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

                       ELECTRICITY COMPETITION--Volume 2

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

                                    HEARINGS

                                   before the

                        SUBCOMMITTEE ON ENERGY AND POWER

                                     of the

                             COMMITTEE ON COMMERCE
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED SIXTH CONGRESS

                                 FIRST SESSION

                                   __________

              MAY 13, 1999--THE ROLE OF FEDERAL ELECTRIC UTILITIES
            MAY 20, 1999--PURPA, STRANDED COSTS AND THE ENVIRONMENT
                    MAY 26, 1999--CONSUMER PROTECTION ISSUES
                      JULY 1, 1999--STATE AND LOCAL ISSUES

                                   __________

                               Serial No. 106-64

                                   __________

                Printed for the use of the Committee on Commerce

                         U.S. GOVERNMENT PRINTING OFFICE
    57-440 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 on:
        May 13, 1999.................................................     1
        May 20, 1999.................................................   115
        May 26, 1999.................................................   243
        July 1, 1999.................................................   309
    Testimony of:
        Adelberg, Arthur W., Executive Vice President, CMP Group, Inc   150
        Agathen, Paul, Senior Vice President, Energy Supply Services.   204
        Ain, Ross, President, East Coast Power.......................   144
        Amos, John, General Manager, Energy and Hedging, Reynolds
          Metals Company.............................................    98
        Andelman, Richard, Energy Systems and Utility Manager, BJ's
          Wholesale Club, Inc........................................   139
        Argo, Gene, President and General Manager, Midwest Energy....   372
        Baker, James O., President, Middle Tennessee Electric
          Membership Corporation, on behalf of Tennessee Valley
          Authority Public Power Association.........................    53
        Bass, Hon. Preston, Mayor, City of Stantonsburg, North
          Carolina...................................................   367
        Bode, Denise A., Commissioner, Oklahoma Corporation
          Commission.................................................   134
        Brice, Jack, Member, Board of Directors, AARP................   276
        Burns, Mary Ellen, Assistant Attorney General in Charge,
          Bureau of Energy and Telecommunications....................   256
        Cantrell, Shawn, Northwest Regional Director, Friends of the
          Earth......................................................   102
        Casper, Blake, Caspers Company...............................   274
        Casten, Thomas R., President and CEO, Trigen Energy
          Corporation................................................   212
        Clement, Hon. Bob, a Representative in Congress from the
          State of Tennessee.........................................    15
        Codey, Lawrence R., President and Chief Operating Officer,
          Public Service Electric and Gas Company....................   207
        Cohen, Armond, Director, Clean Air Task Force................   181
        Coley, William A., Group President, Duke Power, on behalf of
          TVA Watch..................................................    39
        Cooper, Mark N., Director of Research, Consumer Federation of
          America....................................................   281
        Defazio, Hon. Peter, a Representative in Congress from the
          State of Oregon............................................    13
        Eldredge, H. Bradley, Council Member, City of Idaho Falls,
          representing Public Power Council..........................    86
        Franks, Hon. Bob, a Representative in Congress from the State
          of New Jersey..............................................    18
        Hastings, Hon. Doc, a Representative in Congress from the
          State of Washington........................................    27
        Kolish, Elaine D., Associate Director, Bureau of Consumer
          Protection, Federal Trade Commission.......................   250
        Litchfield, James, President, Litchfield Consulting Group....    91
        Mazur, Mark, Acting Director, Office of Policy, U.S.
          Department of Energy; accompanied by Jack Robertson, Deputy
          Administrator, Bonneville Power Administration.............    74
        McDermott, Hon. Jim, a Representative in Congress from the
          State of Washington........................................    24

                                     (iii)

                                      (IV)

                                                                       Page
        Medford, Mark, Executive Vice President, Customer Service,
          Tennessee Valley Authority.................................    34
        Michaels, Harvey, Chief Executive Officer, Nexus Energy
          Software...................................................   261
        Morris, Herman, President and CEO, Memphis Light, Gas and
          Water Division.............................................    47
        Nethercutt, Hon. George R., Jr., a Representative in Congress
          from the State of Washington...............................    28
        Niemiec, Donald W., Vice President, Union Pacific Resources
          Energy Marketing...........................................   177
        Nugent, Hon. William M., Commissioner, Maine Public Utilities
          Commission.................................................   334
        O'Neill, Karen, Vice President, New Markets, Green Mountain
          Energy.....................................................   173
        Savage, John, Administrator, Oregon Office of Energy,
          representing Northwest Energy Review Transition Board......    80
        Sibley, Hon. David, Texas State Senate.......................   317
        Sullivan, Hon. Jim, President, Alabama Public Service
          Commission.................................................   326
        Svanda, Hon. David A., Commissioner, Michigan Public Health
          Service Commission.........................................   330
        Tiencken, John H., Jr., Executive Vice President and General
          Counsel, South Carolina Public Service Authority...........   385
        Toccoli, Betty Jo, Chair, Small Business Alliance for Fair
          Utility Deregulation.......................................   286
        Wamp, Hon. Zach, a Representative in Congress from the State
          of Tennessee...............................................    22
        Watson, Larry, General Manager, Paragould Light and Water
          Commission.................................................   382
        Wolens, Hon. Stephen D., House of Representatives, State of
          Texas......................................................   323
        Wortham, Gregory L., Chief Operating Officer, 1st Rochdale
          Cooperative................................................   376
    Material submitted for the record by:
        Agathen, Paul, Senior Vice President, Energy Supply Services,
          response to questions of Hon. John D. Dingell..............   230
        Casten, Thomas R., President and CEO, Trigen Energy
          Corporation, response to questions of Hon. John D. Dingell.   240
        Codey, Lawrence R., President and Chief Operating Officer,
          Public Service Electric and Gas Company, response to
          questions of Hon. John D. Dingell..........................   234
        Cohen, Armond, Director, Clean Air Task Force, response to
          questions of Hon. John D. Dingell..........................   236
        Niemiec, Donald W., Vice President, Union Pacific Resources
          Energy Marketing, response to questions of Hon. John D.
          Dingell....................................................   232
        O'Neill, Karen, Vice President, New Markets, Green Mountain
          Energy, response to questions of Hon. John D. Dingell......   238

                     THE ROLE OF FEDERAL ELECTRIC UTILITIES

                                  ----------

                             THURSDAY, MAY 13, 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, Rogan, Shimkus, Shadegg, Pickering,
    Fossella, Bryant, Bliley (ex officio), Hall, McCarthy, Sawyer,
    Markey, Rush, Wynn, and Dingell (ex officio).
        Also present: Representative Jenkins.
        Staff present: Joe Kelliher, majority counsel; Ramsen
    Betfarhad, majority counsel; Jeff Krilla, majority counsel;
    Curry Hagerty, majority counsel; Cathy Van Way, majority
    counsel; Donn Salvosa, legislative clerk; Sue Sheridan,
    minority counsel, and Rick Kessler, minority professional staff
    member.
        Mr. Barton. The Subcommittee on Energy and Power of the
    Commerce Committee hearing on the ``Electric Competition: Role
    of Federal Electric Utilities'' will come to order.
        Today the subcommittee continues its hearing on electric
    competition, with the focus on the role of Federal electric
    utilities in the competitive electric market. This hearing,
    like the others before it, focuses on core Federal issues;
    issues that States have little or no authority to address;
    issues that can only be addressed by the Congress. It is clear
    that the role of the Federal electric utilities in a
    competitive electric market can only be addressed by Federal
    legislation since the States have no regulatory authority over
    Federal agencies like the Tennessee Valley Authority and
    Bonneville.
        One of the biggest questions at this hearing, like the
    others before it, is whether the current situation is
    acceptable. The testimony of the witnesses indicates that the
    status quo with respect to Federal electric utilities is not
    acceptable. Under the status quo, Federal law prevents any kind
    of competition in the Tennessee Valley. TVA's wholesale
    customers have to buy from TVA. Under the status quo, the
    taxpayers may have to bail out TVA and Bonneville in the event
    that they cannot pay their debts. Under the status quo, the
    transmission systems of the Federal electric utilities are
    subject to a different set of rules than those that govern the
    rest of the transmission system, and the Federal electric
    utilities can discriminate against their rivals.
        Fortunately, there is strong support in the Tennessee
    Valley and the Pacific Northwest for Federal electric
    legislation that reforms the current role of TVA and Bonneville
    in competitive electric markets. Those regions, and their
    congressional delegations, have addressed many difficult
    issues. I want to commend them for the progress that they have
    made. I support what they have done. I hope that today's
    hearing will allow additional progress to be made. I believe
    that is possible.
        Let me suggest a few things that we should keep in mind as
    we go through the hearing today. I don't think the Congress
    will approve legislation that allows TVA and the Pacific
    Northwest to continue to enjoy preferential access to low-cost
    Federal power systems if those regions do not assume
    responsibility for TVA and Bonneville's debts. I also think
    Congress will want to assure the future operation of the
    Federal electric utilities do not pose risks to the taxpayers.
    I think that Federal electric utilities will have to be subject
    to additional FERC regulation, especially of their transmission
    systems, to ensure that they do not have an unfair competitive
    advantage over their competitors.
        The testimony of the witnesses is similar to the testimony
    of the witnesses at prior hearings on one important point: the
    call for Congress to pass electricity reform legislation. TVA's
    customers are calling for Federal legislation to eliminate the
    barriers in Federal law to wholesale competition. Bonneville's
    customers are also calling for Federal legislation to reform
    Bonneville's role in the market.
        I intend to work closely with congressional delegations
    from these affected regions, members of the subcommittee, and
    members of the full committee, to develop comprehensive
    legislation that addresses regional concerns and also protects
    the National interest. I look forward to the hearing today, and
    to hearing the testimony of the witnesses that we have before
    us.
        With that, I would like to recognize the distinguished
    chairman of the full committee, Mr. Bliley, for an opening
    statement.
        Chairman Bliley. Thank you, Mr. Chairman. I want to commend
    you for holding this timely hearing on the role of Federal
    electric utilities in a competitive electricity power market.
    This is an important issue, not only because Federal electric
    power has a direct impact on many States, but more
    significantly, because of its impact on the national power
    market.
        The Federal Government assumed its role as an electricity
    generator and marketer over 60 years ago. Federal projects were
    intended to control floods, promote river transportation,
    supply water for farms and rural communities, and ultimately,
    and foster employment and economic growth in regions of the
    country that were economically less vibrant. Federal power
    helped advance important goals. I think in many areas victory
    has been declared.
        Today, the original rationale for having the Federal
    Government in the electric power business is far less
    compelling than it was 60 years ago. You have heard me say I
    don't believe the Federal Government should be in the power
    business, but it is. So accepting that, we must figure out how
    to integrate the Federal utilities into a competitive market,
    with minimum distortion to national electric markets.
        For example, some 50,000 circuit-miles of the Nation's
    transmission capacity is controlled by Federal electric
    utilities and is outside the open access mandates of the Energy
    Policy Act and FERC's Order 888. I believe we need to explore
    uniform regulation of all transmission lines, regardless of
    ownership. As I have stated before, benefits of competition in
    the electricity markets must flow to consumers and businesses
    alike. That includes homes and businesses in the Tennessee
    Valley and the Pacific Northwest.
        I believe that the electricity power market must be
    national, open, robust, and competitive. That means all
    consumers, no matter their size, where they are located, or who
    they are presently served by, must be able to choose their
    power supplier.
        Again, Mr. Chairman, I commend you for holding this
    hearing. I applaud the member working group you and Mr.
    Pickering and others are leading. I want to move out smartly on
    putting together a comprehensive package--and I mean
    comprehensive. I look forward to hearing the testimony of the
    witnesses. I thank you for yielding me this time.
        Mr. Barton. Thank you, Mr. Chairman. We now recognize the
    distinguished ranking member of the full committee, Mr.
    Dingell, for an opening statement.
        Mr. Dingell. Mr. Chairman, I thank you. I commend you for
    holding these hearings. I would note that a couple of matters
    in the last couple of days have distressed me. One of which is
    the possibility that we will have a difficulty getting the
    required number of witnesses to explore properly all aspects of
    the different bills before the committee. That would include,
    of course, concerns about what the administration proposes to
    do; the impact of this legislation, if it moves forward, on the
    environment, on industry, on reliability, on investors,
    shareholders, and bond holders. I hope that the Chair will be
    very careful to see to it that we have full and thorough
    inquiries into these matters, and witnesses that might be
    needed to accomplish full and careful hearings. That would
    include, of course, questions of impact of this legislation on
    places like the TVA areas and the Bonneville areas, where the
    major utilities and distributors and generators of power
    function under different exemptions from regulations, the anti-
    trust laws; and have a number of special preferences, including
    extensive subsidies.
        I think we need to know how they will be affected, and how
    deregulation, which would permit them to function outside of
    their service areas, would affect other utilities. I hope the
    Chair will give very careful attention to the need to hear from
    all of the witnesses, including some that the minority will be
    suggesting to the leadership of this committee in the hope of
    being helpful.
        I would also add that I am somewhat troubled about the fact
    that the staff of the minority was excluded from certain
    meetings which were held here to discuss these matters. That
    was done under the invitation to the meeting. I found this to
    be intensely distressing, personally. I did not get evidence of
    the kind of cooperation that I keep hearing the majority wishes
    to afford the minority, and wishes minority to afford in
    return. I would hope that perhaps the Chair, in his wisdom,
    would address this question. As I have observed, it has been
    very distressing to me. Probably that distress would reflect
    itself in these proceedings in a fashion which might inhibit
    the orderly processing of this business.
        Now, Mr. Chairman, I am pleased to note that you are
    considering the TVA and the Bonneville Power Administration.
    They achieve unique advantages for themselves and for the areas
    that they serve. We will want to necessarily know whether they
    should continue to achieve these advantages, and how they will
    impact the other parts of the country and other areas that are
    served. I would note that times have changed since the days
    when retail electric markets were served by a single supplier
    generating most, if not all, of its own power.
        In that era, Federal power marketers, like other
    monopolies, were assigned to serve a specific region. They
    provided fine service. Consumers outside these special areas
    could only envy the low prices that TVA and Bonneville offered,
    and the industries whose low prices attracted them to that
    region. This was, of course, through generous financial backing
    of the Federal Government.
        Today, these giant generators face a more complex world.
    Bonneville is trying to work off billions of dollars in
    nuclear-related stranded costs. It may be responsible for years
    of significant new costs for fish and wildlife conservation
    measures, which should be a matter into which this committee
    will inquire carefully. Because the preservation of the fishery
    resources of the Northwest are not a local concern, but are a
    national concern. They involve the possible extinction of whole
    strains of existing wild salmon stocks, a great calamity for
    the Nation and for the area. I hope that this will be a matter
    of great concern to this committee.
        Again this presents an interesting development and an
    interesting dilemma. Muni's, rural co-ops, private utilities
    and industrial customers in these areas all express interest in
    the benefits of retaining competition, so long as they can
    retain an option to purchase this Federal power; i.e., a first
    call, or a first right of refusal, while at the same time being
    able to sell outside of their service area. Who can blame them?
    They have anti-trust exemptions. They have special exemptions
    from regulations. They have a very fine situation where they
    get an extensive and generous Federal subsidy. I confess that
    my constituents, like anybody else of logic and good sense,
    would like to see a similar right to favorable, and indeed,
    special treatment. After all, we all only want just a fair
    advantage in this world.
        The question for this subcommittee to consider then is what
    will be the role of TVA, Bonneville, and other Federal
    agencies? What role will they play in a more competitive
    electricity market? How will they affect the services of other
    electricity suppliers? How will they continue to function? Will
    they continue to have subsidies while they sell outside of
    their regions? That is an interesting question. Should regional
    customers have the best of both worlds: a monopoly with respect
    to purchasing Federal power, and all the potential benefits of
    competition without the risks? Is this progress, or is it
    simply a retooled version of traditional, regional preference
    that benefits just a few, courtesy of the financial backing of
    many?
        I want to commend you, also, Mr. Chairman, for your
    willingness to hold a hearing on the administration bill. This,
    as I have noted, is a fine bill. It is marketed to us as a
    deregulation bill. But as I look at it, it contains many fine
    examples of new environmental regulation, subsidies and things
    of that kind, into which the committee should inquire with
    extraordinary care.
        Indeed, in any event, these will be interesting hearings. I
    look forward to a thorough and careful explanation of the
    matters in question here today. Thank you, Mr. Chairman.
        Mr. Barton. Thank you, Congressman. Before the ranking
    member, Mr. Hall, proceeds, I did not hear exactly what you
    said about some of the process concerns on the working group
    that we have established. So I will have to read your
    statement.
        Mr. Dingell. I will make a copy of the letter that was sent
    out on the invitation, which invited members, but which I
    interpreted and our staff interpreted as excluding them from
    the working group. I would think this starts group's efforts
    out under a very dark star. I would hope that the Chair would
    be interested enough in that to see that that did not occur.
        Mr. Barton. Well, it would certainly be counterproductive
    to establish a working group with the intent to exclude anyone.
    So I am going to reserve the right, until I read this letter. I
    assure the gentleman from Michigan that I am trying to be
    inclusive, not exclusive. If we want to include anyone at all,
    it is the distinguished gentleman from Virginia, Mr. Bliley,
    and the distinguished gentleman from Michigan, Mr. Dingell.
        Mr. Dingell. Thank you. I knew the Chair, when this
    complaint was raised, would be as concerned as I was about the
    exclusionary practices that I saw in this unfortunate letter.
        Mr. Barton. I am always concerned when anybody of my
    subcommittee or full committee is concerned. We now recognize
    Mr. Hall for an opening statement.
        Mr. Hall. Mr. Chairman, I agree. We ought to let Bliley and
    Dingell in on anything that is going on.
        The title of today's hearing, ``The Role of the Federal
    Utilities,'' can raise a real question of whether or not there
    should be a role. I don't believe that is the intent implied in
    the title, but I want to make it clear that I believe there is
    a role.
        The question that is really before us is how Federal
    utilities conduct their business. How will their business
    practices need to change as States throughout the country
    embark on restructuring investment-owned utilities? My State is
    underway on it right now. In a word, the question is not the
    business role, but, I think, the business behavior.
        The Tennessee Valley Authority, Bonneville Power
    Administration and the other PMAs, including the Southwest
    Power Administration which is in my district, have a long and
    storied history providing dependable, low-cost power to their
    service areas. They literally electrified the countryside in
    the 1930's and 1940's. They brought economic development and a
    new and better way of life to hundreds of thousands of people.
    They were established as regional entities and have been
    devoted to remaining regional entities throughout their
    existence.
        That was all good and well under the pluralistic electric
    system where investor-owned electric utilities, public power
    systems and rural electric cooperatives operated in discrete
    service areas. However, the drive to bring competition to this
    industry is putting new pressures on the Government utilities
    who have operated under substantiality different rules, and
    largely without regulation.
        There is going to be some changes. Competition and the goal
    of the establishment of a nationwide electric market are
    causing us to rethink how the Federal utilities behave, and how
    they can be restructured to become strong but fair players in
    the electric industry of the future. Should they remain
    regional entities? Should the benefits of their low-cost power
    be made more available to those elsewhere? There is a delicate
    balance on a number of issues like this--one that needs to be
    struck as we consider whether to take up Federal electric
    utility restructure legislation. If so, how?
        Let me mention just one example where striking this balance
    is made difficult. Kaiser Aluminum operates an aluminum
    extrusion plant in Sherman, Texas, in my district. Their source
    of aluminum is Kaiser's aluminum smelter in the Northwest,
    served by BPA as one of its direct-service industries. Loss of
    that smelter as a result of high electric rates would most
    certainly put the Sherman plant in jeopardy.
        So as we begin to deal with making changes in the Federal
    electric utilities, we need to recognize that these are
    difficult questions. As a committee, we need to be fully
    informed before we make our decisions. Snap judgments, based on
    fragmentary information or hearsay is the worst way to
    legislate. Mr. Chairman, it is not the way I have ever seen you
    operate, and I don't expect to see that now.
        I thank you for the time that you have given me and for the
    cooperation that you have extended to us. I would ask unanimous
    consent that members be allowed to submit questions to these
    witnesses, because I am going to have to be going and coming.
    We have other committee meetings today. I would ask you to
    leave the record open for their answer. I yield back my time.
        Mr. Barton. Without objection. The gentleman from Georgia,
    Mr. Norwood, is recognized for an opening statement.
        Mr. Norwood. Thank you, Mr. Chairman. Thank you very much
    for holding these hearings today on perhaps what is one of the
    most complex issues surrounding the whole electricity
    restructuring debate. That is: How do we create the ideal goal
    of a level playing field for all electricity suppliers, as we
    seek to give better service and lower rates to their customers?
    Hopefully, this hearing today will shed some light on that, Mr.
    Chairman. It has sort of been my experience in Washington that
    everybody wants a level playing field. They just wanted it
    tilted in their direction.
        As we all know, electricity in the United States is
    generated, transmitted, and distributed by a variety of
    suppliers who are subject to differing levels of Federal and
    State regulation, with a variety of taxation schemes and
    dissimilar legal and corporate structures. Now that we know
    this, it is conceivable to me that the further we probe into
    this issue, we may discover that a Federal role in providing
    choice in electricity to customers may very well be a steep
    mountain to climb.
        In my part of the country, the battle between public and
    private power is almost as old as the battle of boll weevils. I
    am less interested in seeing one side--or the other--win, than
    I am in seeing both sides survive. Therefore, I will be looking
    to our panelists, our experts, on this issue--and everybody at
    home knows what experts means up here--to shed some insight on
    how the Federal Government can pass a deregulation program
    that, at least, from the start will not put any of the
    suppliers at a competitive disadvantage.
        Again, Mr. Chairman, I really look forward to hearing the
    panelists in this hearing. I thank you for having it.
        Mr. Barton. I thank the gentleman from Georgia. I would now
    to recognize the gentleman from Ohio, and before I do, make a
    joint announcement with Congressman Hall.
        We have established a working group to begin to address
    some of these issues in more detail. It meets every Tuesday, at
    4:30 p.m. We had our first meeting this week. We had the
    Secretary of Energy, Mr. Richardson. We had 12 members present,
    6 Republicans and 6 Democrats. Congressman Chip Pickering is
    one of the co-chairs. The other co-chair is the gentleman from
    Ohio, Mr. Sawyer, whom Congressman Hall and I have asked to co-
    chair with Mr. Pickering.
        For those groups that are in attendance today, if you would
    wish to appear before the working group, we encourage you to
    get with Mr. Pickering's staff or Mr. Sawyer's staff. We are
    going to be running a parallel process with our formal hearing
    process.
        We are glad to welcome the gentleman to that co-
    chairmanship and recognize him now for an opening statement.
        Mr. Sawyer. Thank you, Mr. Chairman. Thank you for these
    hearings, and for the work that you are doing to try to build a
    consensus document.
        I have to tell you that I have not had the opportunity,
    yet, to consult with my ranking member on the full committee.
    As you probably detected this morning, it would probably be a
    good idea. I have spoken with his staff, but I have not spoken
    with him yet.
        Mr. Barton. I was told that you had accepted the
    illustrious position I have just publicly announced that you
    have been appointed to. I should have consulted with you before
    I made that announcement. We hope you will.
        Mr. Sawyer. I will get back to you shortly, Mr. Chairman.
        Mr. Barton. Okay. Film at 10, as they say.
        Mr. Sawyer. Let me just associate myself with the remarks
    of virtually everybody who has spoken to this point. The
    Federal utilities do have a unique role in this broader system.
    In the end, by the time we are done we are not really talking
    about one side or another, but rather an integrated system,
    whole, if we work well throughout any transition that occurs.
        I am grateful to see so many of our colleagues here to
    comment on the importance of this particular hearing to their
    regions of the country, and to the Nation as a whole. As you
    know, I have focused a good deal of my interest on
    transmission, in the belief that we need a flexible Federal
    framework to attract the needed capital so the grid can grow
    and thrive in a new environment. The Federal utilities will
    play in important part in that equation. Their operation of the
    transmission, and their components in the transmission grid can
    have a profound effect on the way in which electricity is moved
    and marketed around the country.
        I will be particularly interested today to hear from our
    witnesses in whether they believe that FERC should have
    jurisdiction over major transmission providers, whatever their
    genesis within the system. What happens if FERC were not to
    have that authority? I would also be interested in their views
    on how Federal utilities would be affected by FERC's decision
    on whether to require affiliation with an RTO. I know, as I am
    sure you do, Mr. Chairman, that FERC is about to release its
    notice of proposed rulemaking on this matter today. Final
    result of that effort could have a serious effect on the
    Federal utilities and their control of the grid.
        Other issues concern preferential access to power and
    emission standards. These, too, could have far-reaching effects
    because of the wide net the Federal utilities cast over the
    system.
        In conclusion, let me just say, again, thank you for the
    breadth of hearings; for the diversity of the points of view
    that we have heard, and for the work that lies ahead.
        Mr. Barton. The gentleman from Ohio would recognize the
    Vice Chairman, Mr. Stearns, of Florida, for an opening
    statement.
        Mr. Stearns. Good morning. Thank you, Mr. Chairman. Let me
    welcome our guests and our colleagues who are patiently sitting
    here as we offer our opening statements.
        In this hearing we will examine the issues that are related
    the role Federal utilities. Mr. Chairman, I think it is very
    important to have this hearing. As most of you know, there are
    nine Federal utilities which are part of the several agencies
    in the Federal Government; which include several agencies of
    the Federal Government. Four agencies operate electric
    generation facilities. A fifth power marketing administration,
    the Alaska Power Administration, was sold under a 1995 Federal
    legislation act.
        Now, I think for many of us the Tennessee Valley Authority,
    the TVA, is the largest Federal electric utility. Many of us
    are concerned how we should operate, and what we should do in
    that respect. It is authorized to issue bonds to pay for its
    costs. It cannot issue stock, so it has to go to the bond
    market for it. It has a current debt level, I believe, of
    almost $26 billion. It can go all the way up to $30 billion. It
    has gone as high as $28 billion.
        Because of the provisions in the TVA Act and other laws,
    TVA's wholesale customers must purchase from TVA. TVA has not
    been exposed to competition from other electric suppliers. TVA
    is not subject to FERC or State public utilities commission
    oversight. A recent study by the Putnam-Hayes-Bartlett study
    group indicated that for Florida taxpayers are helping to
    subsidize the TVA, annually at the amount of $1.2 billion. So I
    think I am interested to hear how our panelists hope to protect
    the taxpayers, while ensuring full cost recovery by the Federal
    electric utilities.
        The Bonneville Power Administration serves the Pacific
    Northwest. It operates one of the largest transmission systems
    in the country. FERC has limited authority over its rates under
    the Northwest Power Act. Unlike TVA, Bonneville has been
    exposed to strong wholesale competition. The four Governors in
    that region have recommended certain changes. So I think it is
    altogether important that we discuss what should be done for
    these utility companies, like the TVA and Bonneville. I
    appreciate the opportunity to hear our witnesses. Thank you,
    Mr. Chairman.
        Mr. Barton. Thank you, Congressman Stearns. We recognize
    the gentleman from Tennessee, Mr. Bryant, for an opening
    statement.
        Mr. Bryant. Thank you, Mr. Chairman, and good morning. I am
    glad that we are having this hearing on the role of Federal
    electric utilities and electricity competition. I thank all of
    the witnesses for being here today. I want to extend a special
    welcome to Mark Medford, Herman Morris and James Baker, from
    Tennessee, as well as my two colleagues from Tennessee, Bob
    Clement and Zack Wamp, who share, as we all do in the Tennessee
    delegation, the desire that our State continue to have
    reliable, relatively inexpensive power.
        The Tennessee Valley Authority has played a crucial role in
    the history and economic development of the State of Tennessee.
    Since 1933, TVA has brought us electricity, jobs and economic
    development, flood control, navigation, and recreation. TVA is
    truly the only entity of its kind. It has meant a lot to the
    people of Tennessee and the Tennessee Valley.
        We are here to discuss the future of the Tennessee Valley
    Authority, as well as the other Federal electric utilities. I
    am glad that TVA and the TVPPA have come to an understanding on
    some of the important issues. I hope that continuing talks will
    lead to more agreement within our region. Memphis and Knoxville
    would like the ability to go outside the fence of TVA, and we
    need to balance their need for competition against the needs of
    other Tennessee utilities.
        I am particularly concerned for the rural areas of
    Tennessee, like much of my district. Rural customers should not
    be left behind in the race to restructure. Tennessee is in a
    unique position among the States, because it is the only State
    in the country where electric restructuring cannot occur
    without Federal action. Tennessee's electric industry is wholly
    under the Tennessee Valley Authority.
        While I support fair treatment for TVA, I do not believe
    that it is my role to merely be a defender of the TVA. I
    believe that it is my role to be the defender of the citizens
    of Tennessee, and in particular, the Seventh District, which I
    represent. Whatever the future holds for the electric industry,
    I want ensure that all of the people of Tennessee continue to
    have low-cost, reliable power for decades, as they have had
    through TVA.
        At the end of the day, though, we need to balance all of
    the interests concerned. I look forward to working with all of
    the parties to maintain the low costs and reliability of
    electricity in Tennessee. I yield back.
        Mr. Barton. We thank the gentleman from Tennessee. We would
    recognize the gentleman from Oklahoma, Mr. Largent, for an
    opening statement.
        Mr. Largent. Mr. Chairman, I would just say thanks for
    holding this hearing and continuing to move the ball down the
    court on electricity restructuring. I want to tell you that,
    frankly, I am a little dismayed with the ranking member's
    comments about the working group.
        As you know, this is an effort that Chip and I have been
    working on to actually allow members to elbow their way to the
    table; to be a part of the process--certainly not thinking that
    we were excluding anybody. I hope that those comments will
    relieve any anxiety that anybody might have that they are being
    excluded.
        Mr. Barton. Well, I am sure that we will be able to work
    that out. That is another step in the road toward electricity
    deregulation. We will make it. I am very confident of that. Do
    you have any other additional opening statement?
        [Mr. Largent shakes head indicating no.]
        Mr. Barton. We would recognize the gentleman from Illinois,
    Mr. Shimkus, if he wishes to make an opening statement.
        Mr. Shimkus. Just to thank you for holding this hearing. I
    am interested in hearing my colleagues. So I yield back.
        Mr. Barton. The distinguished gentleman from the great
    State of Kentucky, Mr. Whitfield, for an opening statement.
        Mr. Whitfield. Mr. Chairman, like the other members of this
    committee, I am also quite excited about these hearings and
    look forward to the testimony of colleagues today. I would just
    mention that Kentucky has an average price of 4.03 cents per
    kilowatt/hour on electricity. So our rates are very low. Those
    of us from Kentucky want to proceed in a cautious manner on
    this subject. I look forward to our witnesses today,
    particularly those from TVA. I yield back the balance of my
    time.
        Mr. Barton. I thank the gentleman. The gentleman from the
    great State of Arizona, Mr. Shadegg, for an opening statement.
        Mr. Shadegg Thank you, Mr. Chairman. I, too, want to
    complement you on holding this, the fourth hearing in our
    series on electricity restructuring, addressing the role of
    Federal electrical utilities. I believe this is a critically
    important issue as we move forward in restructuring the utility
    industry in America and deregulating the sale of electrical
    power.
        Congress created these entities. It is, I think, Congress
    which must address how they are to be structured and what role
    they are to play as we move forward from this point. The
    Federal electrical utilities control thousands of miles of
    transmission wires and tens of thousands of kilowatts of
    electrical generating capacity. Their exclusion from
    competition, I think, would distort the marketplace and would
    not be in the interest of American consumers.
        In the 104th Congress, I introduced legislation which would
    have privatized the power marketing associations, excluding TVA
    and Bonneville. Specifically, this legislation was unique in
    that it would allow the PMA customers to buy the PMAs and would
    have recognized their existing ownership interest in those
    PMAs. I do find it somewhat curious that elsewhere throughout
    the world, in Europe and in South America, we are moving away
    from publicly owned generation of electricity to privately
    owned generation of electricity, but here in the United States,
    we don't seem to be able to make significant progress in that
    direction. I think it is vitally important, as we move toward
    energy deregulation and as technology pushes us toward energy
    deregulation and competition, that we address the issue of
    proper role for the existing Federal electric utilities and the
    PMAs.
        I compliment you for holding this hearing. I think it is an
    issue that we are compelled to address and resolve in the
    interest of all electricity consumers in the country. I thank
    the gentleman.
        Mr. Barton. Seeing no other members present, all members
    not present that are members of the subcommittee will have the
    requisite number of days to enter their opening statements into
    the record, at the appropriate point.
        [Additional statement submitted for the record follows:]
     Prepared Statement of Hon. W.J. ``Billy'' Tauzin, a Representative in
                      Congress from the State of Louisiana
        Mr. Chairman, I commend you and the Subcommittee for holding this
    hearing on the role of Federal electric utilities, the Tennessee Valley
    Authority and the Federal Power Marketing Administrations, on
    electricity competition. I hope that the Subcommittee and the full
    Commerce Committee will carefully explore the role of Federal utilities
    in the emerging electricity marketplace as we advance legislation to
    increase competition in that vital industry.
        Throughout the Southeast, people are very much aware of the
    importance of the TVA to our economy. Although it is not as widely
    known, the actions of other Federal utilities, especially the
    Bonneville Power Administration, can also have economic impact in our
    region. Many of the jobs in my state of Louisiana, as well as many of
    the jobs in Texas and other states represented by Subcommittee members
    can be adversely effected by the possible actions of one of the PMAs,
    the Bonneville Power Administration, to discontinue serving its
    industrial customers, and particularly the aluminum industry, after the
    year 2000.
        I am very concerned that workers in my district will be hurt if the
    Bonneville Power Administration decides that it will no longer provide
    electric service to its traditional aluminum customers on a basis
    comparable to the cost of service provided to other BPA customers.
    Approximately forty percent (40%) of America's primary aluminum
    producing capacity is located in the Northwest. The industry is
    dependent upon the hydropower based electricity supplied by BPA.
    Electricity is the largest single cost of producing aluminum,
    representing almost a third of total costs of production.
        In the State of Louisiana, as well as in the State of Texas--so
    ably represented by the Chairman and Ranking Minority Member of this
    subcommittee, large alumina refineries produce the raw materials used
    by the primary aluminum industry in the U.S. These plants, including
    Kaiser's Gramercy alumina refinery in my district, provide hundreds of
    highly skilled, high paying jobs and contribute hundreds of millions of
    dollars to the local economies. Although the Southeastern alumina
    plants do not send all their alumina directly to the primary plants in
    the Northwest, they are dependent upon a healthy U.S. primary aluminum
    industry overall for their economic viability. Loss of the forty
    percent of the U.S. primary production located in the BPA service area
    would have a severe impact on demand for alumina in the United States,
    reducing the market for the products of the Southeastern alumina plants
    and threatening the jobs in Louisiana and Texas.
        Mr. Chairman, the importance of BPA continuing to supply
    electricity at competitive rates to its aluminum customers is
    recognized by both the management and union workers of the aluminum
    companies in the Southeast as well as the Northwest. Most of the
    workers in the aluminum and alumina plants in both regions are
    represented by the United Steelworkers of America. Last month,
    Steelworkers' President George Becker led a group of aluminum company
    and union officials in a meeting with Energy Secretary Richardson to
    discuss the situation facing the Northwest aluminum industry. The
    message from that meeting was clear, the decisions made by the
    Bonneville Power Administration to either continue serving its aluminum
    and other industrial customers or to arbitrarily cut off those
    customers from BPA service, will have major economic impacts on the
    Northwest and the rest of the nation.
        Beyond the impacts on primary aluminum plants in the Northwest and
    the alumina plants in the Southeast, a healthy domestic aluminum
    industry is essential both for the U.S. national defense and for a
    healthy civilian economy. In the 1930's and 1940's the Federal
    Government encouraged the development of the primary aluminum industry
    in the Northwest to supply metal for military aircraft and ships, to
    provide a large, dependable load for BPA's power, and promote
    additional economic development. The Federal Government was so
    committed to the development of the aluminum industry in the Bonneville
    service area that four of the first six aluminum plants were built by
    the Government and later sold to private industry. Today, many
    companies throughout the U.S. are dependent on aluminum produced in the
    Northwest to manufacture products as diverse as airplanes, motor
    vehicles, ships, building materials, and beverage cans. Aluminum's
    light weight, high strength, and energy efficient recyclability have
    made many of the most essential and popular products used by Americans
    more efficient and environmentally friendly.
        The process of transition from regulated to competitive markets in
    the energy sectors can create special vulnerabilities for energy
    intensive industries such as the aluminum industry. Unfortunately, we
    learned a painful lesson in the South during the transition to
    deregulation of natural gas. Prior to deregulation of the interstate
    gas system, a large primary aluminum industry existed in the Southeast
    based upon the availability of electricity generated from low cost gas
    in the uncontrolled intrastate system. Federal policies during the
    transition led to large increases in gas prices in the Southeast and
    the loss of primary aluminum and alumina plants. Among the plants
    permanently closed during the transition to decontrol of natural gas
    were two of Kaiser's three large plants in Louisiana, a primary
    aluminum plant at Chalmette and an alumina refinery at Baton Rouge.
    Those two plant closures resulted in the loss of approximately 4000
    jobs in the aluminum industry in Louisiana. And as Steelworker
    President Becker informed Secretary Richardson, there is a 4 to 1 rate
    of indirect job losses for every job lost in the aluminum industry. The
    loss of primary aluminum plants and the alumina refineries that supply
    the primary industry has been repeated in other states.
        The Federal electric utilities also have had experience with
    increases in electricity prices threatening the economic viability of
    the aluminum industry in their service areas. In the 1980's aluminum
    plants on the both the TVA and BPA systems were either temporarily
    curtailed or permanently closed when electricity prices rose to levels
    comparable to those currently projected by BPA for the Northwest
    aluminum companies if BPA does not continue to serve those plants on
    terms similar to that provided to BPA's other traditional customers.
        In the late 1970's, the Bonneville Power Administration predicted a
    severe shortage of electricity and considered cutting off power to its
    direct service industrial customers. In the 1980 Northwest Power Act,
    Congress required BPA to offer service to the aluminum industry and
    BPA's other industrial customers through 2000 with continuing authority
    to provide service to those industrial customers beyond that time.
    Apparently, the Bonneville Power Administration does not have or
    project a shortage of power that would require it to cut off its
    traditional customers after the expiration of their existing contracts
    in the year 2000. BPA is using its discretionary power to add new
    customers and increase loads to existing customers within and outside
    the Northwest region that constitutes its traditional service area. In
    1995 BPA sought and received Congressional approval to sell to new
    customers outside of the Northwest region any ``excess'' electricity
    resulting from reduced contract demands by BPA's traditional customers.
    At that time, BPA informed Congress that the out of region sales would
    not deprive BPA's traditional customers of power. BPA has also recently
    proposed expanding its electricity sales to new groups of customers in
    the Northwest. This expansion of service to new and existing customers
    is occurring at the same time that BPA is threatening to cut off
    service or greatly increase the price charged to the traditional
    industrial customers.
        Mr. Chairman, I understand that the subcommittee will be receiving
    testimony today on the BPA situation from the Department of Energy and
    from one of the Northwest aluminum companies, the Reynolds Metals
    Company. Like Kaiser Aluminum, Reynolds operates primary aluminum
    plants in the BPA service area and an alumina refinery in the
    Southeast. I hope that the Subcommittee will fully explore the
    intentions and policies of BPA with regard to the sale of electricity
    to its direct service industrial customers. This is a matter of
    considerable impact and importance not only to the states of the
    Pacific Northwest, but to Louisiana, Texas, and other areas of the
    country. It is a matter which directly affects many of my constituents
    and I intend to follow closely BPA's actions as a member of both the
    Commerce and the Resources Committees.
        Thank you.

