the use of market-based rates. FERC is also authorized to 
require the entity to participate in a regional transmission 
organization that will eliminate vertical market power. Only if these 
tools are inadequate to combat the market dominance is FERC authorized 
to order asset divestiture. As a practical matter, we do not believe 
that FERC will likely need to exercise its divestiture authority, but 
having this ultimate sanction--the club in the closet--ensures that the 
less intrusive steps proposed in the DeLay-Markey bill function 
properly.
    The denial of market rates is the central feature of this 
provision. First, it is proper economic practice. Market-based rates 
can only produce efficiencies and competitive pressure to lower costs 
if there is, in fact, a competitive market. In the absence of such 
competition--when one entity or group of entities dominant a market--
then market rates will simply produce monopoly profits. Second, the 
denial of market-based rates will compel utilities to submit their own 
market power mitigation plans in order to regain market-based rates. It 
should be noted that this same doctrine was used in deregulating the 
rail industry under the Staggers Act, where rate regulation is imposed 
on any shipper that dominates a market.
    3. Transmission Operation--The vertical control of the electric 
utility industry is largely incompatible with the needs of the 
competitive market. Despite the progress that has been made as a result 
of the Energy Policy Act and FERC Orders 888 and 889, the nation's 
transmission grid fails to operate on a non-discriminatory and 
comparatively neutral basis and fails to fully promote or support a 
competitive generation market.
    Today, each utility's transmission network, despite a certain 
amount of reliability coordination, is operated largely as if it were 
an isolated island. This unnecessarily constrains and contracts 
markets. By acting in its own self-interest, owners can:

 reserve the majority of transmission capacity for its own use 
        (which use is not effectively subject to FERC comparability 
        standards),
 operate the system to favor its own (or affiliates) generation 
        or retail marketing operation,
 utilize reliability objectives--such as congestion management 
        and emergency curtailment procedures--in a discriminatory and 
        anti-competitive manner, and
 fail to make transmission investments that would alleviate 
        congestion and promote the competitive market.
    CFC believes that ownership and control of the nation's 
transmission system must be transferred to truly independent regional 
bodies with strong authority to operate, plan, maintain and expand the 
transmission system. Such action will:

 ensure all market participants have equal and 
        nondiscriminatory access to transmission services;
 facilitate competition by eliminating rate pancaking and 
        expanding the physical scope of markets;
 eliminate opportunities for the exercise of vertical market 
        power,
 reduce horizontal market power in generation by expanding the 
        size of the power market (and thereby reducing the comparative 
        generation ownership of each regional participant), and
 insure that transmission additions occur to eliminate bottle-
        necks, improve reliability and facilitate construction of new 
        generation.
    CFC believes that the language contained in the DeLay-Markey bill 
can be refined to achieve these aims.
    4. Utility Affiliate Transactions--The former monopoly status of 
utilities (and continued monopoly operation of distribution systems) 
provides anti-competitive opportunities in the ways that utilities and 
their unregulated affiliates interact. Utilities can:

 provide affiliates with preferential and discriminatory access 
        to important information on power and non-power sales 
        opportunities;
 purchase goods or services from affiliates at above-market 
        rates;
 provide affiliates with goods or services at below-market 
        rates;
 perform various administrative services for the affiliate that 
        are charged to the parent company or regulated utility; and
 provide the affiliate, at no cost, with the considerable 
        market value associated with the company name and logo.
    Such actions harm consumers by having captive distribution system 
ratepayers cross-subsidize the utilities unregulated affiliate venture. 
Such actions also harm competitors by providing utility affiliates with 
an unearned and anti-competitive advantage.
    Congress recognized these concerns and adopted several provisions 
in the Telecommunications Act of 1996 to ensure proper affiliate 
relations. These provisions establish ground rules for inter-affiliate 
relations and establish an enforcement mechanism. CFC urges adoption of 
parallel provisions in any electric utility restructuring bill.
    5. Reliability--As long as parties with a commercial commodity 
interest retain exclusive control of system reliability, opportunities 
will exist to manipulate legitimate reliability objectives for 
commercial advantage.
    Establishment of FERC oversight of mandatory reliability 
requirements (and the security coordinators that do the implementation) 
will both promote a reliable electric system and competitively neutral 
reliability standards. The members of CFC support the consensus 
proposal developed by the North American Electric Reliability Council 
(NERC) and urge its adoption.
Stand-Alone PUHCA Repeal
    You will hear assertions that the Public Utility Holding Company 
Act (PUHCA) is no more than an out-dated statute intended to protect 
investors from fraudulent securities practices. Don't be misled. 
Congress enacted PUHCA as a sister statute to the Federal Power Act. 
PUHCA establishes passive restraints on the structure of the electric 
utility industry in order to mitigate the formation and exercise of 
market power, preclude practices abusive to captive consumers and 
competitors, and facilitate effective regulation.
    Rather than ushering in competition as repeal proponents would have 
you believe, stand-alone repeal will have substantial anti-competitive 
repercussions and retard the development of a vibrantly competitive 
market.
    The members of CFC recognize that the current administration of 
PUHCA has clear limitations. However, its underlying purposes--the 
mitigation of market power and prevention of anti-competitive and anti-
consumer utility diversifications--remain relevant today. CFC believes 
that PUHCA could and should only be repealed as part of a broad 
electric restructuring bill that contains the market power provisions 
outlined above.
Conclusion
    Effective, sustainable competition will not automatically emerge in 
the absence of regulation. Regulation can--and should--be relaxed for 
those markets and products that are subject to effective competition. 
However, given the historical operation and structure of the electric 
utility industry, competition in all sectors and regions will not occur 
simply by legislative declaration.
    To promote the transition to competitive electric markets, steps 
must be taken to remove the vestiges of the former regulatory system 
and its accumulated opportunities to exercise market power. Once done, 
the transition to competition can occur and the need for active 
regulation will subside.

    Mr. Stearns. I thank the gentleman.
    Mr. Kahn, you are recognized for 5 minutes for your opening 
statement.

                  STATEMENT OF JOSHUA A. KAHN

    Mr. Kahn. Thank you. Good morning, Mr. Chairman, members of 
the subcommittee. My name is Joshua Kahn, and I am vice-
president for service and control systems of Kahn Mechanical 
Contractors, a family owned and operated heating, ventilation 
and air conditioning contractor located in Dallas, Texas.
    On behalf of our company, its 21 employees and the 
primarily small and medium-sized businesses that make up the 
heating, ventilation and air conditioning, or HVAC, contracting 
industry across this country, I would like to thank you for 
calling this hearing. The issue of market power, and in 
particular, the impact of market power abuses on small 
business, is of vital important to my industry.
    I appear before you today as a member of the Air 
Conditioning Contractors of America, ACCA, a nonprofit trade 
association representing firms that design, install, service 
and repair HVAC equipment for residential, commerical, and 
industrial customers.
    With roots dating back to the turn of the century, ACCA is 
the largest organization of HVAC contractors in the Nation. 
ACCA represents more than 9,000 member-companies through 
national membership, as well as local members through 68 State 
and local chapters.
    For the past several years, ACCA and its members have taken 
every available opportunity to speak to Members of Congress, 
their staffs, State regulators and others regarding the need to 
address the potential for market power abuses in Federal 
legislation.
    We have been joined in this effort by many other building 
trade associations in our industry and related industries 
through the National Alliance for Fair Competition. I would 
also wish to express ACCA's support for the testimony being 
offered by the Consumers for Fair Competition, a larger, more 
diverse coalition, of which ACCA also participates.
    Initially, let me say that ACCA and its members are 
foursquare behind congressional efforts to enact comprehensive 
Federal legislation, to open retail electricity markets to 
competition. We believe in competition and the lower costs and 
innovation it brings, but I am also here to caution you that in 
order for the benefits of competition to be realized, Congress 
must act to prevent cross-subsidization and other forms of 
anticompetitive conduct.
    While I am neither a lawyer nor economist, I am glad to 
have this opportunity to share my views on why cross-
subsidization, preferential deals for utility affiliates, and 
other anticompetitive conduct harm HVAC contractors, other 
small businesses, and eventually, the consumer.
    Cross-subsidization and other anticompetitive conduct harms 
competition in small business. As the electric power industry 
is restructured, utilities will operate in a range of regulated 
and unregulated businesses. In my home State of Texas, there 
are numerous examples of utilities entering unregulated 
businesses, such as HVAC contracting. To gain market share, 
they often resort to uneconomic strategies.
    In one instance, the utility affiliate was selling consumer 
service contracts at 20 to 30 percent below market rates. While 
ACCA is not opposed to utility diversification, without 
appropriate safeguards there are increased incentives to cross-
subsidize regulated and unregulated activities. This will harm 
captive consumers, as well as the promises of open competition.
    Therefore, it is critical that appropriate safeguards be in 
place to prevent utilities from using their regulated 
operations to unfairly create economic advantages for their 
unregulated lines of business.
    One of the greatest challenges we face is the absence of 
sufficient safeguards to prevent utilities from using assets 
paid for by the rate payers to cross-subsidize unregulated 
affiliates through the use of service tools, trucks, personnel, 
and overhead that is misallocated from the affiliate to the 
regulated business. Transactions between the affiliate and the 
regulated business that are not conducted at arms length 
provide additional opportunities to shift resources.
    Another significant problem is the shared use of the 
utility's name and logo by the unregulated affiliates. This 
strategy transfers significant marketing value to the 
unregulated affiliate by creating an incentive to overinvest in 
the brand name of the regulated business. This overinvestment 
enhances the marketing power of the unregulated affiliate at 
the rate payers' expense. The Federal Trade Commission economic 
staff has noted this problem repeatedly in comments to State 
regulators.
    Finally, marketing leads, load patterns, preferential 
referrals to utility affiliates and other information acquired 
due to monopoly status are being provided to unregulated 
affiliates on a preferential basis. This use of the last 
vestiges of monopoly power works to the severe disadvantage of 
fair competition.
    This threatens competition and is particularly harmful to 
small business in two ways. First, the ability to cross-
subsidize and provide other unfair competitive advantages to 
unregulated affiliates means that the affiliate is not bearing 
its own costs of providing service.
    Because the affiliate is not carrying its own weight, it 
can provide service at less than the cost of an otherwise 
equally efficient and often more experienced competitor. While 
this may initially lower costs for consumers, it inevitably 
results in driving independent competitors from the market.
    When this happens, prices will start to rise again, as 
there is no longer any choice for competitive price pressure to 
keep the costs down. Less choice and higher prices are exactly 
the problems that increased competition is supposed to prevent. 
As I said earlier, I am not an economist, but I do know that 
subsidies are bad for competition.
    Second, while cross-subsidization and other anticompetitive 
practices are bad for everyone up and down the food chain, the 
impact will be greater for small business. Absent safeguards to 
prevent anticompetitive conduct, small businesses lack the 
resources to fight unfair competition and will be among the 
first to suffer.
    Let me be clear. Small business does not need, nor do we 
seek, special protection from competition. We stand ready to 
compete and do so every day in a highly competitive industry of 
large and small companies. What we do ask, however, is that the 
utilities do not subsidize their affiliates with resources paid 
for by the rate payer.
    One quick sum comment about this. Many members have asked 
about the application of existing antitrust law. I am not a 
lawyer, but I do understand that the existing laws do not cover 
the new fact patterns that give rise to the competitive abuses 
encountered by small business.
    More importantly, Congress needs to be mindful that the 
aggrieved parties are small businesses which invariably lack 
the necessary resources to prosecute an antitrust action which 
will last for several years. Utilities have deep pockets and 
can prolong such suits until the meager resources of affected 
small businesses are exhausted.
    One very final comment to drive my point home. How would 
you feel as a Congressman if you were required to make a 
monthly contribution to a candidate seeking to take your place 
in Congress? That is exactly how I feel when I pay my utility 
bill, knowing that these dollars can be used to compete 
unfairly against me.
    [The prepared statement of Joshua A. Kahn follows:]
Prepared Statement of Joshua A. Kahn On Behalf of the Air Conditioning 
                         Contractors of America
    Good morning Mr. Chairman and members of the Subcommittee. My name 
is Joshua Kahn, and I am Vice President for Service and Control Systems 
of Kahn Mechanical Contractors, a family owned and operated heating, 
ventilation and air conditioning (``HVAC'') contractor located in 
Dallas, Texas. On behalf of our company, its 21 employees and the 
primarily small and medium-sized businesses that make up the heating, 
ventilation and air conditioning (``HVAC'') contracting industry across 
this country, I would like to thank you for calling this hearing. The 
issue of market power, and in particular the impact of market power 
abuses on small business, is of vital importance to my industry as the 
Congress considers federal legislation to restructure the electric 
power industry.
    I appear before you today as a member of the Air Conditioning 
Contractors of America (``ACCA''), a nonprofit trade association 
representing firms that design, install, service and repair heating, 
ventilation, air conditioning and refrigeration (HVACR) equipment for 
residential, commercial and industrial customers. With roots dating 
back to the turn of the century, ACCA is the largest organization of 
HVACR contractors in the nation, representing more than 9,000 member 
companies through national membership as well as local members served 
through 68 state and local chapters. For the past several years, ACCA 
and its members have taken every available opportunity to speak to 
Members of Congress, their staffs, the Administration, state regulators 
and others regarding the need to address the potential for market power 
abuses in federal legislation to restructure the electric power 
industry. We have been joined in this effort by many other building 
trade associations in our industry and related industries through the 
National Alliance for Fair Competition. I also wish to express ACCA's 
support for the testimony being offered today by the Consumers for Fair 
Competition, a larger, more diverse coalition in which ACCA also 
participates.
    Initially, let me say that ACCA and its members are foursquare 
behind congressional efforts to enact comprehensive federal legislation 
to open retail electricity markets to competition. We believe in 
competition and the lower costs and innovation it brings. But, I am 
also here to caution you that the benefits of competition will not be 
realized if Congress does not act to prevent cross-subsidization and 
other forms of anti-competitive conduct. While I am neither a lawyer 
nor economist, I am glad to have this opportunity to share my views on 
why cross-subsidization, preferential deals for utility affiliates, and 
other anti-competitive conduct harm HVACR contractors, other small 
businesses, and eventually, the consumer.
Cross-subsidization and Other Anticompetitive Conduct Harms Competition 
        and Small Business
    As the electric power industry is restructured, utilities will 
operate in a range of regulated and unregulated businesses. In my home 
state of Texas, there are numerous examples of utilities entering 
unregulated businesses such as HVACR contracting. To gain market share, 
they often resort to uneconomic strategies. In one instance, the 
utility affiliate was selling consumer service contracts at $15 to $40 
below market rates. While ACCA is not opposed to utility 
diversification, without appropriate safeguards there are increased 
incentives to cross-subsidize regulated and unregulated activities in 
ways that harm to captive consumers as well as the promises of open 
competition. Therefore, it is critical that appropriate safeguards be 
in place to prevent utilities from using their regulated operations to 
unfairly create economic advantages for their unregulated lines of 
business.
    One of our greatest challenges we face is the absence of sufficient 
safeguards to prevent utilities from using assets paid for by the 
ratepayer to cross-subsidize unregulated affiliates through the use of 
service tools, trucks, personnel or overhead that is misallocated from 
the affiliate to the regulated business. Transactions between the 
affiliate and the regulated business that are not conducted at arms 
length provide additional opportunities to shift resources.
    Another significant problem is the shared use of the utility's name 
and logo by the unregulated affiliates. This strategy transfers 
significant marketing value to the unregulated affiliate and, as the 
Federal Trade Commission economics staff stated, creates an incentive 
to cross-subsidize by over-investing in the brand name of the regulated 
business in order to enhance the marketing power of the unregulated 
affiliate.
    Finally, marketing leads, load patterns, preferential referrals to 
utility affiliates and other information acquired due to monopoly 
status are being provided to unregulated affiliates on a preferential 
basis. This use of the last vestiges of monopoly power works to the 
severe disadvantage of fair competition.
    This threatens competition and is particularly harmful to small 
business because:

Bad for Competition: The ability to cross-subsidize and provide other 
        unfair competitive advantages to unregulated affiliates means 
        that the affiliate is not bearing its own costs of providing 
        service. Because the affiliate is not ``carrying its own 
        weight,'' it can provide service at less than the cost of an 
        otherwise equally efficient and often more experienced 
        competitor. While this may initially lower costs for consumers, 
        it inevitably results in driving independent competitors from 
        the market. When this happens, prices will start to rise again, 
        as there is no longer any choice or competitive price pressure 
        to keep the costs down. Less choice and higher prices are 
        exactly the problems that increased competition is supposed to 
        prevent. As I said earlier, I am not an economist, but I do 
        know that subsidies are bad for competition.
Bad for Small Business: While cross-subsidization and other anti-
        competitive practices are bad for everyone up and down the food 
        chain, the impact will be greater for small businesses. Absent 
        safeguards to prevent anti-competitive conduct, small 
        businesses lack the resources to fight unfair competition and 
        will be among the first to suffer. Let me be clear, however. 
        Small business does not need nor do we seek special protection 
        from competition. We stand ready to compete, and do so every 
        day in a highly competitive industry of large and small 
        companies. What we do ask, however, is that the utilities do 
        not subsidize their affiliates with resources paid for by the 
        ratepayer who, I might add, includes us.
Federal Legislation is Essential to Address Market Power Abuses
    Although some states have enacted affiliate transaction rules 
through their state public utility commissions (``PUC's'') to address 
cross-subsidization and other forms of anti-competitive conduct, we 
need help from you.
    First, federal legislation to restructure the electric power market 
will accelerate the development of unregulated affiliates in several 
states. In many instances, the authority of state commissions to access 
the books and records of out-of-state affiliates is quite limited. 
Access to books and records of both regulated and unregulated 
businesses are essential to identify cross-subsidization. Yet, 
statutory limits on the authority of state PUC's to audit and sanction 
companies engaged in anti-competitive practices is hampering effective 
enforcement. Such authority must be granted at the federal level.
    Second, the regulation of anti-competitive conduct in interstate 
commerce has long been the role of the federal government. While 
antitrust laws should certainly continue to be applied, additional 
federal authority is necessary to create an environment in which 
competition can prosper. As a small businessman, I can tell you that 
the antitrust laws alone will not get the job done. Very few small 
businesses can afford the time or tremendous cost to bring an antitrust 
case against a major corporation. Congress recognized this reality as 
recently as 1996 in the Telecommunications Act that included provisions 
to address concerns about market power and anti-competitive practices 
by the Bell companies.
    Finally, ACCA believes that there is an important federal interest 
in having uniformity in this area. It has frequently been said that 
electricity doesn't stop at state borders. Neither will the competitive 
practices of multi-state utility holding companies that will have an 
even greater multi-state presence than they do today. Federal 
legislation must recognize this fact if it is to be meaningful in 
curbing anti-competitive conduct.
Addressing Anti-competitive Conduct in Federal Legislation
    This brings me to my final point--what should Congress do to ensure 
effective competition and the unintended consequences to small 
businesses?
    ACCA endorses the approach put forward by Consumers for Fair 
Competition that includes the essential ingredients for promoting 
competition and safeguarding against anti-competitive conduct. 
Comprehensive federal legislation should include: (1) separation of 
unregulated affiliates or subsidiaries; (2) a requirement to maintain 
separate books and records with proper cost allocation mechanisms and 
public access to such records; (3) require arms length transactions 
between utilities and their affiliates; (4) prohibit preferential 
treatment of affiliates, including marketing leads; (5) prohibit 
transfers of tangible and intangible assets that are not fully 
compensated; and (6) prohibit cross-subsidization. Of course, these 
provisions must be joined with effective an enforcement mechanism, 
either through FERC, another federal agency or by empowering the 
states.
Conclusion
    As Congress contemplates the framework for competition that would 
be established through comprehensive federal legislation, I urge the 
members of this Subcommittee to enact appropriate safeguards to govern 
affiliate transactions. With these safeguards, the best competitors--
whether large or small--will flourish, and consumers will benefit.
    I thank you again for allowing me to appear before you today and 
would be happy to answer any questions you may have.

    Mr. Stearns. I thank the gentleman.
    And Mr. Rose, you are recognized for 5 minutes for your 
opening statement.