        Mr. Barton. The Chair is basking in the glow of all these
    members' complimenting him for holding the hearings. We hope
    they are just as interested in helping to move legislation when
    we get to that point.
        We are now going to hear from our first panel, which is a
    distinguished group of Congressmen. Normally, we start the
    Chair's left and go to the right. I don't think it would be
    fair since Mr. Hastings, Mr. McDermott and Mr. DeFazio were the
    last members here. So actually, we are going to go in order of
    appearance. We are going to start with Mr. Clement, who was the
    first member here; then Mr. Franks, who was the second member;
    then Mr. Wamp, then Mr. McDermott, then Mr. Hastings, and then
    Mr. DeFazio. So we will recognize members in order of
    appearance. Unless, Peter, do you have a pending assignment?
        Mr. DeFazio. We are in the middle of another hearing. I am
    the only Democrat at the hearing, Mr. Chairman. That is a
    problem.
        Mr. Barton. Okay. Well, would it help you if you went
    first?
        Mr. DeFazio. If it does not offend my colleagues. I would
    not want to offend my colleagues.
        Mr. Barton. Okay. Well, we will start with you and then we
    will go to Mr. Clement. So you are recognized. Your statement
    is in the record in its entirety. We are going to recognize you
    for 5 minutes.

    STATEMENTS OF HON. PETER DEFAZIO, A REPRESENTATIVE IN CONGRESS
    FROM THE STATE OF OREGON; HON. BOB CLEMENT, A REPRESENTATIVE IN
       CONGRESS FROM THE STATE OF TENNESSEE; HON. BOB FRANKS, A
     REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY; HON.
       ZACH WAMP, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF
      TENNESSEE; HON. JIM MCDERMOTT, A REPRESENTATIVE IN CONGRESS
          FROM THE STATE OF WASHINGTON; HON. DOC HASTINGS, A
     REPRESENTATIVE IN CONGRESS FROM THE STATE OF WASHINGTON; AND
     HON. GEORGE R. NETHERCUTT, JR., A REPRESENTATIVE IN CONGRESS
                      FROM THE STATE OF WASHINGTON

        Mr. DeFazio. Thank you, Mr. Chairman. I don't know if this
    is working; the little light doesn't work. I guess this is
    working. There we go.
        Thank you, Mr. Chairman. My statement is in the record. In
    the interest of time, and given the graciousness of the Chair
    and my colleagues, I will condense my remarks.
        I would just like to address, briefly, a regional concern
    as it relates to your restructuring debate, and a few brief
    comments on the restructuring debate, generally. Perhaps Mr.
    McDermott will echo some of my concerns in his testimony.
        In the Northwest, we are tremendously dependent on the
    Bonneville Power Administration, a Federal power marketing
    agency. We, in the last Congress, came together as a region.
    Bob Smith, the former Chairman of Agriculture, and I organized
    a bipartisan group to develop a Bonneville Power Administration
    title to any potential restructuring legislation. We are
    continuing to meet on a bipartisan basis. What we are looking
    at, in particular, are provisions that would put the Bonneville
    Power Administration--which is, right now, given a unique
    forbearance under Federal law and the wholesale restructuring
    of a few years ago--to bring their transmission under Federal
    aegis, and take care of some other concerns that have been
    expressed by their diverse customer groups in your legislation.
        I would just like to say that there are, sometimes,
    misperceptions about the Bonneville Power Administration. We do
    have low electric rates, because we are primarily dependent
    upon hydropower through the Bonneville Power Administration.
    But BPA does not take appropriations from the Federal Treasury.
    BPA, in fact, pays over $600 million a year on past borrowings
    from the Federal Treasury for the dams and the transmission
    system. The interesting thing is that at the end of amortizing
    that debt, the assets will belong to the Federal Government. So
    those who criticize the Northwest and say we are getting a
    sweet deal, I would like to offer them the same deal on their
    house mortgage: which is, they pay the house mortgage for 30
    years, and then the bank owns the house. So that needs to be
    taken into account.
        Second, we did refinance the debt to take care of the
    concerns about some of the past borrowings that were very low--
    the interest rates were low. When Senator Hatfield was Chair of
    the Appropriations Committee, we restructured the debt; moved
    it to what was, then, the market rate. We did not take a
    variable rate, but we moved to the market rate a few years ago;
    paid a $100 million premium as points to the Federal Treasury
    in order to restructure the debt to that market, and have met
    all of our obligations since that time.
        Finally, just on the broader issue of restructuring, I have
    seen recently, people saying that the problems in the wholesale
    market, evidenced in the Midwest, last year, or in California
    with price spikes, are the reasons why we should move ahead
    with retail restructuring. Actually, those are problems that
    are still the result of the incomplete development of our last
    restructuring legislation in the wholesale market. The retail
    restructuring, really, does not relate to those problems, and
    is unlikely to help resolve those problems. So I would hope
    that the committee would give some particular scrutiny to
    resolving the problems of the last deregulation in the
    wholesale market so we can develop a fully functioning market
    in the wholesale areas that will avoid these extraordinary
    price spikes.
        Then, finally, I would be remiss in saying--you know, from
    a low-cost region of the country; having seen reports from a
    number of think tanks, from the Department of Agriculture and
    others assessing the differential impact between a number of
    Midwest, Western, and even some Southeast States, and other
    States' restructuring, particularly high-impact and rural
    areas--the fact that a number of other think tank studies point
    to the fact that it is unlikely that retail competition will
    bring benefits to the individuals or small businesses in my
    region and in many other States; but will benefit,
    disproportionately, the largest businesses and a few providers.
    I would urge the committee, if it goes forward, to go forward
    in a way that provides flexibility to the individual States to
    meet their needs, so they can develop the most efficient
    markets possible serving their customers.
        With that, I thank the chairman for his indulgence--and my
    colleagues. Thank you, Doc.
        [The prepared statement of Hon. Peter DeFazio follows:]
       Prepared Statement of Hon. Peter A. DeFazio, a Representative in
                       Congress from the State of Oregon
        Mr. Chairman: Thank you for inviting me to testify at your hearing.
        About 2\1/2\ years ago, Bob Smith and I organized the Northwest
    Energy Caucus in the House. The Caucus includes every House member from
    the four Northwestern states--Oregon, Washington, Idaho and Montana.
    Our goals were to develop legislation that could form the basis for a
    NW title in a national energy industry restructuring bill--legislation
    that would retain cost-based rates for federal power in the Northwest,
    while protecting the interests of the U.S. taxpayer.
        Our delegation has been working well together--and we believe we
    are very close to completing our task.
        We have appreciated your committee's forbearance and hope to
    provide you with a proposal that--at a minimum--will put BPA's
    transmission system under the same rules that apply to other
    transmission owners, while providing a mechanism for dealing with any
    stranded costs that Bonneville might have in the future--as unlikely as
    that is.
        I want to say a few words about the Bonneville Power
    Administration.
        BPA owns nearly half of the region's generation and as much as 80
    percent of the Northwest's high voltage transmission. It is an entirely
    self-financed agency, not supported by congressional appropriations,
    but rather by sales of electricity and transmission services--largely
    within the Pacific Northwest.
        There are those who mistakenly believe that Bonneville is somehow
    subsidized by the federal government. I would argue that BPA--and the
    Northwest's electric ratepayers--actually provide a subsidy back to the
    Treasury and the US taxpayer.
        We are providing both short term and long term subsidies to the
    Treasury.
        In the short term--in 1994, we refinanced BPA's appropriated
    Treasury debt at current interest rates, thus eliminating the argument
    about interest rate subsidies.
        In that legislation, we also agreed to give the Treasury $100
    million over and above what BPA had previously owed. Think of it as
    points on a home loan--it was a $100 million gift from Northwest
    ratepayers to the U.S. taxpayer.
        Let me carry the home purchase analogy a step further.
        BPA and the citizens of the Pacific Northwest are repaying most of
    the original construction costs of the federal dams on the Columbia and
    Snake Rivers. But even after we repay the Treasury for those costs--
    with interest--the U.S. taxpayer will still own the assets.
        That would be as if after paying off the mortgage on your home, the
    bank still retained ownership of the house and property.
        If that isn't a subsidy FROM the Northwest to the US Treasury, I
    don't know what is.
        But not only are we repaying the costs of the federal investments
    in the region, we are funding an incredibly expensive and ambitious
    salmon recovery effort on the Columbia and Snake Rivers--an effort that
    will soon have a price tag of more than $500 million a year--all paid
    for by Northwest residents.
        I don't know of any other part of the country that is spending as
    much on its endangered species problems.
        Finally--I should add a word on the broader issue of restructuring.
        There are genuine problems in the functioning of wholesale
    electricity markets--problems that cry out for a legislative solution.
    I believe that we can probably come to a consensus on legislation
    addressing the problems that constrain wholesale markets.
        But as you know, that consensus quickly breaks down when we turn to
    the subject of retail competition.
        I am very skeptical about whether average consumers will benefit
    from retail competition. Especially in a low cost region like mine, it
    is very dubious whether there would be any benefit--and under many
    scenarios, consumers could be harmed.
        I continue to believe we should let the states experiment in this
    area and focus our attention on improving wholesale markets until we
    have more experience to draw from on the subject of retail competition.
        That said, I thank the committee for holding this hearing and look
    forward to working with you.

        Mr. Barton. Thank you Congressman.
        Mr. DeFazio. I owe you.
        Mr. Barton. Yes.
        We would now recognize Mr. Clement, who was the first
    member present for his statement.

                     STATEMENT OF HON. BOB CLEMENT

        Mr. Clement. Thank you, Mr. Chairman, and members of the
    Energy and Power Subcommittee. I learned a long time ago, in
    the U.S. Army, to be on time. I am not sure it always works
    that way.
        Mr. DeFazio. Are you digging at me?
        Mr. Clement. No, absolutely not, Peter.
        Mr. DeFazio. I am chairing your subcommittee.
        Mr. Clement. Thank you.
        As a former TVA board director, TVA caucus chairman, and
    former chairman of the Tennessee Public Service Commission; and
    representing the 5th Congressional District of the State of
    Tennessee, we are very concerned, but we are very exited, about
    the possibilities for the 21st century, when it comes to
    utility deregulation and restructuring.
        We do want all regions of the country treated fairly. We
    don't think that it is too much to ask. We also realize that
    airline deregulation, trucking regulation, telecommunications--
    all combined--are not as large as what we are talking about
    now, when we refer to electricity/utility restructuring and
    deregulation. We realize that in this country we have the
    private, investor-owned utilities, but we also have the public,
    such as Bonneville, the PMAs and TVA.
        We think that it might make a lot of sense in this country
    to have public and private. You know, a lot of us in Congress
    sort of like public and private ventures. We have been able to
    accomplish much in this country and in our communities by
    public/private cooperation. Maybe the same thing applies, even
    in this sector, when we talk about the public power, versus
    private power. Maybe we need that comparison. Maybe we need
    that contrast to see how they both work. We want them to work
    efficiently.
        We feel like in the Tennessee Valley area at times there
    has been a lot of so-called misinformation and
    miscommunication. That surely applies to the money that it
    appears we will not get this year--the $50 million for flood
    control and navigation--simply because we utilize TVA as the
    vehicle to provide for flood control and navigation, where
    other parts of the country don't have TVA. Therefore, they
    utilize the Corps of Engineers, or other entities, to provide
    those same services. We honestly don't think that we ought to
    be penalized simply because we funnel those funds through TVA.
        The working consensus of the many stakeholders of TVA power
    illustrate our region's willingness to enter into a new era of
    competition. TVA will be subjected to new constraints on its
    activities, while at the same time the Tennessee Valley region
    will be open to new competition from others. We don't fear
    competition, but we do want it to be fair. Under the
    administration's bill, these provisions with TVA and TVPPA are
    largely in agreement.
        We do feel that some of the provisions that we were
    debating in the last Congress have been dropped; such as the
    fence, which permitted private power companies, investor-owned
    utilities, to sell power in the Valley area, but we could not
    sell power outside the Valley area. We thought that was very
    unfair. It has been dropped, now.
        We also had a provision, in the last Congress, that
    pertained to the fact that we couldn't have any new generation
    facilities in the future. That provision has also been dropped.
        TVA, for the first time, would be subject to the anti-trust
    prohibitions. TVA's transmissions rates would be subject to
    FERC jurisdiction. Competitors could sell, without limitation,
    in the TVA region. TVA would be required to renegotiate its
    existing, full-requirements contracts with distributors within
    1 year after enactment. TVA could sell outside its region, but
    only at wholesale. TVA could sell, only at retail, to
    grandfathered customers or other very limited circumstances.
        Let me say to the IOU's, I know you want to expand your
    market. I know you want to make more profit, but you are not
    the watchdog for the Tennessee Valley Authority. We, in
    Congress, have that authority. We, in Congress, must fulfill
    that responsibility--individual members, as well as collective
    members--when it comes to TVA, since it is a federally
    regulated agency.
        Mr. Barton. Congressman?
        Mr. Clement. We do think we are making great progress. I
    might share with you that in a lot of different fronts, we are
    very pleased with the 10-year business plan. We want to hold
    TVA's feet to the fire when it comes to reducing their debt in
    half over the next 10 years, by the target date of 2007. Thank
    you, Mr. Chairman.
        [The prepared statement of Hon. Bob Clement follows:]
     Prepared Statement of Hon. Bob Clement, a Representative in Congress
                          from the State of Tennessee
        Good morning. I want to thank Chairman Barton and Ranking Member
    Hall for affording me the opportunity to testify before your committee
    today on the role of federal power in a competitive electric utility
    industry. Your leadership and the work of this committee will be
    pivotal in shaping the future of our nation's electric power industry--
    an industry that affects every aspect of our lives.
        As a former TVA Board Director, TVA Caucus Chairman, Tennessee
    Public Service Commissioner, and as the Member of Congress representing
    the 5th district of Tennessee, I could spend an awful lot of time
    talking about TVA and its importance in the Tennessee Valley. I
    understand the challenges it faces today, its historic role in the
    valley, and what deregulating the electric utility industry could mean
    for TVA's ratepayers. Although I am not a member of the Commerce
    Committee, I have spent a lot of time working on the issue of
    electricity restructuring. Based on my credentials, you can tell that
    TVA affairs are very important to my constituency and me.
        Recently, the Department of Energy released its electricity
    competition proposal. In all, I am pleased with the Administration's
    bill and the provisions it includes in its TVA Title. While I support
    the concept of consumer choice, I also feel very strongly that we must
    not rush into anything. With deregulation, some of the high cost areas
    of the country will see rates decrease, but regions like ours could
    very well see power rates increase. If we pass a comprehensive
    restructuring bill, we must do it right.
        TVA and the Tennessee Valley Public Power Association (TVPPA), the
    distributors of TVA Power, have worked with the congressional
    delegation and the Administration to forge common ground and consensus
    on key issues that will face our very unique situation in the Tennessee
    Valley. I know they are here today and will be offering testimony to
    discuss their perspectives on electricity restructuring. The work and
    consensus of the many stakeholders of TVA power illustrate our region's
    willingness to enter a new era of competition. TVA will be subjected to
    new constraints on its activities, while at the same time, the
    Tennessee Valley region will be open to new competition.
        In the Administration's bill are several key provisions for which
    TVA and TVPPA are largely in agreement:

     TVA, for the first time, would be subject to antitrust
            prohibitions.
     TVA's transmission rates would be subject to FERC
            jurisdiction.
     Competitors could sell, without limitation, in the TVA region.
     TVA would be required to re-negotiate its existing full-
            requirements contracts with distributors--within one year after
            enactment.
     TVA could sell outside its region, but only at wholesale.
     TVA could sell only at retail to ``grandfathered'' customers
            or in other very limited circumstances.
        While many individual states throughout the nation have made their
    own choices about whether, when, and how to bring retail competition to
    their states, TVA's federal status and the fact that it reaches into
    seven states requires a regional solution in a federal bill. Naturally,
    in any kind of federal bill my priority will be that the TVA region and
    its customers are treated fairly and without bias.
        Unfortunately, there are several forces that will try to convince
    this committee to include legislative provisions that could severely
    threaten the future of TVA. For years, TVA has been the target of
    attack from various regions of the country. Time and again, investor-
    owned utilities claim TVA power customers are subsidized by federal tax
    dollars. The investor-owned utilities, who often carry higher power
    rates, fail to point to one key aspect of the rate differential between
    TVA and the IOUs. TVA does not operate for a profit, it operates plain
    and simple to produce the lowest cost electricity it possibly can. It's
    really pretty simple.
        I find it interesting that so much time, energy, and money is being
    spent here in Washington to actually lobby against TVA. You know, we
    have sure enjoyed good economic times in the valley and low cost,
    reliable electricity certainly helps fuel the fire for our strong
    economy. I can't blame other power companies for setting their sights
    on the possibility of selling power to TVA customers. But let's be
    perfectly clear. The so-called ``watch dogs'' of TVA are anything but
    that. They have one motivation--picking off customers from TVA to add
    to the profits of their companies. I truly must question their
    motivations. These groups claim they are trying to ``ensure TVA doesn't
    violate the law.'' I've got news for these groups--that's our job in
    Congress. I have been, at times, a staunch critic of TVA and I have
    been supportive. As a member of Congress and the committee with
    jurisdiction over TVA, I hold that responsibility very sacred.
        To get back to the main issue, we, members of the delegation, are
    concerned about maintaining low cost electric rates for our
    constituents and for our economic base. Any Member, if they were in our
    shoes, would do exactly the same.
        Today, I am pleased to say that TVA is on the right track. TVA's
    nuclear program's capacity factor is 91 percent, compared to an
    industry average of 78 percent. The fossil program has also seen
    dramatic improvements--in the past decade the capacity factor has
    increased by 20 percent. And the entire TVA generating system--fossil,
    nuclear, and hydro--has the lowest generating costs among utilities in
    the region.
        TVA management is implementing a ``Ten Year Business Plan.'' This
    plan will continue to encourage TVA to prepare for deregulation while
    it reduces its debt. GAO recently released a report that confirmed
    TVA's plan was focused on the right issues and had properly addressed
    these issues. While GAO calls to question some of the assumptions used
    by TVA in the formulation of its plan, in all TVA is taking necessary
    steps to prepare for deregulation. I do, however, call on TVA to
    accelerate their debt reduction plan to meet the original target date
    of 2007.
        Mr. Chairman, I commit to work with you and with this Subcommittee
    in developing and moving a bill to bring greater competition to the
    electric industry and new competition to the Tennessee Valley. I also
    ask you to work with me and others from the Valley Delegation, and to
    recognize the importance of what we have done already in developing a
    regional consensus for TVA's role in a competitive market.
        Thank you very much.

        Mr. Barton. Thank you, Congressman. We don't have a new
    member of the subcommittee, but we do have Congressman Jenkins,
    who has asked to observe our hearing today. We welcome you to
    these proceedings. We don't want our Democrat friends to think
    that we have changed the committee ratio. We have not. He is
    just observing.
        Mr. Franks, we will recognize you for 5 minutes, to
    summarize your statement.

                      STATEMENT OF HON. BOB FRANKS

        Mr. Franks. Mr. Chairman, thank you very much for the
    opportunity to testify today. While I recognize that the scope
    of today's hearing is somewhat limited, I don't want to lose
    sight of the fundamental question that has been raised by Mr.
    Hall. That is: should the Federal Government remain in the
    business of generating and selling electricity?
        While government involvement in the electricity market may
    have been justified some 70 years ago, when only 15 percent of
    rural Americans enjoyed electricity, times have changed
    dramatically, since then. Strong private-sector electricity
    companies exist throughout this country. As evidenced by your
    panel's prior hearings on utility deregulation, these private-
    sector firms are strong, active and ready for competition.
        Other than meeting the parochial, political need of
    providing on-going taxpayer subsidies to a few select
    consumers, Federal utilities are simply no longer necessary. I
    began to focus my attention on these Federal utilities about 3
    years ago, when I realized my New Jersey residents pay some of
    the highest rates in the Nation. But their tax dollars are
    being used to keep the price of electricity at below-market
    rates for Federal utility customers. Not only is this misguided
    Federal policy taking money out of the pockets of New Jersey
    taxpayers to finance low electric rates for folks in other
    regions of the country, it is also luring businesses and jobs
    out of my State. It is hard to convince energy-intensive
    industries, particularly those in the manufacturing sector, to
    stay in New Jersey--or in any other State that doesn't have
    access to public power--when they can simply pack up and move
    to an area that is served by one of these PMAs or the TVA.
        It was back in 1930 when Washington first decided to
    generate market-cheap power as a tool to promote economic
    growth in poor and rural areas. But today, these so-called poor
    and rural areas that enjoy federally subsidized electricity
    include areas like Vail, Colorado; Hilton Head, South Carolina;
    Palo Alto; California, and Seattle, Washington. A recent
    General Accounting Office study concluded that most of the
    households served by Federal utilities are in relatively small,
    urbanized areas. Many of those areas are quite well-off, and
    don't require these taxpayer subsidies. GAO also found that
    electricity from power marketing administrations is sold at 40
    percent below market rates.
        I know my constituents would love to take advantage of that
    bargain-basement electric rate. They simply can't understand
    why their tax dollars are being used to deliver cheap power to
    people living in communities like Aspen and Hilton Head. Of
    course, the advocates of the status quo--the recipients of
    federally subsidized electricity--continue to claim that they
    are not subsidized. But again, citing the GAO, if 40 percent
    below market rates is not subsidized, I do not know what is.
        The beneficiaries of Federal electricity will also argue
    that they are paying the full cost of their electricity. But
    the GAO further found that between 1992 and 1996, three PMAs:
    Southeastern, Southwestern and Western, failed to recover $1.5
    billion of their costs, leaving that burden to Federal
    taxpayers. Recipients of Federal electricity don't like the GAO
    or the CBO studies. They will argue strenuously that they are
    flawed.
        But who are we going to believe today? This institution's
    top independent auditors are the self-interested beneficiaries
    of the current taxpayer give-away. Along with my colleague,
    Marty Meehan, for whom I would like, Mr. Chairman, to add a
    statement to the record.
        Mr. Barton. Without objection.
        [The prepared statement of Hon. Marty Meehan follows:]
       Prepared Statement of Hon. Martin T. Meehan, a Representative in
                    Congress from the State of Massachusetts
        Mr. Chairman and Members of the Subcommittee. I appreciate your
    interest in restructuring the federal government's electric power
    companies. While I want to support Rep. Bob Franks' call for
    questioning the very relevance of federal utilities in a competitive
    energy market, my remarks this morning will focus on the Tennessee
    Valley Authority.
        Let me first say that TVA has done a good job. Beginning in the
    1930s, it delivered cheap electricity to thousands of rural households
    and brought new life and hope to the then-depressed Tennessee Valley.
    We all should be proud of that success.
        Fortunately, times have changed, and the Tennessee Valley is a
    thriving region. TVA needs to change as well.
        Restructuring TVA is not a partisan issue. Although the federal
    agency was created by Franklin Roosevelt, Democrats certainly cringe at
    the utility's enormous debt, mismanagement, and abusive business
    practices. Last year the Judiciary Committee, on which I sit, held a
    hearing on TVA's anti-competitive activities associated with a customer
    that wanted to shop for cheaper electricity. Liberals on my committee
    lamented that FDR would be rolling over in his grave at the sight of
    what TVA has become.
        Restructuring TVA also is not a regional issue. No doubt the
    Northeast-Midwest Congressional Coalition has complained about how its
    residents' tax dollars are subsidizing the giant utility. But Senator
    Mitch McConnell, a Republican from the Valley, has called for ending
    TVA's special privileges. And later in this hearing, you'll hear from
    the Memphis utility about how it and other TVA customers would welcome
    the chance to escape TVA's iron grip and to enjoy the benefits of
    competition.
        Perhaps TVA's biggest problem is that it lacks accountability.
    Since the giant utility maintains monopoly control over its service
    territory, it is not accountable to market forces. Its Board members
    are not answerable to the voters. Their decisions are not reviewed by
    state or federal regulators.
        Why is this reaccountability troublesome? Consider TVA's massive
    debt. Where was the oversight when the giant utility accumulated a $28-
    billion debt--and an additional $8.5 billion in deferred assets--while
    enjoying monopolistic control over its customers?
        Other signs of mismanagement were revealed in a report by TVA's own
    Inspector General, who criticized the agency's six-figure bonuses and
    secret retirement funds for top executives, and non-competitive
    consulting contracts to cronies of those officials. Allow me to quote
    from the Chattanooga Times, a key Valley newspaper that usually defends
    TVA: ``One of the most egregious abuses is in the area of compensation.
    TVA secretly established a Senior Executive Retirement Plan in 1996 and
    funneled almost $5 million in previously undisclosed contributions
    through it to 24 high-ranking managers . . . TVA's free-flowing
    millions on consulting contracts are equally disturbing. Excessively
    generous contracts are given to cronies or friends of top managers
    without bids or acceptable oversight. The practice suggests responsible
    fiscal management is not being applied and undermines TVA's
    integrity.''
        TVA's unaccountability also is reflected in its arrogance. The
    utility's chairman, when asked by a national magazine about the
    agency's future, boasted, ``You can't ignore us, you can't leave us
    behind, you can't break us up, and you can't sell us.''
        Well, let me say that this hearing and the growing calls for reform
    suggest that Congress can indeed restructure TVA and hold it
    accountable.
        No doubt TVA is a burden to the nation's taxpayer, but it also is
    of declining benefit to the Tennessee Valley. TVA is one of the
    nation's worst air polluters, spewing tons of sulfur dioxide and
    nitrogen oxides into the Valley's atmosphere and threatening the health
    of its residents. Despite enormous taxpayer subsidies, years of
    mismanagement and bad decision making have resulted in TVA's rates no
    longer being a bargain; many Valley residents see surrounding private
    utilities offering cheaper rates, and new competitors promising even
    lower costs.
        Unfortunately, TVA has trapped Valley residents. The agency has
    locked its customers into long-term contracts that have been virtually
    impossible to break.
        What to do? First, Tennessee Valley residents, like consumers
    across the country, deserve the right to enjoy the benefits of
    competition. Second, private-sector power companies need to be assured
    that TVA does not maintain unfair competitive advantages. Third, the
    nation's taxpayers need to be protected from TVA's mismanagement and
    unnecessary subsidies.
        Congress must first Justify why the federal government should be
    generating electricity in a competitive market. Yet even if TVA remains
    a government agency, Congress must ensure that it competes on a level
    playing field and operates according to the same rules and regulations
    that apply to other power producers.
        Thank you, Mr. Chairman, for this opportunity to discuss the
    restructuring of federal utilities. I look forward to working with you.

        Mr. Franks. I have introduced a bill that would promote
    common sense PMA reform. With national electricity reform just
    over the horizon, subsidies for Federal utilities are
    unacceptable. We must eliminate them, once and for all. Our
    legislation, H.R. 1486, simply orders the PMAs and the TVA to
    charge market-based rates for their power, not rates subsidized
    by Federal taxpayers.
        In addition, it directs the PMA and TVA transmission
    facilities to be subject to open-access regulation by FERC. Our
    bill forces PMAs to charge market rates for power, and makes
    the PMAs operate under the same rules that govern the rest of
    the power industry.
        Mr. Chairman, I appreciate your call to reform Federal
    utilities. Congress should not, and truly, cannot restructure
    the Nation's electric power industry without restructuring our
    own Federal utilities. Put simply, we must end taxpayer
    subsidies and put the Federal Government out of the power
    business, once and for all.
        [The prepared statement of Hon. Bob Franks follows:]
      Prepared Statement of Hon. Bob Franks, a Representative in Congress
                          from the State of New Jersey
        Mr. Chairman and Members of the Subcommittee. Thank you very much
    for allowing me to testify on the role of federal utilities in a
    competitive electricity market. I welcome the Energy and Power
    Subcommittee's efforts to help reform the regulation of TVA's wholesale
    electricity business.
        While I recognize that the scope of today's hearing is limited, I
    hope that we will not lose sight of the fundamental issue--should the
    federal government remain in the business of generating and selling
    electricity?
        While government involvement in the electricity market may have
    been justified 70 years ago when only 15 percent of rural Americans
    enjoyed electricity, times have changed dramatically since then. Strong
    private-sector electricity companies exist throughout this country. As
    evidenced by this panel's other hearings on utility deregulation, these
    private-sector firms are strong, active, and ready for competition.
        Other than meeting the parochial need of providing ongoing taxpayer
    subsidies to a few select consumers, federal utilities are simply no
    longer needed.
        I began to focus my attention on federal utilities about three
    years ago when I realized that while New Jersey residents pay some of
    the highest electric rates in the nation, their tax dollars are being
    used to keep the price of electricity at below market rates for federal
    utility customers. Not only is this misguided federal policy taking
    money out of the pockets of New Jersey taxpayers to finance low-cost
    electric power in other regions of the country, it is also luring
    businesses and jobs out of my state. It's hard to convince energy-
    intensive businesses--particularly in the manufacturing sector--to stay
    in New Jersey--or in any other state that does not benefit from federal
    utilities when they can simply pack up and move to an area with
    subsidized power.
        It was back in the 1930s when Washington first decided to generate
    and market cheap power as a tool to promote economic growth in poor and
    rural areas.
        Today, some of these so-called ``poor and rural'' areas that enjoy
    federally subsidized electricity include Vail, Colorado; Hilton Head,
    South Carolina; Palo Alto, California; and Seattle, Washington.
        A recent General Accounting Office study concluded that most of the
    households served by federal utilities are in a small number of
    urbanized areas, and many of those areas are quite well off and don't
    need taxpayer subsidies.
        GAO also found that electricity from Power Marketing
    Administrations is sold at 40 percent below market rates. I know my
    constituents would love to take advantage of such bargain-basement
    electricity. And they can't understand why their tax dollars are being
    used to deliver cheap power to people living in Aspen and Hilton Head.
        Of course, the recipients of federal electricity continue to claim
    they are not subsidized. If 40 percent below market rates is not
    subsidized, I don't know what is.
        The beneficiaries of federal electricity also will argue that they
    are paying the full costs for their electricity. But the GAO found that
    for fiscal years 1992 through 1996, three PMAs--Southeastern,
    Southwestern and Western--failed to recover $1.5 billion of their
    costs, leaving that burden to federal taxpayers.
        Recipients of federal electricity don't like the GAO or CBO
    studies, and they will argue strenuously that they are flawed. But who
    are you going to believe--this institution's top independent auditors
    or the self-interested beneficiaries of a taxpayer giveaway?
        Along with my colleague Marty Meehan, I have introduced a bill that
    would promote common sense PMA reform. With national electricity
    competition just over the horizon, subsidies for federal utilities are
    unacceptable. We must eliminate once and for all the billions of
    dollars in power subsidies to PMAs, which have been documented by both
    the CBO and GAO.
        Our legislation, H.R. 1486, the Power Marketing Administration
    Reform Act of 1999 simply orders the PMAs and the TVA to charge market-
    based rates for their power--not rates subsidized by federal taxpayers.
    In addition, it directs that PMA and TVA transmissions facilities be
    subject to open-access regulation by FERC. Our bill forces PMAs to
    charge the going rate for power and makes the PMAs operate under the
    same rules that govern the rest of the power industry.
        H.R. 1486 also helps reduce the federal debt and improve the
    environment. If the going rate for power is higher than the
    artificially subsidized rate--which it probably will be--H.R. 1486 uses
    the revenues to reduce the deficit and to set up a fund for
    environmental restoration of the affected rivers.
        A broad array of environmental and taxpayer groups are supporting
    this sensible approach to PMA, reform.
        Mr. Chairman, I appreciate your call to reform federal utilities.
    Congress should not, and cannot truly restructure the nation's electric
    power industry without restructuring our own federal utilities. Put
    simply, we must end taxpayer subsidies and get the federal government
    out of the power business once and for all.