                    STATEMENT OF KENNETH ROSE

    Mr. Rose. Thank you, Mr. Chairman. My name is Kenneth Rose. 
I am with the National Regulatory Research Institute at Ohio 
State University.
    I should state most of our funding comes from the public 
utility commissions around the country, and I do not speak for 
any of those commissions or the National Association of 
Regulatory Commissioners or Ohio State University. I am 
speaking for myself today.
    What I would like to concentrate on is the definition of 
market power. Basically, if you want to have to sum it up in 
one line, it is what every supplier wants, but won't admit it 
to you.
    It is something that anybody wants, and in fact, that is 
the great genius of Adam Smith's book 200 years ago was to 
recognize that everybody was after that, but that there was a 
self-correcting process that prevented anybody from being able 
to acquire market power and charge something other than what 
was the market price.
    The problem market power comes in is when something goes 
wrong with that self-correcting process. The invisible hand 
isn't working anymore, to use Adam Smith's term. Actually, I 
thought we were all going to have to swear on the wealth of 
Nations when I was watching earlier proceedings.
    If you have to sum it up in one sentence--I have this in my 
testimony--is that market power in the electric supply industry 
is the ability of suppliers or a group of suppliers to raise 
and maintain the price that is significantly above a 
competitive level.
    There are two words I would like to just point out there: 
one is, maintain it. You have to be able to do it for an 
appreciable amount of time before it really rises to a level 
that somebody ought to get concerned about. Also, it has to be 
significant. There are probably many players in many markets 
today that have some level of market power, but we are not too 
concerned about it because it is relatively small and the 
overall impact on the economy is relatively small. We don't 
bring the full force and weight of the Federal Government on 
every small amount of market power.
    We also say, I actually wasn't going to bring this analogy 
up because I thought it may not be polite to raise it, but 
since the Chairman raised it about the definition of 
pornography, I would just like to posit it. It is probably 
actually the opposite.
    Market power is probably the opposite of that old saw about 
pornography. Pornography is something you can't define, but 
everyone knows it when they see it or it is the eyes of the 
beholder, I suppose.
    Market power is just the opposite. I can define it fairly 
specifically. I can give you a formula to tell you what it is. 
It is P minus MC divided by P, with P being the price, MC being 
the marginal cost, basically meaning it is a percentage that 
you can mark up above marginal cost.
    But the problem is I am not always sure if you are actually 
looking at it when you see it. That is the problem. It is 
almost the opposite of that. It would be very precisely 
defined. Every intermediate textbook has a fairly precise 
definition of what market power or monopoly power is, but it is 
very, very hard to look at that and tell you exactly what it 
is.
    Part of the problem is how do you define the market. How 
big is the market; what product is it that you are looking at; 
what is the marginal cost; do we have the information to be 
able to do that. All those questions come into play when you 
are trying to decide whether or not there actually is a 
presence of market power.
    Now, there are two different types of market power that you 
heard a lot about, of course. There is the vertical market 
power which is basically transmission and distribution. We have 
heard a lot about transmission, but I probably come more from a 
State perspective. So I would like to just add that 
distribution is also a problem, but when they are actually not 
allowing fair access to their systems and horizontal being 
within the same market, say in generation, for example.
    Because entry is so important, I would just like to give 
two examples of where entry may be an important consideration 
here then. Well, two examples I should say, but we can't go 
into a lot of detail. One is really a Federal issue at the 
transmission level, a State issue at the distribution level, 
and that is access that you have heard a lot about already 
today. Independence and access to transmission and distribution 
is key. It is critical in this; and everybody, even utilities, 
will recognize this.
    Let me just point out, though, that having an RTO that 
allows access isn't the whole thing. It is also having access 
back to the retail customers, really is what the concern is; 
and that is really the key.
    What I see is what FERC has been doing is an evolving 
process, going from monopolies being the worst case down 
through the functional unbundling of 888, down to the RTOs of 
transferring the operation to somebody else who doesn't have an 
interest in the commodity and then perhaps eventually even some 
utilities talking about a fully independent transmission 
system.
    I will skip the horizontal market power. I realize I am 
going to get the cane in a second here. So let me just say 
that----
    Mr. Stearns. I just appreciate the gentleman would 
summarize.
    Mr. Rose. Yes. At the State level all that really matters 
from a market power perspective is that the States are not 
forgotten, that they play a key role in working with the 
Federal regulators in order to be able to monitor the markets 
and take action if they view anything; and I would argue also 
that any comprehensive reform at the Federal level that you do 
that you get the structure of the market correct. That is key.
    [The prepared statement of Kenneth Rose follows:]
Prepared Statement of Kenneth Rose,1 The National Regulatory 
               Research Institute, Ohio State University
---------------------------------------------------------------------------
    \1\ The views and opinions expressed here are the author's and do 
not necessarily state or reflect the views, opinions, or policies of 
The National Regulatory Research Institute (NRRI), Ohio State 
University, the National Association of Regulatory Utility 
Commissioners (NARUC), or funding organizations of the NRRI.
---------------------------------------------------------------------------
    Due to a combination of technological change that makes competitive 
generation possible and belief that competition is a better regulator 
than government, state and federal authorities have been moving toward 
allowing competitive generation markets to develop. However, 
competitive markets do not spontaneously erupt out of nothing, nor can 
they develop or thrive if significant impediments exist. Markets 
develop through the complex influence of necessity, desire, 
technological feasibility, a desire to improve the human condition, 
imagination, and the social and institutional rules that govern the 
behavior of the market participants. This last influence is where 
states and federal legislators and regulators are crucial. They are 
today laying the foundation that a competitive market is, hopefully, 
being built on. The reason that market power is a critical issue is 
because it forms the foundation on which the competitive markets will 
develop, or fail.
What is Market Power?
    Market power in the electric supply industry is the ability of a 
supplier or group of suppliers to raise and maintain a price that is 
significantly above a competitive level. This allows the supplier or 
suppliers to earn economic profits in the long run that, while perhaps 
beneficial to the firm or firms that possess market power, are socially 
inefficient. In order to obtain this market power and earn economic 
profit, the supplier or suppliers would have to prevent or discourage 
entry by other firms in the market. If there is relatively easy entry 
by other firms, then it is less likely that the firm will be able to 
maintain its market power. For this reason, market power can be thought 
of as a market structure issue.
    The focus, therefore, must be on developing a market structure that 
permits reasonable entry into competitive markets by all qualified 
suppliers. Reasonable entry means fair access to customers without 
subsidies or special favors being given to any particular supplier, 
including incumbent utilities, alternative utility suppliers, or new 
entrants. It also means that potential barriers should be removed that 
prevent entry by the various suppliers so that no supplier has a 
special advantages in terms of access to customers. Whether a supplier 
chooses to enter a market is a function of the technology, investment 
costs, and potential barriers that may exist from incumbent firms and 
regulations. The rules and regulations governing structure and entry 
should allow suppliers to vie for customers based on their individual 
merit. In short, the objective is to ``level the playing field,'' but 
not to give preferential treatment to any particular player.
    There are basically two primary types of market power in the 
electric supply industry, vertical and horizontal market power. 
Vertical market power exists when a transmission or distribution owning 
company can favor itself or its own affiliate in the provision of a 
competitive service. This is a barrier to entry that prevents other 
suppliers from having fair access to customers. These barriers may be 
price, such as from an excessively high transmission fee, or non-price, 
such as from a burdensome and excessive amount of conditions and 
qualifications to use the transmission network. This vertical market 
power allows a single supplier or group of suppliers a significant 
strategic advantage in terms of access to customers that other 
suppliers simply will not be able to obtain.
    The second primary type of market power occurs within the same 
competitive service, for example, generation service, and is referred 
to as horizontal market power. This can occur when a supplier or group 
of suppliers is able to influence the price of the competitive product. 
The most commonly cited example of this is when a firm has a large 
share of the market or is ``dominate'' and faces competition from much 
smaller or ``fringe'' firms. The problem with this simple example is 
that size of the firm or its market share alone is not an indicator of 
market power. A firm with a large share in a market that new entrants 
are able to enter and exit from with relative ease (that is, low or no 
sunk costs), will unlikely have market power. It is possible that a 
generation supplier could have considerable market share but little of 
no market power.2
---------------------------------------------------------------------------
    \2\ Conversely, a supplier may have a relatively modest market 
share in the overall generation market but significant market power in 
some smaller market niche where it has a more significant market share, 
for example, peak capacity at certain times of the year. This 
illustrates the importance of properly defining the relevant market.
---------------------------------------------------------------------------
    Having said that size and market share alone are not synonymous 
with market power, it should be noted that it sure helps to be large 
and have significant market share to be able to exercise some degree of 
market power. In general, having a significant market share is a 
necessary but not sufficient condition for the presence of market 
power. It would be difficult for a relatively small player in a market 
to acquire a sufficient degree of market power to be of concern. For 
example, most travelers know that flying to or from cities with a 
single dominate carrier cost more than travel to or from a city that 
has several choices. It has been argued that the problem is not just 
that the carrier is large and has most of the market, but that the 
limited number of gates and airport access deter entry by other 
carriers. Obviously, the carrier has to be large enough to occupy the 
market and be able to get passengers to where they want to go.
    In the developing competitive electric supply industry, many 
incumbent electric utilities will begin with considerable generation 
market share in what was their former service territory. However, the 
relevant market will, in most cases, be much larger than the former 
service territories of the incumbent firms (assuming vertical market 
power is minimized). Also, because of required or voluntary 
divestiture, the incumbent utility may have sold or spun-off its 
generation to an autonomous firm. As a result, the incumbent utility 
may not necessarily be the supplier with horizontal market power, but 
it could be the new owner of the generation assets, a much larger 
neighboring firm, or an entirely new entity. As will be discussed, the 
focus should be on removing or not creating entry barriers for 
alternative suppliers to challenge firms in a market, what ever their 
origin, to deter potential market power problems.
    In summary, it is a basic assumption of economics that no single 
firm or group of firms is able to unilaterally affect the competitive 
market price. If they are able to use some means to control prices, 
then they have some amount of market power. As noted, they must be able 
to significantly affect the market price and be able to sustain it for 
an appreciable amount of time for it to rise to the level of a problem 
that warrants government intervention.
How Can Market Power be Detected?
    While the definition of market power can be straightforward, 
detecting its presence is relatively more complicated. The commonly 
used measures by antitrust regulators and others are market 
concentration measures. The most common of these is the Herfindahl-
Hirschman Index or HHI which is calculated as the sum of the squared 
market shares. Another commonly used method is derived from the 
definition of market power, that is, an estimate of the amount that 
prices exceed marginal cost. It is usually assumed that in a perfectly 
competitive market that price will approximate supplier marginal costs. 
The Lerner Index is simply the markup of price over marginal cost 
expressed as a percentage of the price. For example, if the Lerner 
Index equals 0.5, then there is a 50 percent price markup over marginal 
cost; if it equals 0.02, there is a two percent markup of price. If the 
Index equals 50 percent, it may indicate significant market power and 
require some action; if it is only two percent, it is unlike to raise 
any calls for government action.
    Both the HHI and Lerner Index have particular estimation 
difficulties. To determine HHI, it must first be decided what products 
are in the market in question and which firms are in this market. For 
electric power this may be very complex, for example, is it base load 
capacity, peak, non-peak, spot market, etc.? An even more difficult 
question is what is the relevant geographic area? Is it the service 
territory, the state, or some broader to be determined region? The 
Lerner Index main estimation problem is determining marginal cost. 
While marginal cost can be easily explained in theory, in practice it 
is never ``known'' with certainty but estimated using a proxy variable. 
Moreover, as the industry becomes more competitive, reliable data will 
become more difficult to obtain. Already, while generation data on 
utilities is still available (albeit, generally with a two year lag), 
there is relatively little information on new entrants.
    The HHI and Lerner Index by themselves are not sufficient to 
definitively indicate market power. In practice, these types of 
measures are used preliminarily as screening tools to decide if further 
investigation is needed.
    Computer simulation models are another means to analyze potential 
market power problems. These models are commonly used in merger 
analysis to determine the effect on the market after the merger. They 
can also be used to simulate actual existing market conditions to 
predict behavior patterns. These models are promising, but are very 
complex and are only as good as the assumptions that are used to create 
the model and the data to derive results. Another promising means of 
analysis is experimental simulations. This usually involves a small 
group of ``players'' that are observed while they simulate various 
market conditions. While these experiments provide insights to 
policymakers of potential problems to be aware of or better market 
structures to use, they cannot hope to address all the complexities of 
an actual dynamic market.
    Finally, empirical or econometric analysis are becoming more 
important in antitrust analysis. This involves collecting detailed data 
from actual market transactions from various distinct markets. These 
data are compared using statistical analysis to determine whether 
different market conditions (for example, number or presence of 
competitors) affect the price, holding other factors constant, such as 
transportation costs. In electric power supply markets, however, it may 
be some years before there is sufficient data to analyze and for 
markets to have sufficiently evolved.
    It is probably wise to not pin our hopes on one specific type of 
market analysis, but be prepared to use a battery of tests and measures 
with frequent market monitoring as competitive markets develop.
What Safeguards or Remedies are there for Limiting Market Power?
    Most policymakers involved with this issue understand that it is 
much easier to create a structure that prevents market power while 
restructuring is occurring than trying to correct problems later on. 
The cited measurement problems can be avoided or at least mitigated 
through structural means to avoid market power problems in the first 
place. Antitrust regulators also understand this when they conduct 
merger reviews as a form of preventive measure. If a finding suggests 
that there is a significant probability that market power will likely 
result, a merger will either be rejected outright or approved on a 
condition that mitigation actions are taken first, such as divestiture. 
For this reason, most states that have passed restructuring legislation 
have tried to put into place a structure that avoids market power 
problems and fosters the development of competitive markets.
    The question then becomes, what characteristics of a restructured 
electric supply industry would most likely provide the intended result 
of robust competitive markets that will bring about the expected 
benefits to consumers? The quick answer is to create a structure that 
allows fair entry by all suppliers. Two issues identified below are 
critical to the development of competitive markets and are being 
addressed by states and the Federal Energy Regulatory Commission 
(FERC).
    1) Vertical Market Power Issue: Independence of the ``Wires''--If 
suppliers are prevented from delivering their power to retail customers 
under reasonable terms and conditions, this results in a significant 
entry barrier. With respect to transmission, clearly the single most 
important aspect is independence of the operation and control of the 
transmission system. The clearer the separation of the selling of 
competitive services, or ``merchant'' function, is from the delivery, 
or ``wires'' function, the less likely there will be market power 
abuse. It is matter of degree how effective different ways of 
separating these two functions are. ``Functional unbundling'' of the 
sort that FERC required in its Order 888 and by some states is simply 
not as effective as divestiture of generation (or transmission and 
distribution) where the transmission company has no financial interest 
in selling power. FERC is currently investigating the use of ``Regional 
Transmission Organizations' or RTOs to further its goal of more 
independent transmission systems.3
---------------------------------------------------------------------------
    \3\ FERC, Docket No. RM-99-2-000.
---------------------------------------------------------------------------
    If independent system operators are the answer for transmission, 
then the same is probably true for distribution. Some states will have 
complete or nearly complete divestiture of generation or at least non-
nuclear generation. Will these states have better results than those 
that continue to have vertically integrated companies? Only time will 
tell, but it stands to reason that what FERC has learned concerning 
transmission independence is transferrable to distribution. The states 
that do not have complete divestiture will have to rely on open 
distribution rules and functional separation. Not only is this more 
complex, but may not be as effective at preventing abuse as is 
divestiture.
    The problem, which I have no solution for, is how to achieve a goal 
of real independence. FERC probably cannot order it and it is not clear 
if states have the authority either. Even if it were clear that a state 
had the authority, actually passing legislation would be another 
matter. Legislation with this requirement would probably receive 
considerable political opposition from companies that did not want to 
divest. The states that passed legislation with divestiture of some or 
all generation were able to bargain for it on other details of the 
restructuring package, primarily stranded costs. Of course, it is too 
late for FERC and some other states that already passed legislation 
without it to use stranded cost as an incentive.
    In a recently published article, Commissioner William Massey of the 
FERC stated well the dilemma FERC and the states face on the issue of 
independence:
        . . . we want to mitigate the vertical market power that mere 
        functional unbundling has not reached. A transmission owner 
        that owns generation has the financial incentive to use its 
        transmission facilities to favor sales of its own generation. 
        This is a strong economic incentive, and some utilities will 
        not want to give up the opportunities to exercise vertical 
        market power. Thus, they will attempt to test our commitment to 
        the concept of independence.4
---------------------------------------------------------------------------
    \4\ William L. Massey, ``Policy on Regional Transmission 
Organizations: Five Pitfalls FERC Must Avoid,'' The Electricity 
Journal, March 1999, p. 14.
---------------------------------------------------------------------------
    2) Horizontal Market Power Issue: Incumbent Utility Advantages--
Barriers to entry may also result from strategic advantages that 
incumbent firms, when they remain the principal supplier in a market, 
will have simply because they are the incumbent. This provides the 
incumbent firm with an advantage relative to others in the market. If 
the incumbent firm is able to charge a higher price for essentially the 
same competitive service, this may a case of horizontal market power--
may be, since it is a fair question as to whether a company, with a 
name that is very recognizable to most customers because it was or is 
related to the company that was the regulated monopoly for many years, 
should be able to capitalize on its name recognition. It may become a 
problem when for-profit, unregulated affiliates advertize or send 
material using a similar name and maybe the same logo to entice 
customers to switch to them (at the same time customers are still 
receiving bills from the regulated distribution company with the 
similar name and logo). Some states have adopted codes of conduct to 
address this affiliate relationships and issued rules concerning the 
use of the corporate name and logo.
    As long as there is a reasonable distinction between the regulated 
company and unregulated affiliate, this ``branding'' issue is not a 
major obstacle to competitive market development. States need to be 
able to address this issue in a manner that makes sense in their state. 
Over time, this brand recognition advantage will wear off as other 
suppliers become more familiar to customers.
    Another potential advantage incumbents may have depends on what a 
state decides to do with customers that do not make a specific choice 
of suppler.5 It has been observed that, for various reasons, 
most customers do not make any choice. Even the natural gas and 
electric choice programs with the highest rates of choosing customers 
still have seventy percent or more customers that have not yet made a 
choice. Is this a problem? The answer depends on who you ask. Obviously 
incumbent utilities believe that these customers should be assigned to 
them or their generation affiliate. Competing suppliers believe that 
they should have a fair shot at serving these customers at market 
prices. These customers obviously have to be assigned to some supplier, 
nobody wants them to be unserved. Also, most impartial observers would 
agree that these customers should not be denied the benefits of a 
competitive market.
---------------------------------------------------------------------------
    \5\ These non-choosing customers have been referred to by several 
different names in different states. These terms include default, 
standard offer, or last resort customers.
---------------------------------------------------------------------------
    The reason that this is a market power issue is because of the 
pricing that these non-choosing customers may receive. These customers, 
in the absence of any provisions being made for them, may be charged a 
higher price for the same service. The incumbent firm, fully aware that 
a large segment of customers will make no specific choice, will 
continue to charge these customers a price above the competitive level. 
The fact that the incumbent firm can charge above market prices for 
essentially the same service and maintain a significant market share 
restates the very definition of market power discussed earlier; that 
is, market power is the ability of a supplier or group of suppliers to 
raise and maintain a price that is significantly above a competitive 
level.
    There are three choices states face when deciding what to do about 
non-choosing customers. First, they can be assigned to the incumbent 
firm. If the incumbent is still a vertically integrated firm with its 
own generation, that company may continue to serve the non-choosing 
customers as it did in the past. If the former utility divested its 
generation, then either the distribution company contracts for the 
supply or the customers are given to the new owner of the generation or 
the generation affiliate of the distribution company (usually the 
former utility). The price may be a standard offer that is determined 
by the commission (Massachusetts for example) and may be adjusted based 
on market conditions or the price may be based directly on some market 
indicator (California during the transition period is an example).
    When a state decides that it does not want to just assign non-
choosing customers to the incumbent or its affiliate, it may consider a 
second alternative, random assignment. The Federal Communication 
Commission (FCC) faced a similar problem after the breakup of AT&T when 
there was a large proportion of non-choosing customers for long 
distance service. The FCC assigned customers based on the market share 
each provider had among the customers that did choose. Georgia will 
soon use this method to select natural gas suppliers for non-choosing 
customers in the implementation of the state's gas 
deregulation.6 In Georgia, the number of retail non-choosing 
customers assigned to a particular gas marketer is based on that 
marketer's share of the total market served by all marketers. Under 
this type of program, customers are warned that they would be assigned 
a provider if they did not make a choice (which usually encourages 
customers to make a choice) and, of course, customers are not forced to 
stay with that company if they wanted a different provider. The logic 
is that customers are assigned according to those that did or are 
choosing. This also creates an incentive for the various market 
participants to work very hard to convince customers to choose them, 
since they will then have a higher portion of the non-choosing 
customers in the assignment allocation. 7
---------------------------------------------------------------------------
    \6\ Georgia Public Service Commission, Rules of Georgia Public 
Service Commission, 515-7 Gas Utilities, Chapter 515-7-4, ``Random 
Assignment of Customers,'' December 30, 1997. This is the Commission's 
rule issued under authority from ``The Georgia Natural Gas Competition 
and Deregulation Act of 1997.''
    \7\ The base used to calculate the market share, either the share 
of choosing customers or share of all customers, can have a major 
impact on the suppliers' share of non-choosing customers. Obviously, 
basing in on all customers will tend to favor the incumbent more that 
basing it on customers that did choose if there is a high proportion of 
non-choosers.
---------------------------------------------------------------------------
    Another alternative to simply giving the customers to the 
incumbent, a third option for non-choosing customers, is to conduct an 
auction to determine who will serve these customers. There are several 
ways to use auctions to select the supplier of these non-choosing 
customers. The Maine Public Utilities Commission plans to conduct an 
auction to determine the ``standard offer'' supplier.8 The 
plan is to conduct an auction to choose three or more retail suppliers 
to provide standard offer service in each utility's service territory 
in the state. The selected suppliers will be those with the lowest bid 
price. The marketing arm of each incumbent utility may serve no more 
than 20 percent of its service territory. Utilities will still have 
billing, collections, and enrollment responsibilities for the standard 
offer suppliers. Standard offer suppliers' names will be disclosed to 
customers, but will not interact directly with customers.
---------------------------------------------------------------------------
    \8\ Maine Public Utilities Commission, Chapter 301--Standard Offer 
Service, rule adopted April 1998, amended February 1999.
---------------------------------------------------------------------------
    Ohio has had two auction proposals. A proposal made last 
year9 would have divided the state's current utility service 
territories into Retail Marketing Areas (RMAs). At the beginning of 
retail competition, the Ohio Public Utilities Commission would conduct 
a bidding process to determine which suppliers serve non-choosing 
customers in each RMA. Winning suppliers would be based on the 
qualified suppliers that submitted the lowest price for each RMA. The 
current proposal in Ohio 10 divides the non-choosing load of 
each current utility service territory into equal ten blocks. Bidders 
would submit bids for one or more of these blocks of ten percent. The 
auction would be conducted by a third party selected and supervised by 
the Commission. Winners would be based on the lowest price and would be 
selected through a simultaneous, open auction. Customers would pay the 
average price of the winning bids and winning bidders would be paid 
their bid price. The winning suppliers would serve customers for one 
year The auction would not begin until after the transition period has 
ended when utilities are collecting transition costs and would 
terminate when the Commission determines that there is no longer a need 
for the auction, depending on the market's competitive status. The 
suppliers identities are not revealed to the customer (customers are 
informed of the price and that it was determined through an auction 
process). The customer simply continues to receive a bill from the 
distribution company.
---------------------------------------------------------------------------
    \9\ Companion bills were introduced in 1998 in both the Ohio House 
(H.B. 732) and Senate (S.B. 237). Both bills expired at the end of last 
year.
    \10\ Companion bills in the Ohio House (H.B. 5) and Senate (S.B. 
3). Both are currently under consideration in House and Senate 
Committees.
---------------------------------------------------------------------------
    Pennsylvania plans to use a combination of all three approaches, 
that is, incumbent assignment, random assignment, and an auction. In 
the case of PECO Energy Company,11 the company (the 
incumbent utility) will be the ``provider of last resort'' for all 
customers in its service territory that do not choose an alternative 
supplier. However, beginning January 1, 2001, 20 percent of all of 
PECO's residential customers, determined at random, are to be assigned 
a supplier other than PECO. The supplier for this ``Competitive Default 
Service'' is to be selected based on a commission-approved energy and 
capacity market price bidding process. PECO and its affiliates cannot 
bid or be a part of another suppliers bid. The entire customer group 
will be a single bidding block and will be bid annually (unless changed 
by the commission). To qualify for this bidding process, a supplier 
will have to provide at least two percent of its energy supply from 
renewable resources and increase that amount in increments of 0.5 
percent annually (the commission may lower the percentage if the 
renewable energy sources increase the cost of the entire block by more 
than two percent over the cost without the renewable energy sources). 
Bids cannot exceed the generation rate cap for the transition period. 
For non-choosing customers still served by PECO that were not selected 
for the auction, PECO is required to price residential service between 
the auction price and monthly rate based on power pool prices. This 
price also cannot exceed the generation cap (``shopping credit'').
---------------------------------------------------------------------------
    \11\ From the settlement between the company and the Pennsylvania 
Public Utility Commission, ``Joint Petition for Full Settlement of PECO 
Energy Company's Restructuring Plan and Related Appeals and Application 
for a Qualified Rate Order and Application for Transfer of Generation 
Assets,'' Docket Nos. R-00973953 and P-00971265, April 1998.
---------------------------------------------------------------------------
    In addition, there are market share thresholds in the PECO 
settlement that triggers a random assignment process. Beginning January 
1, 2001, if less than 35 percent of all PECO residential and commercial 
customers have selected to receive generation service from the PECO 
affiliate or alternative suppliers (including customers assigned to the 
auction group), then for the number of customers necessary to reach a 
35 percent target will have a supplier determined by random selection 
on a one-time basis. After January 1, 2003 the percent threshold is 
raised and a random assignment process is used until 50 percent of all 
residential and commercial customers are assigned to either the PECO 
affiliate or alternative supplier.
    Other states, such as Nevada and Missouri, have also either 
proposed or are discussing an auction process for non-choosing 
customers. While many design questions need to be addressed, an auction 
has the advantage of actually determining a price through a competitive 
process (assuming, of course, that the auction is well designed). 
Through random assignment or through an auction process, both are more 
consistent with the goal of developing competitive markets than a 
simple bequest or donation of these customers to the incumbent firm 
because it is the incumbent.
    Assigning non-choosing customers to suppliers other than the 
incumbent firms has come under heavy fire from, not surprisingly, 
incumbent firms. Their main argument is that selecting a supplier for 
these customers is taking a choice away from customers, that is, not 
choosing is the choice the customer made. Implicit in this argument is 
that all non-choosing customers are not making a choice because they 
are content with the incumbent firm. However, it is highly unlikely 
that all these customers fit this profile. Other reasons likely include 
not wanting to spend the time and expense to search for information and 
deciding on which supplier to select (transaction costs), confusion 
over the array of options, and the savings are (or are believed to be) 
too small to bother with. No choice is exactly what it looks like, no 
choice, and may occur for many reasons.
    Another argument is that it is paternalistic or ``government 
deciding what is best'' for a customer to assign them to a supplier 
other than the incumbent. After all, the whole point of a retail choice 
program is to allow customers a choice. This assumes, however, that the 
state has no obligation to assist customers in the move from regulated 
monopolies to competition. These customers have to be assigned to a 
supplier, whether it is the incumbent or alternative. It should be kept 
in mind that with most competitive customer choice programs, customers 
are free to choose a supplier of their choice at any time. Also, if 
customers are to be assigned to a supplier, they are usually warned 
before the change is made and allowed some time to make a selection 
(including the incumbent supplier). No one is forced to purchase 
generation service from a particular supplier they do not want. In 
fact, having no choice is what the former system of regulated 
monopolists was about, where customers could only buy from the state 
sanctioned utility.
    Simply put, customers did not pick the incumbent utility that is or 
originally served them, the state or municipality did. There is no 
compelling reason why the incumbent firm should inherit these customers 
simply by default. All suppliers should be required to compete with 
each other for the customers business, like firms in competitive 
markets usually do. This insures that no supplier, incumbent or 
alternative supplier, has an advantage in terms of access to customers.
    Like brand name recognition, this reluctance of customers to make a 
choice will also wear off. It should be expected that, over time, an 
increasing proportion of retail customers will make a specific 
choice.12 However, this may take several years and some 
customers may not choose after a decade or more. But the specific 
assignment of non-choosing customers probably does not need to be made 
for more than the first several years of a customer choice program.
---------------------------------------------------------------------------
    \12\ As an example of how AT&T's market share declined since the 
breakup, see Zolnierek, James and Rangos, Katie, ``Long Distance Market 
Shares, Third Quarter 1997,'' Federal Communications Commission, 
January 1998.
---------------------------------------------------------------------------
State Role in Addressing Market Power
    Two aspects of addressing market power are best done by state 
public service commissions and state attorneys general--retail market 
power assessment and market performance assessment. These are best done 
at the state level, because the state public service commissions have 
the legal authority to monitor and, if necessary, regulate retail 
markets. (FERC, of course, has jurisdiction of wholesale markets.) 
State public service commissions may, in some states, also have the 
authority to address retail market power problems directly by ordering 
divestiture of generation from transmission or perhaps retail marketing 
from transmission and distribution. Where a state commission does not 
have this authority, it could be granted to them by their state 
legislature.
    State public service commissions and state legislatures can, as 
part of a state restructuring statute, encourage or require utilities 
providing direct retail access to expand their geographic markets by 
joining an Independent System Operator or some other form of a Regional 
Transmission Organization. (FERC, again, has jurisdiction over the form 
and approval of these ISO or RTO.) State commissions can also help to 
reduce barriers to entry that might occur from the strategic advantages 
noted earlier that incumbent firms will have, such as codes of conduct 
to address affiliate relationships, rules concerning the use of the 
corporate logo, and assignment of non-choosing customers. States, 
through the public service commissions and siting agencies, can ease 
entry impediments to new suppliers through licensing and siting law 
reforms. Finally, a state commission can address market performance and 
consumer protection concerns by monitoring deceptive advertising claims 
and, if they wish to go even further, by providing a neutral source of 
comparative pricing and service information for retail customers.
    What can the federal agencies do to assist the states in their role 
of monitoring competitive markets and competitive trade practices? 
There should be a clear recognition of the appropriate role of the 
states.13 Also, there needs to be recognition that state 
agencies are, after implementation of the state's law, acting under 
clearly articulated pro-competitive state policies and are actively 
supervising retail markets. This deserves deference from federal 
agencies that are also involved, the Federal Energy Regulatory 
Commission, the Federal Trade Commission, and the Department of 
Justice. Indeed, ongoing cooperation is already developing among these 
groups.
---------------------------------------------------------------------------
    \13\ The Federal Trade Commission and The National Regulatory 
Research Institute are holding a joint workshop on this topic this 
September in the offices of the FTC.
---------------------------------------------------------------------------
    Finally, Congress can provide state commissions with full and 
complete access to books and records of holding companies with both 
regulated and unregulated affiliates and subsidiaries. Without such 
access to books and records, state commissions cannot regulate 
affiliate transactions to prevent cross-subsidies from the regulated 
(that is, transmission and distribution) markets to the unregulated 
markets. Those utilities with captive customers would be able to 
transfer costs to those customers and unfairly leverage this advantage 
in competitive and unregulated markets.
Conclusion
    Some may argue that if there is a competitive market, you don't 
have to worry about market power. However, minimizing potential market 
power is a prerequisite to the development of a competitive market. If 
a flawed structure is put in place, a structure that is being shaped 
today, we will not see the full benefits of competition. Also, if there 
are inadequate remedies available to state and federal regulators, then 
they will not be able to respond to future market power problem that 
may arise. This is restructuring not deregulation of the entire 
industry. Many aspects of the industry will remain regulated and others 
we are trying to back out of nearly a century of cost regulated 
monopolies. The competitive market that emerges will be the culmination 
of state and federal actions (or inactions). The structure of any 
market is guided by the rules and regulations that make it possible. If 
there are obstacles, market participants will look for ways, maybe even 
inefficient ways, to find a way around them. Clearly, like it or not, 
the future structure of the electric supply business is in your hands 
and those of state legislators and federal and state regulators.

    Mr. Stearns. I thank the gentleman.
    And Mr. Gordon, you are recognized for your opening 
statement for 5 minutes.

                  STATEMENT OF KENNETH GORDON

    Mr. Gordon. Thank you, Mr. Chairman. My name is Kenneth 
Gordon. I am a senior vice-president at National Economic 
Research Associates. I am a former chairman of the 
Massachusetts and the Maine Public Utility Commissions, and I 
am currently consulting on matters pertaining to these 
industries.
    I have long been and I remain a strong advocate of 
wholesale and retail electric competition, and I took a leading 
role in efforts to introduce retail competition in 
Massachusetts while I was chairman there.
    As you have heard many times, there are two broad areas of 
concern with respect to market power and the introduction of 
competition, horizontal and vertical. First, as to vertical.
    The FERC's work on open transmission access already begun 
in orders 888, and related orders has paved the way for 
wholesale competition and toward efforts in the States to 
introduce retail competition. Regulatory assurance of an open, 
nondiscriminatory access to essential facilities for incumbents 
and new entrants alike is critical.
    Once such access has been assured, in my view. The critical 
perquisite for competition is in place, and further efforts to 
manage the competitive process are as likely to subvert the 
goals of competition as to advance them.
    Assuring independent control and nondiscriminatory access 
to transmission is critical, but it is the beginning, not the 
end, of the FERC's responsibilities in this area. Important 
tasks that are as yet uncompleted include deciding the proper 
role for ISOs and for private for-profit transmission companies 
and determining the relationship between them.
    ISOs provide independent control and oversight and can be 
used to begin the process of regionalization. It is necessary 
to create a broad and open electricity market.
    Transcos that cover a sufficiently broad market area have 
the potential to respond directly to economic signals for 
investment in transmission and to charge and respond to prices 
that reflect the cost of transmission use and transmission 
congestion.
    However, the efficient evolution of the transmission 
organization over the longer term depends critically on the 
development of regulatory structures that properly reflect 
marginal costs of transmission and that provide appropriate 
investment incentives for transmission. The current embedded 
cost approach being used at the FERC is wholly inadequate to 
this task. In my view, this is a critical priority and should 
be the FERC's top assignment in fostering competition.
    Now briefly with respect to horizontal market power. 
Policymakers are properly concerned that firms not be able to 
exercise market power where entry is not feasible and where 
there are too few firms, but it is important to state at the 
outset that market share does not equate to market power, 
especially in an industry with this regulated history.
    Even with only a few firms, if entry is truly open, firms 
are unlikely to have market power for very long. The fact that 
market shares erode only over time and not instantly is 
certainly cause for watchfulness, but not for immediate 
intervention.
    In my view, appropriate oversight of horizontal market 
power should come under the traditional antitrust agencies, 
DOJ, and the Federal Trade Commission. The attempt in 
restructuring is to reduce regulation in generation in 
marketing of electricity as competition becomes feasible.
    FERC plays an important role with respect to transmission 
and, hence, entry conditions but should not be expanding its 
regulatory mandate into a market that is clearly becoming more 
competitive all the time, nor should policymakers attempt to 
jump start competition, i.e., lower concentration by forcing 
customers to make affirmative choices or explicit 
reaffirmations of their current choice or otherwise divvying up 
the market among the would-be competitors.
    Arbitrarily assigning customers to a supplier amounts to 
regulatory slamming, something you have heard about in the 
telecommunications industry. It doesn't make customers very 
happy; but more fundamentally, such processes do not jump-start 
competition; rather, they short-circuit it. No one has to go 
through the process of winning customers through lower prices 
or better service. Regulators should not be dictating the 
industry structure as we begin the competitive process.
    On other issues, I have testified in the past that PUHCA 
should be repealed. I still agree with that. I would add that 
for PURPA, and with these kinds of guidelines in mind, I think 
the move into a competitive marketplace should yield real 
benefits to consumers.
    Thank you.
    [The prepared statement of Kenneth Gordon follows:]
 Prepared Statement of Kenneth Gordon, Senior Vice President, National 
                      Economic Research Associates
                            i. introduction
    The Federal Energy Regulatory Commission's (``FERC's'') efforts, 
particularly in response to the Energy Policy Act of 1992, to increase 
competition in generation markets on the wholesale level has ``paved 
the way'' for the states' introduction of retail competition by 
requiring open, nondiscriminatory access to transmission (in FERC Order 
No. 888) and by addressing issues surrounding Regional Transmission 
Operators--whether they are Independent System Operators (``ISOs'') or 
Independent Transmission Companies (``Transcos''). Many states are now 
in the midst of a historic restructuring of their electricity industry 
to provide for retail competition in their state, which would allow 
consumers to choose their generation provider. Most other states are 
actively considering whether to embark on this restructuring process.
    I have long been, and remain, an advocate of wholesale and retail 
electric competition and I took a leading role in the introduction of 
competition in Massachusetts when I was Chairman of the Department of 
Public Utilities. I applaud federal and state policy makers' and 
regulators' efforts in introducing competition in electricity markets.
    Competition, properly introduced, impels inns to seek and adopt new 
and better ways of doing business, and also ensures that the resulting 
efficiency gains are passed through to customers in the form of lower 
prices and better service. What is needed is real people, making new 
investments, creating new organizations, introducing new products and 
services, and doing so in response to market forces, not regulatory 
imperatives. After all, the creation of new types of organizations and 
new products and processes--which wholesale and retail competition in 
electricity markets could provide--is the most powerful form of 
competition, and is much more important over time than textbook notions 
of price competition alone.
    Retail competition can provide the important benefit of allowing 
consumers to make their own consumption decisions in electricity 
markets. No longer would utilities and regulators need to make these 
decisions on consumers' behalf. Consumers are well able to make many, 
many choices every time that they go to a grocery, hardware, or 
department store or when they buy a new house, car, or insurance. I see 
no reason why consumers should not be perfectly able to choose for 
themselves in electricity markets as well. I should add here that 
consumers can reasonably ``choose not to choose'' by deciding that they 
prefer to stay with their traditional provider. As long as prices are 
designed in ways that provide ``competitive parity'' and accounting, 
behavioral, and, if needed, structural safeguards are in place, 
consumers should be completely free to choose for themselves whether 
they wish to switch providers.
    The basic problem with attempts to administer in detail how 
competitive markets evolve is that the result of this ``managed 
competition'' may be to develop ``markets''--by handing new entrants 
market share without requiring them to persuade customers that they 
have a better offering--that make no sense to anyone but the ``central 
planner'' that developed the ``market.'' To obtain the maximum benefits 
of competition and reduce regulatory costs, market forces should 
substitute for, and not simply add to, regulation. Economic reasoning--
as well as prudence and appropriate humility with respect to anyone's 
ability to discern the optimal future--suggests that policy makers at 
all levels should focus primarily on ensuring openness of entry and 
choice for consumers.
                ii. horizontal and vertical market power
    Policymakers are properly concerned that utilities wishing to 
operate in traditional or newly competitive markets not be able to 
exercise market power, regardless of how it arises. As I have already 
noted, regulators will continue to regulate the transmission and 
distribution systems.\1\ For policies that support and promote 
efficient competition, it is critical to understand what market power 
is, and just as important, what it is not.
---------------------------------------------------------------------------
    \1\ These problems are special but not unique. The reform of the 
interstate natural gas market offers an interesting analogue to the 
opening of electricity markets to competition. For most of the gas 
industry's history, pipelines were regulated transporters and sellers 
of natural gas. A series of FERC orders in the 1980s and 1990s led 
interstate pipelines to unbundle their merchant and transportation 
functions and eventually to spin their merchant functions down into 
unregulated marketing affiliates. Many of these pipeline affiliates, 
such as Enron, have been quite successful.
---------------------------------------------------------------------------
    From the traditional economic perspective, market power is the 
ability of a single firm or a group of firms profitably to restrict 
output and raise prices above competitive levels for a significant 
period of time. The virtue of this definition is that it puts the focus 
of concern where it should be--on the consumer. Monopoly pricing in 
excess of cost (or competitive equilibrium prices) harms consumers: 
they are denied the benefits of consumption that would more than cover 
their opportunity costs. As a result, society's resources may not be 
allocated efficiently. Productive efficiency may suffer as well when 
firms are sheltered from full competition, and if so, the waste 
involved will ultimately be borne by consumers.
A. Horizontal Market Power
    Horizontal market power concerns arise when there is only one 
(unregulated) firm, or when a few firms hold a large fraction of the 
market and where the competitive pressure arising from actual or 
potential entry by new firms is not sufficient to limit the firms' 
ability to profitably restrict output and raise the price. In 
electricity markets, horizontal market power issues concern whether 
competition in the generation market in a region will be effective--
that is, will some firm or firms in the market have market power such 
that prices are higher than a frilly competitive result?
    Market share is not equivalent to market power. If the incumbent 
cannot raise prices or restrict output without losing market share--
because markets are open and choice is available to consumers--then 
there is no significant market power. Moreover, incumbency by itself 
does not necessarily confer market power. First, and critical to 
establishing market power is that competitors not be able to enter the 
market. Regulation of the essential transmission and distribution 
systems is aimed directly at making sure potential competitors can 
enter the market.
    The most important consideration in assessing horizontal market 
power is the ease of entry (openness) of the market. Other criteria, 
such as market shares and concentration ratios, can be used to measure 
the results of the process but taken by themselves they give no 
indication of whether those entrants are more efficient than incumbents 
or whether consumers are better off. And, indeed, antitrust regulators 
use market share analysis only as a first step (or screening test) in 
deciding whether further market power analysis is merited. Market share 
is by no means a conclusive indicator of market power, and is likely to 
be a particularly misleading indicator of horizontal market power when 
applied to industries with a history of legal monopoly.
    Market share analysis and similar criteria can be difficult to 
actually implement. When market boundaries are blurred, the analyst's 
decision about whether or not to include particular groups of 
competitors in the market power analysis can arbitrarily determine the 
outcome of the market structure investigation. In electricity markets 
the market boundaries are likely to be particularly difficult to draw 
and therefore the analysis of ``effective competition'' will be 
controversial. This is another practical reason for policy makers to 
focus primarily on openness and choice rather than attempting to 
prescribe how the market will evolve.
    In a competitive generation market, competitors will be forced to 
compete strongly based on price and perhaps such features as 
``greenness'' or other value-added services that the electricity is 
bundled with. Reliance on market forces and technological changes (more 
efficient generating unit technologies, increased availability of 
distribution generation, changing transmission technologies, etc.) can 
provide dynamic efficiencies that can benefit consumers. In addition, 
compared to the current regulatory model, competitors will be less able 
to use the regulatory process strategically to improve their 
competitive position or to raise rivals' costs.\2\ Policy makers should 
reject calls for forced divestiture and other extreme measures, unless 
these calls are warranted by sound economic analysis.
---------------------------------------------------------------------------
    See Bruce M. Owen and Ronald Braeutigam, The Regulation Game: 
Strategic Use Of The Administrative Process (Cambridge, MA: Ballinger 
Publishing, 1978) and Thomas G. Krattenmaker and Steven C. Salop, 
``Anticompetitive Exclusion: Raising Rivals' Cost to Achieve Power Over 
Price,'' 96 Yale Law Journal 209 (1986).
---------------------------------------------------------------------------
    Nevertheless, the appropriate antitrust authorities, the Department 
of Justice and the Federal Trade Commission, will need to carefully 
monitor electricity power markets and address horizontal market power 
issues in the generation business if and when they come up.
B. Vertical Market Power
    Vertical control issues relate to the ownership and control over 
neighboring stages of production and distribution. Vertical market 
power, a leading concern in the regulation of utilities and their 
affiliates, refers to the possibility that a firm could exercise its 
horizontal market power at one stage of the production process (such as 
transmission or distribution) to influence price and output at another 
stage, such as generation and retail sales, or in new markets. This 
assumes that entry will not sufficiently police price-increasing 
behavior in those markets.
    The principal vertical market power concern in the industry has 
been that integrated transmission and distribution owners would use 
their control of bottleneck facilities to favor sales of their own 
generation over sales of their competitors. Unless properly regulated, 
entities that own wires and retailing affiliates could use their 
control of the wires to favor their retail affiliates. At the federal 
level, this concern has been largely addressed by FERC Order Nos. 888 
and 889, as well as by the continuing formation of ISOs and similar 
institutions. On the state level, policy makers and regulators have 
addressed these issues primarily by requiring functional unbundling or, 
in a few cases, by requiring or encouraging divestiture.
    In the electric restructuring debate, policymakers and/or 
regulators must determine whether an ISO or Transco should own and 
operate transmission and must determine what accounting, behavioral, 
and structural safeguards are necessary. If a vertically integrated 
firm competes to market energy services in its service territory, 
policymakers would also determine whether codes of conduct are needed 
and would develop accounting procedures to address cost allocation 
issues.
    Policymakers and regulators should balance the need for an 
effective boundary between regulated and competitive businesses with 
the need to allow all participants in the new markets to exploit as 
fully as possible whatever efficiencies they have. If efficiencies from 
vertical integration are lost, then consumers will ultimately be worse 
off. Incumbent utilities should be able to compete against new entrants 
during the current period of rapid change in the electric utility 
industry. In the short-term, however, there is a significant 
(demonstrated) risk that regulators will seek to micromanage incumbent 
utilities' activities by engaging in ``command and-control'' 
deregulation.
    While it is understandable that regulators would want to ``get the 
details right'' given the scrutiny that they will be under as electric 
restructuring proceeds, the administrative costs of command-and-control 
deregulation are likely to be substantial. Much more importantly, 
adverse efficiency and competitive effects are also likely. Efficiency 
effects could include lost economies resulting from mistaken vertical 
disaggregation or the loss of scope economies through unnecessary 
limits on resource sharing. Competitive effects could include increased 
prices resulting from effectively foreclosing some efficient 
competitors (e.g., incumbent utilities) from competing fully in a 
market.
C. Open Access to Essential Transmission and Distribution Facilities Is 
        Needed
    For the foreseeable future, the delivery or wires portion of the 
business is likely to remain an essential facility for most buyers and 
sellers of electricity.\3\ If competition in the generation and 
marketing of electricity is to thrive, there must be open and 
nondiscriminatory access to the transmission and distribution wires. In 
implementing open access, nondiscriminatory transmission, regional 
transmission operators, whether they are organized and operated as ISOs 
or Transcos (private, profit-based companies), will play a critical 
role. For both ISOs and Transcos, federal (and state) policies should 
emphasize the role of independence and regionalization. An ISO or 
Transco with a high degree of independence, and the authority to 
operate the transmission grid as a unified network would help assure 
that the transmission network operates in a way that serves the users 
of the network, without unduly favoring the interests of any particular 
user. The ISO's or Transco's operations must be governed and operated 
as an independent stand-alone activity, which can be achieved through 
functional separation of transmission from the generation and 
distribution aspects of utilities' businesses and independent 
governance of the ISO or Transco. The size of the transmission 
organization should be large enough to exploit any available economies 
of scope or scale, and to allow the development of as wide a 
competitive marketplace for electricity as feasible. If the electricity 
market is balkanized, consumers will not enjoy the full benefits of 
competition.
---------------------------------------------------------------------------
    \3\ An essential facility is an input to which all competitors must 
have access on reasonable terms if they are to be able to compete in 
the market.
---------------------------------------------------------------------------
    While ISOs are viewed by many as more feasible and desirable to 
implement in the near term, some form of Transco may be more effective 
in operating and expanding the transmission system over time because, 
if regulated appropriately, the incentives facing these businesses may 
be more conducive to efficient operation of and investment in the 
transmission infrastructure.\4\ In any event, the structure and 
governance of ISO's and Transco's are likely to adapt and change over 
time, in ways that cannot be completely anticipated up-front and 
therefore policy makers should expect that competition and deregulation 
will be a long term process and that changes and adaptations are likely 
in the area of transmission operation and governance.\5\ Therefore, 
highly prescriptive solutions are inappropriate at this stage of the 
process.
---------------------------------------------------------------------------
    \4\ While ISOs will operate transmission systems, they would not 
own transmission assets and therefore may find the actual upgrade and 
expansion of the transmission network to be a challenging task.
    \5\ Clifford Winston insightfully points out that ``Economic 
deregulation does not happen overnight. It takes time for lawmakers and 
regulators to dismantle regulatory regimes, and then it takes more time 
for the deregulated industries to adjust to their new competitive 
environment. . . . Deregulation is a long-term process from which 
society will continue to reap benefits as firms continue to adjust to 
free market competition and as more industries are more fully 
deregulated.'' Clifford Winston, ``U.S. Industry Adjustment to Economic 
Deregulation,'' Journal of Economic Perspectives, Summer 1998, pp. 89-
110.
---------------------------------------------------------------------------
    For the state regulated distribution ``wires'' business, where 
ownership of the distribution wires remains part of the vertically-
integrated utility business, the transmission and distribution systems 
will also have to be functionally separated from the operation of 
competitive generation and retail services. In particular, regulation 
must ensure that the competitive functions do not receive preferential 
treatment from the regulated functions. Under the traditional 
regulatory and industry structure, regulators have developed policies 
to address affiliate relations issues--and these approaches will need 
to be adapted in order to address functional unbundling issues as 
electric restructuring progresses.
                    iii. comments on proposed bills
    Some provisions of the proposed bills are quite sound and are 
likely to provide benefits for consumers. The focus of this testimony, 
however, is to discuss those aspects of the proposed bills, with an 
emphasis on the Administration's Comprehensive Electricity Competition 
Act (``CECA'') and the Markey-DeLay Electric System Reliability Act of 
1998 (``Markey-DeLay''), that could harm rather than help consumers. My 
point of departure is that policy makers should rely on markets to 
reveal consumer preferences and provide incentives to competitors. 
After all, a primary strength of markets (and the main reason for 
relying on them instead of regulation whenever and wherever possible) 
is their ability to efficiently discover what consumers want and 
effectively respond to consumer demand.
A. Generation Should Be Treated Like Any Other Competitive Business 
        Once Necessary Markets And Institutions Are In Place
    Open markets should become the major source of protection for 
consumers except where monopoly arrangements are deliberately continued 
(e.g., the wires portions of the business). Energy utility regulators 
should withdraw from detailed oversight once they have opened entry 
into formerly regulated markets because such regulatory oversight is 
likely to become unnecessary and even counterproductive as competition 
unfolds. The Administration's bill, for example, goes too far in 
authorizing FERC to remedy market power in wholesale and retail 
markets. FERC should focus on ensuring that open-access, 
nondiscriminatory transmission service is available so that actual or 
potential entry into generation markets can act as a check on the 
behavior of competitors in generation markets. Attempting to remedy 
market power may have been a part of FERC's historic regulated industry 
responsibilities, but the goal is to make the electricity marketplace 
more like that for other commodities and services. If intervention is 
necessary to address market power issues, the established agencies for 
the purpose should be relied upon.
    The introduction of wholesale and retail competition for the 
electricity commodity is likely to increase efficiency in the 
production and sale of electricity--perhaps somewhat modestly in the 
short term, but much more substantially in the longer term-as market 
processes displace the heavily regulated, central planning oriented 
procedures used by utilities and most regulators until very recently. 
The evidence available from other industries to date suggests that as 
regulation's role recedes, innovation and dynamic efficiency get a 
significant boost. Ultimately, that is the long-term wellspring of 
customer benefits.
    This view suggests that there will be a continuing--albeit 
changing--role for regulation of those aspects of the transmission and 
distribution businesses as long as they retain natural monopoly 
characteristics. But the generation business should become a 
competitive business, subject to the same oversight as other 
competitive businesses.
B. State Regulators Have (Properly) Relied Primarily on Functional 
        Unbundling to Address Vertical Market Power Issues
    The role of regulation will change as electric restructuring 
continues. An important ongoing role of regulation will be to oversee 
the conduct and performance of regulated firms, who may also compete in 
competitive markets, either directly or through affiliates. While the 
role of regulation will change as competitive electricity commodity 
markets emerge, experience in the telecommunications and natural gas 
industries indicates that a primary reliance on accounting and 
behavioral rules--supplemented, as needed on a case-by-case basis, by 
structural safeguards--can adequately address vertical market power 
concerns.
    When a utility's energy marketing affiliate operates in the 
utility's service territory, there are two broad areas of legitimate 
regulatory concern. The first is the utility's control over the 
transmission system, to which potential competitors must have access if 
they are to reach their customers. Recognizing the key role of the 
transmission system, the FERC directed utilities to create open access 
tariffs in Order No. 888. Regulators, utilities and others are in the 
process of designing a framework for transmission that should offer 
effective means to remove utilities' opportunities to leverage their 
ownership of these facilities and to foreclose upstream rivals from 
downstream markets, while preserving reliability and a foundation for 
the development of an efficient competitive electricity market. Major 
federal issues, as yet unsolved, are how to price transmission so that 
it supports efficient and competitive markets, and second, how to 
ensure that the appropriate investments in transmission are made to 
provide a firm basis for future competition. The FERC is not without 
important problems to solve.
    The second concern, access to the distribution system, is the 
province of state policy makers and regulators. Each state 
restructuring plan must address these issues through unbundling and 
related requirements. Particularly important for state regulators is 
overseeing the unbundling of rates. A final concern is that, without 
proper regulation, the utility might be able to shift costs from the 
unregulated portion into the regulated portion of its business, and 
recover those costs through regulated rates. Major issues in this 
process, yet unsolved, are how to price transmission so that it is used 
efficiently to support competitive markets, and second, how to ensure 
that appropriate investments in transmission are made to provide a firm 
basis for efficient competition in the future.
    Appropriate accounting controls and codes of conduct to govern the 
relationship between the parent utility and its marketing affiliate are 
necessary. Such codes are being designed and implemented in many 
states. For example, in Order No. 888, FERC concluded
    In light of the competitive changes occurring in today's electric 
        industry, we believe that the only effective remedy is non-
        discriminatory open access transmission, including functional 
        unbundling and OASIS requirements, and that it is within our 
        statutory authority to order that remedy. (P. 114)
    However, in some jurisdictions, proposed affiliate rules are likely 
to do more harm than good, because they go too far. Many proposed 
policies will force consumers to bear the cost of increased regulation 
and to forego the benefits of scale and scope economies that the new 
regulations would sacrifice. Proposed regulations should be subjected 
to an incremental cost-benefit test. When contemplating the possibility 
of structural restrictions on top of codes of conduct and accounting 
controls, the proper comparison is whether the additional protection 
gained outweighs the foregone benefits of increased scale or scope 
economies. The fact that some regulation is necessary and beneficial 
does not mean that more regulation is always better. Indeed, a 
significant reason behind the shift to greater reliance on markets is 
that we have had overly extensive regulation of industry operations.
C. Policy Makers Should Not Dictate Industry Structure
    An essential element of a competitive market is that any firm 
wishing to enter the market can do so bringing with it whatever special 
capabilities or resources it may apply to the task of serving 
customers. By this process the efficiencies associated with scope and 
scale are discovered and realized. Only by relying on markets in which 
inns are free to make decisions about what to produce will this 
discovery take place. The 1997 Economic Report of the President noted:
    An insufficiently appreciated property of markets is their ability 
        to collect and distribute information on costs and benefits in 
        a way that enables buyers and sellers to make effective, 
        responsive decisions. As tastes, technology, and resource 
        availability change, market prices will change in corresponding 
        ways, to direct resources to the newly valued ends and away 
        from obsolete means. It is simply impossible for governments to 
        duplicate and utilize the massive amount of information 
        exchanged and acted upon daily by the millions of participants 
        in the marketplace. (p. 191)
    Over-reliance on structural and behavioral restrictions short 
circuits that process, and thereby forces society to forego the 
benefits of the lower incremental costs that can be achieved through 
resource sharing. Where regulated inns are involved in these processes, 
regulations preventing anti-competitive behavior are necessary and 
protections for captive ratepayers remain appropriate. But the 
protection can and should be accomplished without unnecessarily 
sacrificing available economies.
D. PUHCA Should Be Repealed
    Intensive regulation of public utility holding companies is no 
longer needed and therefore the Public Utility Holding Company Act of 
1935 (``PUHCA'') should be repealed. The legislation approved by the 
Senate Banking Committee, which is incorporated into the 
Administration's bill, provides a generally reasonable approach 
regarding the repeal of PUHCA. Repealing PUHCA is appropriate because 
it is no longer needed and is actually acting to slow the competitive 
transformation and recapitalization of the electric and gas industries.
    As part of the repeal of PUHCA, CECA would expand FERC's and the 
states' access to the book and records of the holding company and its 
regulated utility affiliates. This approach is generally appropriate 
because FERC and the states can use this information to identify cross 
subsidization and cost shifting issues that would cause regulated 
utility customers to pay excessive rates for regulated services. I am 
concerned, however, that CECA's approach goes too far in giving FERC 
and the states access to the books and records of non-utility 
affiliates of the holding company that compete in competitive markets. 
I do note that CECA provides for ``exemption authority'' that the FERC 
could use to exempt certain non-utility affiliates from the ``books and 
records'' requirements, but am still concerned the FERC not be enabled 
to explore in non-regulated, competitive areas. Focusing on the books 
and records of the utility holding company and its regulated affiliates 
is clearly appropriate and CECA should reflect this principle.
E. Enabling Competition is Desirable, Creating it is Not.
    Once consumers are able to choose their provider of electric 
generation services for themselves, consumers will have the opportunity 
to make choices that formerly were made by utilities and/or regulators. 
There is a limited but important role for government interventions 
aimed at reducing the search and information costs for consumers. 
Requiring information disclosure, such as the equivalent of product 
labeling, by identifying the fuel mix of the power that they are 
aggregating or generating is one example.
    Policy makers should focus on information disclosure and essential 
facility pricing issues. This provides a basis for competitive markets 
to develop naturally. By contrast, regulators should avoid overly-
prescriptive policies, such as ``competitive auctions'' of retail 
customers that ``choose not to choose.'' While `auction'' or 
``competitive bidding'' processes can very effectively identify the 
market price at a point in time, these processes are not necessarily 
effective in identifying a price that makes sense over a period of 
time. Thus, auction prices could quickly become substantially out of 
date if energy prices, inflation, or interest rates were to change. In 
contrast, setting the ``shopping credit'' based on wholesale 
electricity costs, adjusted to reflect the costs the utility avoids as 
a result of it no longer providing ``aggregation'' services to 
customers that shop, could reflect dynamic changes in market 
conditions. This, in essence, is the approach that California uses and 
is preferable to ``competitive auction'' processes or administratively 
determining the ``shopping credit.''
F. PURPA Should Be Repealed and Renewable Standards May Not Be Needed.
    I favor repealing the Public Utility Regulatory Policies Act of 
1978 (``PURPA''), especially with respect to the ``must-buy'' 
provisions of Section 210. While PURPA surely played an important role 
by providing a ``gateway to entry'' for some non-utility generators 
during a period when the barriers to entry into the generation market 
were high, this ``leg up'' carried a very high price tag and is no 
longer needed. Therefore those provisions of PURPA should be repealed. 
Of course, this should not affect existing contracts.
    I also recommend caution when considering CECA's federal renewable 
portfolio standard. In a competitive market, some proportion of 
consumers are likely to prefer purchasing ``green'' electricity (e.g., 
electricity generated from solar, wind, geothermal, or biomass 
sources). Some early evidence in Massachusetts, where retail choice has 
generally been stalled due to mispricing, is encouraging in this 
respect. In several pilot programs, green power has been selected by a 
significant number of customers. Given the potential attractiveness of 
electricity generated from renewables, I see no reason to artificially 
skew the choices available to consumers by mandating their use. I would 
also caution that it will be difficult to establish a renewable 
standard on a national basis given the considerable differences among 
regions; for example, a particular renewable standard might be 
relatively easy for some states (say, Maine, where I live) to meet, 
while the same standard could be difficult and costly to meet in other 
parts of this country.
G. Competitive Parity Among Market Participants
    It is very important that all utilities and new entrants should be 
treated in as symmetrical a manner as practicable. Efficient 
competition requires that all incumbent and prospective firms be given 
equal opportunities to compete for customers. This means that new 
entrants should have the same opportunities as incumbents to succeed 
while, at the same time, incumbents are not unduly restricted in their 
market activities.
    As formerly regulated utility markets become competitive, it will 
become increasingly important that all utilities, regardless of 
ownership form and tax status, compete on a level playing field. Going 
forward, it will also be very important that all utilities, whether 
they be investor-owned, municipally or publicly owned, or cooperatives, 
be able to compete with all other competitors on an equal-opportunity 
basis. The Administration's bill begins the process of moving toward 
competitive parity and symmetry among different types of utilities. For 
example, CECA would: (1) amend the IRS codes to prohibit municipalities 
from issuing tax exempt bonds for transmission and generation; and (2) 
extend FERC transmission jurisdiction to currently non-regulated 
utilities. Thus, CECA provides a good starting point in leveling the 
playing field among different types of electric utilities.
        iv. policy objectives in electric industry restructuring
    The main public policy reason for restructuring the electricity 
industry and allowing the entry of competitive providers of generation 
is to enhance consumers' welfare. The criterion for evaluating 
restructuring policies should be the impact that these policies have on 
consumers. Unfortunately, it is all too easy to lose sight of consumers 
in the policy making process. There can arise a point at which policies 
become ``pro-competitor'' rather than ``proconsumer.'' The assumption 
that what is good for competitors (read: new entrants) is good for 
consumers is a common error, but it is a bad principle on which to make 
policy. Policy makers should formulate their electric restructuring 
based on the following objectives:
A. Consumer Benefits Should Be the Primary Criterion for Judging 
        Competition Policies
    The appropriate test for competition policies is whether or not 
they lead to benefits (lower prices, better quality, service 
innovation, etc.) to consumers, and not whether one or another 
competitor benefits from their adoption. As a former regulator, I would 
emphasize that the focus should always be on the consumer and whether 
or not consumers experience real economic benefits from a particular 
policy.
B. Policy Makers Should Focus on Providing Openness for New Competitors 
        and Enable Choice for Consumers
    Policy makers must provide openness in generation markets so that 
choice is available to consumers. If policy makers focus primarily on 
providing openness and choice for consumers, they will find that they 
need not prescribe precisely how the market will develop instead 
markets would be used to discover consumer preferences and wants, as 
well as optimal industry organization.
    Electricity markets that have previously been closed to consumer 
choice by franchise or similar regulation must be legally opened, so 
that competitors can provide their products and services to consumers 
where they believe that profitable market opportunities are present. 
Among the firms offering their services should be the incumbent 
electric utilities, so long as the regulated utility's operations 
continue to be regulated so that competitive activities are not cross-
subsidized and do not have inappropriate access to information as a 
result of its affiliation with a regulated utility. Once openness and 
choice is present, the generation business should be treated in the 
same ways as other competitive businesses, i.e., through antitrust 
oversight by the Department of Justice, the Federal Trade Commission, 
and related state agencies.
C. The Dynamic Benefits of Competition Cannot be Fully Anticipated Up-
        front
    Markets encourage the relentless search for efficiency that is 
essential to competitive success in global markets, and also provide 
the means to discover what consumers really want. Markets reward 
innovation--the search for and discovery, development, adoption and 
commercialization of new products, services, organizational structures, 
processes and procedures--that meets market demand. Successful market 
innovation requires risk taking, research, experimentation, and 
testing. Needless to say, for every innovation that is successful in 
the market, there are many ``dry holes'' and ``blind alleys'' that fail 
to meet the market test. This can apply to incumbents as well as new 
entrants.
    Market structures should evolve through customers' demands and 
firms' responses to them, not by statutory or regulatory planning and 
design. If regulators succeed in creating an effective open-access 
competitive environment, then those firms which are most efficient at 
attracting and meeting the needs of consumers will be successful. Even 
more importantly, consumers will be able to get the products and 
service that they want at favorable prices. But the real economic 
benefits of increased economic efficiency will only come as firms 
reorganize their structures and operations. This takes time--and some 
patience on the part of policy makers and regulators.
    On the other hand, if markets are not efficiently opened to entry, 
no amount of handicapping the incumbent, or giving a leg up to 
entrants, will guarantee a more efficient result for consumers. Indeed, 
the success of less efficient providers is more likely. That outcome 
would be the antithesis of what the drive to open markets to consumer 
choice is all about. In short, policies that strive to enhance the 
efficiency of the competitive process will be helpful, while policies 
that directly influence specific industry structures and outcomes will 
not, and should be avoided.
    Dynamic, flexible, and practical regulation is needed during the 
transition to efficient competition in generation markets. There is no 
direct path from ``regulation'' to ``competition.'' Policy makers and 
regulators are up to the task of providing a flexible and practical 
transition to a restructured electric utility industry but must become 
more effective at triage--by identifying and addressing the truly 
important issues (e.g., providing openness and choice for consumers), 
and not get bogged down in designing the specifics of future markets.
D. Policy Makers and Regulators Should Allow the Efficiencies that 
        Vertically Integrated, Multiproduct Utilities Can Provide To 
        Benefit Consumers
    Electric utilities have traditionally been organized as vertically 
integrated, multiproduct firms because it has facilitated coordination 
of the generation, transmission, distribution and sale of electricity. 
As vertically integrated firms, utilities have traditionally provided a 
single bundled utility service. An electric utility's primary product, 
for example, has been the bundled utility service that it provides to 
its retail customers, rather than the variety of potentially separate 
services that comprise basic utility output. Electric utilities have 
often provided a variety of incidental services to customers (e.g., 
appliance sales and service, fiber optic installations, trenching 
services, high-voltage services, etc.), that could either be purchased 
from the utility or from a non-utility provider. In short, vertically 
integrated electric utilities have been multiproduct firms for many 
years. Now, with increased competition emerging, policy makers and 
regulators must search for ways to maintain or replace the economies 
that have resulted from vertical integration while accommodating 
efficient--and ``fair''--competition.
    Many aspects of a utility's or a utility affiliate's participation 
in competitive markets raise controversial issues, and an appropriate 
mix of regulatory affiliate standards, accounting and cost allocation 
procedures, and behavioral codes of conduct can be used to address 
these issues. Only in relatively rare cases, would structural 
solutions, such as divestiture, be needed, and should only be used if 
less intrusive approaches fail.
E. Policy Makers Should Not Tilt the Competitive Pressures that Firms 
        Face
    Reliance on competitive markets is based on the principle that 
firms that can produce most efficiently (based on forward-looking 
costs), and bring the most value to consumers, should (and will) 
prevail. Thus, a real economic advantage in satisfying the needs of 
consumers possessed by one competitor, but not by others, is not anti-
competitive. It simply reflects the different skills and endowments 
that each and every firm brings to the market, including differences in 
their overall cost of doing business. In competitive markets, firms, 
like people, are not just peas in a pod. Moreover, one of the most 
important lessons of competitive markets in other restructured 
industries is that today's advantage can be a fleeting phenomenon. 
Success either in entering the market, or in retaining any existing 
market share, is not guaranteed.
    Policies that distort the competitive pressure faced by some firms 
would weaken the efficiency of competition. This might be good for some 
competitors but would raise the prices paid by consumers and would 
reduce social welfare. Policy makers should seek to promote consumer 
welfare via efficient competition, and should be careful not to 
artificially promote the competitive interests of any particular 
category of competitors. Pro-consumer policies provide strong 
incentives for efficiency, which benefits consumers (by providing low 
prices) and society (by encouraging efficient use of resources). 
Policies that artificially limit the competition faced by some firms 
would weaken the robustness and efficiency of competition and would 
thereby allow competitors to earn economic rents. This might be good 
for the ``competitors'' but would raise the prices paid by consumers 
and would reduce social welfare.
F. Consumers Need to Be Protected from Unfair Practices
    Regulators continue to have a legitimate role in protecting 
customers from deception and other unfair practices. Early evidence 
from unbundled energy markets is that some residential customers can be 
vulnerable to fraud. Slamming and cramming are also problems consumers 
may face as firms compete vigorously for business. Safeguards will be 
important here. Finally, improving consumers' access to information on 
the choices that are and will be available to them is an important part 
of consumer protection.
                             v. conclusion
    Providing openness (ease of entry) and choice for consumers is 
critically important. Where entry is easy, incumbent firms will be 
unable to exercise market power, and where entry is artificially 
difficult (or impossible) they may well be able to exercise market 
power to the detriment of customers.
    Most critical to facilitating competition in generation and 
retailing is ensuring that the regulated wires--clearly essential 
facilities at the present time--are available on reasonable terms to 
all buyers and sellers in the newly opened market. Regulators will 
continue to have a critical role in ensuring transmission and 
distribution access, and there must be appropriate and continuing 
oversight. Once legal barriers are removed, and an appropriate 
regulatory structure for the wires monopoly is achieved, the major 
elements necessary for competition to ensue are in place. From that 
point on, competitors' claims of inequitable treatment or unfairness 
require an empirical demonstration and should no longer be taken at 
face value.