        Mr. Franks. Mr. Chairman, I apologize to beg leave, but I
    am very late for my own subcommittee.
        Mr. Barton. I think given what you have just said, it is
    probably wise that you leave the room.
        Mr. Franks. I look forward to returning, Mr. Chairman.
        Mr. Barton. Okay. Thank you for your testimony.
        We recognize the distinguished gentleman, and one of the
    most valuable players from last year's congressional baseball
    game, Mr. Zach Wamp, for 5 minutes.

                       STATEMENT OF HON. ZACH WAMP

        Mr. Wamp. Thank you, Mr. Chairman, and thank you all the
    members of this very influential subcommittee, especially at
    this time.
        Let me say, Mr. Chairman, you said in your opening
    statement that TVA was open to competition and open to this
    legislation. I want to say that you are absolutely right. TVA
    has been preparing, for a number of months and even years, for
    this day, and for this legislation to begin working its way
    through the Congress.
        Let me also open on a note of caution. I have lived for 40
    years in Chattanooga, Tennessee. Twenty years ago, airline
    deregulation was signed into law. The country, overall, was
    better off. Competition was increased. Access was increased.
    Rates came down. But 20 percent of the country is worse off. We
    are still struggling, terribly, in Chattanooga, Tennessee, with
    higher airline fares; lower access, and less competition,
    because there were winners and losers.
        This has long-term, major consequences for 8 million people
    in the foothills of Appalachia, in what is called the Tennessee
    Valley. I hope we will be very methodical, very careful, and
    ultimately, fair to both the investor-owned utility industry
    and public power; because this is very serious business.
        It just so happens, that a disproportionate share of the
    losers in airline deregulation are in the same region. So we
    don't need to be hit so often with deregulation initiatives
    that may help the country, as a whole, but hurt certain parts
    of the country more.
        I want to focus, briefly, on three major issues. One is
    TVA's 10-year business plan; two is the regional consensus that
    has been developed within the 7-state, 8-million-customer, TVA
    service area, and three is some basic principles that still
    need to be resolved as we move legislation through the
    subcommittee.
        First of all, TVA is moving in the right direction with
    their current management plan and the 10-year business plan.
    TVA management should be commended on their focus to prepare
    TVA for competition by reducing debt, making rates more
    competitive, and by implementing the rest of the details of the
    10-year plan. While the recent GAO report points out that TVA
    may not achieve the level of debt reduction stated in the plan
    until 2009--2 years later than the plan called for--GAO did
    acknowledge, ``However, since it is not possible to accurately
    predict what the market price of power will be in 2007, TVA
    could still achieve its objective of offering competitively
    priced power, even if it does not fully achieve the Plan's
    other goals and objectives.'' The GAO report clearly says, too,
    that TVA is, in a major way, reducing its debt. We have already
    heard testimony earlier today about how much it has already
    been reduced. You are going to hear more of that as the day
    goes on.
        Second, both the Tennessee delegation and TVA caucus
    encourage TVA and the Tennessee Valley Public Power
    Association, which represents TVA's 159 distributors, to come
    up with a regional solution to electricity restructuring. I
    applaud TVA and TVPPA for working together to come to agreement
    on guiding principles for electricity restructuring that best
    serves the needs of the entire Valley. Both will be testifying
    more about their proposals today, and in the future. The
    subcommittee needs to understand that getting TVA and its
    distributors to come to agreement on a majority of the issues
    is a major accomplishment, reached only through hard work and
    compromise. The issues they have reached consensus on include:
    equitable competition; TVA power sales; stranded investment
    recovery; anti-trust coverage, and the renegotiation of
    wholesale power contracts.
        The third issue is the basic principles. The
    administration/DOE bill is very similar to the consensus
    position reached by TVA and TVPPA. However, there are some
    difference between the consensus position and the draft being
    circulated by subcommittee members that we hope we can reach
    agreement on. All the proposals pave the way for competition by
    bringing the fence down both ways: allowing competition into
    the TVA region, and allowing TVA to sell excess wholesale power
    outside the TVA region. But everyone should understand that TVA
    will continue to focus on its primary mission, and that is
    serving the customer needs of the Tennessee Valley.
        TVA also must retain its ability to build generating
    capacity. TVA must have the flexibility to build new generation
    if it is going to be able to continue to meet the power needs
    of the Valley. This continues to be a major hurdle between the
    subcommittee drafts and a fair resolution for these 8 million
    customers in the 7-state region.
        In closing, let me raise one other issue that we might need
    to begin discussing today: that is, TVA's management is
    improving. TVA is improving. There is clear data to that
    effect. But it still operates under a three-member,
    Presidentially appointed, board of directors. Beginning next
    week, for a short period of time--I hope--only one of those
    board members will be serving. Senator Frist, from Tennessee,
    has proposed expanding the TVA board to increase accountability
    and improve the management of the future TVA. I want to commend
    the current management for the strides that have been taken;
    but I think that as we move this major, comprehensive,
    direction-changing legislation, we should consider expanding
    the TVA board of directors to increase the accountability
    overall, so that it may be more like a corporate board in
    today's climate, where just a handful of people don't make
    decisions for a $6.7 billion power company.
        I thank the chairman for giving me this opportunity.
        Mr. Barton. Thank you. I am sure our friends from
    Washington State will understand that the Tennessean--it just
    takes him a little bit longer to get it out.
        We would recognize the gentleman from Washington State, Dr.
    McDermott, for an opening statement.

                     STATEMENT OF HON. JIM MCDERMOTT

        Mr. McDermott. Thank you, Mr. Chairman. I want to commend
    you for holding a hearing in which you brought the right, the
    left and the center, together. That you could get Peter
    DeFazio, Doc Hastings, me, and George, all coming here to say
    the same thing is a real statement about this issue and the
    effect it has in our area.
        One of my former colleagues in the state senate used to say
    that the eastern two-thirds of the State of Washington was a
    place where the jackrabbits had to carry canteens before the
    Bonneville Power Administration. It was a desert. There was dry
    land, wheat, and that was about it.
        Our State is basically an agricultural State. In spite of
    what you might think--with Boeing, Microsoft, and all the
    rest--the biggest industry in our State is agriculture created
    by the Bonneville Power Administration. So its affect on our
    State is from border to border.
        In my city of Seattle, the voters favored public ownership
    of power, beginning in 1902 when they voted for a $590,000 bond
    issue. Now, that established our public power system. That has
    been the system in the Northwest, since that point. In 1937 the
    Bonneville Power Administration was created. That expanded it
    out of the city.
        Cities, like Seattle, have been tied to this in good times
    and in bad. From the beginning, BPA entered a partnership with
    the Northwest to bring low rates, industrialization and rural
    electrification. This partnership resulted in a unique role for
    BPA and many benefits for the region. Obviously, one of the
    benefits has been low cost; but there have been costs for our
    area. The Northwest has been paying that costs. The region
    agrees that BPA must continue to pay its full share of Federal
    obligations, including those for fish costs and other public
    purposes.
        One of the major issues today we are dealing with is how we
    deal with the listing of the salmon as an endangered species,
    and what that means for the power generation in the area.
        In 1996, the Governors of Washington, Oregon, Montana, and
    Idaho, appointed a four-member, Northwest Energy Review
    Transition Board to oversee the recommendation of the 1996
    comprehensive review. The Transition Board is responsible for
    assuring accountability, acceptance and implementation of those
    recommendations. The Transition Board works with the regional
    interests and the BPA to oversee the development of a
    subscription process for the sale of BPA power. The Transition
    Board also works with the Northwest Congressional Delegation,
    reviewing BPA's marketing plan and its control in the
    competitive electric market. It provides guidance of the
    implementation of the other review recommendations.
        In 1997, as you heard from Peter DeFazio, we established an
    NW Energy Caucus. It is bipartisan. Everybody is in it. In less
    than 2 years since we began, the members and staff have been
    working with representatives of all the regional stakeholders,
    and have spent countless hours working to achieve a consensus
    which--we hope in any bill that we have--will have a title for
    the Northwest, or for BPA.
        Amazingly, we came to an agreement that the BPA's benefits
    should be retained in the region. It is often suggested,
    however, that the best way to retain the regional benefits, and
    to generate revenue for the Federal Government, is to sell BPA.
    This is a simplistic-sounding solution that, actually, is
    extraordinarily complex--as this committee will find as you
    begin to dig into the details.
        Unlike private power companies, BPA operates under its own
    statutes; has a very different regulatory role, and has
    Canadian treaty obligations. Additionally, BPA still owes
    billions of dollars to the Federal Treasury for the Washington
    Public Power Supply System, which is known generally as
    ``WPPSS.'' Those nuclear plants: they planned five; only one
    was built, but the costs are still having to be paid off by the
    region.
        BPA is also obligated to fund fish and wildlife mitigation
    resulting from the impacts of power generation. So privatizing
    the BPA would shift these obligations from the ratepayers in
    the Northwest to the American taxpayers. Most importantly,
    there is no certainty that privatizing BPA would generate
    revenue for the Treasury.
        To privatize BPA, because you pray at the altar of the
    market, is not compelling. The market power that a privatized
    BPA would have is tremendous. BPA would own 80 percent of the
    region's transmission lines. If you sold it, BPA would control
    the market and set its own price. Even if the BPA were broken
    apart, its individuals parts would still have significant
    market power. For instance, the Grand Cooley Dam controls the
    downstream dams in Doc Hastings district. There are three
    counties that have their own dams: Chelan, Douglas and Grant
    Counties. But the Grand Cooley is above it and controls the
    water flow. So if you sell that to a private operator, you then
    throw some other public utilities into serious problems.
        For more than 60 years, the BPA has sold low-cost, reliable
    power to the Northwest. It is an integral part of the
    prosperity and heritage of the region. To change that covenant
    now needlessly breaks faith with the region. It is not clear
    that the privatizing of BPA would result in a windfall for the
    Treasury. What is clear is that privatizing BPA would
    complicate the market in the Northwest, placing the burden of
    numerous obligations squarely on the shoulders of the American
    taxpayers.
        Let me give you one example.
        Mr. Barton. Make this the last example.
        Mr. McDermott. Potatoes. Everybody think potatoes come from
    Idaho. Washington grows more potatoes than the rest of the
    world--or any other State in the Union. And McDonald's french
    fries come out of that area. So if you want to fool with
    McDonald's prices, starting fooling with BPA and the water that
    irrigates the potato fields that makes McDonald's potatoes.
        [The prepared statement of Hon. Jim McDermott follows:]
    Prepared Statement of Hon. Jim McDermott, a Representative in Congress
                          from the State of Washington
        Chairman Barton, Congressman Hall, and Members of the Committee,
    thank you for inviting me to testify today on the importance of the
    Bonneville Power Administration (BPA) to the Pacific Northwest.
        In my city, Seattle, voters have supported public ownership of the
    city's water and electric system since 1902 when they approved a
    $590,000 bond to develop a hydroelectric facility on the Cedar River.
        Support for public power was cemented in 1937, when President
    Roosevelt signed the Bonneville Project Act. BPA has become an integral
    force in the development and heritage of the region. Seattle, like
    cities across the Northwest, have maintained their support of public
    power in good times and in bad.
        From the beginning, BPA entered a partnership with the Northwest to
    bring low rates, industrialization and rural electrification to the
    region. This partnership resulted in a unique role for BPA and many
    benefits to the region. However, with these benefits comes a cost. The
    Northwest has been paying that cost and the region agrees that BPA must
    continue to pay its full share of federal obligations, including those
    for fish costs and other public purposes.
        In 1996, the governors of Washington, Oregon, Montana, and Idaho
    appointed a four-member Northwest Energy Review Transition Board to
    oversee the recommendations from the 1996 Comprehensive Review. The
    Transition Board is responsible for ensuring accountability,
    acceptance, and implementation of the recommendations. The Transition
    Board works with regional interests and BPA to oversee development of a
    subscription process for the sales of BPA's power. The Transition Board
    also works with the Northwest congressional delegation, reviews BPA's
    marketing plan and its role in the competitive electricity market, and
    provides guidance in the implementation of the Comprehensive Review's
    other recommendations.
        In 1997, members of the Northwest congressional delegation formed
    the Northwest Energy Caucus. Every member of the delegation joined in
    an effort to reach a regional consensus on electric industry
    deregulation. In the less than two years since the Caucus has been in
    existence, the Members and our staffs have met with representatives
    from all the regional stake holders and spent countless hours working
    to achieve a consensus. The Caucus agrees that BPA's benefits must be
    retained in the region.
        It is often suggested that the best way to retain regional benefits
    and to generate revenue for the Federal government is to sell BPA. This
    simplistic sounding solution is actually extraordinarily complex.
    Unlike private power companies, BPA operates under its own statutes and
    a very different regulatory role, and has Canadian treaty obligations.
    Additionally, BPA still owes billions of dollars to the Federal
    Treasury for the Washington Public Power Supply System (WPPSS) nuclear
    plants, only one of which was ever completed. BPA is also obligated to
    fund fish and wildlife mitigation resulting from the impacts from power
    generation at Federal Dams. Privatizing BPA would shift these
    obligations from the rate payers in the Northwest to the American
    taxpayers. Most importantly, there is no certainty that privatizing BPA
    would generate revenue for the Treasury.
        To privatize BPA because you pray at the altar of the market is not
    compelling. The market power that a privatized BPA would yield is
    tremendous--BPA owns 80% of the region's transmission. If sold, BPA
    would control the market and set its own price. Even if BPA were broken
    apart, its individual parts would still have significant market power.
    For instance, the Grand Coulee dam controls the down stream dams on the
    Columbia River. Clearly, BPA is a significant force in the Northwest.
        For more than 60 years BPA has sold low cost, reliable power to the
    Northwest. And, is an integral part of the prosperity and heritage of
    the region. To change this covenant now, needlessly breaks faith with
    the region. It is not clear that privatizing BPA would result in a
    windfall for the Treasury. What is clear is that privatizing BPA would
    complicate the market in the Northwest, placing the burden of numerous
    obligations squarely on the shoulders of American taxpayers.
        I look forward to working with the Committee on this issue.
        Thank you.

        Mr. Barton. We are not going to make Ronald McDonald mad, I
    assure you.
        Mr. McDermott. Thank you. Thank you for your time.
        Mr. Barton. I want to commend you. You went through about
    40 pages of written testimony in 5 minutes. That is not bad;
    that is pretty good.
        Mr. Hastings--Doc--Congressman Hastings, who has worked
    with this committee on a number of other issues with Hanford,
    we will put your statement in the record and recognize you for
    5 minutes to summarize it.

                     STATEMENT OF HON. DOC HASTINGS

        Mr. Hastings. Thank you very much, Mr. Chairman. I want to
    remark to my colleague, Mr. McDermott's saying that somebody
    that has disparate political views coming together on this
    issue; this will probably be the only issue on which we will
    all agree. We probably won't make a habit of this.
    Nevertheless, we are here in this regard.
        I would agree with what my two colleagues from Oregon and
    what Mr. McDermott said, in general, from this standpoint: that
    is, you will hear as you embark upon this--you have already
    heard it today, and undoubtedly you will hear it more and
    more--that various parts of the country are very unique.
    Certainly, Washington State, the Northwest: Oregon, Washington,
    Idaho, and Montana are unique from the standpoint of power
    producing, because so much of our power is produced by
    hydropower. Then you overlay that, particularly in our State,
    with decisions that were made within our State of public power.
    These are some things that for people in my district,
    especially, that decision was made 60 years ago.
        Yet, as we embark upon this, and as you go down the line of
    deregulating as we move into more market areas; obviously, that
    will have an effect on us as to what the final disposition is.
    When I went home and talked to my PUD's and those people that
    were involved, the first question they said to me was, ``Why do
    we want to do this? We do have low-cost power.'' This is
    accurate. We do have low-cost power. My suggestion to them was
    this is an issue, in my view, that no longer is it the question
    of if we are going to have deregulation. The question is, when?
    It is prudent for us then, within our region, to sit down and
    try to figure out how we fit in this whole puzzle.
        So in that regard, we have been working with you and others
    on this committee. One of the messages that we are taking to
    you, because we think it is a valid one for all of the negative
    things that could come if we don't have this is the Northwest
    title. Then you have other conditions that fall into place. I
    am pleased that in initial conversations that we have had with
    you and other members that there will be a Northwest title. The
    administration has suggested that a Northwest title would be
    something that needs to work out.
        If that were the case, then obviously the burden is on us
    within the Northwest on how we deal with our electricity and
    the structuring of that. We do have a precedent in place. It is
    called the Northwest Power Planning Council. That was passed
    just about 20 years ago to deal with the uniqueness that we
    have all been talking about.
        So with that, I am very pleased to have had the opportunity
    to speak to you. We do have a Northwest energy caucus,
    bipartisan in nature. We are working on that. We don't,
    unfortunately, have a member of your committee. I do
    appreciate, very much, the courtesy that you have given me. I
    know I speak for my colleagues as to how these concerns should
    be addressed.
        So with that, Mr. Chairman, thank you very much for your
    courtesy.
        Mr. Barton. Thank you, Congressman.
        And last, but certainly not least, we would like to hear
    from another Washingtonian, Congressmen Nethercutt, for 5
    minutes.

               STATEMENT OF HON. GEORGE R. NETHERCUTT, JR.

        Mr. Nethercutt. Thank you, Mr. Chairman. It is my pleasure
    to be here before you and your subcommittee, and also with my
    colleagues from our State and our region.
        I am proud to represent about one-fourth of the
    geographical area of our State. As Jim said, Doc and I
    represent about two-thirds of our State, all east of the
    Cascade Mountains. All are certainly dependent upon a power
    generation system that has developed over the years, I think,
    to the benefit of not just eastern Washington, but all parts of
    our Pacific Northwest region.
        Grand Coulee Dam is the largest hydroelectric facility in
    the Nation. It provides 25 percent of the power in the Federal
    Columbia River Power System. It can serve 2 million homes for 1
    year. It has that much power generated through that particular
    resource in our region. We also have, in the Fifth District,
    the Snake River hydroelectric facilities, which are under the
    jurisdiction of the Corps of Engineers.
        So every single person in our State and in our region is
    affected by what happens to the Bonneville Power
    Administration. It is home to investor-owned utilities, public
    power, rural cooperatives and aluminum plants. It is of extreme
    importance to our region, not just my district, but our entire
    region. I think the fact that people are represented from
    Oregon, Montana, Washington, and Idaho--it all is important to
    us.
        We are feeling a bit aggrieved because last Congress we had
    three members of the Northwest on this committee: Congresswoman
    Furse, from Oregon; Rick White, from our State, and Mike Crapo,
    from Idaho. So we appreciate, sir, your gracious welcome of us,
    and your consideration, as a subcommittee to the needs of our
    district. We need to have a good dialog with you. We hope that
    can continue. We know it will.
        We do have a bipartisan energy caucus. We have common
    interests that span our entire region. I think we are speaking
    with one voice. That one voice, if I can summarize, is simply
    that we are unique. We do have special considerations in our
    region. We have a debt load. We have BPA owning, as was stated,
    about 75 percent of our transmission facilities. We have taken
    upon ourselves to deal with the listings of endangered species
    and threatened species. We have 12 listings, now, of fish that
    we need to deal with. The ratepayers of our region are paying
    the freight. They are paying for that consequence of the
    Endangered Species Act.
        So I am here to say that we want to work with you. We are
    stepping up to the plate as a region, and as a delegation--a
    broad delegation--to deal with the problem that affects our
    region. We hope to have your consideration along the way toward
    what, as Congressman Hastings said, is probably, eventually,
    going to be deregulation in this country. If that happens, we
    want to make sure you understand our special needs and our
    unique circumstances.
        So we thank you for your time. I hope my statement can be
    made part of the record. It goes into more detail and is,
    somewhat, repetitive. I want you to know that we are grateful
    for the opportunity. We look forward to working with you to
    make this work for our region, as well as our constituents,
    ratepayers and taxpayers. Thank you, very much.
        [The prepared statement of Hon. George R. Nethercutt, Jr.
    follows:]
    Prepared Statement of Hon. George R. Nethercutt, Jr., a Representative
                    in Congress from the State of Washington
        Thank you Mr. Chairman and members of the Subcommittee for the
    opportunity to testify today on the future of the Bonneville Power
    Administration.
        I represent the 5th Congressional District of Washington State, the
    eastern part of Washington State. My region is home to the Grand Coulee
    Dam, the largest hydroelectric facility in the nation, providing 25% of
    the power in the Federal Columbia River Power System--enough power to
    turn the lights on in more than 2 million homes for a year. In addition
    to this grand hydroelectric facility, the 5th Congressional District
    has four Corps of Engineers hydro facilities on the lower Snake River
    and is home to investor owned utilities, public power, rural
    cooperatives and aluminum plants--every one of my constituents is
    affected in some manner by the Bonneville Power Administration. I would
    like to emphasize, however, that the future of BPA is not a district by
    district or state by state issue in the Pacific Northwest--this is
    something that the region has and will continue to work on in a
    bipartisan manner. As the co-chair of the bipartisan Northwest Energy
    Caucus, my colleagues and I are committed to working together and with
    you to prepare Bonneville for a restructured electricity environment,
    protect the U.S. Treasury and maintain the benefits of the Federal
    Columbia River Power System for the region.
        Mr. Chairman, before I go on, let me express my thanks for allowing
    Mr. DeFazio, Mr. Hastings, Mr. McDermott and myself to testify before
    the subcommittee on behalf of the Pacific Northwest delegation. Your
    staff has been most helpful in working with our offices over the past
    few months and it is appreciated. I especially appreciate the
    opportunity to represent the Pacific Northwest before your subcommittee
    with the departure of the three former Northwest members of the
    Committee, Representatives White, Furse and Crapo.
        The Pacific Northwest faces many unique challenges as Congress
    moves toward restructuring the billion dollar electricity industry, but
    the Northwest is determined to face these challenges head on. In 1996,
    the region's four Governors released the Comprehensive Regional Review
    of the Northwest Energy System, a report intended to outline what the
    region must do to prepare the Pacific Northwest for the national push
    toward competition in the retail market. This report began the
    discussions our delegation has had for the past 3 years with BPA's
    customers in the region on what changes are necessary to federal
    statute and we have made significant progress. Recognizing the
    pressures from other parts of the country, this process went forward
    with the goal of protecting the federal taxpayer in Oklahoma or Texas
    from having to cover the debts incurred in the Pacific Northwest, while
    still maintaining the benefits of the system for the region's
    residents.
        The region is working on language to subject BPA to application of
    the Federal Power Act, requiring BPA to operate more like other
    utilities and most importantly ensure that BPA meets its financial
    obligations to the U.S. Treasury. This has not been an easy task and
    when you hear from BPA's customers today you will hear that there is
    still work to do. But, we are all committed to moving this process
    forward and the delegation will continue to encourage the region to
    that end.
        You may also hear discussions about Bonneville's debt load from my
    colleagues outside of the Pacific Northwest. Bonneville does carry a
    debt to the U.S. Treasury of $6.5 billion and yes, Bonneville has
    defaulted on treasury payment in the early 1980's but it has not missed
    a payment since 1984. In fact, since 1984 under the watchful eye of the
    Pacific Northwest delegation BPA has been accountable to the U.S.
    Treasury and to repayment of the $5.4 billion in debt incurred for the
    Washington Public Power Supply System. Because of the pressures from
    the Governors' regional review, the Pacific Northwest Congressional
    delegation and from our colleagues outside the region in Congress, BPA
    continues to cut its operating costs, has encouraged early retirement
    of some of its employees to reduce costs, and with the help of former
    Senator Hatfield and Senator Gorton placed a cap on the amount of
    spending on fish mitigation efforts. The Northwest delegation will
    continue to watch BPA closely to ensure that it maintains this level of
    financial discipline.
        Let me remind my colleagues from outside the region that the
    Bonneville Power Administration is a unique entity. It provides 60% of
    the power for the region, owning almost 75% of the transmission lines
    and is the entity responsible for mitigating hydroelectric impacts on
    fish and wildlife. The Pacific Northwest region has 12 listed species
    of salmon that migrate through 8 federal dams and 5 non-federal dams on
    the Columbia and Lower Snake Rivers. BPA is responsible for mitigating
    hydro impacts on the listed species. This mitigation costs the
    ratepayers of the Pacific Northwest millions of dollars annually and
    some claim that the federal government has subsidized this effort. Let
    me point out that 70% of the funds used to mitigate impacts on salmon
    on the Columbia and Snake River System are reimbursed to the U.S.
    Treasury by the Northwest ratepayer. In fact, on some of the facilities
    up to 98% of the fish and wildlife mitigation efforts are reimbursed by
    the Northwest ratepayer. Finally, these listings may impact the way our
    river system is operated--let me say that there is no consensus on what
    changes may be made to the system--and I remind the committee and my
    colleagues that I do not support removal of any dams on this river
    system--but whatever the decision Congress authorizes, a federal cost
    share will be required--that will be incurred by the taxpayer, not just
    the Northwest ratepayer.
        As you can see the debt incurred and the potential costs that may
    be required due to changes in the hydro system because of the
    Endangered Species Act, leave a big question on what the value of this
    system is to the taxpayer. Should the system be sold, as some outside
    the region advocate, the risk to the U.S. Treasury is real. The Pacific
    Northwest region is willing to take the risk of covering costs to the
    U.S. Treasury in order to maintain the benefits of the system.
        Mr. Chairman and members of the Subcommittee, this has not been an
    easy job for our delegation and yes, we are at a disadvantage with the
    departures of our colleagues on your committee. But, we are willing to
    rise to the challenge and will do the work necessary to provide you a
    ``Northwest Title'' for you to meet your time line. Again, thank you
    Mr. Chairman for the opportunity to testify this morning. I look
    forward to working with you and your staff on this issue of great
    importance to the Pacific Northwest.