    Mr. Barton. I want to thank you for your testimony. I did 
again scan all your testimony last evening, and so the fact 
that I wasn't here for most of the verbal summary doesn't mean 
that I haven't looked at it, and I am very appreciative of it.
    The Chair is going to recognize ranking member Mr. Hall for 
the first 5 minutes of questions.
    Mr. Hall. Mr. Chairman, thank you. Mr. Kanner, your 
testimony seems to conclude that States can't deal with market 
power problems on their own and that some Federal authority and 
Federal intervention, Federal oversight, are absolutely 
necessary. Is that your position?
    Mr. Kanner. That is correct, Congressman Hall. Your State 
of Texas is in a unique position where, with the ERCOT system, 
the market is defined by the different system, and the bill 
pending in your legislature includes a number of provisions to 
deal with market power, including pretty effective tools that 
don't require divestiture. But that is a unique situation. In 
most States, the market is much bigger than that single State.
    Mr. Hall. Well, maybe I ought to ask Mr. Kahn, but is that 
bill going to pass in the Texas legislature?
    Mr. Kahn. You probably know what the Texans are doing 
better than I. The only thing that I would like to add to that 
is that----
    Mr. Hall. No, they don't like Federal intervention down 
there.
    Mr. Kahn. No, they certainly don't, not in Texas; but I can 
state that our PUC only has control over what the regulated 
side of the business does. They don't have any control over the 
unregulated affiliates.
    Mr. Hall. Well, I get back to Mr. Kanner, if he thinks--do 
you think the States that have already adopted retail 
competition plans have just missed the boat with their 
legislation or what position are they in now? Texas still has 
it in front of them. Are you telling me something different, 
that it is simply beyond the State's ability to accomplish, and 
why?
    Mr. Kanner. Some of the States did address it to a certain 
extent. Some States looked at divestiture of generation, but 
that was normally used as a tool for valuing assets for strand 
cost determination, not specifically to address market power. 
Although, again, there are some exceptions.
    It is largely outside the State control for a couple of 
reasons. One, once they establish retail competition they no 
longer have control over those generating assets. They are not 
rate regulated anymore.
    Second, the transmission system is multistate in nature and 
regulated by FERC; and in many cases, the party that has the 
potential to exercise market power can be located outside the 
State's boundaries. So a State act says we want retail 
competition, and it is an entity located two States over. That 
is the, quote, ``offending party.''
    Mr. Hall. You oppose the stand-alone PUHCA repeal, don't 
you?
    Mr. Kanner. Correct.
    Mr. Hall. Does PUHCA have some harmful effects on the 
marketplace? Do you agree or disagree with that?
    Mr. Kanner. Well, I would agree that the tools that PUHCA 
establishes don't correspond perfectly to today's fact 
situation.
    Mr. Hall. Is the harm more to consumers or to companies who 
are constrained by the statute?
    Mr. Kanner. My own personal view is that the constraints on 
the companies are not overwhelming. I think we can come up with 
a better structure for looking at it than PUHCA currently has, 
but I don't think the constraints are overwhelming.
    Companies can build generation facilities under the EPAct 
provisions anywhere in the country. They can invest overseas. 
They can get into a number of different business lines under 
the SEC standards. So I don't believe the limitations are 
excessive or inappropriate.
    Mr. Hall. Mr. Gordon, I think I gleaned from some of your 
statements that the administration's bill goes too far in 
authorizing FERC to remedy market power in wholesale and retail 
markets; is that right?
    Mr. Gordon. Yes, I think that is probably not necessary.
    Mr. Hall. And what effect would the administration's bill 
have on competition, and could the new FERC's authority on 
divestiture and on original transition groups backfire on them? 
Do you think it will?
    Mr. Gordon. Do I think it will backfire? I think it simply 
is unnecessarily intrusive in a process. That as long as the 
transmission end of it is dealt with properly and the antitrust 
authorities maintain the oversight that they can, I think the 
simple thing is you don't need to go beyond that.
    Mr. Hall. All right. Mr. Chairman, I want to ask for a 
unanimous consent, if I might, that statements by interested 
parties that have asked me to put something in the record, that 
we be allowed--that are not witnesses, be included in the 
record, if we submit them to you timely.
    Mr. Barton. Subject that we need to make sure that they are 
pertinent and germane to the hearing. You know, all these 
adulatory----
    Mr. Hall. Adulterous?
    Mr. Barton. No, no, no. All of these very favorable 
telegrams from your constituents may not be rendered relevant 
to the record, but if it is relevant to the record, we will put 
it in by unanimous consent.
    Mr. Hall. If they brag on you, it is the same telegram, 
though.
    Mr. Barton. Well, that is probably relevant to the record 
then.
    Mr. Hall. Let me go out and come in again. If I have 
statements that we think are pertinent, that need to be in the 
record, I ask unanimous consent that they be entered.
    Mr. Barton. Yes, without objection.
    Mr. Hall. I yield back.
    Mr. Barton. Gentleman from Oklahoma, Mr. Largent, is 
recognized for 5 minutes.
    Mr. Largent. Thank you, Mr. Chairman. Mr. Kanner, I wanted 
to ask you, should the FERC have the authority to order 
divestiture?
    Mr. Kanner. We do adopt in our model legislation the 
delayed market provision that gives FERC that authority. I 
point out, though, Congressman Largent, that it is the club in 
the closet that's the last resort that we frankly don't expect 
would be needed to be used, that the first conditions would be 
FERC requiring a party to participate in the regional 
transmission organization or denying market-based rates if 
there is not a competitive marketplace, and only if those tools 
were insufficient would it have that divestiture authority. And 
frankly, I think that authority is there so that the company 
says, all right, you won't give me market-based rates, I need 
to come forward with my own mitigation plan. I know the club in 
the closet that you have, so here is what I am going to do.
    Mr. Largent. Is FERC authority to order divestiture--is 
that something that is going to be critical only during the 
transition period or principally during the transition period 
so that if we had to do something, if we had to put divestiture 
in, it is something we could sunset after, say, a period of 3 
or 4 or 5 years.
    Mr. Kanner. I believe mostly likely it would be something 
only used during the transition period. The question of in 
terms of sunsetting is if in some way there was a 
reconstitution that somehow escaped review, would you want that 
authority there? But our expectation is that these are 
transition mechanisms that allow us to get to and then sustain 
that competitive market.
    Mr. Largent. Now, Mr. Gordon, in your testimony you said 
that we just need to make sure that there is open access, 
thereby it produces a competitive marketplace and then just 
allows the market to work.
    Mr. Gordon. That would be my starting point. I do think 
that getting a transmission truly available to everybody on an 
exactly equivalent basis is the core to making this market 
work. An ISO attempts to do that. Various versions of so-called 
transcos also attempt to do that, perhaps in conjunction with 
some kind of an ISO that hasn't been completely worked out yet. 
And that is the way I would think we need to go. It amounts to 
functional unbundling of the transmission.
    The question of whether you need to go beyond that and 
actually separate it legally is something that I actually have 
a somewhat similar position on. I don't think so. If it should 
prove that ISOs don't work or are somehow insufficient, then I 
might be prepared to go to that stage because I do think that 
is critical.
    I would also say in passing that once control over 
transmission that you own has been taken away from you, 
effectively, so you can no longer use it as a strategic 
resource, I have to wonder why the board of directors would 
still be interested in having it.
    Mr. Largent. Yeah. That is a good question.
    Mr. Kahn, I wanted to ask you a question about this issue 
of cross-subsidization. You probably have not had an 
opportunity to read Utility.com's testimony. I did. And in 
there it talks about one approach is to allow utilities to use 
their names or branding for unregulated competitive affiliates, 
provided they disclose clearly that those affiliates are not 
the same as the regulated utility, operate completely 
independently, keep entirely separate accounts, and obtain no 
financial benefits from the regulated entity, including credit. 
Would you find that palatable?
    Mr. Kahn. Well, I appreciate all of those other caveats. 
Name recognition in my industry is one of the things that I 
most possess. If I were to sell my business today to that 
particular utility, what they would be buying is my name and my 
customers. That is all I have. Skills are obtainable. So, yes, 
that would be a problem for me.
    Mr. Largent. Would that be a show stopper for the 
contractors?
    Mr. Kahn. I can assure you that for the independent 
contractors it would, only from the standpoint that 12 times a 
year I get an opportunity to write a check to that company. I 
know that company intimately, and namesake and logo is 
something that is a very valuable thing in my industry.
    Mr. Largent. Even with the transparency in the pricing and 
with the separation of the books and there is absolutely no 
cross-subsidization, you just have goodwill that is cross-
subsidizing now.
    Mr. Kahn. I appreciate the fact that you could put fine 
lines on there. I can read fine lines in a McDonald's coffee 
cup that says the coffee is hot, but that lady still got money 
in her pocket when she spilled it in her lap.
    Mr. Barton. Would the gentleman yield on that?
    Mr. Largent. Yeah.
    Mr. Barton. But if you take your position, you are in 
effect saying that somebody who has gone to the time and the 
difficulty and all of the hard work to develop a brand name 
identity, can't make use of it. And I personally don't think 
that is fair.
    Mr. Kahn. No, I agree. But that the fact brand name 
identity was contrived with monopoly power, that is my 
perspective. They had the advantage of all of these years to 
have contrived that name.
    Mr. Barton. But the point is that we are looking 
prospectively, and how they obtained it. We can't hold it 
against them forever that in the time period that they obtained 
their brand name, everyone was monopolized. I mean, that is the 
way the world was for the first hundred years.
    Mr. Kahn. I guess one point that was just brought to my 
attention again, the utility is certainly not going to be 
prohibited from using that for their own purposes. What we are 
talking about is in these unrelated businesses, these arms-
length businesses.
    Texas Utilities has never been in the air conditioning 
business before. Now that they want to go into that business, 
that is fine. I have no problem competing against them. Why 
should they be able to take advantage of the name ``Texas 
Utilities'' to beat me over the head?
    Mr. Barton. If we literally listen to your interest group 
on this issue, your position is probably unconstitutional 
because as long as we put all the caveats that Congressman 
Largent that, you know, you can't have credits, and it has to 
be totally separate arms-length transaction. I don't see how 
you can prohibit somebody from licensing the use of their name. 
I know where you are coming from, but I just don't see how you 
can----
    Mr. Kahn. [continuing] Justify that point? Again, I was 
reminded, ACCA, my trade association, has done some analysis on 
the benefit of namesakes; and I would be happy to get you the 
information about that.
    Mr. Barton. The gentleman's time has expired but I took 
some of his time.
    Mr. Largent. I just have one follow-up question, and that 
is, the issue of just allowing the State PUCs, who are already 
enacting codes of conduct, and then you got antitrust relief, 
which I know could be very costly and time consuming for the 
guy that has got, you know, he is his only employee; it is a 
family business.
    I understand that, and I am sympathetic with that argument; 
but in reality, couldn't the States really develop these codes 
of conduct and kind of the rules of play on a State-by-State 
basis and we not do anything at the Federal level?
    Mr. Kahn. Well, you bring up two different points there. 
First, I appreciate your sympathy on the antitrust issue, that 
for me, 21 employees, man, I am lucky to get here to 
Washington. It is tough enough to run an air conditioning 
business, much less prosecute an antitrust case against a 
utility company.
    With regard to the crossing State lines issue, I really 
have to go back to my point that the States have control over 
what that regulated arm does within their State. As soon as 
they move to Oklahoma, for example, what is the Texas Public 
Utility Commission going to do to enforce what happens in 
Oklahoma?
    Mr. Largent. Well, they won't, but Oklahoma will. What I am 
saying is rather than you coming and making your case in 
Washington, DC, which I know is the easiest way to do this 
because you can do kind of a one-size-fits-all and it will 
cover all fifty States--you only got to lobby one place and 
that is here--you are going to have to lobby in fifty States, 
and so you may lack a certain uniformity from State to State, 
and that creates a problem; but again, we are not stepping on 
the States. But you will have effectively, your trade 
organization and members of it in those individual States, will 
have the opportunity to lobby their individual----
    Mr. Kahn. And we have obviously. But again, when a 
competitor from outside of my State comes into my State, what 
power does my State have over that unregulated business?
    Mr. Barton. Gentleman's----
    Mr. Largent. I was just going to say, when they are doing 
business in your State, they would have regulatory authority.
    Mr. Kahn. Not the PUC.
    Mr. Barton. You all can continue this conversation in the 
cloak room.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Barton. The gentleman from Ohio is recognized for 5 
minutes.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Gordon. Could I follow up?
    Mr. Barton. Let us go on, if you want to allude to that, 
and give Mr. Sawyer his time.
    Mr. Sawyer. I was going to give him some time, but I have 
to tell you, it reminds me of Roger Penske, who was a great 
racing driver in his youth and a great owner throughout most of 
his adult life, and he was asked what he attributed his great 
success to and he said the ability to read the rules. What do 
you mean? He said it is where I can find an unfair advantage.
    And the truth of the matter is, I mean that is what we are 
all struggling for here is we talk about level playing fields, 
and yes, that is the least we will accept; but what we would 
really like in our heart of hearts is an unfair advantage.
    I really want to--I am sorry Mr. Largent left because I 
think he really hit squarely on the button. Some of the 
difficulty with goodwill--that goodwill exists in a rate-of-
return regulated obligation to serve--service territory, and as 
soon as you move beyond, that really doesn't exist in the same 
terms; and even the terminology with which we construct this 
unfair perception is grounded in a previous era.
    When we talk about rate payers being forced to pay to 
subsidize, they are not rate payers. They are customers who 
aren't being forced to choose anybody. They can really go and 
choose in a far more open market if that is, in fact, the idea.
    Having said that, I tend to support the idea that we don't 
want to have unfair cross-subsidization, but that is extremely 
difficult to do. And we need to think through with great care 
how each of the States can look at the internal financial 
workings of the companies involved so that they can determine 
where that cross-subsidization exists. I would be very 
reluctant to see that done on a Federal level just because of 
the size and magnitude of all of that.
    I just want to make an observation. I was really intrigued 
by Commissioner Thompson's comment about how distribution 
facilities yield monopoly power without resorting to 
uncompetitive practices, and it seems to me that the testimony 
we had among our last two commentators really got--had some of 
that.
    Mr. Rose, welcome from Columbus. At some point I hope you 
can illuminate what, in fact, is going on in Ohio 
restructuring. Texas, I think, looks transparent by comparison 
to the meetings that have been going on in Ohio.
    Mr. Rose. I should say I have been working with the Ohio 
legislators--and I am not speaking for them as well--but we 
have a contract to help them develop this year's legislation as 
well as last year's as well.
    Mr. Sawyer. And maybe next year's.
    Mr. Rose. And next year.
    Mr. Gordon. Could I add I have also testified in Ohio on 
these issues, and treatment of codes of conduct in Ohio, as in 
other States, is fairly extensive. Logo issues, affiliate 
transaction issues, cross-subsidy issues are the subject of 
intensive examination, and I think the home State regulator for 
whatever the utility is will be likely to be quite alert to any 
cross-subsidy that may be attempted.
    Mr. Sawyer. Let me go back to the last comment that you 
were both addressing with regard to distribution and access to 
real choice among providers.
    Mr. Rose, you have championed the notion of putting 
together lotteries so that customers who did not make an 
affirmative choice would be distributed among potential 
providers. Mr. Gordon, you sounded like you opposed that.
    Mr. Gordon. You picked the right pair to address your 
question.
    Mr. Sawyer. I guess my question comes down to again a 
question of market power. I would like you to discuss this, but 
I particularly would like you to concentrate on deciding on who 
gets to be in the lottery. Among those who are potential 
providers, what thresholds for being eligible you would have to 
meet, or do you simply have to register? If I have made no 
effort, do I simply get to gain market access by filling out a 
form, or do I have to qualify in some way?
    Could we just take a moment to have a brief conversation 
between these two on that topic?
    Mr. Rose. Let me, first of all, just correct one thing. 
What I would favor is actually an auction where anybody who is 
qualified would participate in the lottery, is preferable to 
doing nothing in my view, which is somewhat similar to what FEC 
did in the mid-'80's after the AT&T breakup and that Georgia is 
now going to do for its gas utilities, which is a random 
assignment of customers.
    The way the random assignment works is that in order to 
qualify for any allocation of those nonchoosing or default 
customers or provider of last resort, they all have different 
names in different States. The way that is allocated is based 
on your market share of those customers who did choose, or in 
the FCC case it was a market share of those customers who did 
choose, and the Georgia case it is the market share of the 
whole market, which has different ramifications obviously for 
whether that favors the incumbent or whether it is favors the 
new entrants.
    But that is how you get in. You have zero market share, 
then you don't get anything, and presumably there is some kind 
of a threshold that anybody has to have almost on every 
program, and every State has this. And let me add, too, this is 
purely a State issue in my view. This is not a Federal issue, 
this is something that every State has to look into and decide 
for themselves.
    Mr. Sawyer. That was going to be my last question.
    Mr. Gordon. My objection to it is that it basically short-
circuits the market. It doesn't necessarily offer a better 
service. And it also doesn't rely on consumer choice, which I 
think is the linchpin to all of this. Consumers won't all 
change instantly, but they will change as they learn and as 
they are offered better deals. That generates the real 
benefits.
    That is what electric restructuring was all about in the 
first place; real investment, doing things better, figuring out 
a better bundle of services. All of that has to be done to 
generate any real improvement in economic welfare. Otherwise 
you are just shifting customers around to different people. 
That does reduce concentration but it misses the point of the 
competitive process.
    Mr. Rose. Let me respond to that, it is very important----
    Mr. Barton. The gentleman will have to claim the time here.
    Mr. Rose. [continuing] nobody is taking the customer away 
from anybody and no customer at any time is being assigned to 
somebody they don't want. And in the FCC example customers got 
a warning that they would be placed in this random allocation 
if they didn't choose. That spurred a lot of people to decide. 
If I recall correctly, that is when I picked my long-distance 
provider.
    The other thing is that it was one free switch back, so if 
I got assigned to a provider I didn't like, I can go back, it 
didn't cost me anything. So nobody is ever forced to be with 
anybody.
    I realize that has been in Ohio. I am very sensitive to 
this because we are fighting this battle right now. It has been 
grossly mischaracterized, the auction procedure that is in 
there, in the Mead-Johnson proposal this year, and it is also 
very different than last year, by the way.
    In this case, now the customers would never even know who 
is supplying the kilowatt hours to them. It is not like last 
year where they would. There is no direct interface. It is 
looking at 10 percent loads of the default customers. They are 
getting allocated. The customers still sees their bill from the 
company that sends them the bill today.
    Mr. Sawyer. In large measure, would you both then agree 
with the notion that although Mr. Thompson's observation may 
have some merit, that it is most appropriately a State issue 
when it comes to questions of distribution?
    Mr. Rose. Yes, I agree.
    Mr. Gordon. I agree with that.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Barton. It is a strange feeling when the witnesses 
outnumber the members by about 3 to 1. We have got to be 
careful here.
    I have a 1:30 meeting with one of the commissioners on the 
Nuclear Regulatory Commission. So I am going to recognize 
myself for a few questions and then turn it over to Mr. Burr. 
The left end of the panel as I look at it, I don't want you to 
all to feel unloved that all the questions have been down here.
    I want to ask Mr. Rogers a question. Do you think that the 
FERC should be given the authority to require transmission 
owners to join ISOs?
    Mr. Rogers. My judgment is, RTOs are very important to 
creating a robust wholesale market, and that the FERC's 
authority should be clarified in this area. And that is 
critical, I believe, and consistent with the underlying policy 
of the Energy Policy Act of 1992.
    Mr. Barton. Are you for a FERC mandate or for more of a 
voluntarily incentivized system?
    Mr. Rogers. I am more for incentives, but I am also for 
conditioning authority. I think there are circumstances because 
where they may recognize market power as a result of a merger 
or some proposal that they have to approve, I believe the 
commission should have the authority to condition the approval, 
for instance, of a merger. Were they to eliminate market power, 
they would then join the RTO.
    Mr. Barton. Okay. What about PUHCA? I assume you would 
support PUHCA being repealed?
    Mr. Rogers. I would say that would be an understatement.
    Mr. Barton. An understatement. Is PUHCA, as it is currently 
configured, a barrier to entry for utilities that are thinking 
about building additional generation capacity?
    Mr. Rogers. It is a significant impediment for us, for 
instance, in terms of we are limited. Even though our balance 
sheet allows us, PUHCA limits our ability to invest in merchant 
plants. It limits our ability to compete for generation. It 
limits our ability to invest internationally, even though our 
balance sheet allows us to do it.
    I will tell you the most important distinction. Foreign 
companies, they come into this country and buy utilities, and 
then under PUHCA we are precluded. An example of that is 
Pacificorp. which was acquired by Scottish Power. Under PUHCA 
we couldn't even compete for that business or for that----
    Mr. Barton. Competing to buy the----
    Mr. Rogers. To buy.
    Mr. Barton. [continuing] what the foreign entity bought? 
Okay.
    Mr. King, could you describe briefly your modern meter 
technology that you have been using and how that might help in 
going into a competitive market?
    Mr. King. Sure.
    Mr. Barton. Did somebody already ask you that? I wasn't 
here for the whole time. I was told they haven't. It is really 
creative.
    Mr. King. It is a solid state meter, fully electronic. It 
includes wireless modems in it. So it communicates over radio 
communications, sending the meter readbacks eventually to us 
over the Internet, and records the information every 5 minutes. 
And what is important about that is that customers who don't 
want to pay the high price of peak energy don't have to, and 
they can save significantly on their bills.
    Mr. Barton. Does your meter technology have the ability to 
do what is called reverse metering?
    Mr. King. Some flavors of it do, where you can do net 
metering if the customer produces power onsite as well, if they 
have solar panels, for example.
    Mr. Barton. Okay.
    Mr. King. I would like to address this in the context of 
market power. We talk about no cross-subsidization, but under 
the rules right now in California we provide meters for those 
customers. We pay all the costs of doing so, including reading 
those meters and so on. The way it is set up now, those 
customers have to continue to pay the utility for metering 
services within their bundled distribution rate as part of 
their monopoly distribution.
    Mr. Barton. They pay them and then they pay you too?
    Mr. King. They pay twice.
    Mr. Barton. You think that is unfair?
    Mr. King. Yes, somehow.
    Mr. Barton. Okay. I am going to yield back the balance of 
my time to recognize Mr. Burr to chair the remainder of the 
hearing. He has the full power and authority that such 
chairmanship has.
    I want to thank the panel, and I apologize for requiring 
eight of you to be at the table. We kept having additional 
members want additional witnesses. We started out, this panel 
was going to have 5 witnesses, and it was 6 and then it was 7 
and then it was 8, and there was even a request late for there 
to be even another 1 or 2. So I do apologize for each of you to 
be here in such a large group.
    Mr. Burr [presiding]. I also apologize to this panel for 
running in and out. But we are going to have quite a day on the 
floor, I think, before it is over, and we are all trying to 
figure out exactly how it is going to happen. So please accept 
everybody's apology.
    Let me go to you, Mr. Kurtz, real quick, because if I 
understand from your testimony, you believe that FERC ought to 
have the ability to mandate everybody in the ISOs, correct?
    Mr. Kurtz. Yes, we do.
    Mr. Burr. Does that include municipals that own 
transmission?
    Mr. Kurtz. Well, that may very well be possible as a 
necessity in the future, in large part publicly owned 
organizations. There is going to be a struggle clearly between 
local control----
    Mr. Burr. Can you pull that mike a little closer to you?
    Mr. Kurtz. Clearly one would recognize the struggle between 
local control and being controlled at the Federal level with 
small organizations. From my standpoint, you are not going to 
run into that greatly through members of the American Public 
Power Association, because generally most of them are 
distributing companies only. They are very few, very large 
organizations in the American Public Power organization.
    Mr. Burr. But there are some that own transmission?
    Mr. Kurtz. There are some that own, and for there to be an 
expectation, if there is the ability I think to have a dominant 
position, that they would forever expect to be excluded from 
that consideration I think may be unrealistic.
    Mr. Burr. So your answer would be, yes, you think that 
municipals that own transmission should be included under the 
FERC's ability to force them into ISOs?
    Mr. Kurtz. I think if they are dominant players in the 
industry that should be considered.
    Mr. Burr. Let me go back. If there are municipals that own 
transmission, should they be included under the same brush that 
you said the rest of the industry should as it relates to 
FERC's power with ISOs, with them?
    Mr. Kurtz. Well, the reason why I would hedge on that is 
because you have different levels of transmission. For 
instance, take Gainesville, Florida. We are not a dominant 
player in the transmission world. We are generally a local 
company.
    And, therefore, you have publicly owned organizations whose 
transmission or subtransmission or high voltage distribution do 
not play a significant component, nor could it be considered a 
significant component in the transfer of power into and out of 
regions, I would submit much different than the Tennessee 
Valley Authority.
    Mr. Burr. Would FERC agree with your assessment that it 
wouldn't affect other people's ability to deliver power?
    Mr. Kurtz. FERC has, if I remember correctly, a seven-step 
evaluatory process where they determine the difference between 
whether transmission is significant enough to be transmission 
or whether it is local distribution. So there is a methodology 
FERC uses for making that evaluation.
    Mr. Burr. How about you, Mr. Rogers, the same question?
    Mr. Rogers. It would be my judgment, as a former Deputy 
General Counsel of the FERC, that they would include municipal 
transmission under their definition. And it would be my 
recommendation, as a matter of public policy, that all 
transmission, whether it is a public agency that owns it or the 
government that owns or it is an investor-owned, it all ought 
to be included, because the critical point about an RTO is to 
have increased reliability to all the potential customers on 
the grid, and that requires participation by everybody and 
nobody should be allowed to be an island.
    Mr. Burr. With few exceptions, don't most of the proposals 
and most of the initiatives agree on what it is we need to do, 
the thing that is lacking? We use different words to describe, 
but is it confidence that the marketplace will work in a 
competitive way?
    Mr. Rogers. I think that is a fair characterization.
    Mr. Burr. So the challenge for this committee, as we move 
legislation, is to assure from you all the way down to Mr. 
Gordon and to the companies and, more importantly, to the 
capital markets across the country, that the free flow of 
electricity can happen from point A to point Z without 
interruption, which means that you can't exclude anybody. 
Whether the decision is made to empower FEC or whether we 
choose to go another avenue, you can't have one size over here 
and another size over here. It has to be predictable and make 
sense.
    Mr. Rogers. I would agree with that.
    Mr. Burr. How important is it--let me ask you, from the 
standpoint of Cinergy, how important is it that the capital 
markets perceive the change that we make--potentially make as a 
tremendous opportunity for their capital to be invested?
    Mr. Rogers. I would say from a capital market perspective, 
they want to see a truly competitive market. When you have a 
hybrid market, you have the great possibility that capital 
invested, the returns would be uneven in that situation.
    Mr. Burr. Where is the capital injection going to be used?
    Mr. Rogers. My judgment is, is you look at the amount of 
distribution we own in this country and the amount of 
transmission and generation, most of the capital in the future 
will go into the generation part of the business, which in my 
judgment should be deregulated completely, and would be under 
most State plans as well as Federal.
    Second, and this is a very critical point, Congressman, I 
believe--and you can study what has happened in the U.K. and 
the National Grid Company there--if we have regional 
transmission organizations, significant capital would be put 
into the transmission system, which would improve an already 
very reliable system but would enhance the reliability over 
time.
    Mr. Burr. Mr. Kurtz, I don't want you to think that I 
disagree with you on your statement. I am not sure where I am 
on the question of the transmission right now, but I do find it 
troubling from the first panel that there is not an expectation 
of new generation.
    And I guess I would ask anybody who would like to comment, 
if we get it right, I realize that that is a big if, but let us 
assume that we get the ideal bill, do we have no generation? 
Yes, sir.
    Mr. Rogers. I would be quick to say in the Northeast they 
identified about 6,000 megawatts of new generation needed, and 
there is already on the drawing board today 24,000 megawatts. 
So you have significant capital money in project, in the 
innovation of American industry moving into that region.
    In our region, you may remember the problems that we had 
last summer, which was really a price fluctuation in the 
market. Let me just show you how quickly the markets responded. 
We have already seen instances where companies from other 
regions of the country are coming into our region proposing to 
build gas turbine units to deal with these perceived market 
shortages.
    The point is, markets are very efficient and they work 
quickly, and where people see opportunities, they invest the 
money, and that translates into putting generation on the 
ground when it is needed in the future.
    Mr. Burr. Which is competition?
    Mr. Rogers. Which is what competition is all about.
    Ms. Tighe. Yes, really just to echo that, in those places 
where there is demand, we are definitely seeing new generation 
projects being developed. Actually, we have a compilation of 
some of these projects and we would be happy to provide that to 
you.
    One of the key things here is that it is important that the 
structure of those regional transmission organizations be done 
properly, so that there will be ability to interconnect with 
the transmission system on a fair basis, and that the decisions 
made and the operation of the transmission grid will be fair to 
these new generators. That is an important factor as developers 
consider where they are going to locate.
    Mr. Sawyer. Mr. Chairman, might I piggyback on your 
question----
    Mr. Burr. I would be happy to yield.
    Mr. Sawyer. [continuing] and turn back to the question of 
capital formation around transmission per se. I have great 
confidence that generation will be able to do that. You, 
throughout the history of regulated utilities, have been 
largely competing with one another for capital. That has been 
really the terms of competition.
    I am concerned that transmission in an uncertain 
environment, a blend of both Federal oversight, State siting 
responsibilities, and the degree to which States become 
important links in transmission without benefiting directly 
from the siting and investment in those transmission 
facilities, I am concerned about the uncertainty of that and 
their ability to attract sufficient capital to maintain and 
grow the system into real competition.
    Did that make sense to you and, if so, can you comment on 
it from the point of view of transmission per se?
    Mr. Rogers. I think you have raised a very important set of 
issues around what will transmission look like in the future. 
My comment will be that you will see, and you have already seen 
it, ISOs formed in California and in New England and the mid-
Atlantic and the Midwest. You will see regional transmission 
companies developed, some as ISOs, some as TRANSCOs, but at the 
end of the day they will become initially in some regions and 
then they will combine, because the flow of electricity is not 
bound by State lines. It is not bound by regions.
    And what is going to happen? Think about the history. The 
history is this: Every utility that has been developed over the 
last 75 years primarily built transmission to get power from 
the plants to their distribution grid. In a competitive world, 
all of these little individual islands, and that is what RTOs 
do, get connected up, and so the ability to move power. So when 
you have power over here, it is enhanced dramatically if you 
built the right transmission between the areas.
    And we have worked hard as separate companies to do this, 
and that is part of our tradition and that is part of good 
business. But the other reality, and this is your point, the 
most important reality is in a new competitive world there have 
got to be incentives to beef up the transmission grids.
    Mr. Sawyer. Exactly.
    Mr. Rogers. And those have to be done, and there has to be 
a coordinated effort between the incentives on the Federal 
level, because it only makes sense for the FERC to regulate 
what is interstate commerce transmission. But there needs to be 
some coordinated mechanism in the siting of transmission, 
because let me tell you one of the difficult most things to do 
today is build a new transmission line, and we need to build 
new transmission lines to facilitate the growth of this 
country.
    Mr. Sawyer. And without that the ability to attract capital 
and doing all of those good things that you just described 
could be substantially limited?
    Mr. Rogers. Well, it becomes very difficult to attract 
capital if you have difficulty in getting approvals and getting 
the construction done. I mean it does create a problem, but the 
truth of the matter is, capital will be there if we have clear 
guidelines in terms of the interface between the regulation and 
the incentives on the Federal level and the siting on the state 
level.
    Mr. Sawyer. Thank you.
    Mr. Gordon. Could I add a point?
    Mr. Burr. Yes, sir.
    Mr. Gordon. I wanted to say that I agree with everything 
that Jim has to say there, but I think there is one piece that 
has to be solved, I mentioned it earlier, and that is the 
pricing mechanism for transmission and the oversight regulation 
that exists for it. It has to have in it some incentive for 
whoever the transmission owner is to look for where the new 
transmission is needed and then to build it. There has to be a 
driver.
    Otherwise you are back in the world where engineers look at 
the system and decide what is needed next. That was probably 
okay in the earlier era. In fact, it was very successful in the 
New England region for a long time, but I don't think it will 
carry a competitive era forward. So the FERC really does have 
to address that and address it sooner.
    Mr. Burr. That was probably the design in your area, and I 
would ask you, how much did the transmission lines contribute 
to the price spike that happened?
    Mr. Rogers. Well, we had an unusual set of things coming 
together last summer in the Midwest. And I mean we had a 
tornado knock out one of the nuclear units in northern Ohio, we 
had some unplanned outages, and plus we had peaky weather. The 
fact of the matter is, we had adequate capacity, but the 
psychology of markets sometimes drives prices.
    The FERC did an investigation of this and came back and 
said these are the bumps in the road to a competitive market. 
My judgment is, and I feel very strongly about this, our 
company has got a very strong transmission system. In fact, we 
have been named one of the five delivery points for all new 
future contracts, even though we don't have the largest 
transmission system in the Midwest.
    My judgment is, if we would have had an effective ISO in 
the Midwest last summer, we would not have had the problems 
that we had. So I am one of those people that believe the 
sooner we can get these ISOs in place or some form of RTO, the 
better off we are and the smoother the road will be to 
competition.
    Mr. Sawyer. Did you have a further comment?
    Mr. Rogers. Yes, sir, Congressman, I think a very 
instructive example of how money flows into the transmission 
grid is to look at what is going on in the U.K. When they 
privatized the U.K., which was the government-owned operation, 
and they already had a national grid because they ran it as a 
government operation, the amount of money that the national 
grid company has invested in transmission to facilitate the 
flow and to deal with these load pockets, it has been amazing 
the amount of capital that has been put into that system and 
the efficiency and the reliability in the system today, 
fundamentally better than it was when the government ran it.
    My judgment is, in this country our transmission grid will 
be fundamentally better in a world of RTOs than in the world 
that we are in today.
    Mr. Sawyer. Thank you, Mr. Chairman. I appreciate your 
latitude on that.
    Mr. Burr. The Chair would recognize the gentleman from 
Oklahoma.
    Mr. Largent. Thank you.
    Mr. Gordon, I want to come back to you real quick on this 
subject of ordered divestiture, because I know in your 
testimony you said we just need to have open access and allow 
the markets to work. Is it your opinion that if we do this 
thing right and we have good open access and it is working, we 
have competition, having language in there that would allow 
FERC to order divesture, would that be a bad thing?
    Mr. Gordon. You know, my instinct is to say you really want 
to not force people to do things unless you absolutely have to 
force them. If you would like to see which way the industry 
structure would settle out in a competitive environment--and I 
can't imagine what economy of scale there is going to be, but 
there might be one--there might be a reason not to do it unless 
you absolutely had to. So I think my own preference would be 
not to require it.
    Mr. Largent. Okay. Mr. Rogers, I had a question for you. I 
have been trying to think this through from a utility 
perspective. If you had the option to choose a TRANSCO versus 
an ISO, speak to me from kind of a utility's perspective on why 
you might prefer one over another.
    Mr. Rogers. Because I am such a strong believer in 
competitive markets, I would like to see the markets become 
robust sooner rather than later. We have been part of the 
process of building an ISO in the Midwest. Because of all of 
the issues related to ownership and debentures, it takes a long 
time to put a TRANSCO organization together. Because sooner is 
better than later in creating this competitive market, we have 
opted for an ISO, but we clearly see in our future converting 
that into a TRANSCO.
    It is also my opinion that companies that primarily support 
TRANSCOs, are unwilling to go to ISOs in the short run, don't 
really want regional grids at all, and so it is a stalling 
technique. And so from my standpoint we need to move into ISOs 
sooner. We are going to learn a lot, it is going to help us 
transition to TRANSCOs. It is going to allow us to work through 
the mortgage debenture issues, the State regulatory issues in 
terms of ownership and splitting it out of your rate base, in 
which your rates are set for in the State level.
    So I think you get an effective regional market working 
sooner, but we have to be clear about the goal line. The goal 
line ultimately is going to be a TRANSCO, because to get the 
rewards and the risks in better balance, I think long term 
having an independent TRANSCO company--I think the U.K. is a 
wonderful example of how that works . You are going to see 
significant investments to beef up the system because it will 
be in the interest of the entire system, not necessarily the 
interest of one company.
    Mr. Largent. It seems like it sort of flies in the face of 
experience that you want to appoint a committee, which is what 
an ISO would basically be, a political committee, to move the 
ball down the court quickly. But I guess I understand what you 
are saying, and I never really thought about the fact that you 
move from an ISO on into a TRANSCO. I personally think 
TRANSCOs, if I were a utility I would prefer to be dealing with 
somebody that is working either on a for-profit or not-for-
profit basis operating that transmission system.
    Mr. Rogers. Let me tell you our board of directors 
struggled with this as we felt our way through, and I think we 
reached the conclusion, and that is why in the ISO in the 
Midwest that we are involved with, there is a provision that 
allows it to convert to a TRANSCO.
    If you live through the experience we lived through last 
summer in the Midwest, with the volatility and the reliability 
issues that were raised, I believe a lot of people that don't 
want to see competition happen in this country, the first thing 
they say, if there is any reliability problem that is 
attributable to competitive markets. So if you believe, as I 
do, that competitive markets are the right answer, you want to 
reduce the probability of reliability problems. In my judgment 
you can set guidelines for this independent system operator 
that allow the market to work and allow the transmission to 
work.
    And as I said, I don't think we would have had the degree 
of the problem we had in the Midwest last summer if we would 
had had a functioning ISO. I also agree with you that 
ultimately the TRANSCO is the right structure, but if you are 
committed to getting a competitive market, you have got to 
think first about reliability, and an ISO will be very 
effective in the short run in making sure that we have a very 
reliable system as we make this transition over the next 5 to 
10 years for the competitive market.
    Mr. Largent. Mr. Chairman, if I could indulge just one more 
thing. I have read the testimony of utility.com, and Mr. King, 
I would like you to make a brief comment. The thing that I 
really found fascinating, and it was really an angle that I 
never had read before or thought of before, was the 
environmental impact of having individual metering, advanced 
metering of your retail consumers, so they could optimize their 
consumption at low-cost times and back away when there is high 
cost times, and the environmental effect that that has of 
operating utilities at peak efficiencies. And could you just 
comment on that?
    Mr. King. Sure. It really has a huge impact. Up to now 
under the industry, power plants have been built to meet the 
peak day of the summer, and consumers have been given no reason 
to reduce their consumption at those times. So unlike most 
markets where you have the supply and demand curve, people 
weren't asked whether they wanted to pay those high prices, and 
the solution was just build more and more power plants.
    By giving them this choice, they don't even have to make 
big reductions in those. They can have a major impact on the 
efficiency of the industry. In fact, right now the power 
industry operates at only about 46 percent capacity, because 
you have got these power plants that sit around and only are 
used for 10 or 20 or 100 hours a year. And that efficiency 
could go up about by as much as 50 percent, by some estimates, 
just by letting consumers have that choice and having the 
technology that records when they use the power.
    Another part of the environmental aspect of that is that 
many of those peaking plants tend to be the dirtiest plants in 
terms of emitting air pollution. So there is additional major 
benefit from avoiding the use of those power plants.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Burr. Let me ask one final question, if I could, and I 
would segue into it off of the ISO issue that is on the table, 
and only make a point that I would hope that we could find a 
way to allow FERC, if we choose FERC to be the determining 
factor on ISOs, to expedite the process of not only the 
formation but the asset valuation.
    And I go back to a recent thing in California where 
companies are still trying to determine whether the dollars 
that they claimed are, in fact, the dollars that they are 
credited with by FERC. And I think it gets back to not only the 
capital issue, it gets back to business planning, it gets back 
to how we evaluate the success or failure of the ISO and of the 
transmission grid.
    And I will use that to segue into mergers. Clearly I throw 
on the table to anybody who would like to comment, is there a 
need in the future, assuming that we find the right legislation 
to accomplish retail open access, for FERC to be involved in 
any primary way in the determination of mergers? Ms. Tighe.
    Ms. Tighe. Thank you. Yes, we believe that they should be, 
that in fact they should have the ability to examine mergers, 
not only for a wholesale impacts but also impacts on the retail 
markets.
    Mr. Burr. Mr. Kurtz.
    Mr. Kurtz. We do believe that FERC should now and should 
continue to be involved in evaluating mergers. You know, there 
is a lot of discussion about if we get the right legislation, 
if this, if that. I think one of the points of our testimony is 
that we are not there by a long shot yet, and we have a long 
way to go and there are a lot of things we need to do to get 
there. And, therefore, to get to the answers to the ``ifs,'' we 
have got to make sure that FERC has the regulatory ability to 
deal with those.
    If we have a drawback in the future or anomalies in the 
future, FERC needs to be able to continue to oversee that 
process and we believe strongly they should continue to do 
that.
    Mr. Burr. I would remind you and others that I don't think 
there are any members that are proposing the deregulation of 
transmission of many of the areas that we concentrate on, 
saying here are concerns. We still expect, because we are not 
changing FERC's involvement, for there to be the correct 
oversight of those areas.
    I think that one can question whether the attempt is to 
deregulate or reregulate the generation, and I think there is a 
huge difference in that that we will deal with based upon the 
great testimonies of you and others who have come before this 
committee, some 36 before you, and what members have been able 
to learn from those testimonies.
    Mr. Gordon.
    Mr. Kurtz. Mr. Chairman, if I may.
    Mr. Burr. Excuse me?
    Mr. Kurtz. The point is it is really hard to separate. 
There seems to be a lot of discussion about separating 
generation from transmission. The fact is, electric systems 
operate as a dynamic system, I come from the State of Florida. 
The State of Florida is a very long, narrow State. It has 
transmission that runs up and down. The predominant load in the 
state of Florida is in south Florida.
    Depending on what generation that you are operating, even 
if you have absolute and total complete access to transmission 
in the State of Florida, depending on where the load is and 
where you operate generators in, you can break up the State of 
Florida on a real-time dynamic stability basis if you have the 
outage of a unit, if you have the outage of a certain 
transmission corridor.
    And so for us I guess to intellectually not recognize the 
electrical link and the dynamics of an electric system between 
the generators and the transmission, and to assume that you can 
just say we are going to regulate transmission and we are going 
to deregulate generation, if we end up with a system where 
everybody chooses to put generation in north Florida, all of 
the transmission is deregulated, all of the load is in south 
Florida, electrically you are not going to have a reliable 
system to do that.
    Mr. Burr. Clearly I would hope that companies that go in to 
build generation would locate that new generation in an area 
that, one, the load is; two, that they have confidence in the 
transmission grid. But I think you raise another question, and 
that is that there are infrastructure needs in our transmission 
grid around the country, and I don't think anybody argues with 
us on that.
    I think it will take movement of a retail bill for there 
ever to be the investment that is needed in the transmission 
grid, to upgrade it.
    Mr. Gordon.
    Mr. Gordon. Yes, my preference is, as you heard earlier, is 
to try and not to expand into the generation market the FERC's 
authority. We want to deregulate to the extent that we possibly 
can. To the extent that somebody is gaming the transmission 
system through operating the generation in a way that it is out 
of the usual order, that is a kind of a horizontal issue that 
an antitrust agency might have to look at.
    But I would still leave it at that level and not try to 
have the FERC regulating a market that hopefully we are making 
competitive. So there is a horizontal market power problem to 
be overseen there, and it may be subtle and require 
sophisticated engineering understanding of how a unified 
electrical system works, but I think it should be handled on 
that basis rather than on regulating the whole market.
    Mr. Burr. Anybody? Mr. Rogers.
    Mr. Rogers. I would just make one comment. Since our 
company is a product of a 20-month approval process where we 
had to go to three different States and the FERC and the SEC 
before we became Cinergy--and by the way, as a footnote, our 
utilities still keep their names. All of our nonregulated 
businesses are under the name Cinergy, not Public Service 
Indiana, not Cincinnati Gas and Electric, for some of the 
reasons that we talked about earlier today.
    But this is my point, the FTC and the Justice Department 
have deadlines on how quickly they can deal with the merger. 
They could go up or down. On the BP, British Petroleum-Amoco 
merger, 6 months. They can go up and down. And that created a 
company between $50 and $100 million of market capitalization. 
The largest company in our industry is less, about $20 billion. 
Chrysler, Daimler-Benz, Exxon, Mobil, do you want to talk about 
large combinations? They don't go through a 20-month approval 
processes, they get done in less than 6 months. The capital 
markets put a huge penalty on utility combinations because of 
the uncertainty.
    And quite frankly it is a burden on the managements of the 
companies trying to put them together, because of the 
uncertainty and the length of the period for approval. My point 
to you is this: FERC has the authority today, and I can clearly 
see situations where the FERC, and particularly dealing with 
market power issues, should have the authority to eliminate the 
market power, whether it is some limited divesture or requiring 
them to be part of an RTO, which has the effect, quite frankly, 
of eliminating some of the problem.
    But the fact of the matter is, is that virtually every 
merger at the FERC has taken 18 months to 2 years to get done. 
There needs to be, and, yes, they have imposed on themselves 
time lines, but I think it would be incumbent upon you to 
facilitate the process, good for the capital markets, good for 
consumers, to say to the FERC, ``This is what your authority 
is, this is what you look at, and you get it done in 6 
months.''
    Then I think you facilitate a consolidation that is going 
to happen in our industry. The one thing that nobody has talked 
about today as they worry about market power, we have 3,000 
sellers of electricity in this country. We have one of the most 
fragmented markets in the world, our companies, and I compete 
all around the country. I compete with companies that are $30, 
$40, and $50 billion dollars market capitalization and my 
company is only $4 billion, and I am considered a big company 
in the U.S.
    Mr. Kanner. I wanted to add, it is a very valid question, 
whether FERC needs to be the lead agency in merger review. Our 
feeling is it does, both to look at the competitive effects, as 
others have suggested, we need to add that to it, but we also 
need to make sure that some of the regulatory gaps, some of the 
mergers or potential combinations that are outside FERC review 
are captured.
    And Mr. Largent's amendment of last year addressed some of 
these issues. Holding company to holding company mergers, we 
believe that is appropriate. The reason for FERC being in the 
lead is their expertise, as Mr. Rogers said, in the merger. In 
a utility merger conditions will be imposed looking at things 
like RTO participation or potential divestiture, and FERC is 
going to be the agency that is going to oversee the 
implementation of that. So it is appropriate for them to be the 
merger review entity, since they are still going to end up 
being the enforcement entity.
    Mr. Burr. Where would your confidence level with the FTC 
and DOJ be in their divestiture determinations between the BP-
Mobil? I mean clearly they are not the Department of Energy. I 
am sure as they go through their evaluation, they consult very 
closely with not only the Department of Energy but others as it 
relates to the monopoly that might be created, the marketplaces 
that they might have tremendous advantages without divestiture.
    And I would ask you then, what is the difference in what 
they currently do and what we would ask them to do, if they 
were the primary agency on electric merger?
    Mr. Kanner. The difference would be is that the oil 
industry hasn't been subject to 90 plus years of rate 
regulation, and it is that history that FERC has had as the 
primary regulator that is the difference here.
    Mr. Rogers. May I comment on that, because I think there 
ought to be clarity around that point?
    Mr. Burr. Yes, sir.
    Mr. Rogers. Just make this comment. I mean when you file 
for a merger, you have to have Hart-Scott-Rodino approval. And 
in an early part of my life when I worked for Enron, one of the 
things we had to do is, it didn't require FERC approval but it 
did require Hart-Scott, and there were issues in terms of in 
the gathering fields, in production areas, being required to 
spin off some gathering facilities or some of the lines in that 
area.
    The reality of life is you get very extensive review of 
what you do at the FTC under that approval process, as well as 
the Department of Justice today defers to the FERC. That is the 
way it has been in the past; it doesn't mean that is the way it 
should be in the future. And quite frankly, the Department of 
Justice and FTC have done a very good job in dealing with these 
issues, and the combinations are significantly bigger than the 
ones that we would be contemplating in this industry in the 
future.
    Mr. Burr. Ms. Tighe, you will be the last one.
    Ms. Tighe. Mr. Burr, you brought up the issue of 
infrastructure investment, particularly in the transmission 
system, and the fact that will be needed. We very much see that 
as part of the role of the properly structured RTO. And it is 
also clearly within the authority of FERC to see that that 
responsibility is structured properly within the RTO.
    And I think we would go even farther to say that in order 
to implement that needed investment in the transmission 
infrastructure, that FERC should have the responsibility for 
transmission siting, of course in coordination with the States 
and the regions, but they should be the one that provides the 
overall coordination for the transmission siting so we will 
have this consistency and uniformity from region to region.
    Mr. Burr. I thank you, as I do the rest of the witnesses, 
for your willingness to come in to share your information. And 
I know that you can't judge the interest of this subcommittee 
by the number of members who are here because a lot of them are 
on the floor debating amendments as we sit here. But clearly 
this is a subject that will be--we will have more hearings on 
before we see movement, but I am hopeful that we can begin to 
work with everybody that has an interest to see whether in fact 
a bill can be reached, one that is good for not only the 
companies but the consumers and the consumer groups that are 
concerned.
    And this hearing is now adjourned.
    [Whereupon, at 2:18 p.m., the subcommittee was adjourned.]
    [Additional material submitted for the record follows:]
         Prepared Statement of the Repeal PUHCA Now! Coalition
    Mr. Chairman and Members of the Subcommittee: The Repeal PUCHA Now! 
Coalition is pleased to submit this testimony to address the need to 
repeal the Public Utility Holding Company Act (otherwise known as 
PUHCA). The Repeal PUHCA Now! Coalition is a group of electric and gas 
companies which has supported enactment of legislation repealing PUHCA 
as recommended by the Securities and Exchange Commission in a report to 
Congress in 1995. Member companies include registered and exempt 
electric and gas utility holding companies restricted under PUHCA. The 
Repeal PUHCA Now! Coalition believes it is essential that PUHCA repeal 
legislation be enacted into law this year. Simply put, repealing PUHCA 
repeals an Act that serves as a barrier to competition, a barrier to 
state restructuring efforts and a barrier to consumer benefits.
    The Coalition commends the Subcommittee for conducting a hearing on 
PUHCA so that the need and urgency for repeal may be made again this 
Congress. The Coalition respectfully believes that the subjects of 
today's hearings, ``Market Power, Mergers, and PUHCA,'' need not be 
linked to examine vigorously the separate issues of each. As discussed 
below, the Coalition believes that PUHCA repeal must be considered 
independently, on its own merits. PUHCA repeal is not a market power/
merger issue. Indeed, keeping the 64-year old statute in place 
frustrates competition, is a barrier to entry, and actually promotes 
industry concentration. When this occurs, the case for repealing PUHCA 
now is overwhelming.
                            i. introduction
    As everyone here knows, the electric utility industry is changing 
rapidly. Twenty states have now enacted laws or regulations 
restructuring retail electric markets affecting 58% of the U.S. 
population. Other states are considering similar measures. As 
electricity markets become more and more competitive, the strictures 
and limitations of PUHCA are not compatible with the current state of 
the industry. PUHCA is outdated, duplicative and no longer serves the 
interests of consumers or investors. PUHCA has become a regulatory 
anachronism, a barrier to competition and innovation. It imposes 
unneeded restrictions, significant costs, and confers no real benefit. 
The time to act to repeal PUHCA is now and the Repeal PUHCA Now! 
Coalition urges the Congress to pass PUHCA repeal legislation as soon 
as it can reasonably be done.
    PUHCA repeal should not be held hostage to the important debate 
about the potential further restructuring of the electric industry, or 
whether comprehensive federal electricity legislation is needed to 
benefit all consumers nationwide. From state to state and here in 
Washington, the members of the Repeal PUHCA Now! Coalition have been 
very active in this debate. But the Congress must realize that electric 
utility restructuring issues impact all stakeholders in the electric 
utility industry, not just the eighteen (18) active registered holding 
companies and one hundred fifty-one (151) exempt electric holding 
companies. These electric utility restructuring issues deserve serious 
study, discussion and debate. This discussion and debate is well 
underway in the Congress. Already this Congress, there are no less than 
seven bills currently pending in the Congress that would in some 
respect restructure the electric utility industry, and other bills, 
including the Administration's, are expected to be introduced soon. As 
this reflects, the issues are as contentious as they are complex. As a 
result, no meaningful consensus has emerged on whether, or even if, 
Congress should enact comprehensive electricity legislation. A truly 
durable consensus will not develop overnight. Thus, the Repeal PUHCA 
Now! Coalition strongly urges that the debate on future electric policy 
move forward separately from consideration of PUHCA repeal legislation.
    Keep in mind, Mr. Chairman, that serious debate and discussion of 
these global electric policy issues has only developed in the last two 
Congresses. Conversely, a full merits review of PUHCA repeal started 
over seventeen years ago. In 1982, during a Republican Administration, 
the SEC found that PUHCA's statutory objective had been achieved and 
recommended PUHCA repeal to a Congress composed of a Republican Senate 
and a Democratic House. In the intervening seventeen years, the case 
has been overwhelmingly built to show that conclusion was correct. In 
1995, during a Democratic Administration, after conducting another full 
study of PUHCA's relevance, including significant public participation, 
the SEC again concluded that PUHCA was no longer needed and that, with 
appropriate consumer protection provisions to assure effective 
regulation of utilities, repeal was the preferred option.
    The Repeal PUHCA Now! Coalition agrees. The SEC's 1995 supporting 
analysis is clear and irrefutable. Indeed, it has now been over twenty-
five years that the agency accomplished the goals Congress set for it 
when the PUHCA was passed in 1935. We agree with the SEC that leaving 
PUHCA in place burdens the industry and the agency, and does so at a 
cost to society that far exceeds any potential benefits.
    Repealing PUHCA is important not just to the companies that for 
over 64 years have borne the burden of its regulatory requirements, and 
whose ability to respond to existing competition is handicapped by that 
Act, but to other utilities--gas and electric--as well. On this issue, 
gas and electric registered holding companies are united: we all need 
the ability to respond more freely and flexibly to market opportunities 
emerging daily as the States restructure retail electric markets and 
respond to vigorous competition in the wholesale markets.
    Similarly, companies now exempt from the Act's requirements--again 
both gas and electric--also seek repeal. The potential application to 
them of the Act's full strictures, and the current imposition of limits 
on their ability to serve customers geographically or through 
additional utility services, hinders innovation and frustrates an 
exempt holding company's ability to compete in wholesale and retail 
markets.
    While the future structure of the electric industry remains open to 
debate, there is a much clearer picture with respect to the natural gas 
industry. The gas industry has already experienced significant and 
historic regulatory and competitive changes. All the gas registered 
companies now face competition in virtually every facet of their 
business. Yet they remain subject to additional regulation over their 
lines of business, corporate structures and financing that their 
competitors do not have. PUHCA's regulations impose higher costs and 
less flexibility, handicapping them in meeting the demands of intensely 
competitive gas markets. Suffice it to say, repeal of PUHCA, with 
appropriate consumer safeguards, is essential in letting these gas 
companies compete and develop innovative products and services, while 
the regulatory agencies and legislatures, including Congress, consider 
further changes in energy policy as applied to the electric industries.
                        ii. the burden of puhca
    Registered holding companies face burdensome and limiting 
requirements under PUHCA. These burdens, which create severe 
disadvantages when compared to other industry participants, include:

 We are limited to serving utility customers in a ``single 
        integrated'' utility system, which seriously restricts the 
        geographic scope of our utility operations. As a result, we are 
        hampered in offering services to others, even in our core 
        business, either by significantly expanding our operations or 
        investing in other utilities, as can be done by non-holding 
        companies.
 We generally need prior approval from the SEC before our 
        affiliates and subsidiaries can enter into contracts with each 
        other. The SEC determination of the terms (including whether 
        the contract will be at market rates or at cost) is binding on 
        rate regulatory agencies. As a result, opportunities to save 
        some costs or to operate with efficiencies, available on short 
        notice, cannot always be seized.
 We, and our non-utility subsidiaries, generally cannot issue 
        or sell securities, or alter the rights and powers of security 
        holders, without prior SEC approval. As a result, our capital 
        structures are much more limited; and our ability to take 
        advantage of financing opportunities, especially in dynamic 
        capital markets, is more limited; and we cannot use several 
        types of securities now widely accepted as appropriate 
        throughout the rest of our industries.
 Without special SEC approval, we cannot diversify into other 
        lines of business--under existing SEC interpretations, we are 
        limited to the single utility business, plus only such other 
        businesses as ``reasonably incidental, or economically 
        necessary or appropriate'' to the operation of an integrated 
        utility business. Even with some recent SEC initiatives, 
        business opportunities that would help additional economic 
        development in our service territories, and even businesses 
        that if allowed to operate freely would save our customers 
        money, may be foreclosed. In addition, where exemptions do 
        exist, they often contain technical requirements that prevent 
        the use of efficient business structures and often restrict or 
        limit how registered companies can employ shareholder capital.
    PUHCA places severe restrictions on registered holding company 
acquisitions of natural gas distribution companies. The SEC has 
consistently refused to view an electric system and a natural gas 
system as capable of constituting a ``single integrated public utility 
system''. The agency allows electric registered holding companies to 
``retain'' a gas system only if the demanding standards of the Section 
11 ``ABC Clauses'' are met. This requirement effectively precludes an 
existing electric registered holding company from acquiring even a 
neighboring gas system and enjoying the competitive convergence 
benefits enjoyed by numerous combination (electric and gas) exempt 
holding companies. A registered holding company could potentially 
satisfy the ABC clauses only if it acquired or merged with an existing 
combination company.
    Even the exempt companies, although free of virtually all of the 
specific corporate restrictions in PUHCA, are limited to serving 
utility customers in a specific geographic area, lest they lose their 
exemption. They also must be concerned about diversification, because 
the SEC has the power to revoke their exemption under the so-called 
``unless and except'' clause.
    Although they were important at the time of the Act's passage, the 
stringency and severity of these restrictions make little sense today, 
especially as the utility industry is restructuring. In the 64 years 
since 1935, securities markets have become much more effective and 
efficient. The SEC's other authorities under the Securities Act of 
1933, the Securities Exchange Act of 1934, and the Trust Indenture Act 
of 1939 assure that investors receive appropriate information and can 
make informed decisions. Moreover, there is extensive financial and 
corporate information available commercially through hundreds of 
magazines, newsletters, on-line computer services, and network sources, 
enabling the markets to respond within hours of significant events. 
Rating agencies, such as Moody's and Standard & Poor's, constantly 
evaluate our management, financial integrity, and operations and rate 
us accordingly. As a capital intensive industry dependent on the 
financial markets and being sensitive to the costs of such capital, we 
are committed to maintaining financial flexibility through a strong 
capital structure and favorable securities ratings by such agencies.
    Similarly, the utility regulatory commissions, both FERC and the 
State Commissions, have clearer authority than was in place in 1935. 
The standardization of utility accounting, better staffing and more 
clearly defined requirements have all made rate regulation more 
effective.
    In light of the changes the electric industry is experiencing 
today, and expressly in light of the authority that already exists in 
the SEC, FERC and the State Commissions regarding the securities 
markets and rate matters, PUHCA has become redundant regulation. It 
lacks the flexibility to allow the companies to adapt to new 
circumstances. Its model of the utility industry simply no longer 
comports with the reality of what the industry is doing, and what FERC, 
the State legislatures and State Commissions would like us to do. We 
need permanent relief today from the unnecessary regulatory burdens 
imposed by the Act.
                  iii. debunking the myths about puhca
    There is strong bipartisan support for PUHCA reform. In the last 
two Congresses, PUHCA repeal bills have had cosponsors from both sides 
of the aisle. Both Democratic and Republic Administrations, dating back 
to the Reagan Administration, support PUHCA repeal. While not everyone 
may agree on all the details of potential federal electric utility 
restructuring legislation, there is strong support that the time for 
PUHCA to be repealed or reformed is now. With this in mind, it may be 
helpful to address several of the last gasp arguments repeal opponents 
still make.
MYTH No. 1: PUHCA Prevents Utilities from Exercising Market Power.
    This hearing today appears to link PUHCA with merger and market 
power issues. Such appearance might lead policy makers to conclude 
erroneously that PUHCA repeal will create market power abuses. Contrary 
to the myths about PUHCA preventing the exercise of market power, PUHCA 
actually perpetuates market concentration. Companies subject to PUHCA 
are confined within geographic boundaries consistent with the 
``integration'' standard. While at one time this was considered a way 
of stopping growth, and enabling federal and state utility regulation 
to mature, it has instead led to a concentration of the utility market. 
This market concentration that occurs in a monopoly situation serves to 
impede competition and frustrate state restructuring programs. If PUHCA 
stays in place, it will only perpetuate a monopoly situation for those 
consumers in that service territory.
    Now the Coalition realizes that some have asserted that it is 
essential to retain PUHCA in order to limit what they call 
``concentration of market power'' as the electric industry 
restructures. Those who make that assertion either do not understand 
the role PUHCA has played, or willfully misstate it. As stated earlier, 
PUHCA is a corporate structure and securities statute. Its main goal 
was corporate simplification, not establishing or setting specific 
rates for utility services. We cannot emphasize enough that PUHCA's 
existing provisions actually increase the likelihood of concentrations 
in particular markets, because the ``integration requirements'' and 
geographic restrictions of the Act limit both registered companies and 
exempt companies to retail utility holdings in particular areas, and 
restricts the ability of more distant companies to acquire, construct 
or operate facilities that could compete with the local utility. PUHCA 
effectively keeps new entrants out of markets, and keeps registered 
companies from engaging in competitive lines of business. Indeed, PUHCA 
as it stands requires utilities to limit acquisitions to nearby 
utilities--ones that can be integrated or that do not result in a loss 
of exempt status. Those nearby utilities are the ones most likely to 
have presented the possibility of competition.
    PUHCA was originally enacted to prevent abuses by utility companies 
by restricting growth and advancements at a time when there were little 
or no state or federal utility regulatory controls available. While 
this approach served us well in 1935, it is now outdated and serves as 
an impediment and a barrier to a competitive market, especially at the 
retail level.
    PUHCA was not designed as and is not a utility or rate regulation 
statute. PUHCA is primarily a law dealing with corporate governance and 
securities issues. Aside from the fact that it has outlived its 
usefulness because of changes in the way we regulate and review 
securities transactions, PUHCA might be viewed as an energy matter only 
from the standpoint that the companies it governs happen to be in the 
energy sector. Regulating public utilities when they provide 
electricity services to consumers is governed by other significant 
laws. These laws, most notably the Federal Power Act, the Natural Gas 
Act, and other state utility laws, deal with the rates consumers pay 
for electricity and gas services. PUHCA does not. In fact, PUHCA repeal 
bills in the last two Congresses, with their consumer protection 
provisions, actually will help public utility regulators do their 
ratemaking job at both the federal and state levels. To withhold PUHCA 
repeal from moving forward due to concerns about market concentration 
in a time when competition in the retail market is rapidly moving 
forward sends conflicting policy signals. Competition is good, unless 
you are a registered holding company. Over the long-term, a 
competitive, free market provides low prices and efficiencies for our 
consumers, but long-term consumers benefits will be prevented to 
consumers served by the 18 active registered holding companies.
Myth No. 2: Repealing PUHCA Will Create a Regulatory Gap.
    Repealing PUHCA will not create a regulatory gap, it will eliminate 
one. Ever since the U.S. Supreme Court issued the Ohio Power decision, 
PUHCA's requirements that affiliate contracts be ``at cost'' have 
prevented FERC and state regulators from applying a market test to 
lower costs of services for wholesale and retail consumers in most 
cases. This decision, in large measure, has protected utilities' costs 
in rate bases and, to a significant degree, has preempted FERC and 
state regulators from disallowing the recovery of certain costs. With 
the repeal of PUHCA, this regulatory gap will be eliminated once and 
for all. The rate regulators, at both the wholesale and retail levels, 
properly will have the authority to determine the allocation and 
reasonableness of costs incurred by the utility in the provision of 
necessary services and whether or not such costs should be recovered in 
rates. Currently PUHCA hinders such rate regulation.
    Yet, despite the need to repeal this outdated act, many are 
concerned that repeal of PUHCA is a repeal of consumer protections. 
This is simply not true.
    It is important to remember that there are more than 3,000 entities 
currently providing electric and gas service to consumers. Of these, 
approximately 170 are holding companies. However, approximately 151 
holding companies are exempt from PUHCA, leaving PUHCA to regulate the 
18 active registered holding companies. Repealing PUHCA does not mean 
these registered holding companies will no longer be regulated. It only 
means they will be regulated under other a number of statutes, 
including all state public utility laws, the Federal Power Act, and the 
Natural Gas Act. There will be no regulatory gap if PUHCA is repealed.
    Yet the cries continue that PUHCA cannot be repealed because it 
protects consumers. What about the majority of individuals who are 
served by utilities not covered by PUHCA? Who is currently protecting 
them?
    Repealing PUHCA will not hurt consumers, but retaining the status 
quo will. If a consumer is served by a company regulated under PUHCA, 
that company is restricted from entering into competitive transactions, 
expanding into new business areas and improving efficiencies that could 
benefit the consumer. While the protections that various PUHCA repeal 
bills provide for consumers are clear, we should also note the 
benefits.
    In fact, stand alone PUHCA repeal bills introduced in the last two 
Congresses continue to provide protection for consumers, but eliminates 
unnecessary agency duplication and deletes arcane provisions that no 
longer serve a public interest purpose. These repeal bills actually 
improve certain important aspects of federal and state utility 
regulation if enacted in the current regulated market conditions. Some 
have indicated that this may be financially burdensome to states; 
however, the ongoing restructuring of the electric utility system has 
imposed significant new responsibilities on the states, involving 
numerous companies and issues. The states have been in the lead in 
taking on these responsibilities. Surely, with the experience the 
states have had to date with restructuring issues, they will be able to 
effectively deal with any potential resource issues.
    Various stand alone PUHCA repeal bills also fully provide for 
protection of consumers by providing access to books and records, by 
maintaining accountability procedures, providing for review of 
affiliate transactions and continued FERC and State commission rate 
regulation and audit authority. These are a far more direct means of 
addressing market concerns and protecting consumers than PUHCA of 1935 
can provide in today's regulated market.
    The Repeal PUHCA Now! Coalition recognizes that some state 
commissioners and other ratepayer advocates have expressed concern that 
state authority would not be sufficient to obtain the necessary 
information for proper discharge of state regulatory action. They are 
concerned that there would be a continuing need, after repeal of PUHCA, 
for federal audit authority and federal oversight of system 
transactions that would pass costs through to ratepayers. The Coalition 
understands those concerns. We also understand the significant 
difference between repealing the Act while providing for certain 
safeguards, and simply transferring the existing burdensome 
requirements to a new forum. We believe PUHCA repeal legislation can 
fully address these concerns and include provisions to provide 
appropriate access to books and records. The Coalition is fully 
prepared to work with the Congress to assure that a final bill includes 
provisions that would implement any necessary consumer safeguards.
    With regard to books and records, all utility companies know full 
well that the books and records of the utility company must be 
available to regulators for their review. The burden will remain on a 
utility to demonstrate that its proposed rates are just and reasonable. 
Similarly, we understand and can accept a review of the books and 
records of those affiliates that deal with the utility company and that 
would thereby pass costs through in rates. Regulators should have 
access to all information that is relevant in reviewing and 
establishing rates for electric services. However, there are 
undoubtedly some affiliates in a diversified company that will not pass 
costs through to ratepayers, or whose activities are so removed from 
the utility activities that access to their books and records would be 
of no legitimate value for ratemaking or cost allocation purposes. The 
key test is what access is actually necessary for the effective and 
proper discharge of the regulatory authority involved.
    As to the oversight of affiliate transactions, again we understand 
the interest of regulators in reviewing those transactions involving 
the utility, and which will cause the incurrence of costs to be passed 
through to ratepayers. Indeed, many state regulatory commissions 
already review transactions between a utility and its affiliates, and 
no further authority is needed. Here again, to the extent it affects 
rates, we do not oppose reasonable affiliate transaction provisions in 
a PUHCA repeal bill. However, we can also envision a number of 
transactions between affiliates completely apart from the operating 
utility companies, and which would not cause the incurrence of costs to 
the utility. Where the affiliate contractual arrangements are not 
related to costs to be incurred or passed through in the utility's 
regulated rates, separate regulatory review of the interaffiliate 
transactions would be unnecessary.
Myth No. 3: More Utilities Will Merge If PUHCA Is Repealed.
    As noted earlier, the competitive transformation of the utility 
industry is underway. Twenty states have now enacted restructuring 
legislation or regulations. Similar to every other heavily regulated 
industry that has undergone a competitive transition, some 
consolidation of service providers is inevitable. But contrary to myth, 
consolidation will not occur exclusively because of PUHCA repeal, and 
whatever consolidation takes place will not escape significant 
regulatory review and oversight.
    It is important to recognize several facts about mergers and market 
power assertions if PUHCA is repealed. First, the very same expert 
agencies and departments who today substantively review mergers will do 
so after PUHCA is repealed. FERC will retain all of its merger 
authority. It has recently updated its merger policy in light of 
changes occurring in the electric utility industry. Without PUHCA, FERC 
will still review future mergers unconstrained by any new Ohio Power or 
other similar regulatory conflicts at the federal level. State 
Commissions will still have their authority to approve, block or 
condition mergers that they have today under state law. State 
legislatures that wish to require that a utility company operating in 
that state must be incorporated in that state and remain fully subject 
to the state's authority regarding its securities and other corporate 
matters, can continue to do so. PUHCA's repeal will have no effect on 
that. The Department of Justice will retain its antitrust authority, 
and the FTC its Hart-Scott-Rodino authority. The only thing that will 
change when PUHCA is repealed is that after all of those approvals are 
given, the SEC will no longer have the unnecessary and duplicative 
regulatory burden of again stating its deference to the decisions the 
regulatory agencies have already reached.
    Mr. Chairman, let us be clear: when PUHCA is repealed, no merger 
will occur without the same full regulatory scrutiny that occurs today. 
If there are efficiencies and benefits to be gained, those mergers 
should go forward. If there are not, there is ample regulatory 
authority in the hands of knowledgeable regulators to stop them.
    The Repeal PUHCA Now! Coalition recognizes there is concern that 
states may not have the resources necessary to handle these new 
responsibilities. But again, the Coalition notes that the additional 
resources needed to handle the activities of 18 companies is nothing 
compared with the responsibilities of regulating the remaining electric 
and gas utility companies that do not come under the purview of PUHCA. 
It seems this problem is one of ensuring that this type of review 
occurs, not by whom it is done.
    Simply put, we believe that the nation's state and federal 
regulators have the ability to review potential mergers and protect the 
consumer. There is no failure of federal and state utility regulation 
requiring PUHCA to stay in place to review the inevitable consolidation 
of the utility industry. In fact, removing the SEC from reviewing 
mergers does not mean these assurances go away.
Myth No. 4: PUHCA Cannot Be Repealed Until Retail Competition Is 
        Established.
    Effective retail competition can not be established unless and 
until PUHCA is repealed. PUHCA's requirements and restrictions unduly 
limit and burden virtually any utility company owning or operating any 
utility assets for the production, transmission, transportation or 
distribution of electric energy or manufactured or natural gas within 
the United States. As discussed more fully below, not Congress, the 
states, or the FERC can create a truly competitive environment with 
PUHCA remaining in place.
    In reviewing the issues that may need to be addressed this year, 
Congress should keep in mind the level of activity concerning retail 
choice in the states and at the FERC. As you know, almost every state 
currently has some type of electricity restructuring proceedings 
underway. Twenty states have implemented retail competition frameworks, 
some on a phased-in basis.
    Congress has wisely given the states and FERC significant time and 
latitude in picking the pace, method and means for achieving retail 
competition. This approach has allowed the states to proceed with 
retail competition tailored to their own regional circumstances. This 
has provided Congress and regulators critical information and 
experience to make informed decisions about any potential comprehensive 
federal legislation.
    Based upon the evidence to date, the states that are restructuring 
are in fact moving forward without federal intervention. From 
California to New York, Arizona to Arkansas, Maine to Maryland, the 
states have passed laws or regulations to establish retail competition. 
Thus, the real question for the Congress to focus on is whether the 
sixty-four year old statute is impeding the numerous state initiatives 
to restructure retail electric markets. Does PUHCA help or hurt the 
existing and future efforts to establish state ordered retail 
competition?
    In the Coalition's view, keeping PUHCA in place will hurt state 
ordered establishment of retail electric competition. Simply put, the 
scope of retail competition will be artificially constrained and 
truncated by a number of PUHCA's regulatory restrictions. Let us give 
you several examples.
    PUHCA forbids domestic Exempt Wholesale Generators (``EWGs'') from 
selling power at retail. As a result, many low-cost generation 
suppliers refrain from making retail sales because of PUHCA-related 
concerns. This applies to all entities--whether registered, exempt or 
non-holding companies. Indeed, any generation supplier wishing to avoid 
a holding company structure would face potential PUHCA jurisdiction if 
it were to setup a subsidiary and that subsidiary were to make retail 
sales.
    Registered holding companies interested in making retail sales from 
facilities that are distant from their franchised retail service areas 
must face the geographic constraints of PUHCA's ``integration'' 
standard, which, as noted above, generally restricts registered company 
``utility'' operations to a regional scope. This means, for example, 
that a registered holding company based in the Eastern U.S. would be 
effectively excluded from selling retail power from a facility located 
in California. Similarly, an exempt holding company can risk its exempt 
status by undertaking non-EWG sales outside the geographic boundaries 
defined by Sections 3(a)(1) and 3(a)(2). Thus, for example, a utility 
holding a Section 3(a)(1) ``intrastate'' exemption cannot make 
substantial retail sales outside the state where the utility is 
incorporated and conducts most of its utility business. This does not 
promote economic efficiency or a robust retail generation market.
    In addition, many state restructuring laws call for or are 
contemplating the separation of generation and transmission/
distribution assets into separate corporate entities. This aspect of 
restructuring can cause particular problems for both registered and 
exempt holding companies. Think about it: can a 64-year-old piece of 
legislation be applied to a different utility business than was 
conceivably envisioned in 1935? PUHCA was not designed to be flexible. 
PUHCA mandates a single geographically and operational integrated 
structure, not well adapted to an evolving industry as a result of 
federal and state restructuring competition initiatives. As noted 
earlier, PUHCA isolates electric and gas systems to limited, discrete 
geographic areas. The requirement under PUHCA that registered holding 
companies maintain a single, integrated utility business has quickly 
become problematic as governmental entities and a growing competitive 
market pressures companies to restructure. As electric utilities are 
compelled by state legislation, regulation or competitive forces to 
either ``unbundle'' utility functions and assets in an effort to 
restructure their businesses along product lines or comply with 
corporate unbundling requirements, the conflicts with PUHCA are 
becoming acute.
    PUHCA controls this ``unbundling'' process unnecessarily. Yet the 
``unbundling'' already has begun as a result of the twenty state 
restructuring plans already enacted, the Public Utility Regulatory 
Policies Act of 1978 (``PURPA'') and the Energy Policy Act of 1992 
(``Policy Act''). This ``unbundling'' has produced significant new 
players with geographically widespread utility properties. Since the 
new players under PURPA and the Policy Act are exempt from PUHCA, how 
can PUHCA's geographic integration requirements be significant and 
necessary to this changing industry?
    There is another aspect of PUHCA's integration requirements, which 
may be at odds with retail competition unbundling of functions and 
services. Registered holding company systems are required to operate in 
an integrated manner. This requirement has led to centralized electric 
system planning, construction, and the use of (a) companies providing 
common management, financial, accounting and planning services, among 
other services, for all companies, utility and non-utility alike, in 
the same system, (b) fuel companies serving various affiliated 
companies and (c) companies operating power plants for various 
affiliated companies. In addition, for registered holding company 
systems and their integrated operations, it has been a prevalent 
practice to have common officers, and in many cases, common directors 
among affiliated companies. Will these integrated planning, service and 
personnel requirements be appropriate and workable in a disaggregated 
and competitive electric business where flexibility is necessary?
    A number of registered holding companies have divested or are 
planning to divest their electric generator assets and will operate in 
restructured systems where their retail customer base will be open to 
competition. It is unclear that the integration standard will have any 
relevance under such circumstances.
    For multistate registered holding company, PUHCA is a major concern 
as states move forward to competition. PUHCA restricts our ability to 
compete. This is attractive to our ``unregulated'' competitors as they 
move forward unimpeded. PUHCA restricts the types of business we can 
invest in, where we can invest and how much capital we can deploy. 
Restricted investments, required integration systems and financial 
prohibitions severely impact our structural and financial ability to 
respond to a rapidly moving competitive retail market. If a level 
playing field is sought, for a competitive market, PUHCA stands out as 
a significant barrier to achieving this goal.
    Technology is another issue. PUHCA was adopted in a world without 
computers, without reliable transmission systems, without regional 
power pools, without reliable long-distance communication. Technology 
was one reason for PUHCA's geographic integration limits. Obviously, 
technology has passed PUHCA, and its integration requirements by.
    A prominent feature of current FERC policy and most state 
restructuring frameworks is the establishing of so-called Regional 
Transmission Organizations (``RTOs'')--whether they are an independent 
transmission company (``Transco'') or an Independent System Operator 
(or ``ISO''). These RTOs typically assume in some fashion control of 
the regional or statewide electric transmission grid in order to assure 
further non-discriminatory access and efficient, reliable system 
operation.
    PUHCA presents a potential regulatory dilemma for some RTOs, since 
these entities may, depending on the facts, fall under the definition 
of ``electric utility company'' under Section 2(a)(3) of PUHCA--that 
is, an RTO will ``operate facilities used for the generation, 
transmission, or distribution of electric energy for sale . . .'' 
Indeed, in order to perform their mandate effectively, RTOs must 
necessarily exercise operational control over transmission grid 
facilities.
    RTOs are not the kind of public utility entities that PUHCA was 
designed to regulate. They will not exercise market power. They raise 
no issues regarding ratepayer harm; rather, they will facilitate 
ratepayer interests by promoting regional electricity markets. Yet 
because RTOs could, under certain circumstances, be deemed to be PUHCA 
``electric utility companies'', any person or company which might be 
regarded as exerting a ``controlling influence'' over an RTO could in 
turn be deemed a ``holding company'' potentially subject to full PUHCA 
regulation. This is a very real concern. To be sure, the SEC Staff has 
issued a no-action letter concurring that the California ISO is not a 
PUHCA ``electric utility company'' because it is an ``instrumentality'' 
of the State of California, based on the State legislature's 
restructuring directive. However, the means of RTO creation varies from 
region to region, and most RTOs will operate on a regional, rather than 
a statewide basis. The PUHCA uncertainties associated with the 
structure and operations of RTOs may cast a regulatory cloud over a 
vital aspect of state and federal restructuring efforts. It is unclear 
how the SEC will deal with this critical issue, especially now that 
most of the RTOs that have been approved to date have been and are also 
power pools, which have not been regarded as creating a holding company 
structure for member utilities. Thus, on the one hand, RTOs will be 
critical to successful restructuring efforts. On the other hand, PUHCA 
may impede RTOs from developing regionally, with broad-based 
membership.
    The corporate or functional unbundling features of current 
restructuring programs can also be highly problematic for utilities 
holding a Section 3(a)(2) exemption. Section 3(a)(2) provides an 
exemption for holding companies that carry on the bulk of their utility 
activity at the parent company level, with only minor utility 
subsidiary operations. Thus, for example, if a parent utility company 
must transfer to a subsidiary company substantial generation assets to 
comply with state initiated restructuring law, it may no longer qualify 
for a Section 3(a)(2) exemption, since the bulk of its utility 
operations may now be conducted downstream at the subsidiary level.
    In addition, restructuring mandates may effectively compel a 
utility to create a new holding company over generation, transmission/
distribution, and non-utility subsidiaries, as a means of assuring 
effective corporate separation of utility functions and safeguarding 
against potential cross-subsidization. The creation of such a top-tier 
holding company with no utility assets of its own, however, precludes 
retention of a Section 3(a)(2) exemption (which requires that the 
parent holding company also be a utility company).
    In sum, over the long-road PUHCA will hinder state restructuring 
efforts. PUHCA is an entry barrier, impeding robust retail competition. 
State driven restructuring presents potential problems for the ability 
of registered companies to comply with PUHCA's requirements and compete 
in newly created retail markets. Registered companies are subject to 
the ``integration'' standard, which demands, among other things, that 
utility operations be component parts of a vertically integrated 
system. This standard clearly clashes with emerging competitive systems 
based on unbundled service, independent system operators, and power 
exchanges. And ironically, state restructuring will likely endanger 
certain utilities' existing exemptions and thus require them to become 
registered holding companies.
    Leaving PUHCA intact as state restructuring proceeds will create 
perverse incentives, as companies recreate ``PUHCA Pretzels''--
especially regarding transmission assets--to comply with PUHCA's broad 
reach, restructure their products and services, and to compete in 
retail electricity markets. This federal barrier to state enacted 
retail competition reforms can only be removed by the Congress. That is 
why PUHCA repeal legislation should be signed into law this year.
                             iv. conclusion
    In conclusion, the Repeal PUHCA Now! Coalition believes it has 
addressed the various issues of concern that have been raised about 
repeal of this statute which, as the SEC has noted, is outdated and no 
longer needed. Consumer protections will still be provided, market 
power problems are not compounded and regulatory guardians will still 
vigorously oversee the exercise of market power through rate reviews 
and merger activities. If we are for fair wholesale and retail 
competition, where numerous firms compete under similar regulatory 
restrictions, then removal of PUHCA is a key component to a competitive 
atmosphere. We urge the Congress to repeal PUHCA this year.
                                 ______
                                 