        Mr. Barton. Thank you. That concludes statements of the
    congressional panel. The Chair would just point out that given
    the turnout from Tennessee and Washington, we are glad there is
    not a California Power Authority.
        They have 52 members. I am going to defer questions, since
    I can talk to these gentlemen on the floor. We are going to
    give the other members an opportunity, but encourage them to be
    brief in their questions because we do have two more panels.
        Does Mr. Sawyer wish to ask questions of this panel? Does
    Mr. Norwood?
        Mr. Norwood. Yes.
        Mr. Barton. You want to? Okay, you are recognized for 5
    minutes.
        Mr. Norwood. Thank you, Mr. Chairman. I am sorry the
    Tennesseans left. You noted that they talk slow. But one thing
    about it, when they do talk, you can understand what they say.
    They mean what they say, and are very plain about it. That is
    exactly what I intend to be now.
        I am disappointed that Mr. Franks is not here, since he
    boiled this down to sort of a regional thing. I want to respond
    to him and for the record.
        Part of my problem with their bill, the PMA Reform Act, is
    that it has the wrong name. If they would be honest and put the
    right name on it, I could live with it a little better. It
    should be entitled, since New Jersey can't control its own
    power rates and they have some of the highest rates in the
    Nation, ``Let Us Make Everybody Else's Rates Go Up So We Can Be
    Competitive Act.''
        I suggest they spend a little more time looking internally
    as to why their rates are two to three cents higher than the
    national average, rather than being concerned how to raise my
    rates down in Georgia.
        Now, Mr. Chairman, I would ask permission--unanimous
    consent--to totally rebut the statement made by Mr. Franks, and
    submit it for the record.
        Mr. Barton. You certainly can submit a statement for the
    record. I don't think that it is possible to give unanimous
    consent to totally rebut.
        Mr. Norwood. Well, the statement is loaded, Mr. Chairman,
    with things that are simply not true.
        Mr. Barton. Would the gentleman wish unanimous consent to
    put a statement into the record?
        Mr. Norwood. He does.
        Mr. Barton. Is there an objection to that? Hearing none, so
    ordered.
        Mr. Norwood. Thank you, very much, Mr. Chairman. I will
    conclude simply by saying things like stating to the public
    that power marketing administrations sell at 40 percent below
    market rates is simply just not true. Putting statements in the
    record saying that the Southeastern Market Administration
    failed to recover $1.5 billion of their costs, that is simply
    just not true.
        I want to conclude with this: power sold by the
    Southeastern Administration SEPA is vitally important to my
    constituents, which does not include Hilton Head. I will oppose
    efforts represented by Mr. Franks to change the current cost-
    based rates formula for the PMAs, or to privatize PMAs. It is
    important to recognize--not to overlook--the multipurpose
    aspects of these water projects. Power is only one aspect of
    the Federal projects. Flood control, navigation, water quality,
    recreation, fish, and wildlife purposes are other important
    uses.
        Now Mr. Franks refers to the CBO study and points out
    things that he likes in the CBO study.
        Mr. Barton. Now, is there a question in this?
        Mr. Norwood. No.
        I didn't want the witness to leave. I would have nailed him
    if he would have stayed.
        Mr. Barton. Well, the gentleman has unanimous consent to
    put his statement in the record.
        Mr. Norwood. Do I have consent to finish?
        Mr. Barton. Yes, you have 5 minutes.
        Mr. Norwood. Well, let me just quote a couple of other
    things in that same CBO study. They say, ``Under certain
    circumstances, the Government could easily lose money by
    privatizing PMAs.'' Well, you can't privatize them without
    meeting those circumstances. It is very clear they would.
        The CBO says, and I quote, ``Selling Federal power assets
    continues to raise concerns about future electricity prices,
    the environment, and access to recreational resources. Some
    power consumers would be likely to face increases in rates
    under new ownership.'' That is exactly what comes from the CBO.
    And that is exactly what his bill will do.
        Now, I am done. I yield the floor.
        Mr. Barton. I thank the gentleman from Georgia, for his
    low-key, non-inflammatory, conciliatory statement.
        Mr. Norwood. I was only being nice because Mr. Franks was
    not here to defend himself.
        Mr. Barton. Does the gentlelady from Missouri wish to ask
    the two members here any questions?
        Ms. McCarthy. I don't.
        Mr. Barton. Does the gentleman from Tennessee wish to ask
    any questions of these two?
        Mr. Bryant. I would simply associate myself with my
    colleague's remarks from Georgia. He says it so eloquently. I
    would pass on the questioning of this panel. Thank you.
        Mr. Barton. Does the gentleman from Oklahoma wish to ask
    questions? Does the gentleman from Kentucky, Mr. Whitfield,
    wish to ask questions?
        Mr. Whitfield. Mr. Chairman, I would just say that I was
    going to make a statement in defense of PMAs, but I think Mr.
    Norwood has said it all.
        Mr. Barton. All right. Does the gentleman from Mississippi,
    Mr. Pickering, wish to ask any questions of the two members
    here?
        Mr. Pickering. Mr. Chairman, at this time, no. Thank you.
        Mr. Barton. Okay. Before we go to the next panel, does Mr.
    Jenkins wish to make a brief statement? We give that
    opportunity, if you will make it very brief.
        Mr. Jenkins. Thank you, Mr. Chairman. I appreciate the
    opportunity. I have refrained, since I have been on these
    sacred premises, from associating myself with the remarks of
    other folks. Sometimes that brings on more talk. But I would
    point out that the gentleman from Georgia, Mr. Norwood, has
    spoken the absolute truth in every word he said, here. In that
    regard, I am associating myself with his remarks.
        I would point out that, in order for the committee to
    really do the work that needs to be done and to look at this in
    the light in which it should be looked at, the claims that--and
    I heard this spoken--Federal money pays for low rates for other
    parts of the country. I don't know about all parts of the
    country, but I would say with respect to the TVA area, this
    committee should look to that statement, and ask any person who
    makes that statement to come forth and specify, exactly, what
    those sums are that are spent to lower rates in some parts of
    the country. I don't believe it is necessarily true.
        I think, with respect to TVA especially, anybody should go
    back--this committee should go back--and study the 1959
    amendments to the TVA Act, which basically made a self-
    financing company out of TVA. TVA has to go to the market to
    borrow money, just like anybody else.
        Somebody might make the claim that they went to a Federal
    bank and borrowed some money. That is true. They were given
    permission last year to pay it off, because it was not a good
    deal. They could borrow money from other banks around the
    country and other places at a lower interest rate. They were
    able to do that.
        Mr. Barton. Could the gentleman summarize what he wants to
    say, fairly quickly?
        Mr. Jenkins. Yes. I am sorry, Mr. Chairman. I started out
    to tell you what time it was and I am telling you how to make a
    watch here.
        I appreciate the opportunity to comment thusly: I would ask
    the committee to look to these statements that are made, and
    verify the truthfulness of them, as they are made. Thank you.
        Mr. Barton. The gentleman from Illinois, Mr. Rush, we just
    missed the first member panel. Would you wish to make a brief
    statement before we go.
        Mr. Rush. No, Mr. Chairman. But I will ask unanimous
    consent to have an opening statement issued into the record.
        Mr. Barton. Without objection, so ordered.
        We would now like to welcome our first panel of non-
    congressional members. If you folks would come forward?
        We have Mr. Medford, who is the Executive Vice President
    for Customer Service for the Tennessee Valley Authority. We
    have Mr. William Coley, who is the Group President for Duke
    Power; Mr. Herman Morris, who is the President and CEO for
    Memphis Light, Gas and Water Division, and we have Mr. James
    Baker, who is the President of Middle Tennessee Electric
    Membership.
        If you gentlemen would come forward, please? We would like
    to welcome you gentlemen to the subcommittee. Each of you has
    presented written testimony. It is in the record in its
    entirety. We are going to start with Mr. Medford and let you
    summarize your written statements for 5 minutes. We will go
    right down the line: Mr. Medford, Mr. Coley, Mr. Morris and Mr.
    Baker.
        Again, the statements are in the record in their entirety.
    You are recognized for 5 minutes.

    STATEMENTS OF MARK MEDFORD, EXECUTIVE VICE PRESIDENT, CUSTOMER
     SERVICE, TENNESSEE VALLEY AUTHORITY; WILLIAM A. COLEY, GROUP
     PRESIDENT, DUKE POWER, ON BEHALF OF TVA WATCH; HERMAN MORRIS,
     PRESIDENT AND CEO, MEMPHIS LIGHT, GAS AND WATER DIVISION; AND
    JAMES O. BAKER, PRESIDENT, MIDDLE TENNESSEE ELECTRIC MEMBERSHIP
      CORPORATION, ON BEHALF OF TENNESSEE VALLEY AUTHORITY PUBLIC
                           POWER ASSOCIATION

        Mr. Medford. Good Morning, Mr. Chairman.
        Mr. Barton. You really need to pull that microphone closer
    to you.
        Mr. Medford. Mr. Chairman, is this on?
        Mr. Barton. Yes, sir.
        Mr. Medford. Good morning, Mr. Chairman and members of the
    subcommittee. My name is Mark Medford and I serve as the
    Tennessee Valley Authority's Executive Vice President of
    Customer Service and Marketing. I am also the executive officer
    responsible for industry restructuring.
        I appreciate the opportunity to come before the Energy and
    Power subcommittee to discuss how TVA fits into the electric
    industry and our future role in a competitive, less-regulated
    environment.
        TVA is the Nation's largest producer of public power. We
    serve 159 retail distributors and 68 directly served customers
    in parts of 7 Southeastern States: Alabama, Georgia, Kentucky,
    Mississippi, North Carolina, Tennessee, and Virginia. TVA has
    the statutory responsibility to provide for the economic
    development of the entire region. To do so, TVA manages the
    Tennessee River as a completely integrated system. By managing
    the river's resources in this way, TVA maximizes the benefits
    of flood control, navigation, and power generation, all of
    which are critical to our original mission.
        TVA appreciates the subcommittee's leadership in addressing
    the significant disconnect that has developed between the
    Federal statutory scheme for the power industry and the power
    markets as they have moved quickly toward greater competition.
    Like you, we see the need for comprehensive Federal electric
    restructuring legislation.
        As the result of market pressures, under TVA Chairman
    Craven Crowell's leadership, TVA began the difficult process of
    conforming itself into a competition-oriented business. This
    effort included painful staff reductions, cost containment, and
    significantly improving our productivity.
        In 1997, TVA unveiled a comprehensive program to guide our
    agency for the next 10 years called the Ten Year Business Plan.
    The overriding goal of the plan is to ensure that TVA's total
    delivered cost of power will be competitive with the market
    price of power through the year 2007, and beyond. The primary
    means for accomplishing this is reducing the debt and lowering
    interests costs. In the first 2 years of the plan, I am pleased
    to report that TVA is already ahead of schedule and has reduced
    our debt by over $1 billion.
        Mr. Chairman, less than 2 years ago, this subcommittee
    expressed concern about the lack of progress on a regional
    consensus for the future of TVA. We listened to the
    subcommittee, and we have participated extensively in several
    initiatives to develop a reasonable consensus for the TVA
    region. We participated in the Department of Energy's TVA
    Advisory Committee, along with our customers, labor,
    environmentalists, TVA Watch, power marketers, and other
    stakeholder groups to ensure that the Tennessee Valley region,
    as a whole, is treated fairly in a more competitive
    environment.
        DOE took the results of this regional effort and crafted a
    TVA title for inclusion in its comprehensive electricity
    competition plan, released by the administration on April 15 of
    this year. Furthermore, Members of Congress from the TVA region
    strongly encouraged us to work with TVPPA to develop a regional
    consensus on this issue. We jointly completed work on
    legislative language to reflect that consensus in March of this
    year.
        Both titles reflect a great deal of hard work and hard
    compromise. However, TVA believes that they both define an
    appropriate role for TVA in a competitive environment, and that
    they are, in fact, quite similar. I am pleased to offer our
    support for the administration in this critical legislative
    initiative and to be here today with Jim Baker and Herman
    Morris to discuss proposed regional approaches.
        Throughout the regional process of developing our proposal
    with TVPPA and working with the administration, TVA had three
    major goals. First, leave no customer behind. All customers in
    the TVA region benefit from the current structure of low-cost
    electricity and integrated river management. Any change to that
    structure should, likewise, benefit all customers. This is of
    particular concern to TVA, since we are a predominantly rural
    region.
        Second, maintain TVA's Federal status, which enables the
    integrated river management that benefits not only the
    residents of the region, but also facilitates the low-cost
    movement of goods and commerce from other States.
        Finally, ensure that the reliability of the regional power
    transmission grids are maintained and enhanced within a more
    competitive environment.
        In conclusion, we believe both proposals accomplish all
    these fundamental goals. We look forward to working with this
    subcommittee to develop legislation that moves carefully toward
    a well-conceived plan to bring competition to the electric
    industry.
        Once again, I want to thank you for the opportunity to
    discuss this very important issue with you today. I would be
    happy to answer any questions.
        [The prepared statement of Mark Medford follows:]
    Prepared Statement of Mark Medford, Executive Vice President, Customer
                      Service, Tennessee Valley Authority
        Mr. Chairman and Members of the subcommittee, thank you for this
    opportunity to explain how the Tennessee Valley Authority currently
    fits into the electric industry and how TVA can continue to serve the
    public interest in a competitive, less regulated environment. My name
    is Mark Medford and I serve as TVA's Executive Vice President for
    Customer Service and Marketing and the executive officer responsible
    for industry restructuring.
        My responsibilities include working very closely with the 159
    distributors of TVA electric power and 68 direct-served customers
    within the Tennessee Valley. These are the two groups who would be most
    directly affected by comprehensive restructuring legislation.
        I am pleased to appear before the Energy and Power Subcommittee and
    greatly appreciate the opportunity to talk about TVA. Together with the
    Tennessee Valley Public Power Association, the trade association
    representing our distributors, I am pleased to discuss a constructive,
    regional approach for dealing with TVA in any legislation this Congress
    considers.
                               background on tva
        The Tennessee Valley Authority is large and complex. TVA is not
    only the nation's largest producer of public power, but it also acts as
    a regional economic development agency and the steward of the Tennessee
    River basin. TVA was established by Congress in 1933, primarily to
    provide flood control, navigation, and electric power in the Tennessee
    Valley's seven state region. The TVA Act also directs its 3 member
    Board of Directors, all of whom are appointed by the President and
    confirmed in the Senate, to set the lowest possible electric rates that
    recover the full cost of providing electricity for the Valley. TVA is
    the leader within the Tennessee Valley for economic development, and a
    provider of low cost electricity and integrated resource management
    which cuts across state boundaries.
        The Tennessee River is the fifth largest river system in the United
    States. It stretches 652 miles from Knoxville, Tennessee to Paducah,
    Kentucky, where it flows into the Ohio River and ultimately the
    Mississippi. It encompasses over 11,000 miles of shoreline, 54 dams and
    14 locks. About 34,000 loaded barges travel the Tennessee River each
    year--the equivalent of two million trucks traveling the roads. Prior
    to the creation of TVA, the Tennessee River flooded on a regular basis,
    causing millions of dollars of damage per year. Under TVA's integrated
    resource management the Tennessee River is the only major river system
    in the United States which has not flooded, thus saving the region
    billions of dollars in damages.
        TVA's power system has a dependable generating capacity of 28,417
    MW. In 1998 TVA's generation was approximately 61% coal, 28% nuclear,
    and 11% hydropower. TVA provides wholesale power to its 159 local
    municipal and cooperative power distributors through a network of
    17,000 miles of transmission lines in the seven state region. TVA also
    sells power directly to 68 large industrial and federal customers.
    Ultimately, TVA supplies the energy needs of nearly 8 million people
    every day over a power service area covering 80,000 square miles,
    including Tennessee, and parts of Mississippi, Alabama, Georgia, North
    Carolina, Virginia, and Kentucky.
        The area in which TVA can provide electricity service is currently
    limited by law. Established by law in 1959, the TVA ``fence'' limits
    our service area to only those customers within the Tennessee Valley.
    Conversely, other utility companies are limited in their ability to
    compete to serve distributors inside the TVA region. As I will explain
    later, TVA worked closely within the Administration to develop an
    important regional consensus. The successful result was the TVA title
    in the Administration plan. This regional approach would allow outside
    companies to compete for customers throughout the TVA service area
    while allowing TVA limited rights to sell power outside its service
    territory.
        Currently, the TVA power system is 100% self-financed through its
    power revenues. This year the Administration has requested $7 million
    in appropriations for TVA to continue management of The Land Between
    the Lakes, a beautiful 170,000 acre national recreation area bordering
    Kentucky and Tennessee. While LBL is not part of the power system, it
    is an integral part of TVA's ongoing statutory responsibility for
    unified regional, sustainable development that contributes to the
    regional economy and quality of life of the Tennessee Valley.
                           tva's recent achievements
        Over the past five years TVA has worked very hard to improve all
    aspects of its operations. For example, TVA has:

     Reduced its debt by $1 billion and introduced a comprehensive
            Ten Year Financial Plan to ensure that TVA's power will remain
            competitive in the coming decade.
     Developed five nuclear units into an outstanding nuclear
            program and brought Watts Bar Nuclear Plant on line.
     Initiated refurbishment of coal and hydropower units to
            increase generation without building new plants.
     Enhanced a huge transmission system and maintained reliability
            of service even during last summer's heat wave.
        TVA's Ten Year Business Plan was specifically designed to ensure
    that TVA will be ready for the new competitive marketplace of the
    future. Its overriding goal is to keep TVA's total delivered cost of
    power to a level consistent with the forecast of the future market
    price of power surrounding TVA's service territory while recovering the
    cost of power from electricity consumers. The primary means for
    accomplishing this is reducing debt and lowering interest costs. Over
    the course of the Ten Year Plan, TVA plans to cut its debt by half,
    although this debt reduction schedule may be changed depending on
    future market conditions. TVA will remain competitive within the
    electric utility marketplace, and TVA's debt will continue to decline,
    so long as we adhere to this sound financial strategy and we are
    treated fairly in restructuring legislation.
                    tva and electric industry restructuring
        TVA is prepared to assist this Subcommittee as you tackle the
    complex and challenging issues associated with restructuring the
    electric industry. TVA also appreciates the Administration's initiative
    in addressing the difficult issue of the role of public power in its
    proposed restructuring bill. Public power represents 25% of the
    electricity market and has historically filled an important role in
    ensuring that affordable power is available to all consumers.
        As we all know, TVA is a federal agency. Despite the most sincere
    efforts by the Tennessee Valley region, only a federal bill, fashioned
    by the leadership of this Committee, can give the states in the
    Tennessee Valley the tools needed to bring about the kinds of changes
    to the electricity marketplace envisioned by states in other regions of
    the country.
        In general, TVA supports legislation that affirms the role of TVA
    as a regional agency for integrated resource management and economic
    development; ensures the availability of affordable electricity for
    rural and fixed income consumers in the Tennessee Valley; and ensures
    the continued reliability of the power supply and the transmission
    system. We also believe strongly that TVA must only be dealt with as
    part of the comprehensive package of issues determined by Congress to
    be appropriate federal jurisdiction within this important debate.
        We are pleased to share with you the regional approach we have
    developed with our distributors. In addition, the Administration has
    taken an extensive look at the issues surrounding TVA.
        In the fall of 1997, the Department of Energy created the
    ``Tennessee Valley Electric System Advisory Committee.'' The purpose of
    that task force was to develop, as much as possible, a consensus among
    regional stakeholders for a legislative proposal to define the role of
    TVA in a restructured competitive electric industry. In addition to
    TVA, the participants included: the Tennessee Valley Public Power
    Association representing distributors, the Tennessee Valley Industrial
    Customers representing large industrial customers directly served by
    TVA, Associated Valley Industries representing industrial customers
    served by the distributors, the Southern States Energy Board, the
    Tennessee Valley Energy Reform Coalition representing local
    environmental interests, the Rural Legal Services of Tennessee
    representing the interests of rural consumers, the League of Women
    Voters Natural Resources Chair in Knox County, the International
    Brotherhood of Electrical Workers, and the International Brotherhood of
    Teamsters. As national energy stakeholders, ENRON, TVA Watch, and the
    Electric Clearinghouse also participated.
        Last March, the task force submitted its final report. Relying on
    the report and working with the various stakeholders, the Department of
    Energy crafted a ``TVA title'' for inclusion in its Comprehensive
    Electricity Competition Plan, released on April 15 of this year.
    Consequently, although the title reflects hard work and compromises,
    the ``TVA title'' in the Administration plan is the product of a
    regional consensus and creates an appropriate role for TVA in a
    competitive environment. TVA supports this title in the
    Administration's bill and greatly appreciates DOE's impressive effort.
                              administration title
        The TVA title of the Administration's proposal affirms TVA's
    continued role within the Valley managing the river system and
    providing electricity primarily for Valley residents. It also imposes
    new limitations on TVA, such as:

     For the first time, subjects TVA to antitrust prohibitions.
     For the first time, subjects TVA transmission rates to FERC
            jurisdiction.
     Requires TVA--unlike other utilities in the country--to re-
            negotiate existing full-requirement contracts with distributors
            within one year of enactment, and gives FERC authority to
            settle disputes.
        Early this spring, members of Congress from the TVA region strongly
    urged TVA to work directly with the Tennessee Valley Public Power
    Association, which represents TVA's 159 distributors, to put the final
    touches on a regional solution for inclusion in restructuring
    legislation which will be considered by Congress. As a result, in
    March, TVA and TVPPA developed legislative language for a ``TVA
    Title.''
        From TVA's perspective, the Administration's proposal and the TVPPA
    proposal are very similar in critical ways. The most important
    characteristic is that they both represent a regional consensus and
    regional compromises. Since many of you are already familiar with the
    Administration's plan, I would like to briefly discuss 5 areas of
    similarity. (Also, attached is a chart comparing the TVA title in the
    Administration plan with the TVPPA proposal.)
    1. Equitable Competition
     TVA transmission rates, terms and conditions would be subject
            to regulation by the Federal Energy Regulatory Commission.
     Limitations on fair competition, such as the TVA ``Fence'' and
            ``Anti-Cherry Picking amendment would be removed simultaneously
            on the effective date of federal legislation.
    2. TVA Power Sales
     TVA's sales of electricity outside of the existing service
            area would be limited in two ways. First, TVA would be limited
            to wholesale sales--no retail sales, and second, these sales
            would be limited to electricity that is surplus to the demand
            of its customers in the TVA service area.
     TVA would be permitted to sell to new retail customers inside
            the TVA service area but only under circumstances agreed to by
            the power distributors.
     TVA would not offer long-term contracts for firm wholesale
            energy sales to customers outside the service area at rates
            more favorable than those offered to distributors unless power
            distributors agree.
    3. Stranded Investment Recovery
     TVA and the distributors would negotiate the amount of
            stranded investment due as a result of the move to open
            markets. In the event TVA and distributors cannot agree on
            stranded investment, FERC would decide the issue.
     FERC would review and approve the stranded investment recovery
            plan, or reconcile the TVA/distributors differences if a joint
            plan is not submitted.
     TVA would not collect stranded investment after September 30,
            2007.
     TVA would use any funds recovered to repay debt consistent
            with TVA's 10-Year Plan objectives.
    4. Antitrust Coverage
     TVA would be subject to the injunctive relief and criminal
            penalties--but not the civil damage provisions--of the anti-
            trust laws of the United States. This exclusion from civil
            damage liability is comparable to the anti-trust standards
            generally applied to governmental entities.
    5. Renegotiation of Wholesale Power Contracts
     TVA and the distributors would renegotiate their existing
            power contracts within one year of enactment of comprehensive
            energy legislation.
     If TVA and a distributor cannot reach agreement on new
            contract terms--and if FERC has approved TVA's stranded
            investment recovery with respect to that distributor--the
            distributor could terminate its existing contract upon three
            years notice from the date of the FERC order.
        TVA has been working with our customers to provide them with
    greater contract flexibility in anticipation of a more open and
    competitive marketplace. Even more importantly, TVA has further
    demonstrated our willingness to re-negotiate these contracts yet again
    as part of this regional consensus approach. As far as I know, this is
    the only example to date where a party to a contract advantageous to
    that party willingly agrees to legislation requiring re-negotiation of
    that contract.
                                   conclusion
        TVA is working hard to prepare for competition by reducing our
    debt, keeping our electric rates low, and efficiently managing the
    Tennessee Valley's integrated resource system.
        We have worked with many stakeholders, especially TVPPA, to develop
    a regional approach to restructuring. TVA is committed to work with
    this Committee and with other TVA stakeholders to ensure a regional
    solution that brings the benefits of competition to the Tennessee River
    Valley.
        Thank you for the opportunity to testify before this committee. TVA
    is eager to contribute to efforts to include a regional consensus as
    part of any federal legislation Congress undertakes in the future.

        Mr. Barton. Thank you, Mr. Medford.
        We would now like to hear from Mr.--is it ``Co-lee,'' or
    ``Coo-lee''?
        Mr. Coley. ``Co-lee.''
        Mr. Barton. ``Co-lee.''
        Mr. Coley. ``Coley,'' that is correct.
        Mr. Barton. Your statement is in the record. We will
    recognize you for 5 minutes to summarize.

                     STATEMENT OF WILLIAM A. COLEY

        Mr. Coley. Thank you Mr. Chairman, and members of the
    panel. I appreciate your inviting me here to testify today. My
    name is Bill Coley and I am president of Duke Power Company,
    and I am testifying on behalf of TVA Watch.
        TVA Watch is a group of six investor-owned utilities
    adjacent to, or near, the TVA service area. TVA Watch was
    formed in late 1995, based on concerns that TVA was illegally
    selling power outside of its statutorily defined territory,
    commonly known as the ``fence,'' and because of a number of
    statements made by TVA that it wanted to become ``America's
    power company,'' and compete nationwide. Those statements
    reminded many of us in the surrounding areas of TVA's unbridled
    competition, prior to 1959.
        In fact, TVA Watch members have been forced to take TVA to
    court on three occasions since 1995. All cases involve TVA's
    power sales outside the fence, in violation of the
    congressionally imposed boundary. In 1996, the Federal Court
    found that TVA was selling power outside its legal territory in
    violation. One year later, TVA was again caught illegally
    selling power outside the fence, and promptly settled a second
    lawsuit we had filed. The third case is ongoing. TVA is
    fighting hard for the right to capture customers already served
    by others. We were forced to take these actions to court
    because TVA is not accountable to any regulatory body; neither
    to FERC nor any State public service commission. Our only
    recourse has been, and remains, litigation.
        In 1959, investor-owned utilities found they could not
    compete against a Federal corporation which didn't pay taxes;
    was not subject to the same regulatory bodies; was immune from
    anti-trust laws, and was the beneficiary of many other
    subsidies because of it was a Government entity. We do not fear
    competition. We have been competing vigorously in the wholesale
    market in all of our companies. But we are justifiably fearful
    of unfair competition from our own Government. Mr. Chairman, I
    would submit that if the U.S. Air Force were to announce a new
    commercial passenger shuttle between Washington and New York,
    American Airlines, U.S. Airways, and others would voice similar
    concerns.
        Admirably, TVA has embarked on a 10-year plan to cut its
    $27 billion of debt and improve its poor financial situation.
    All of our companies would have, at best, very poor ratings by
    credit analysts with a similar debt load. But in recent reviews
    by agencies, TVA was given a AAA credit rating, which is
    another tangible example of TVA's competitive advantage as a
    Government utility. No investor-owned utility in the United
    States has a AAA credit rating.
        We emphatically believe that the fence should remain
    intact. However, should the fence be, as TVA states,
    preordained to come down, then we believe it imperative that
    Congress replace it with mechanisms that allow for fair
    competition between suppliers, and foster competitive benefits
    for consumers. Congress must also recognize the need to protect
    Valley ratepayers, and perhaps most importantly, all taxpayers.
        First, TVA should be covered by full FERC regulations,
    including rate regulation. Second, TVA's immunity from anti-
    trust laws should be removed, so that TVA would be constrained
    to act as an equal market participant. Third, TVA's ability to
    build or acquire new generation should be controlled. Its
    appetite for unneeded generating plants some years ago greatly
    added to its massive debt. Fourth, TVA should either be
    required to pay taxes as we do, or its payment in lieu of taxes
    should be expanded to include the full burden of local, State
    and Federal taxes. There are several other advantages which TVA
    enjoys, which should also be addressed. They are included in my
    written testimony.
        Mr. Chairman, in summary, the more things change; the more
    they stay the same. The debate over TVA today is amazingly
    similar to that of 40 years ago. As this committee deliberates
    restructuring, it must determine the appropriate role of TVA.
        I conclude with a statement from one of the authors of the
    fence provisions of 1959, Senator Jennings Randolph. ``At some
    time in the future, when memories have dimmed and new faces
    have come upon the scene, the purpose of the prohibition
    against TVA supplying power outside of the fence might be
    forgotten.'' Mr. Chairman, we hope that our concerns, and that
    the history of the fence, will not be forgotten.
        Again, I appreciate being here and am happy to welcome your
    questions.
        [The prepared statement of William A. Coley follows:]
     prepared statement of william a. coley, president, duke power and co-
                              chairman, tva watch
                                  introduction
        Mr. Chairman and Members of the Committee: my name is Bill Coley
    and I am President of Duke Power. I am here today as Co-chairman of TVA
    Watch, a coalition of shareholder-owned utilities that was formed to
    serve two public policy functions: First, to ensure that TVA complies
    with the TVA Act. Second, to promote policy discussion regarding the
    proper role of TVA in a competitive marketplace. In addition, TVA Watch
    supports efforts to bring meaningful reform to TVA as America's
    electric power industry evolves into a more competitive market. Other
    members of TVA Watch include American Electric Power, Entergy
    Corporation, Illinova Corporation, LG&E/Kentucky Utilities, and SCANA
    Corporation.
        To set the stage for my testimony, I'd like to refer to a statement
    made 40 years ago by Senator Jennings Randolph of West Virginia, one of
    the authors of the 1959 of the law that placed a ``fence'' around TVA
    electricity operations that remains to this day. Senator Randolph said
    that ``at some time in the future, when memories have dimmed and new
    faces have come upon the scene,'' the purpose of the prohibition
    against TVA supplying power outside the ``fence'' might be forgotten.
        Mr. Chairman, Senator Randolph hit the nail on the proverbial head.
    The issues that led to Senator Randolph making that statement are as
    valid today as they were 40 years ago. In fact, as the electric power
    industry becomes more subject to market, rather than regulatory,
    discipline, I urge you to remain alert to the problem that led to the
    creation of the ``fence.'' The problem was unfair competition by the
    federal government. If the ``fence'' is to be removed so that TVA can
    compete in an open market, then the law that created the ``fence'' must
    be replaced with a new law that will assure fair competition. Put
    another way, failure to deal with the competitive fairness issues that
    led to the ``fence'' being created in the first place will only
    compromise the objective of encouraging true efficiency in America's
    electric power industry in a competitive market.
        I believe all of us support the proposition that competition is
    good for consumers. I think we also can agree that consumers (at both
    wholesale and, where permitted by individual states, retail levels) are
    best served when they can choose among the widest range of providers
    who compete under the same rules. However, it isn't enough for all of
    us to recite the competition mantra without dealing forthrightly with
    the issues of how TVA is to operate if it is to enter a competitive
    market. We believe that TVA has a place in the future of our industry.
    However, there are some very fundamental issues that must be dealt with
    if TVA's role is to be that of a competitive power supplier. I want to
    emphasize that my company and others in TVA Watch have worked with TVA
    over the years under a provision of the 1959 law that allows our power
    grids to be interconnected for purposes of maintaining reliability.
    When we agree with TVA, we work well together. When we disagree with
    TVA, we do so in the spirit of constructive debate. That is how we
    approach this hearing today. We seek to be constructive, yet
    forthright.
        TVA is not just another government agency. Nor is TVA just another
    public power utility. TVA is completely and undeniably unique. It is a
    corporate entity created by the government, with bonds issued to the
    public, that engages on both purely public functions (such as flood
    control) and purely commercial functions (such as electricity
    generation and supply). By some measures, it is the largest electric
    supplier in the country. It is an agency like no other. In the
    Tennessee Valley, it is the retail rate regulator, the wholesale
    supplier, the leading environmental agency and the dominant producer of
    power in its seven-state region. No other entity in the country even
    comes close to having this type of authority or license. If Congress is
    to enact legislation that will fundamentally change the relationship
    we've had with TVA, then the issue of how TVA is to function in a
    changing market must be confronted and resolved to protect the public
    interest and further the objective of open and fair competition. TVA
    Watch believes it is entirely possible to resolve these issues and is
    prepared to work constructively with Congress to do so.
                              history of the fence
        The fact that TVA has such powerful tools while other utilities do
    not is the very reason Congress took action to limit TVA's reach by
    creating the ``fence.'' These tools were provided to TVA so that it
    could issue revenue bonds to finance the expansion of its power program
    without having to come to Congress for appropriations to finance the
    program's growth. Congress deliberated four years between 1955 and 1959
    before agreeing to provide TVA with these extraordinary powers, but
    with the proviso that TVA confine its power operations within what we
    call the ``fence.'' Congress created the ``fence'' around TVA to
    ``protect surrounding utilities from competition with the public power
    authority,'' out of a justified concern that TVA would have a
    governmentally-conferred competitive advantage and be able to siphon
    off customers who could be otherwise served by private enterprise.
    Without the fence, TVA would be able to gain market share not by virtue
    of its being the most efficient supplier, but because it could undercut
    the market based upon its governmentally-granted benefits.
        This concern is especially valid today because of recent statements
    by the leadership of TVA that the issue of whether the ``fence'' will
    come down is ``preordained'' and that TVA ``intends to be one of the
    successful few'' utilities in a changing market.
                       tva is trying to destroy the fence
        These statements have been followed by specific deeds. During the
    past four years, TVA has been carrying out a strategy to undermine and
    eliminate the ``fence.'' For example:

     In April 1995, TVA released a study stating that TVA is ready
            for competition.
     In October 1995, TVA renewed its efforts to take over the
            Southeastern Power Administration assets on the Cumberland
            River.
     In 1995, TVA began to advertise outside its service territory.
     In August 1996, as a result of a lawsuit filed by several
            subsidiaries of Southern Company, a Federal judge ruled that
            TVA improperly stepped outside the Fence when it sold power to
            a power marketer, a ruling which TVA did not appeal.
     In November 1996, Kentucky Utilities filed an action before
            the Virginia Corporation Commission (VCC) alleging that one of
            TVA's distributors, Powell Valley Electric Cooperative,
            violated state law by making and performing a contract for the
            sale and delivery of TVA-produced power outside the ``fence.''
            Last month, the VCC ruled the transaction violated state law.
            An appeal is pending.
     In April 1997, Duke Power and several other members of TVA
            Watch filed suit in Federal court, alleging TVA was selling
            power outside its congressionally-mandated territory. These
            transactions made it nearly impossible for buyers in the market
            to identify TVA as the actual source of power or to avoid
            unwittingly purchasing TVA's power. TVA ultimately agreed to
            settle this suit and stop its sham transactions on terms
            satisfactory to our member companies. TVA's compliance with its
            settlement obligations remains subject to the continuing
            jurisdiction of a federal court in Alabama.
        We believe the experiences of the past few years justify continued
    vigilance over TVA's activities.
        Clearly, if the ``fence'' is removed without addressing the unique
    and powerful advantages that TVA already has, it will continue to
    receive billions of dollars in direct and indirect federal benefits,
    and inhibit efficient competition by selling outside of its
    congressionally-mandated ``fence.'' By doing so, TVA will have ignored
    the General Accounting Office warnings that the ``fence'' may actually
    provide TVA with protection from the significant risks that competition
    could hold for TVA. Congress should not permit TVA to dismantle the
    ``fence.''
                      there must be a level playing field
        TVA Watch believes that issues surrounding the Tennessee Valley
    Authority--its huge debt, substantial subsidies, exemption from basic
    laws, artificial competitive advantages, and its lack of
    accountability--must be addressed before the ``fence'' can come down so
    that TVA can compete with private enterprise. Failure to address these
    many issues will undermine the primary goal Congress and State
    legislators seek, namely fair and efficient competition.
        TVA Watch believes the following ground rules that apply to TVA's
    competitors must apply to TVA itself:

    1. Anti-trust laws that apply to private-sector utilities must apply
            with the same force and effect to TVA.
    2. TVA must come under the jurisdiction of the Federal Energy
            Regulatory Commission (FERC) to the same degree as other
            utilities. This includes regulation not only of TVA's
            transmission system, but its power sales practices.
    3. TVA must not be allowed to build new or expanded generation
            resources with the wide range of subsidies that are denied
            other utilities.
    4. TVA must bear the same federal, state and local tax burdens as other
            utilities.
    5. TVA should not have preferential access to power from other federal
            facilities at rates below fair market value.
    6. TVA's exemption from open access transmission system requirements
            should be repealed.
    7. TVA's exemption from nuclear decommissioning rules must be
            eliminated.
        We do not believe it is sufficient for Congress to pick and choose
    among this list. We've been asked on several occasions which of these
    rules are more important than others. Our response is that is the wrong
    question. The right question to ask is whether or not we are going to
    have competition where everyone competes under the same rules. Our
    position is that if TVA doesn't want to play ball under the same rules
    as everyone else, they should not be allowed into the competitive
    supply game.
                      the clinton administration proposal
        In this regard, TVA Watch has serious concerns about a provision in
    the proposed electricity restructuring legislation recently released by
    the Clinton Administration that deals with TVA. While the overall goal
    of the Administration's bill to encourage more competition is a worthy
    one, the bill falls far short of providing adequate measures to
    safeguard U.S. taxpayers, electricity consumers and electricity
    providers against unfair competition from TVA.
        The Administration's bill, to be frank, would create a special set
    of rules for TVA while requiring other utilities to operate under more
    stringent rules. The Administration's bill would permit TVA to issue
    more debt to build and operate facilities anywhere with only
    superficial changes in the rules that currently govern TVA. U.S.
    taxpayers would be placed at greater risk for any TVA business activity
    and consumers would be denied the benefits of fair competition.
        Among the inadequacies in the Administration's bill:

     The only limit on TVA's ability to expand its generation
            portfolio provided by the Administration's bill is that TVA
            could not use any funds recovered for stranded costs to finance
            the expansion. While this limit on the use of stranded cost
            recovery is useful, it is inadequate because TVA would still
            have other advantages that are not available to its potential
            competitors.
     The bill calls for TVA to be subject to only selected
            provisions of some anti-trust laws. However, this provision is
            virtually meaningless because TVA would be exempt from any
            damage liability for any anti-competitive acts. TVA Watch
            maintains that anti-trust laws must apply to TVA with the same
            force and effect as other commercial firms. If TVA wants to
            compete, it must do so under the same anti-trust ground rules
            with adequate deterrent mechanisms.
     Although the Administration's bill provides for regulation of
            TVA's transmission system by the Federal Energy Regulatory
            Commission (FERC), it does not provide for regulation of TVA's
            sales practices and rates by FERC. What this means, among other
            things, is that while TVA's transmission system would be open
            to all suppliers, TVA could price its power and access to its
            transmission system without the FERC review that applies to
            other utilities. TVA also would be guaranteed recovery of all
            stranded costs (regardless of reasonableness) and would be
            exempt from any FERC initiative to promote regional
            transmission organizations or to investigate abusive practices.
            TVA Watch maintains that TVA must be regulated just like other
            public utilities if the ``fence'' is to be removed.
     The Administration's bill is silent on other steps needed to
            ensure fairness and prevent economic distortions if the
            ``fence'' is to be removed. These steps include (1) elimination
            of TVA's exemption from nuclear decommissioning laws, (2)
            requiring TVA to pay for power from other federal facilities at
            fair market rates, and (3) requiring TVA to pay all federal,
            state and local taxes at rates comparable to those paid by
            TVA's potential competitors.
        According to a 1995 study by Putnam, Hayes & Bartlett, these
    advantages provided by the federal government to TVA cost U.S.
    taxpayers more than $1.2 billion per year. Even with these subsidies in
    a service area closed to competition, TVA has amassed a long-term debt
    of more than $27 billion. This debt, ultimately an obligation to be
    borne by U.S. taxpayers in the event of a TVA default, likely could
    increase if TVA is permitted to amass more debt to expand its business
    beyond the ``fence.''
        In short, TVA Watch believes TVA must not be allowed to compete
    outside the ``fence'' unless (1) TVA is positioned to function without
    federal subsidies and (2) the protections enacted in 1959 are replaced
    with new rules that will assure fair competition among all providers.
    The Administration's bill is completely inadequate on both counts.
        In defending its proposal to remove the ``fence,'' the
    Administration says that if TVA's current customers are to have new
    options that may result in TVA losing business, then TVA should be able
    to compete outside the ``fence'' to replace that lost load. While that
    rationale may seem logical, it ignores the larger question of why TVA
    should operate under its own lenient rules while other competitors must
    function under more stringent rules. There is an implied assumption in
    the Administration's proposal that could be stated in the following
    way: TVA's customers want new options. This means TVA has to compete
    against other utilities. However, TVA can't succeed in direct
    competition against other utilities because it lacks the financial
    strength to do so. Therefore, a special set of rules with light-handed
    regulatory treatment must be created to ``balance out'' TVA's financial
    impairments so that it will have a better chance to compete.
        Mr. Chairman, even if the Administration denies that is the case,
    the fact remains that if their bill were to become law, TVA would have
    advantages that would not be available to its potential competitors.
    It's rather like allowing the U.S. Air Force to get into the air
    passenger business against commercial airlines. We submit that creating
    a special set of rules to prop up a financially-impaired TVA as it
    tries to compete is absolutely contrary to established economic thought
    and harmful to the public interest. The public interest is served by
    setting the right priorities. TVA should get its financial house in
    order first. Then, and only then, should TVA be allowed to compete
    under the same rules as everyone else.
                           tva's huge long-term debt
        TVA has a long way to go to get its house in order. Even though TVA
    has its advantages in an 80,000 square mile area closed to competition,
    it nonetheless has amassed a debt of more than $27 billion dollars. TVA
    has said it is trying to reduce that debt. Two years ago, TVA unveiled
    a ten-year plan to cut its debt in half by 2007. Yet, the General
    Accounting Office (GAO) recently released a study showing that TVA
    likely will not meet its debt reduction targets within its originally
    announced schedule. What this means is that Congress should not rest
    easy because TVA has promised not to go deeper in debt. In fact, TVA is
    currently entering into a series of deals in which, without borrowing
    money, it commits the authority to long-term purchases of power--as
    long as thirty years--from private parties. These new TVA obligations,
    made by a federal corporation, should be viewed for what they are--an
    indirect means for TVA to get around its $30 billion Congressional bond
    cap. By essentially paying others to build these new plants, but
    agreeing to buy all the plants' output at specific rates over a long
    period of time, TVA is essentially underwriting the debt and is on the
    hook if its decisions turn out to be wrong.
        tva's bonds have the implicit backing of the federal government
        You may ask how TVA is able to continue to issue bonds, and to
    continue to carry such massive debt on its books year after year
    without raising rates, and without defaulting on its debts. The reason
    is simple: TVA is an arm of the United States government, a Federal
    Corporation. As such, according to Standard and Poor's and other bond-
    rating services, its bonds carry the implicit guarantee that the United
    States will bail out TVA should it not be able to repay its debt, much
    as the government bailed out the savings and loan industry. Because TVA
    is not subjected to any meaningful outside oversight, it is much more
    free from the accountability shareholder-owned utilities must
    demonstrate.
        For example, TVA is not required to abide strictly by the generally
    accepted accounting principles utilized by virtually all American
    businesses. In effect, there is no existing legislative authority
    requiring TVA to do so. In fact, there currently is no method even to
    meaningfully compare TVA's financial position to that of shareholder-
    owned utilities, except by using the data TVA chooses to make public.
    Regulation of TVA by FERC to the same extent other utilities are
    regulated would go a long way in rectifying this.
                         tva enjoys numerous subsidies
        The analysis by Putnam Hayes & Bartlett has quantified those
    advantages at more than $1.2 billion a year. These advantages include
    exemption from Federal and state income taxes, exemption from State and
    local ad valorem and other taxes, the purchase of federal preference
    power at subsidized rates, and lower financing costs because its bonds
    are partially tax exempt. The executive summary of the study is
    attached to my statement and a copy of the full study has been provided
    to the Committee.
        TVA's ``payments in lieu'' of taxes do not even begin to reach the
    amounts of taxes paid each year by shareholder-owned utilities. I
    understand that TVA officials claim otherwise and insist that certain
    tax breaks enjoyed by shareholder-owned utilities are somehow equal to,
    or even greater than, the subsidies TVA enjoys. This is an apples-to-
    oranges comparison of the worst sort. Without getting into a numbers
    game or confusing statistics, I would like to make four quick points
    regarding taxes. First, all of the tax provisions cited by TVA are
    available to every corporation in America--all you have to do is pay
    taxes. Second, the tax provisions merely determine when the tax is
    paid--not whether it's paid. Third, because shareholder-owned utilities
    are regulated, it is the customer--not the utility taxpayer--who
    benefits from these tax provisions. Fourth, the disparity between TVA's
    payments in lieu of taxes and the tax burdens of investor-owned
    utilities is glaring. For example, in 1998, TVA's gross revenues were
    $6.7 billion, but their tax expenditures were only $264 million. In
    contrast, Duke Power Company's gross revenues were $4.5 billion, yet
    our total federal, state and local tax bill was $854 million. Any claim
    by TVA that their payments in lieu of taxes are somehow ``equivalent''
    to what is paid by a private sector company simply does not hold up
    under examination.
                tva is exempt from federal and state regulation
        In addition to the myriad financial subsidies it enjoys, TVA is, in
    essence, ``self regulated.'' It is not subject to regulatory oversight,
    either by State regulatory authorities, or by the Federal Energy
    Regulatory Commission (FERC). Its rates and capital investments are
    left entirely to TVA's discretion and are immune even from challenges
    in federal court. As I have mentioned before, this has resulted in TVA
    incurring almost $27 billion of debt.
        But let me focus for a minute on FERC, since it is clearly in the
    jurisdiction of this Committee. TVA is substantially exempt from
    regulation under the Federal Power Act. Neither TVA's wholesale power
    rates nor its transmission service rates are regulated by FERC. At a
    minimum, TVA should be subject to the same FERC regulation as are its
    shareholder-owned neighbors. As it now stands, TVA is accountable only
    to its three-member board while other market participants have to
    answer to independent federal and state regulators.
        One glaring example of TVA's favored status is that it is not
    required to file open access transmission tariffs at FERC as are all
    shareholder-owned utilities. The purpose of those tariffs is to
    guarantee that any power market participant can gain non-discriminatory
    access easily and quickly to transmission services from jurisdictional
    utilities. Public power utilities such as TVA are not required to make
    such filings because the Commission does not regulate them.
        Although FERC has attempted to impose reciprocity requirements on
    TVA, if a power seller seeks to move power across TVA, TVA's compliance
    is frequently obtained only by the seller requesting an order from
    FERC, which can slow a transaction by months, or even eliminate it.
    TVA's voluntary transmission ``guidelines,'' for example, are, for the
    most part, ``window dressing'' which appear to be intended as much to
    persuade policymakers and the public that TVA will play by the same
    competitive rules that other utilities must obey, as to provide
    transmission access.
        Below is a list of FERC provisions that shareholder-owned utilities
    must comply with, but TVA does not.