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  Response of David R. Nevius, Vice President, NERC to Questions From 
                          Hon. John D. Dingell
    Question 1. In its Reliability Assessment: 1998-2007, the North 
American Electric Reliability Council (NERC) specifically raises 
concerns about the impact of the Environmental Protection Agency's 
(EPA) September 24, 1998 final rule for reducing regional transport of 
ground-level ozone (also known as the NOx SIP call) upon 
reliability.
    (a) In developing the NOx SIP call, did EPA consult with 
NERC regarding the impact of the SIP call on the supply adequacy and 
overall reliability of our nation's electric system?
    Answer: NERC was not consulted by EPA concerning the potential 
supply adequacy and overall reliability of the electric system in 
developing the NOx SIP Call.
    (b) If NERC was consulted, which of NERC's views incorporated into 
EPA's rule and which were not?
    Answer: NERC was not consulted.
    Question 2. I understand that NERC has been studying the potential 
effect of the NOx SIP call upon adequacy and reliability.
    (a) At this time, does NERC believe the SIP call will affect supply 
adequacy and overall reliability in the 22 state-region covered by 
EPA's rule, and, if so, will the effect be negative or positive?
    Answer: NERC's reliability analysis has yet to be completed (see 
answer to Question 2d below). However the primary impact on supply 
adequacy and overall electric system reliability would result from 
changes in the availability of generation. Generally speaking, if 
generation availability is increased, reliability of the power supply 
is improved, and if availability is decreased, reliability suffers. One 
of the issues being investigated in the study is the validity of EPA 
estimates of the amount and location of generation that will be 
unavailable to accommodate the retrofits needed to comply with the May 
1, 2003 deadline for meeting the EPA regulations.
    One of the primary NOx reduction technologies is the use 
of selective catalytic reduction (SCR) equipment. Retrofitting 
generators with SCR equipment may require extensions to scheduled 
outage times and therefore increase generation unavailability.
    A survey of ECAR Region generation owners concerning their 
NOx SIP Call compliance plans indicate that about 20,000 MW 
more capacity will use selective catalytic reduction (SCR) technology 
than projected by EPA.
    EPA estimated total scheduled outage time of 5 weeks, for 
generation undergoing SCR retrofits. More recent theoretical studies by 
the Ozone Attainment coalition (OAC), the Utility Air Regulatory Group 
(UARG), and Zinder--Cichanowicz (consultants to UARG and Edison 
Electric Institute) estimate total outage time ranging from 6 to 9 
weeks. The ECAR survey results indicate expected total outage times at 
6-8 weeks based on quotes from equipment vendors.
    (b) Could the NOx SIP call have a greater impact on 
supply adequacy and overall system reliability in some regions of the 
SIP call area than in others?
    Answer: Yes. Each NERC Region has a different generation mix, and 
each has a different level of generation that would require the 
installation of NOx reduction equipment, so the potential 
for reliability impacts varies from Region to Region. Recent analysis 
by the MAIN Region on the potential impacts does not indicate any 
adverse impact to reliability caused by NOx mitigation 
retrofits. That work was based on a survey of generation owners in the 
MAIN Region. However, MAIN's generation mix includes a higher 
percentage of nuclear generation than ECAR, which is more heavily 
impacted by the NOx SIP Call. Therefore, the reliability 
impacts in the ECAR Region may be more significant.
    (c) Could the NOx SIP call adversely affect supply 
adequacy and system reliability in states outside the SIP call area?
    Answer: Yes. The Eastern Interconnection of North America 
electrically behaves as one system, without regard to political 
boundaries of countries, states, or NERC Regions. Movement of 
generation resources across the Interconnection is subject to the laws 
of physics and the physical limitations between portions of the 
Interconnection. What happens in one location of the Eastern 
Interconnection affects the rest of the Eastern Interconnection.
    The below figure shows the states subject to the NOx SIP 
Call.
[GRAPHIC] [TIFF OMITTED] T5641.127