     License required to operate hydroelectric power generation
            facilities. (16 USC 800).
     Conditions on licenses, restrictions on modification, and
            controls on maintenance. (16 USC 803).
     Determination of cost of projects constructed under license.
            (18 CFR 4.1-4.7).
     Rules and regulations concerning applications for permits,
            licenses, exemptions, etc. (18 CFR 4.30-4.84).
     Utilities required to petition to amend license. (18 CFR
            4,200).
     Assessment of license fees against utilities. (18 CFR 4-300-
            4.305).
     Regulation of minimum recreational opportunities at licensed
            hydroelectric projects. (18 CFR 1 to 8.11).
     Restrictions on license transfer and lease of project
            property. (18 CFR 9.1-9.3).
     Annual charges imposed on utilities operating hydroelectric
            facilities. (18 CFR 11.1 to 11.21).
     Safety regulation of water power projects and project works.
            (I 8 CFR 12.1 to 12.44).
     Requirement of utilities to interconnect facilities and to
            coordinate operations. (16 USC 824a).
     Requirement to seek pre-approval for utility disposition of
            property or purchase of securities. (16 USC 824b).
     Federal regulation of utility issuance of securities and
            assumption of liabilities. (16 USC 824c). Regulation and
            control of rates for sale of power at wholesale. (16 USC 824d).
     Authority of Federal Energy Regulatory Commission to fix rates
            and charges and to prevent imposition of unjust or preferential
            rates. (16 USC 824e).
     Duty of utilities to furnish service. (16 USC 824f).
     Regulatory ascertainment of cost of utility property,
            investigations, requests for inventory and cost statements. (16
            USC 824g).
     Federal authority to require utilities to interconnect
            facilities.(16 USC 824i).
     Federal authority to require utilities to provide transmission
            service. (16 USC 824j-824k).
     Duty of utilities to keep and maintain accounts and records.
            (I 6 USC 825).
     Regulators' authority to determine and set appropriate
            depreciation schedules. (16 USC 625b).
        Congress must fix this imbalance if the ``fence'' is to be
    eliminated.
        If Congress enacts new electricity legislation, it must extend
    FERC's authority to regulate TVA in the same manner it regulates other
    utilities. We certainly have no disagreement with FERC Chairman James
    Hoecker, who testified before this subcommittee on April 22 about the
    need for authority to regulate TVA.
        In addition to not being subject to FERC rate rules, TVA avoids
    payments to FERC and the costs of securing FERC licenses for its
    hydroelectric projects. Shareholder-owned utilities, on the other hand,
    pay FERC millions of dollars for the privilege of being regulated. In
    addition, shareholder-owned utilities spend millions of dollars--not to
    mention upwards of seven years--to obtain FERC licenses for hydro
    projects.
                       tva is exempt from anti-trust laws
        Another key area that Congress must deal with is anti-trust laws. I
    cannot emphasize strongly enough that if TVA is not subject to basic
    rules that govern all other competitors, that exemption, coupled with
    its total discretion in rate-making, give TVA the power to ``control
    the market'' by engaging in predatory pricing or other anti-competitive
    activity.
        TVA is in a commercial enterprise-- the supply of electric power.
    There is no doubt that the activities of private sector companies in
    the commercial business of supplying electric power are subject to the
    antitrust laws. This means that power suppliers, such as Duke Power and
    the other members of TVA Watch, all are subject to lawsuits by private
    parties and by the government for violations of the various antitrust
    laws, such as the Sherman Act, the Clayton Act and the Federal Trade
    Commission Act. For example, if a public utility were to supply power
    to somebody on the condition that the customer agree not to compete
    with that utility, the Department of Justice would probably file an
    antitrust lawsuit against that utility seeking treble damages and other
    penalties.
        TVA, however, operates under a different set of rules. In response
    to calls that it be made subject to the antitrust laws and to treble
    damages for violations of those laws, TVA offers two general responses,
    both of which are inadequate. First, TVA claims that it is incapable of
    competing on an unfair basis because it was created solely to promote
    ``governmental'' and ``public'' purposes. Second, TVA claims that the
    antitrust laws are directed to eliminating the concentration of
    economic power in the hands of those who serve only their own profit-
    making interests, and because TVA is not operated on a ``for profit''
    basis, it should remain exempt from the antitrust laws. Both of these
    arguments are easily dismissed.
        TVA's power program--its sale and transmission of power at retail
    and at wholesale--is a commercial enterprise. What this means is that
    TVA, in reality, is in the commercial business of selling electricity.
    Moreover, the absence of a ``profit motive'' is hardly grounds for
    immunity from antitrust laws. The antitrust laws contain no such ``non-
    profit'' exemption.
        The Supreme Court has long-recognized that the profit motive is not
    the only reason why the centralization of economic power is properly
    subject to antitrust laws. The Supreme Court has also recognized that
    the instinct of government to survive and thrive in a competitive
    environmental also can lead to anti-competitive behavior. In the
    landmark case of City of Lafayette v. Louisiana Power & Light Co., 435
    U.S. 389, 408 (1978), the Supreme Court has noted that public
    corporations, such as TVA, are fully capable of competitive mischief:
            ``. . . the economic choices made by public corporations in the
            conduct of their business affairs, designed as they are to
            assure maximum benefits for the community constituency, are not
            inherently more likely to comport with the broader interests of
            national economic well-being than are those of private
            corporations acting in furtherance of the interests of the
            organization and its shareholders . . . When [government] acts
            as owners and providers of services, they are fully capable of
            aggrandizing other economic units with which they interrelate,
            with the potential of serious distortion of the rational and
            efficient allocation of resources, and the efficiency of free
            markets which the regime of competition embodied in the
            antitrust laws is thought to engender.''
        The Administration's proposal to subject TVA to only certain
    antitrust laws without penalties simply does not serve the public
    interests because there will be no deterrent. It's rather like having a
    law saying that drunken driving is bad, but not having any penalties to
    go with the law. If persons harmed by anti-competitive conduct by TVA
    only have the redress offered by the Administration--injunction
    available only on a prospective basis--then TVA may as well remain
    immune from the antitrust laws. This is because antitrust litigation is
    time consuming and expensive. If the remedy at the end of the
    proceeding is a slap on the hand, then no rational person would ever
    initiate the process. There must be a deterrent to keep TVA from
    committing anti-competitive acts in the first place. That deterrent can
    only come in the form of making TVA pay damages for the competitive
    injuries that result from violations of the antitrust laws. If TVA
    claims that it, a billion dollar commercial enterprise, can't afford to
    pay antitrust damages, we have one simple response: If you can't do the
    time, don't do the crime.
                                   conclusion
        TVA Watch encourages this Committee, and indeed all of Congress, to
    consider carefully the ramifications on TVA's original mission, and the
    significant effects on the nation's debt and taxpayer's pockets, of
    enacting legislation allowing such competition from a taxpayer-
    supported Federal utility.
        TVA Watch supports efficient competition that is not skewed by
    allowing TVA to escape legal or regulatory burdens shareholder-owned
    utilities must bear. Many of the states that are moving forward on
    competition are largely ignoring the potential difficulties inherent in
    competition between private and government-supported entities because
    in most cases they have no jurisdictional authority to deal with these
    entities. This disparate treatment between public and private entities
    supplying electricity will distort competition. The states and Congress
    must find a remedy to allow competition to flourish. This can only
    occur if all competitors--regardless of ownership--are competing fairly
    against each other.
        We at TVA Watch are committed to working not only with this
    Committee, but with all others who are genuinely interested in
    reforming TVA. The plain language of the TVA Bond Act remains and its
    purpose has not been lost. TVA Watch hopes that this Committee, and
    Congress as a whole, will remind TVA that the clear statutory mandate
    of Congress is not a dim memory.

        Mr. Barton. Thank you, Mr. Coley.
        The Chair is going to recognize Mr. Bryant to introduce Mr.
    Morris to the subcommittee in a little more detail.
        Mr. Bryant. Thank you, Mr. Chairman. I appreciate that very
    much. I did want to specifically welcome Mr. Morris as a
    witness today. I am actually substituting for Congressman Ford,
    who was supposed to be here to introduce you. Congressman Ford
    and I, and Congressman Tanner, actually share you, so I will
    gladly step in for Congressman Ford.
        Mr. Morris is the president and CEO of Memphis, Light, Gas
    and Water. That is one of the largest municipal resource
    facilities in the country. He presides over 2,700 employees,
    and a $1.1 billion budget. He is a very distinguished, very
    qualified witness to come in and testify. I think he has much
    to offer to this committee and those here today. I would simply
    welcome him on behalf of the Tennessee Delegation, and yield
    back my time.
        Mr. Barton. Thank you, Mr. Bryant. Before we recognize Mr.
    Morris, my question would be is Elvis still paying his light
    bill?
        Mr. Morris. Elvis has been current and stays current, and
    is very actively involved in our local economy.
        Mr. Barton. Good. Gentlemen. Mr. Morris, your statement is
    in the record. You are recognized for 5 minutes to summarize
    it.

                       STATEMENT OF HERMAN MORRIS

        Mr. Morris. Thank you, Mr. Chairman and members of the
    subcommittee. My name is Herman Morris. As you have heard, I am
    president and CEO of Memphis Light, Gas and Water Municipal
    Utility, serving the city of Memphis, in Shelby County,
    Tennessee.
        I am here today on behalf of Memphis' and Knoxville's
    utility boards. I want to thank the members of the subcommittee
    for giving us the opportunity to present our views on
    electricity competition and the role of Federal electric
    utilities. We would also like to thank Congressman Ed Bryant
    and Congressman Harold Ford, Jr., whose districts serve our
    customers, as we serve their constituents, for their interest
    in these very important issues.
        I am going to limit my remarks this morning to 5 minutes. I
    hope that you will have time to review my more detailed written
    statement, and accept it into the subcommittee's records.
        As you have heard, Memphis is a large--in fact it is TVA's
    largest--customer, accounting for approximately 11 percent of
    TVA power sales. Together, Memphis and Knoxville purchase about
    16 percent of TVA's power for distribution to over half-a-
    million customers. Accordingly, we have a significant interest
    in how Federal electric restructuring legislation affects the
    Tennessee Valley, generally, and TVA, particularly.
        We spent countless hours debating and analyzing the
    environment in which we believe we will operate in the future.
    Our customers' needs are our primary concern. It is of
    paramount importance to our customers that we maintain our
    ability to provide them with reliable electric service at the
    lowest reasonable costs. To do that, we are convinced that the
    Tennessee Valley must be open to wholesale electric
    competition, which is already a reality in many other parts of
    the country. Simply put, our belief is that a competitive bulk
    power market will result in lower electric rates for our
    customers, without diminishing service and reliability.
        This conclusion is based, in part, on our experience in the
    natural gas industry. Since 1986, for example, Memphis has
    saved our customers more than $70 million through our spot-
    market gas purchase program, which allows us to buy natural gas
    directly from marketers and producers. It has contributed to a
    20 percent decrease in our natural gas rates. We are seeking to
    obtain similar competitive market opportunities for our
    electric consumers, as well.
        We have been a TVA power customer for 60 years. We
    appreciate the good that TVA has done in the Valley, and for
    its residents, over those years. We believe that TVA can
    continue to be a force for good in the Valley, and the country,
    for many years to come. By the same token, we also believe that
    our customers would greatly benefit if the Tennessee Valley
    were open to wholesale electric competition. However, if we are
    to get access to competitive power markets, there must be
    changes to the way TVA does business, and most of those changes
    can only be made by Congress.
        Fundamentally, Memphis and Knoxville have two primary
    objectives: access to competitive wholesale power markets, and
    fairness in the process of transition to such access. In
    furtherance of these objectives, we support Federal
    restructuring legislation that would: one, repeal the TVA fence
    and anti-cherry-picking provisions on the date of enactment;
    two, modify our power supply contracts with TVA to permit us
    access to alternative power suppliers in the near term, and
    three, provide for full FERC regulation of TVA transmission,
    wholesale power rates, and stranded cost recovery.
        These three principles are essential to full and fair
    transition to wholesale competition. First, Tennessee Valley
    distributors will never gain access to competitive power
    markets unless, and until, the TVA fence and anti-cherry-
    picking provisions are repealed. Therefore, we strongly urge
    Congress to repeal these statutory barriers to competition, and
    to make their repeal effective on the date of enactment of the
    legislation.
        Second, without the ability to terminate our contracts with
    TVA, we will not be able to renegotiate our contracts with TVA,
    or realize the benefits of competitive electric markets for
    another decade. These contracts, which were entered into with
    TVA--a Federal agency, under federally sanctioned and enforced
    monopoly structures--are fundamentally antithetical to electric
    competition in the Valley. They must be modified to equalize
    the parties' radically different negotiating leverage.
        Finally, more specifically, given TVA's unquestionable
    market power, the rates, terms and conditions for TVA
    transmission service, as well as its wholesale power rates, and
    as well as the questions of how, when and from whom TVA may
    collect stranded costs, must also be subject to FERC
    jurisdiction.
        In summary, we are seeking the same open access to
    wholesale power markets that most of the rest of the country
    already enjoys. We believe that our traditional power supplier,
    TVA, should be subject to the same FERC rules and regulations
    as traditional public utilities. We do not want to undercut or
    hamper TVA. We do want to ensure that we, our customers, and
    TVA are treated fairly in the transition to a competitive,
    wholesale power market.
        Oh behalf of Memphis Light, Gas and Water and the Knoxville
    Utility Board, I want to thank you for the opportunity to
    address the subcommittee today. We hope that you will take our
    views into consideration as you debate, deliberate, consider,
    and decide these matters. I will be happy to respond to any
    questions at such time as you choose.
        [The prepared statement of Herman Morris follows:]
     Prepared Statement of Herman Morris, Jr., President and CEO, Memphis
     Light, Gas & Water Division and Representing Knoxville Utilities Board
        Mr. Chairman and Members of the Subcommittee: My name is Herman
    Morris and I am President and CEO of the Memphis Light, Gas & Water
    Division (``Memphis''). I am here today on behalf of Memphis and the
    Knoxville Utilities Board (``Knoxville''). We would like to thank the
    Members of the Subcommittee for the opportunity to present our views on
    ``Electricity Competition: The Role of Federal Electric Utilities.'' We
    would also like to thank Congressman Ed Bryant, whose congressional
    district Memphis serves, for his interest in these important issues. I
    have appended to this prepared statement several documents that we hope
    will assist the Subcommittee in its analysis of TVA-related
    restructuring issues. These documents are:

    (1) A one-page summary of our positions on the Administration's TVA
            title in its comprehensive electric industry proposal;
    (2) Our critique of the Administration's TVA title;
    (3) A chart that compares existing law, several of the bills introduced
            last Congress, and our positions on the TVA issues;
    (4) Draft legislation that we believe would be appropriate for TVA;
    (5) A section-by-section summary of our draft TVA legislation; and
    (6) An executed Truth-In-Testimony Disclosure Form and a short-form
            resume, as per the Committee's May 6, 1999 letter.
    Introduction
        Memphis and Knoxville have been serving electric consumers in
    Tennessee since 1939. We have been power customers of the Tennessee
    Valley Authority practically since its inception over sixty years ago.
    We appreciate the good that TVA has done for the Valley and its
    residents over those years. We and our customers have benefited from
    TVA's power operations in the Tennessee Valley, and we believe that TVA
    can continue to be a force for good in the Valley for many years to
    come. By the same token, we also believe that we and our half a million
    customers would greatly benefit if the Tennessee Valley were opened to
    wholesale electricity competition. If we are to have access to
    competitive power markets, however, there must be some changes to the
    way TVA does business. Most of those changes can only be made by
    Congress.
        Memphis, TVA's largest customer, accounts for approximately 11
    percent of TVA's power sales, serving over 385,000 electric customers
    in Memphis and Shelby County, Tennessee. Knoxville is TVA's fourth
    largest customer, providing electricity to over 170,000 consumers in a
    750 square-mile service area that includes Knoxville, Tennessee and
    parts of each of the seven surrounding counties in East Tennessee.
    Together, Memphis and Knoxville purchase approximately 16 percent of
    TVA's power for distribution to over half a million consumerscustomers.
    We have a significant interest in how federal electric restructuring
    legislation affects the Tennessee Valley generally, and TVA in
    particular.
        Like the other 157 distributors of TVA power, Memphis and Knoxville
    are members of the Tennessee Valley Public Power Association
    (``TVPPA''), a nonprofit organization of TVA distributors devoted to
    the furtherance of distributor interests. TVPPA has taken an interest
    in the potential impact of federal electric restructuring legislation.
    In some respects, as extremely large distributors, our views are
    different from TVPPA's. We continue to meet and discuss those
    differences and are attempting to achieve consensus.
        We have spent countless hours analyzing the environment in which we
    believe we will operate in the future. Our customers' needs are our
    chief concern. We plan to continue that focus as deregulation of the
    electric industry progresses. It is of paramount importance to our
    customers that we maintain our ability to provide them with reliable
    electric service at the lowest reasonable cost. Ensuring reliability
    means minimizing system disturbances so that our power is there when
    our customers need it. Historically, we are among the nation's most
    dependable electric systems. Even during the extreme heat wave in the
    summer of 1998, we were able to meet our customers' power needs. Our
    customers expect us to continue our strong tradition of reliability
    into the next millennium.
        However, as stated, in addition to ensuring reliable service, our
    customers expect us to also deliver power and service at the lowest
    reasonable cost. To do that, we believe that we should have access to
    power suppliers beyond TVA. In short, distributors should be allowed
    access to competitive wholesale electric markets, which is already a
    reality in many other parts of the country.
        Our belief that a competitive market will result in lower electric
    rates for our customers is based in part on our experience with the
    natural gas industry. Since 1986, Memphis has saved its customers more
    than $70 million through its Spot Market Gas Purchase Program, which
    allows Memphis to buy natural gas directly from marketers and
    producers. This program has led to a 20 percent decrease in Memphis'
    natural gas rates. We are seeking the opportunity to achieve similar
    savings from a competitive market for our electric customers as well.
    We cannot do so unless and until Congress takes action to remove the
    statutory impediments to a competitive power market in the Tennessee
    Valley.
    The TVA Fence and the Anti-Cherry Picking Provision
        The two primary statutory barriers to wholesale power competition
    in the Valley are popularly known as the TVA ``Fence'' and the ``anti-
    cherry picking'' provision. The Fence, a result of the 1959 amendments
    to the TVA Act, prohibits TVA from entering into power sales contracts
    that would have the effect of making TVA or its distributors a source
    of power supply outside its defined service area. 16 U.S.C. Sec. 831n-
    4(a) (1995). This statutory provision is referred to as the ``Fence''
    because it ``fences'' TVA in. It limits TVA to power sales within a
    defined geographic service territory that includes virtually all of
    Tennessee.
        While the Fence confines TVA to the Tennessee Valley, the so-called
    ``anti-cherry picking'' provision is a wall of sorts to keep other
    power suppliers out. The Energy Policy Act of 1992, legislation that
    was intended to promote competition, provides that the Federal Energy
    Regulatory Commission (``FERC'') cannot order TVA to ``wheel'' power to
    distributors to be consumed within the Valley. 16 U.S.C. Sec. 824k(j)
    (1995). Thus, despite FERC Order No. 888, which mandates open access
    transmission systems throughout the country, TVA cannot be ordered to
    provide such access to its transmission grid for the purpose of
    bringing non-TVA power to distributors within the Valley. Until the
    anti-cherry picking provision is repealed, there will only be open
    transmission across the Valley, but not into the Valley. TVA will soon
    become an isolated island in a sea of competition where Memphis,
    Knoxville and other distributors will be captive customers.
        In the interest of fairness, Memphis and Knoxville advocate repeal
    of the TVA Fence. Any legislation that would allow competitors into the
    Valley should also permit TVA to sell power outside the Valley. Repeal
    of one provision without repeal of the other would produce anomalous
    results and would frustrate this body's pro-competitive motives in
    enacting such legislation in the first place. In addition, TVA's
    ability to reduce its debt and mitigate its stranded costs is enhanced
    by its ability to sell excess power outside the Fence, just as other
    utilities are able to mitigate stranded costs by selling outside of
    their traditional service territories. Memphis and Knoxville strongly
    urge Congress to take the necessary action to repeal both the TVA Fence
    and the anti-cherry picking provision, and in so doing, to open the
    Tennessee Valley to wholesale electric competition.
    Pre-Existing Power Contracts
        Even if Congress repeals the TVA Fence and the anti-cherry picking
    provision, Memphis and Knoxville would not be able to take advantage of
    the many benefits a competitive market has to offer. This is because of
    pre-existing long-term contracts. These were entered into under an
    entirely different regulatory regime. They were also entered into by
    parties with radically different negotiation leverage. Our current
    power contracts with TVA require 10 years' advance notice of
    termination and continue in perpetuity. This is due to the rolling
    nature of the contract term. Until notice of termination is given and
    the 10 years have elapsed, the contract remains in effect. We are
    convinced that any TVA restructuring legislation that fails to adjust
    these anachronistic contracts will unreasonably delay our access to the
    competitive wholesale power market and will deny our customers the
    benefits of competition for an unreasonably long period of time.
        We recognize concerns about the sanctity of private contracts.
    However, those concerns are not implicated here, where one of the
    parties to the contracts in question is itself an agency of the federal
    government. Some have proposed giving TVA distributors a right of
    contract renegotiation, as opposed to contract termination. However,
    the right to renegotiate without the right to terminate is no right at
    all. Memphis and Knoxville have, in fact, been engaged in contract
    renegotiations with TVA for four long years, with few, if any, results.
        Memphis and Knoxville lack the bargaining power necessary to bring
    TVA to the bargaining table in a serious manner. The 10-year notice
    provision and the perpetual nature of the current contract give TVA too
    much bargaining power. TVA is the largest electric utility in the
    United States, and in the current monopolistic environment, even
    Memphis, TVA's largest customer, can bring little pressure to bear on
    TVA to obtain meaningful concessions during the course of
    renegotiations. Therefore, we urge Congress to equalize the parties'
    bargaining power. We believe that only a short-term contract
    termination right, exercisable by TVA distributors in the very near
    future, would provide the incentive necessary to motivate TVA to
    negotiate with us in good faith.
        Memphis and Knoxville are seeking the right to terminate our long-
    term TVA contracts on one year's notice. Thus armed, serious arms'
    length negotiations could take place. Both Memphis and Knoxville might
    well continue to obtain a majority of our wholesale power requirements
    from TVA, but we need the option of having the ability to purchase a
    portion of those requirements from alternative suppliers. Perhaps more
    importantly, we need TVA to know that we have the ability to pursue
    such options. TVA would then be required to respond to the forces of a
    competitive market. Memphis and Knoxville firmly believe that the
    result would be a better, more efficient TVA, able to respond to our
    needs as customers and to compete ably for wholesale power customers in
    other parts of the country as well.
    TVA Regulation of Distributors Should Cease
        At present, Tennessee Valley distributors are subject to regulation
    by TVA, rather than solely pursuant to local ordinances and charters,
    which is are standard regulatory models in most states throughout the
    rest of the country. If TVA is going to be a market participant, as we
    think it should be, its regulation of distributors must cease. It would
    be inappropriate, in a competitive market, for a wholesaler to regulate
    retail distributors in any way. These relationships should be subject
    instead to regulation by the appropriate local governing body.
    FERC Jurisdiction Over TVA Transmission and Wholesale Sales
        In a competitive market, TVA simply should not be a self-regulated
    entity. Instead, like traditional public utilities, TVA should be
    subject to full regulation under the Federal Power Act (``FPA''),
    including FERC oversight of TVA transmission services, wholesale power
    sales, and stranded cost recovery.
        With the passage of the Energy Policy Act of 1992, Congress
    mandated open access to most of the nation's transmission grid.
    However, the Energy Policy Act left several important gaps in open
    access, including those areas of the country that are served by TVA. As
    explained above, if the benefits of open access transmission are to be
    realized in the Tennessee Valley, Congress must act to repeal the anti-
    cherry picking provision of the Energy Policy Act of 1992. However,
    open access to TVA's transmission system alone will not provide
    Tennessee Valley distributors with full access to the benefits of a
    competitive power market. This will not occur unless TVA's charges,
    terms and conditions for the use of its transmission system are
    reasonable. Regulation by a neutral body like the FERC is essential.
    This would minimize the potential for discriminatory transmission rates
    intended, for example, to penalize distributors that choose to take
    advantage of the open access regime. FERC regulation would also provide
    a disincentive for TVA to cross-subsidize its wholesale power rates.
    Thus, to discourage such potential abuses and to provide a neutral
    forum for resolving disputes regarding TVA transmission and wholesale
    sales pricing, terms and conditions, FERC jurisdiction is essential.
        TVA's wholesale power sales should also be subject to FERC
    regulation under sections 205 and 206 of the FPA. It has been suggested
    that TVA's rates should be subject to judicial review in the federal
    district courts. Unlike state and federal courts, which are ill-suited
    to the task of rate review, FERC has decades of expertise in regulating
    wholesale power rates. In addition, FERC's many years of experience
    with wholesale rate regulation have produced a well-developed body of
    law to guide FERC in the exercise of its power. Thus, it seems clear
    that FERC is the entity best suited to the task of reviewing,
    modifying, and approving TVA's wholesale rates.
        Memphis and Knoxville fully expect that, as the competitive market
    matures and TVA's market power dissipates, FERC regulation will become
    increasingly light-handed. Nevertheless, we support FERC jurisdiction
    over TVA's wholesale rates. We are confident that such oversight will
    be even-handed and is necessary to provide Tennessee Valley
    distributors the same level of protection that the rest of the country
    enjoys. Moreover, notwithstanding whatever environment the future may
    bring, regulation of TVA's rates will be essential during the early
    years of the transition to a competitive market.
    FERC Jurisdiction Over Stranded Costs
        FERC's Order No. 888 authorized public utilities' long-term
    customers to seek to shorten the term of their contracts in exchange
    for the customers' agreement to pay their fair share of legitimate,
    prudent and verifiable stranded costs. Order No. 888 at pp. 31,663-66;
    Order No. 888-A at pp. 30,191-94. We are willing to pay our fair share
    of any such TVA costs that are in fact stranded as a result of the
    transition to wholesale competition in the Tennessee Valley. We believe
    that stranded costs determinations should be made by a neutral body
    applying neutral principles. We support full FERC jurisdiction over TVA
    stranded cost determinations in accordance with the rules, principles,
    and protections afforded by FERC Order No. 888.
        Order No. 888 provides the fairest and most efficient way to deal
    with the issue of TVA's stranded costs. First, as a practical matter,
    there is no reason whatever to ``re-invent the wheel'' in prescribing
    the procedure by which TVA should be permitted to recover its stranded
    costs. FERC has already performed an exhaustive review of the merits of
    various approaches to stranded cost recovery, the result of which was
    Order No. 888. This occurred only after a careful and circumspect
    rulemaking proceeding that took nearly two years to complete. During
    the course of the Order No. 888 proceedings, FERC received literally
    tens of thousands of pages of commentary from all segments of the
    industry, consumers, and state and federal agencies. There is no sound
    reason not to apply for the Order No. 888 stranded cost mechanism to
    TVA. Failure to do so would likely entail further contentious
    administrative proceedings and would delay even further Tennessee
    Valley distributors' access to the competitive wholesale power market.
    It would also likely establish ground rules for TVA stranded costs that
    are incompatible and inconsistent with other utility systems and
    competitive electric markets.
        In addition, Memphis and Knoxville believe that, from a substantive
    perspective, Order No. 888 represents the fairest way to address the
    problem of costs stranded as a result of the transition to a
    competitive market. Order No. 888 mandates a ``direct assignment
    approach'' to stranded cost recovery, pursuant to which stranded costs
    are recovered specifically from the departing generation customer whose
    departure caused the costs to be stranded. Order No. 888 at pp. 31,797-
    800. FERC explained that it favored a direct assignment approach over a
    broad-based, systemwide approach for several reasons. Id. FERC found
    that direct assignment would provide greater accuracy, certainty, and
    administrative ease than would an up-front, broad-based approach. FERC
    further determined that direct assignment would be more consistent with
    ``the well established principle of cost causation, namely, that the
    party who has caused a cost to be incurred should pay it.'' Id.
        Similar considerations have led Memphis and Knoxville to support a
    direct assignment approach to TVA's stranded costs. One great concern
    with regard to stranded costs is the potential for cost-shifting among
    distributors. A direct assignment approach would obviate such concerns
    by ensuring that stranded costs are directly assigned to the
    distributor responsible for causing such costs. In addition, in
    contrast to an up-front, broad based approach, Order No. 888's approach
    to stranded costs would preclude TVA from charging its existing
    customers up front for costs that may never actually become stranded.
    Id. at 31,798. Finally, Order No. 888's direct assignment approach
    eliminates the incentive that would exist, under a broad-based
    approach, for a utility to ``try to recover the costs of all of its
    uneconomic assets whether or not they were prudently incurred.'' Id. at
    31,799. For all of the foregoing reasons, Memphis and Knoxville support
    FERC jurisdiction over TVA stranded cost determinations in accordance
    with Order No. 888.
    Antitrust
        Finally, TVA should be subject to the antitrust laws to the same
    extent that such laws apply to other governmental entities competing in
    the electricity marketplace. Memphis and Knoxville support the
    availability of injunctive relief against TVA for violations of the
    federal antitrust laws, but believe that, for reasons of public policy,
    TVA should not be subject to civil damages liability.
    Conclusion
        In conclusion, Memphis and Knoxville strongly urge the repeal of
    the TVA Fence and the anti-cherry picking provision, as well as
    shortening to one year the ten-year notice periods of our long term
    power contracts with TVA. The rates charged by TVA for transmission
    services and wholesale power, as well as the questions of how, when,
    and from whom TVA may collect stranded costs, must be regulated by a
    neutral body, such as FERC.
        We appreciate the opportunity to address the Subcommittee today,
    and we hope that you will take our views into account as the debate
    regarding TVA's appropriate role in a competitive wholesale power
    market proceeds.