    The SERC Region contains a number of states subject to the SIP 
Call, but also, all or parts of four other states are in the SERC 
Region. If the reliability of SERC as a whole is adversely impacted, 
those other states may also feel the impact. The same is true for 
states in the MAPP and SPP Regions, which are also part of the Eastern 
Interconnection. As such, the NOx SIP Call could adversely 
affect supply adequacy and system reliability in states outside the SIP 
call area.
    (d) Will NERC issue a report on the impact of the NOx 
SIP Call on adequacy and reliability? If so, when? If not, why not?
    Answer: Yes. The NERC Reliability Assessment Subcommittee (RAS) is 
in the process of conducting a screening study of the potential impacts 
to short-term power supply and reliability.
    The screening analysis will focus on 4 Regions--ECAR, MAAC, MAIN, 
and SERC (see figure below).
[GRAPHIC] [TIFF OMITTED] T5641.128

    The study methods will analyze:
 Weekly available installed reserve margin
 Loss-of-load expectation (LOLE)
 Support from remainder of Eastern Interconnection
 Change in LOLE for each scenario
 Available data (NERC Generating Availability Data System, NERC 
        Electricity Supply & Demand)
 Used simplifying assumptions
    The goals of the screening study are to:
 Examine range of retrofit level scenarios using probabilistic 
        reliability analysis techniques
 Minimize variation in other assumptions
 Perform a comparative analysis of range of critical 
        assumptions
    --Transfer capability interaction
    --Length of retrofit time
    --Reliance on Interruptibles
 Build groundwork for detailed analysis
    The NERC Board of Trustees has also endorsed RAS conducting a 
detailed study of the short-term power supply impacts of the 
NOx regulations in collaboration with the Edison Electric 
Institute (EEI).
    Question 3. For this summer, the Michigan Public Utilities 
Commission has already stated its official concerns about reliability 
due to the prospect of electricity supply inadequacy. On June 19, 1997, 
in testimony before the Energy and Power Subcommittee, you cited NERC's 
MAIN region, as an area where system adequacy was a concern. 
Specifically, you cited the projected unavailability of 4,700-6,500 MW 
of nuclear generating capacity and the limited ability of the region to 
import power. The following summer, shortages of electricity in the 
MAIN and ECAR regions, which are comprised of Michigan and other mid-
Western states, resulted in spot market price spikes as high as nearly 
$7,500 MWh.
    (a) As the electric utility industry moves closer to a market 
framework, could such price spikes become more commonplace?
    Answer: NERC does not have extensive expertise in markets and the 
reasons for price spikes. The FERC staff conducted an investigation of 
the reasons for the price spikes (Staff Report to the Federal Energy 
Regulatory Commission on the Causes of the Pricing Abnormalities in the 
Midwest during June 1998). In the Executive Summary of this report the 
FERC staff said:
    ``what some have called a price `spike' was an extraordinarily 
high, but rather narrow and short-lived increase in wholesale spot 
market prices.'' The report goes on to say ``. . . the particular 
combination of events that led to the magnitude of the June 1998 price 
increases is not likely to recur, although wholesale prices can be 
expected to rise and fall as a result of the dynamics of supply and 
demand.'' The report also identifies issue areas for policy makers and 
others to focus on to prevent a recurrence of these events.
    (b) Has NERC identified a problem with capacity and system adequacy 
in its ECAR region?
    Answer: In its soon to be issued 1999 Summer Assessment, NERC 
reports for ECAR that: ``With the ongoing outage of the Cook Nuclear 
Units (2,060 MW total) ECAR's operational capacity margin is only 
slightly improved from last summer. However, there is a greater 
likelihood this year that power will be available from neighboring 
Regions.''
    ECAR, in its 1999 Assessment of Load and Capacity states: ``The 
ECAR Members expect capacity margins in the region to be 10.8% during 
peak demand this summer compared with 9.3% last summer. The increase in 
capacity margin is a result of ECAR Members bringing existing 
generating capacity back on line and installing new capacity. Under 
peak load conditions, ECAR will likely need to utilize supplemental 
capacity resources (contractually interruptible loads) and imports of 
power from outside of ECAR) to meet its projected peak demand. Severe 
weather (abnormally hot and humid) or unexpected generator outages and 
the unavailability of power from outside the region could make it 
necessary to curtail additional load, beyond contractually 
interruptible loads and demand side management.''
    (c) Could EPA's NOx SIP call, which will result in both 
short and long-term losses of generating capacity, further exacerbate 
such price spikes?
    Answer: As indicated above, the NOx SIP call could 
increase the unavailability of generation in some areas to the point 
that reliability will be adversely impacted. NERC is not in a position 
to speculate on whether or not such increased generation 
unavailability, if it does occur, would result in price spikes.
    (d) While curtailment generally refers to the physical loss of 
power, isn't it possible that EPA's NOx SIP call could 
result in effective curtailments by driving the price of electricity so 
high that it is beyond the ability of the average customer to afford?
    Answer: This is not NERC's purview.
    Question 4. In your prior testimony before the Subcommittee, you 
pointed to the inadequacy of the transmission system in the MAIN 
region, which includes Michigan's upper peninsula, with regard to the 
ability of that region to import power.
    (a) Should EPA's NOx SIP call result in generation 
losses that require the import of large amounts of electricity into the 
MAIN region, are you aware of any EPA proposal to increase the ability 
of the region to import power?
    Answer: NERC is not aware of any EPA proposal to increase the 
ability of the MAIN Region to import power. However, MAIN's Regional 
analysis of the potential impacts of the NOx SIP Call does 
not find detrimental impacts on power supply that would warrant import 
of large amounts of electricity into the MAIN Region.
    (b) What would it take, in terms of money, time, and effort, to 
remedy the transmission problems in the MAIN region?
    The transmission situation in MAIN is not as critical this summer 
as indicated in my prior testimony (1997) primarily because of the 
reduced requirement for imports from outside the region. As stated 
above, MAIN's Regional analysis of the potential impacts of the 
NOx SIP Call does not find detrimental impacts on power 
supply that would warrant import of large amounts of electricity into 
the MAIN Region.
    Question 5. In its analysis of the costs and benefits associated 
with the NOx SIP call, EPA asserts that existing utility 
boilers can be retrofitted with pollution control equipment during 
normal planned outages. Others, including affected utilities, contest 
that assumption, claiming that retrofit activities cannot be completed 
solely within the scope of normal planned outage periods.
    (a) Has NERC assessed the potential for retrofit activities to 
result in additional outage periods for affected utility boilers? If 
not, why not?
    Answer: The NERC Reliability Assessment Subcommittee (RAS) is 
currently guiding the screening study on potential reliability impacts 
of the NOx SIP Call mentioned in 2(d) above, which assesses 
the impact of outage extensions on utility boilers NOx 
mitigation plans. This detailed study is expected to be completed by 
September at which time the results will be reported to the NERC Board 
of Trustees.
    (b) If NERC has performed such an assessment, please provide a 
detailed summary of your analysis.
    Answer: NERC will be glad to keep you and your Staff appraised of 
the results of both the screening study and the detailed study on the 
potential reliability impacts of the NOx SIP Call.
                                 ______
                                 
                                        FirstEnergy
                                                Akron, Ohio
                                                  September 3, 1999
The Honorable Joe Barton
Chairman, Subcommittee on Energy and Power
U.S. House of Representatives
2264 Rayburn House Office Building
Washington, D.C. 20515
    Dear Chairman Barton: On behalf of FirstEnergy Corp., enclosed is 
my response to the questions posed in your August 11, 1999, letter. 
Thank you for the opportunity to respond to these important questions. 
I understand my response will become part of the hearing record from 
your subcommittee's April 22, 1999, hearing on transmission and 
reliability.
    Let me state again how important I believe transmission is in 
creating consumer benefits, improving reliability, and spurring 
competition as you and we envision. Simply put, our nation's 
transmission infrastructure must grow in order to accommodate the 
increasing number and the different kinds of transactions occurring in 
the increasingly competitive electric generation market. There has been 
little if any significant expansion of our nation's transmission 
network for decades. For competition to work, the system that delivers 
the product--the transmission networks--must expand. They will only 
grow through new investments, not through new regulations. Congress 
must do its part to create an environment that encourages investment in 
transmission improvements, reduces regulatory burdens, and allows for 
the voluntary development of transmission institutions, especially 
business-oriented institutions that will be motivated to provide the 
best possible service for their customers.
    In the months following your April hearing, transmission has 
become, for a variety of reasons, an even higher profile issue in the 
electric industry restructuring debate. For example, the following all 
occurred after the April hearing:

On May 13, the Federal Energy Regulatory Commission (``FERC'' or ``the 
        Commission'') issued a Notice of Proposed Rulemaking (NOPR) 
        with respect to the formation of regional transmission 
        organizations (RTOs). In essence, the NOPR calls for utilities 
        to voluntarily join RTOs that meet certain minimum criteria, or 
        to justify to FERC why they will not do so.
On June 3, FirstEnergy joined American Electric Power, CMS/Consumers 
        Energy, Detroit Edison and Virginia Power in the ``Alliance'' 
        filing for what would enable the first-ever independent 
        transmission company or ``transco.'' In our judgement, the 
        Alliance filing has spurred debate both within the FERC and 
        Congress about future transmission entities and sets forth a 
        positive model for the kind of voluntary, business-oriented 
        regional transmission entity my testimony supported. As we 
        discussed when I met with you in July, the Alliance RTO will 
        be: made up of the transmission facilities of all the foregoing 
        companies; privately owned; governed by a board appointed by 
        its owners (as is customary for business enterprises); 
        independent (in ownership and governance) of electric 
        generation companies and other users of the system; and, 
        privately operated. From our perspective, the proposal meets 
        all of the criteria the Commission outlined in its RTO NOPR. 
        This independent entity will generate revenue solely by 
        providing transmission service to generators, marketers and 
        other users of the system, providing it every incentive to 
        support vigorous competition for electric sales by its 
        customers.
On July 28, the Commission granted a request for Declaratory Order by 
        Entergy Corporation for a single-company transco. Entergy would 
        retain passive ownership in the transco, which would be under 
        the control of an independent board.
Throughout this year, concern has steadily increased from industry 
        observers about the returns being permitted on transmission 
        assets. For example, a ruling of an Administrative Law Judge 
        with the Commission, in effect, ``penalizing'' Southern 
        California Edison Company for having joined the California ISO, 
        has drawn criticism from users of the transmission system and 
        transmission providers alike.
The East, South and Midwest--including your home State of Texas--
        experienced a record-breaking heat wave that sent demand for 
        energy soaring to all-time highs in numerous cities, affecting 
        service reliability and price in some areas. Without question, 
        expanded and improved transmission networks would have eased 
        constraints.
Several financial analysts commented recently to the Commission on its 
        RTO NOPR. Analysts from Solomon Smith Barney, one of the major 
        investment banking institutions in the world, stressed the need 
        for incentives for new transmission investment: ``[t]he 
        problem, as we see it, is that the existing regulatory scheme 
        has contributed to the problems, by inhibiting both capital 
        investment and innovation, and the solution is to apply 
        incentive ratemaking of some sort across the board.'' I have 
        enclosed a copy of the comments of Solomon Smith Barney for 
        your review.
On August 4, Congressman Tom Sawyer, whose opinion on transmission 
        issues I know you value, introduced H.R. 2786, the proposed 
        ``Interstate Transmission Act.'' The Sawyer bill is consistent 
        with our principles of proposed transmission expansion, 
        allowing voluntary participation in RTOs, allowing for 
        business-oriented transmission entities, and reducing 
        regulation. Among other things, the bill authorizes incentive-
        based transmission pricing, prohibits FERC from mandating RTO 
        participation, and eliminates FERC's authority to review 
        mergers and condition orders on participation in an RTO.
Voluntary RTO formation continues to work. According to statistics 
        complied by the Edison Electric Institute, more than 60 percent 
        of electric customers in the U.S. are either served by an 
        operating RTO or soon will be. Moreover, as of August 1, 1999, 
        more than 70 percent of the total customers and more than 70 
        percent of the MWh sales of investor-owned utilities were 
        covered by an RTO that already has been approved or proposed.
    In addition, FirstEnergy has worked to educate Members and staff on 
transmission issues by joining six other utilities in a coalition to 
promote the principles for transmission growth and improvement outlined 
in my April 22 testimony. Many other transmission providers not 
formally part of our coalition are supportive of our efforts. We 
believe this is the first group devoted solely to transmission issues. 
We are pleased that you made time to meet with us before the release of 
your draft legislation. On behalf of the group, let me again formally 
offer you our assistance in your work.
    Thank you for your consideration of my views. Good luck with your 
efforts.
            Sincerely,
                                                 Stan Szwed
                                                     Vice President
Enclosures
       Responses to Questions for the Record from Chairman Barton
    Question 1. Your testimony suggests there is no need for 
enforceable reliability standards, and market participants should be 
free to ``devise and implement new arrangements.'' Do you believe 
continued reliance on voluntary compliance with reliability standards 
is a good idea? If not, how can reliability standards be made 
enforceable without Federal legislation? Can NERC compel market 
participants to join it? Can NERC assume enforcement powers?
    Response. My testimony was intended to address a somewhat different 
set of issues. In my testimony, I did not specifically address 
reliability, but was addressing the best way to improve transmission 
service. Reliability is an important part of transmission service in 
that customers expect and need electric power to be delivered when they 
need it. Reliability in a formal definition is the degree of 
performance of the elements of the bulk electric system that results in 
electricity being delivered to customers within accepted standards and 
in the amount desired.\1\ Focusing on improving transmission service 
will result in improved service for customers, including improved 
reliability. The best way to improve transmission service is to let 
market participants devise and implement new business structures and 
arrangements for providing services, new investment, new methods, and 
new technology.
---------------------------------------------------------------------------
    \1\ From definition of reliability in ``Glossary of Terms,'' 
prepared by the Glossary of Terms Task Force, North American Electric 
Reliability Council, August 1996.
---------------------------------------------------------------------------
    The evolution of the reliability infrastructure of the North 
American interconnected electric system from NERC to NAERO to create a 
self-regulating reliability organization is one example of market 
participant's ability to be responsive on a voluntary basis to ensure 
grid reliability in a more regionalized and competitive market.
    Although the NERC to NAERO evolution has widespread support, the 
NERC/NAERO organization cannot compel market participants to join it or 
to assume enforcement powers. Federal legislation is needed to provide 
the legislative authority for NAERO under the regulatory jurisdiction 
of the Federal Energy Regulatory Commission (``FERC'' or ``the 
Commission'') in the United States. Although FirstEnergy supports the 
NERC consensus language, with which you are familiar, legislation 
introduced by Congressman Sawyer (H.R. 2786) contains provisions that 
are shorter and less prescriptive than the NERC draft.
    Question 2. Your testimony calls for a ``market-driven and 
business-oriented resolution to transmission issues.'' Are you calling 
for an end to FERC regulation of transmission rates?
    Response. No. It is appropriate for FERC to continue to regulate 
rates for transmission service. Without sufficient competition for bulk 
delivered power, transmission will continue to have the characteristics 
of a natural monopoly. However, it may be possible in the future, given 
sufficient competition for delivered bulk power, to reduce or eliminate 
transmission rate regulation. Congressman Sawyer's bill, H.R. 2786, 
envisions that possibility.
    FERC should encourage transmission investment to support a robust 
transmission network to achieve open access goals. Alternatives for 
encouraging investment in the transmission system could include: allow 
a higher rate of return for investment in new assets, accelerated 
depreciation for new transmission investments, eliminate revenue 
credits for non-firm transmission services, permit an acquisition 
premium on purchased transmission facilities, ``and'' pricing for new 
lines or technological additions, tax advantaged transfer for asset 
movement, incentive rate recovery and light handed regulation.
    Your draft bill released in July and H.R. 2786 both provide for 
incentive rates. I am grateful that this critical concept of incentive 
rates has made its way into your legislative language.
    What I meant by a ``market-driven and business-oriented resolution 
to transmission issues'' is primarily that transmission owners should 
be free to decide the most appropriate corporate form, structure, 
geographical shape and ownership that they will need to meet the 
evolving energy market. Barely two years ago, only 10 States had 
enacted retail choice laws. Now more than half of all States have done 
so. Major announcements about electricity generation are being made 
nearly every day. And no one knows the effect distributed generation 
will play in the market. It is critical to permit flexibility, 
experimentation and customization of each transmission entity to 
reflect regional needs, market variations and transition requirements. 
Transmission institutions need to be able to adapt quickly in such a 
volatile marketplace, just as transmission systems are able to adapt 
quickly to rapid load changes.
    As the Global Power Group of Salomon Smith Barney, one of the 
world's leading investment banking institutions, put it in its comments 
to the Commission in response to the Commission's Notice of Proposed 
Rulemaking (``NOPR'') on Regional Transmission Organizations 
(``RTOs''), ``The real value of the new, commercially-incentivized 
transmission company might come from its ability to offer an unimagined 
new set of product offerings or its ability to do so much more with 
existing assets.''
    Question 3. The State of Ohio is concerned your transco proposal 
will split Ohio into two RTOs, the Alliance transco and the Midwest 
ISO. How do you address the State's concerns?
    Response. As I stated at the April 22 hearing in response to a 
question from Representative Largent, I believe that RTOs need not 
follow State boundaries and should not be determined by State 
boundaries. RTOs should develop in response to market dynamics.
    Electricity flows according to the laws of physics. It doesn't stop 
at the State line. Except as to the consequences of the old system of 
monopoly franchises, State boundaries are almost wholly unrelated to 
patterns in electric generation, transmission and use.
    The operating companies of Ohio's investor-owned utilities are 
aligned with Regional Transmission Organizations:

Midwest ISO--Cincinnati Gas and Electric (operating company of 
        Cinergy).
Alliance RTO--Ohio Edison, the Cleveland Electric Illuminating Company 
        and the Toledo Edison Company (operating companies of 
        FirstEnergy Corp.) and Columbus Southern Power and Ohio Power 
        Company (operating companies of American Electric Power)
Not Currently Committed to an RTO--Dayton Power and LightAllegheny 
        Power.
    As shown on Attachment 1 to this response, approximately 74% of 
customers served by IOUs in Ohio will take transmission service from 
the Alliance RTO, 12% will take service from IOUs not now committed to 
an RTO and 14% will take service from the Midwest ISO.
    Ohio's recently enacted electric restructuring legislation imposes 
a starting date for competitive retail electric service on January 1, 
2001. Further, Ohio's electric utilities are required to transfer 
control to a FERC-approved RTO that would be operational by December 
31, 2003. However, the legislation does not require participation in a 
particular type of RTO. Finally, the legislation does not require the 
elimination of pancaked transmission rates, rather it requires 
minimization of these rates.\2\
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    \2\ Section 4928.12.(A)(3) of the Ohio Revised Code.
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    Question 4. At the hearing you stated you did not see a problem 
with Ohio transmission systems being operated by two different 
entities, the Alliance transco and the Midwest ISO. Are these proposals 
consistent with the FERC proposed rule on RTOs, specifically the 
provisions relating to scope and regional configuration? The proposed 
rule favors RTOs that encompass contiguous areas and encompass a highly 
interconnected portion of the grid.
    Response. FERC's draft rule proposes that RTOs must be of 
sufficient scope and regional configuration to permit the RTO to 
perform its required functions and to support efficient non-
discriminatory power markets. The proposal of Alliance RTO satisfies 
this proposed requirement.
    By any measure, the proposed Alliance RTO is large. The Alliance 
RTO will serve a combined area of 124,000 square miles in nine states, 
encompassing a population of 26 million people and representing a load 
of approximately 67,000 MW. The Alliance RTO would provide ``one-stop 
shopping'' for transmission service over 43,000 miles of transmission 
lines. By these and other measurers, the Alliance RTO, if approved, 
would be one of the largest RTOs in the nation.
    The proposed Alliance RTO is contiguous. It will be of sufficient 
size and configuration to perform effectively the RTO functions 
described in the Commission's proposed rule on RTOs.
    The proposed Alliance RTO encompasses a highly interconnected 
portion of the transmission grid.
    Further, as the Commission observed in its Notice of Proposed 
Rulemaking:
          There is likely no one ``right'' configuration of regions. 
        One particular boundary may satisfy one desirable RTO objective 
        and conflict with another. The industry will continue to 
        evolve, and the appropriate regional configuration will likely 
        change over time with technological and market developments.\3\
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    \3\ Notice of Proposed Rulemaking, Regional Transmission 
Organizations, Docket No. RM99-2-000, IV FERC Stats. & Regs. para. 
33,730.
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    Seams issues are unavoidable unless there is a single RTO for each 
interconnection. Such an arrangement is impractical at best since the 
operational requirements for this type of transmission network are 
beyond today's technology. Even if this problem could be solved, at 
some point combining additional systems would reduce efficiency and 
raise costs. The better alternative would be to allow the market place 
to voluntarily form RTOs in response to the needs of transmission 
customers with the appropriate incentives. This will result in RTOs 
that provide the needed services in efficient and cost effective 
manner.
    Question 5. There are different kinds of transmission owners--
Federal agencies, State agencies, municipal utilities, rural electric 
cooperatives, and IOUs. Could a transco be formed with these different 
kinds of owners? Are there examples of entities that have that kind of 
mixed ownership? How long would it take to form a transco that had that 
kind of mixed ownership?
    Question 6. How difficult would it be for non-profit entities such 
as Federal agencies, State agencies, municipal utilities, and rural 
electric cooperatives to join a transco? If so, is an ISO the only 
option in regions with large non-IOU transmission systems?
    Question 7. In some regions, such as the Pacific Northwest and the 
Tennessee Valley, the Federal transmission system predominates. Can the 
Federal government have an ownership interest in a private for-profit 
transmission company? Does the Federal government have an ownership 
role in other for-profit ventures?
    Response. Based on the similarities and interrelations of the 
issues they pose, I have taken the liberty of answering questions 5, 6 
and 7 in one combined answer.
    We believe that a Transco can be formed with different types of 
owners. A transco-based RTO can incorporate passive ownership or 
limited ownership interests in the RTO in exchange for transmission 
assets. This could provide an opportunity for some Federal agencies, 
State agencies, municipal utilities and rural electric cooperatives to 
participate in an RTO. Governments currently invest in private 
securities. However, I can see the potential for concerns if a 
governmental entity with a financial interest also has a regulatory 
role with respect to the entity or its competitors. Also, I can see the 
potential for concerns if participation in an RTO by a governmental 
entity creates an unfair competitive advantage.
    While the Alliance RTO has not yet been confronted with this 
issues, were we to face the question, we would probably consider a non-
IOU entity as a potential partner in an RTO generally on the same bases 
on which we have considered IOUs as potential partners in an RTO. Many 
of the issues you raised are issues that would have to be resolved by 
the non-IOU entities.
    The current restructuring of the electric industry, i.e. the sale 
of generation facilities, creation of RTOs and the unbundling of 
electric service at the state level, begs the question whether the 
Federal government's ownership in larger power-marketing agencies 
should be privatized. As I am sure you are aware, privatization of 
electric facilities, including transmission facilities has been a major 
feature of electric industry restructuring abroad. At the same time, I 
recognize the many policy and political questions that are subsumed 
within the question of privatization.
[GRAPHIC] [TIFF OMITTED] T5641.129

                             The Large Public Power Council
                                                  November 23, 1999
The Honorable Joe Barton, Chairman
Subcommittee on Energy and Power
Committee on Commerce
U.S. House of Representatives
2123 Rayburn House Office Building
Washington, DC 20515-6115
    Dear Chairman Barton: On April 22, 1999, Dr. Matthew Cordaro, 
former President and CEO of Nashville Electric Service, provided 
testimony before the Subcommittee on Energy and Power on behalf of the 
Large Public Power Council (LPPC) regarding ``Electricity Competition: 
Reliability and Transmission in Competitive Electricity Markets.'' On 
August 11, 1999, you forwarded follow-up questions to Dr. Cordaro 
requesting that responses be filed for the record on or before 
September 3, 1999.
    Prior to receipt of your follow up questions, Dr. Cordaro had left 
Nashville Gas and Electric to become CEO of the Midwest ISO. It has 
recently come to my attention that responses to your August 11, 1999 
questions were not provided to the committee. On behalf of the LPPC, I 
am submitting the attached responses to your questions. I sincerely 
apologize for the delay.
    Please let me know if I can provide you with any additional 
information.
            Sincerely,
                                          T. Graham Edwards
                               Chairman, Large Public Power Council
  responses of lppc to follow up questions from chairman joe barton, 
                    subcommittee on energy and power
    The following questions were directed to Dr. Matthew Cordaro, 
former CEO of Nashville Electric Service, who testified before the 
Subcommittee on Energy and Power on April 22, 1999. Dr. Cordaro 
provided testimony on behalf of the Large Public Power Council (LPPC) 
regarding ``Electricity Competition: Reliability and Transmission in 
Competitive Electricity Markets.''
    Question 1: Your testimony states a majority of LPPC members have 
adopted open access tariffs and submitted them to FERC. Please indicate 
which LPPC members have submitted open access tariffs, and indicate the 
disposition by FERC of these tariff submissions.
    Response: Open access transmission tariffs have been filed with and 
accepted by FERC for the following LPPC members: South Carolina Public 
Service Authority; Omaha Public Power District; New York Power 
Authority; Colorado Springs Utilities; Orlando Utilities Commission; 
and Salt River Project
    For the Committee's information, a number of LPPC members either 
serve territories outside of FERC's jurisdiction (i.e., in Texas or 
Puerto Rico), have no significant transmission facilities, or have an 
open access transmission tariff but have not filed it at FERC.
    Question 2: What is LPPC's position on the FERC proposed rule on 
RTOs?
    Response: Set forth below is the executive summary of the comments 
filed by LPPC in Docket No. RM99-2-000, FERC's proposed rulemaking 
regarding RTOs.
    LPPC supports initiatives that: (1) provide greater access to 
competitive wholesale power markets; (2) ensure open access, non-
discriminatory, transmission service; (3) improve reliability and 
increase efficiencies in the management and operation of the nation's 
transmission grid; and (4) ensure delivery of services to consumers at 
the lowest reasonable cost. To the extent these objectives can be 
achieved through the voluntary formation of RTOs, LPPC endorses the 
Commission's proposed rule. The final rule, however, must ensure that 
RTOs fully accommodate the existing legal obligations of public power 
utilities, and the Commission will need to provide RTO participants 
with significant flexibility to design and implement RTOs.
A. Obligations of Public Power Entities that Seek Participation in an 
        RTO Must be Accommodated
    Federal, state, and locally-owned electric utilities, which own and 
operate a significant portion of the nation's interconnected grid, are 
subject to a number of legal obligations that will substantially affect 
the scope of their participation in an RTO. These obligations are 
imposed by, among other things, state constitutions, bond covenants, 
IRS private use regulations, and federal, state, and local laws. The 
effect of these legal obligations vary from utility to utility and, in 
LPPC's view, it would not be feasible for the Commission's final rule 
to specifically address each of these legal requirements and their 
potential impact on public power participation in RTOs. LPPC believes 
the final rule should, however, set forth a general requirement 
mandating that all RTOs accommodate the legal and practical constraints 
applicable to public power entities. LPPC's comments stated that any 
RTO proposal that cannot demonstrate that a good faith effort was made 
to accommodate public power participation should be rejected as 
discriminatory, unjust, and contrary to the public interest.
B. RTOs Must be Independent of Market Participants
    LPPC strongly agrees with the Commission's assertion that ``[a]n 
RTO needs to be independent in both reality and perception.'' \1\ 
Without independence, market participants cannot be assured that an RTO 
will provide non-discriminatory transmission service. In its comments 
to FERC, LPPC stated that the Commission should approve only those 
ownership structures that can be adequately regulated and policed in 
order to ensure that RTOs will not provide preferential service to 
affiliated owners of the RTO. Further, although LPPC believes the final 
rule should provide flexibility to RTO participants to determine an 
appropriate form of governance, all governing structures must ensure 
that no class of market participants is treated preferentially or 
allowed to unduly influence a governing board's decisionmaking 
processes.
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    \1\ RTO NOPR at 33,726.
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C. RTOs Must Result in Consumer Benefits
    Providing incentives for utilities to participate in RTOs requires 
a balancing of costs and benefits, and the benefits of RTO formation to 
consumers must outweigh the attendant costs. For that reason, LPPC's 
comments stated that, if the Commission does provide incentives for 
utilities to participate in RTOs, these incentives should be provided 
only if there are demonstrable corresponding public benefits. 
Similarly, LPPC's comments argued that if the Commission approves 
performance-based rate proposals, productivity objectives should: (1) 
reflect achievement of certain public interest outcomes; and (2) be 
based on performance factors that have been negotiated between the RTO 
and transmission customers. If proposed performance factors are not the 
product of consensus, LPPC argued that the Commission should approve 
such rates only after the RTO has demonstrated that the use of 
performance-based rates would result in significant consumer benefits.
    Question 3: Could municipal utilities join transcos formed by IOUs? 
Municipal utilities and cooperatives own power plants jointly with 
IOUs, why can't you own a transco jointly with IOUs?
    Response: The state and local laws that created each of LPPC's 
members and the federal, state, and local laws that continue to 
regulate them differ significantly both in scope and degree of 
regulation. Moreover, most relevant federal, state and local laws do 
not specifically address the authority of public power entities to 
participate in the large, regional transmission organizations 
envisioned by the Commission. The application of each of these laws to 
the issue of public entities' participation in RTOs therefore usually 
is not clear. To further complicate the matter, a significant body of 
case law exists in each state construing that state's constitution and 
statutes with respect to the scope of authority and duties of public 
power entities. While this case law does not specifically address 
public power entities' authority to participate in RTOs, it 
nevertheless may carry precedential weight in determining the scope of 
that authority under state law. Consequently, to assess its ability to 
engage in any of these arrangements, each LPPC member must consider the 
requirements of its state constitution, state and local law, bond 
covenants, charters, and other legal obligations, as well as the case 
law that construes these authorities.
    Additionally, Section 141 of the Internal Revenue Code (``Code'') 
imposes limitations on the use by non-governmental entities of public 
power electric facilities financed with tax exempt bonds. These 
``private use'' limitations significantly limit the form and extent of 
participation by public power systems in RTOs. While the Internal 
Revenue Service issued regulations in January 1998 that provided some 
relief from these limitations (``1998 Temporary Regulations''),\2\ the 
regulations are in effect only until January 2001, and they fail to 
address fully the constraints imposed by the Code's private use 
limitations on public power entities' RTO participation. For example, 
the temporary regulations, did not provide the same relief to issuers 
of new tax exempt bonds. Those issuers remain subject to the same 
constraints on offering open access transmission and RTO membership as 
were in effect before the 1998 Temporary Regulations. Issuers of new 
bonds thus are not free to provide open access transmission or join 
RTOs on the same terms as other public power systems or investor-owned 
utilities. Moreover, the Temporary Regulations are in fact temporary--
they expire by their terms on January 21, 2001. No public power system 
with transmission facilities financed with tax exempt bonds can 
prudently commit itself to providing unrestricted open access 
transmission or to surrender control of its transmission system to an 
RTO without retaining a clear right to terminate open access 
transmission services to non-governmental entities and to regain 
control of its transmission system after January 20, 2001.
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    \2\ Treas. Reg. Sec. Sec. 1.141-7T & -8T.