        Mr. Barton. Thank you, Mr. Morris.
        We would now like to hear from Mr. Baker, who is the
    president of Middle Tennessee Electric Membership Corporation.
    Again, your statement is in the record. We will ask you to try
    to summarize it in 5 minutes.

                       STATEMENT OF JAMES O. BAKER

        Mr. Baker. Thank you, Mr. Chairman. As a slow-talking
    Tennessean, I will try to get that in.
        My name is James O. Baker. I am president of the Middle
    Tennessee Electric Membership Corporation. It is an electric
    cooperative with headquarters in Murfreesboro, Tennessee.
        Mr. Barton. Put your microphone, Mr. Baker, a little bit
    closer to you. Thank you.
        Mr. Baker. I am testifying today on behalf of the Tennessee
    Valley Public Power Association.
        TVPPA has long supported the mission of the Tennessee
    Valley Authority. An integral part of that mission is to
    provide power at the lowest feasible rate to the region's
    consumers. In an effort to preserve the benefits of TVA, and
    acknowledge the changes that are evolving in the electric
    utility industry because of competition, TVPPA has worked
    closely with TVA to develop a TVA title that can be supported
    by both organizations, and by the Valley's congressional
    delegation.
        We have made tremendous progress in that effort. Of the
    eight sections described in my prepared statement, TVA and
    TVPPA have agreed on all except two provisions. These relate to
    the regulation of distributors and the TVA wholesale rate
    review. Attached to my written statement is a copy of that
    draft. Differences between TVA and TVPPA are noted in italics.
        Because of time limitations, I will limit my comments to
    just the major highlights of these bills. First, the removal of
    the TVA fence and repeal of the anti-cherry-picking provision.
    Since 1959, with certain exceptions, TVA and the distributors
    have not been permitted to sell power outside the fence erected
    by Congress around the TVA service area. Because TVA was not
    allowed to sell power outside the fence, Congress, in the 1992
    Energy Policy Act, added language to prevent outside utilities
    from using the new wholesale access provisions of the Federal
    Power Act to require TVA to make its transmission to serve, or
    cherry pick, selected distributors served by TVA. If Congress
    had not added this anti-cherry-picking provision, TVA and
    distributors would have been placed in a competitive wholesale
    environment with, in effect, one hand tied behind them.
        Section 002 of our proposed TVA title would repeal both the
    fence and the anti-cherry-picking provisions of the existing
    law on the effective date of the Federal restructuring
    legislation. This would permit, two-way, open wholesale
    competition in the TVA service territory for the first time.
    Under subsequent provisions, section 003, TVA would be able to
    sell surplus power outside the fence, at wholesale only, with
    certain limitations.
        Second, the regulation of the transmission system. Our
    draft TVA title further recommends that TVA transmission rates,
    terms and conditions shall be subject to the regulation by the
    Federal Energy Regulatory Commission. Distributors should be
    permitted to buy wholesale power from the most economical and
    reliable source. FERC regulation would be desirable to assure
    that the distributors have fair access to TVA's transmission
    lines, and that TVA transmission rates are just and reasonable.
        Third, renegotiation of wholesale power contracts. Under
    TVA's present wholesale power contracts, distributors cannot
    buy wholesale power from another source, nor can they generate
    their own power. These limitations are clearly contrary to the
    spirit of a competitive environment. In the interest of their
    customers, distributors should have the option of shopping for
    the lowest cost, lowest source of wholesale power, or
    generating power for themselves. Section 005 of our draft,
    therefore, authorizes TVA and distributors to renegotiate the
    existing contracts within 1 year of the enactment of a
    comprehensive energy legislation. If TVA and the distributors
    cannot reach agreement on new contract terms, and if FERC has
    approved TVA's stranded investment recovery, the distributor
    may terminate its existing contract on 3-year's notice from the
    FERC order.
        Fourth, the wholesale rate jurisdiction. As long as TVA has
    unilateral right under a power contract with distributors to
    set wholesale power rates, TVA believes that the distributors
    should have access to a third-party review of any TVA rate
    action which a distributor believes to be unjust, unreasonable,
    or unduly discriminatory. This section would give distributors
    the right to subject rate disagreements to third-party binding
    arbitration and/or judicial review. TVA does not agree with
    this recommendation. We understand that. It is the position of
    the TVA board that they should have continual final authority
    to set and adjust wholesale rates. We have continued
    discussions with TVA in an effort to resolve that.
        Mr. Chairman, I appreciate the opportunity to testify. I
    will be available for questioning.
        [The prepared statement of James O. Baker follows:]
      Prepared Statement of James O. Baker on Behalf of Tennessee Valley
                            Public Power Association
        My name is James O. Baker. I am President of the Middle Tennessee
    Electric Membership Corporation, a rural electric cooperative with
    headquarters at Murfreesboro, TN. The Middle Tennessee Electric
    Membership Corporation purchases all of its power at wholesale from the
    Tennessee Valley Authority (TVA), and provides electric service to more
    than 115,000 customers in four counties. It is one of TVA's largest
    wholesale customers, and is one of the largest rural electric
    cooperatives in the United States, on the basis of number of consumers
    served.
        I am testifying today on behalf of the Tennessee Valley Public
    Power Association. I am a member of the Board of Directors of TVPPA. I
    am also a member of TVPPA's Government Relations Committee, and have
    been intimately involved for almost three years in the work of this
    committee and a predecessor committee in developing TVPPA's positions
    on electric industry restructuring. I served from 1997 to 1999 as
    President of the National Rural Electric Cooperative Association, a
    national organization representing about 1,000 of the nation's rural
    electric cooperatives.
        TVPPA represents the interests of 159 municipal electric utilities
    and rural electric cooperatives that purchase all of their wholesale
    power requirements from TVA and distribute it to about eight million
    people in seven states.
        Through its committee structure and membership, TVPPA has been
    working for almost three years to develop positions on electric
    industry restructuring legislation. This effort culminated in the
    development of positions that were reviewed at district meetings of the
    Association, and last year were approved by the Association's Board of
    Directors. Based on these restructuring positions, the Association
    subsequently prepared legislative language for a TVA title that could
    be incorporated in federal restructuring legislation. A copy of
    language for this title is attached. I believe this language addresses
    virtually all of the questions raised in Chairman Barton's letter of
    May 10 inviting me to testify here today.
        In formulating its restructuring positions, TVPPA has been guided
    foremost by its concern for consumers. All members of TVPPA are
    consumer-owned, non-profit electric utilities. The Association
    therefore has a responsibility to safeguard the interests of its
    consumers. By seeking to keep rates as low as possible, TVPPA believes
    that the benefits will accrue to the Tennessee Valley, and that its
    example will be helpful to neighboring areas.
        TVPPA does not endorse any specific restructuring bill. The
    Association's position paper of September 29, 1998 states that ``it is
    desirable to allow the customer to have a choice of electric suppliers
    provided that the federal legislation is designed to benefit and be in
    the best interest of all the electric customers served by TVPPA
    members.'' The paper adds that Congress should allow states to consider
    the option of instituting customer choice, but should not mandate the
    outcome of such consideration, nor should the Congress mandate customer
    choice by a date certain.
        TVPPA has long supported the mission of the Tennessee Valley
    Authority. TVA has been an excellent source of reliable, reasonably
    priced power, and has been instrumental in advancing the economic
    development of the Tennessee Valley. Demand for electric power has
    grown considerably, and continued increases are anticipated.
        Members of TVPPA want TVA to continue to be a viable source of
    electric power supply. However, the electric industry has been moving
    toward a more competitive environment, especially in wholesale power
    supply, and all utilities must adapt to changing conditions. TVPPA
    believes that its recommendations, if adopted, will make TVA more
    competitive, and will be good for that agency as well as the
    distributors and their customers.
        In an effort to preserve the benefits of TVA for the future, TVPPA
    has worked closely with TVA to attempt to develop positions that can be
    supported by both organizations. For the most part, this effort has
    been successful. Of the eight sections described below, TVA and TVPPA
    have agreed on all except two provisions--those in Section .006
    Regulation of Distributors, and Section .008 TVA Wholesale Rates to
    Distributors. The differences are noted in italics in the applicable
    sections described below.
        Although TVPPA's restructuring positions have been endorsed by the
    vast majority of its members, two member utilities--the Knoxville
    Utilities Board and Memphis Light, Gas and Water Division--have
    differed with TVPPA on a few points. A witness from Memphis is
    scheduled to testify before your committee and will describe their
    concerns. TVPPA respects the views of Knoxville and Memphis, and have
    met with representatives of these utilities in an effort to arrive at a
    consensus. These discussions are continuing, and we are hopeful that
    agreement will be reached.
        The following describes provisions that TVPPA believes should be
    incorporated in any restructuring bill adopted by Congress.
                        Sec. 002. Equitable Competition
        This section contains three provisions to protect consumer
    interests.
        Removal of the TVA ``fence'' and repeal of the ``anti-cherry
    picking'' provision. Since 1959, when TVA was authorized to issue bonds
    in the private financial market, TVA and the distributors have not been
    permitted to sell power outside of a ``fence'' that was erected by
    Congress around TVA's service area. An exception was made, however, for
    power exchanges between TVA and the investor owned utilities with which
    it had interconnections at that time.
        Because TVA was not allowed to sell outside the fence, Congress in
    the 1992 Energy Policy Act added language to prevent outside utilities
    from using the new wholesale access provisions of the Federal Power Act
    to require TVA to make its transmission available to serve (or
    ``cherry-pick'') selected distributors served by TVA. If Congress had
    not added this ``anti-cherry picking'' provision, TVA and the
    distributors would have been placed in a competitive wholesale
    environment with one hand tied behind them.
        Section 002 of our proposed TVA Title would repeal both the
    ``fence'' and the anti-cherry picking provisions of existing law on the
    effective date of federal restructuring legislation. This would permit
    two-way, open wholesale competition in the TVA service territory for
    the first time. Consumers in the Valley would then enjoy the benefits
    of wholesale competition that were made available to consumers in the
    rest of the country under the Energy Policy Act of 1992 and FERC Order
    888. Under subsequent provisions (Sec. 003), TVA would be able to sell
    surplus power outside the fence at wholesale only, with certain
    exceptions.
        Regulation of transmission. TVPPA recommends that TVA's
    transmission rates, terms and conditions shall be subject to regulation
    by the Federal Energy Regulatory Commission. This provision is
    predicated on the assumption that, in a restructured industry,
    distributors should be permitted to buy wholesale power from the most
    economical, reliable source. In the event that a distributor elects to
    purchase wholesale power from a supplier other than the Tennessee
    Valley Authority, the distributor should be able to utilize TVA's
    transmission lines to ``wheel'' the bulk power to the distributor. In
    this event, FERC regulation would be desirable to assure that the
    distributor has fair access to TVA's transmission lines, and that TVA's
    rates are just and reasonable. Similar protection is given to utilities
    utilizing transmission lines owned by investor owned companies.
                            Sec. 003 TVA Power Sales
        This section prohibits TVA from offering long-term contracts for
    firm energy sales outside of its service area at rates more favorable
    than those offered to distributors, unless the power distributors agree
    to such sales. This section therefore would assure that consumers
    served by the distributors within the Valley have access to TVA's most
    favorable rates. Put another way, it would prevent TVA from using sales
    within the Valley to subsidize sales of power at lower cost outside of
    the region.
                     Sec. 004. Stranded Investment Recovery
        The purpose of various provisions in this section is to assure that
    consumers are not burdened with undue costs of stranded investment--
    that is, investment made in the past by TVA to build facilities that
    are no longer economical in a competitive environment. TVA and the
    distributors would be required to negotiate the amount of the stranded
    investment that should be borne by the customers. If an agreement
    cannot be reached, FERC is given authority to decide the question.
        Two other provisions relating to stranded investment also are
    included. One prohibits TVA from charging stranded investment to
    distributors after September 30, 2007. This limitation was inserted
    because on October 1, 1997 the distributors entered into new 10-year
    contracts with TVA. Wholesale rates called for in these contracts
    provide sufficient funds to compensate TVA for an appropriate share of
    its stranded investment. Distributors who complete the term of the new
    contracts therefore are assumed to have discharged their obligations
    for payment of stranded investment.
        Another provision in this section requires TVA to use any funds
    recovered from stranded investment to repay its debt. This requirement
    assures that, consistent with the objectives of TVA's 10-Year Plan,
    recovery of stranded investment would reduce TVA's debt and thereby
    lower TVA's interest expenses, which constitute a significant portion
    of TVA's total expenses charged to consumers. TVPPA strongly supports
    the goal of the 10-Year Plan to reduce TVA's debt to $13 billion, and
    believes that its recommendation would be an important element in
    achieving that goal.
              Sec. 005. Renegotiation of Wholesale Power Contracts
        Under TVA's present wholesale power contracts with distributors,
    the distributors cannot buy wholesale power from another source, nor
    can they generate their own power. These limitations are clearly
    contrary to the spirit of a competitive environment. In the interests
    of their customers, distributors should have the option of shopping for
    the lowest cost source of wholesale power or generating power
    themselves. Thus, Sec. 005 authorizes TVA and the distributors to
    renegotiate their existing power contracts within one year of the
    enactment of comprehensive energy legislation. If TVA and a distributor
    cannot reach agreement on new contract terms--and if FERC has approved
    TVA's stranded investment recovery--the distributor may terminate its
    existing contract upon three years' notice from the date of the FERC
    order.
                      Sec. 006. Regulation of Distributors
        As locally owned enterprises controlled by their consumers,
    distributors believe that they are in the best position to determine
    their own rates. Consequently, this section provides that the rates,
    terms and conditions of retail rates are not subject to regulation by
    TVA.
        TVA, however, does not agree with a TVPPA recommendation that TVA
    be allowed to include provisions in its power contracts with
    distributors that would be necessary in order to achieve the objective
    in the TVA Act that power be sold to the ultimate consumer at the
    lowest feasible rates. TVPPA recommends that TVA, in its power
    contracts, allow flexibility in the use of funds by a distributor ``if
    those funds are not used to subsidize or support activities that have
    no reasonable relationship to the financial benefits of the electric
    utility operations of the distributor.''
                          Sec. 007. Antitrust Coverage
        In order to assure that TVA does not use its market power to
    prevent distributors from obtaining wholesale power from the most
    economical source, this section subjects TVA to the injunctive relief
    and criminal penalties--but not the civil damage provisions--of the
    antitrust laws. TVA would not be made subject to civil damages because,
    unlike a private corporation whose damages might be paid by
    stockholders, consumers would ultimately pay any damages assessed
    against TVA. TVPPA believes that injunctive relief and criminal
    penalties would be sufficient deterrents to antitrust activities. This
    standard is comparable to the antitrust standards generally applied to
    local governmental entities.
                     Sec. 008. Wholesale Rate Jurisdiction
        As long as TVA has a unilateral right under a power contract with
    distributors to set wholesale power rates, TVPPA believes that
    distributors should have access to a third party review of any TVA rate
    action which a distributor believes to be unjust, unreasonable or
    unduly discriminatory. This section therefore would give distributors
    the right to subject rate disagreements to third-party binding
    arbitration and/or judicial review.
        TVA does not agree with this recommendation. The TVA position is
    that the TVA Board should continue to have final authority to set and
    adjust TVA wholesale power rates.

        Mr. Barton. Thank you. The Chair is going to recognize
    himself for the first 5-minute question period.
        My first question is a general question. I just want to
    make sure that we get this on the record. Each of you gentleman
    do not support the same type of Federal legislation, obviously.
    But from reading your testimony and listening to your oral
    comments, my assumption is that you all do agree that there
    should be, and you support, Federal legislation in this area in
    this Congress. Is that correct? Is there anybody here that
    proposes that we not do a bill? You have to say something for
    the record. We can't just let you look at me.
        Mr. Coley. Mr. Chairman, our company is on record as saying
    that, ultimately, we believe competition is in the best
    interest of consumers in the United States. The timing of that
    action and when and how it would take place is simply the
    jurisdiction of Congress and State commissions. We understand
    that. Our company is attempting to prepare ourselves for
    competition. Whenever it occurs, we hope that we will be able
    to compete and the playing field will be level.
        Mr. Barton. I am going to take that as a ``yes,'' you
    support a bill this year. Is that correct?
        [Mr. Coley nods head indicating yes.]
        Mr. Morris. I would offer a ``yes,'' as well. We simply
    want to have our perspective and concerns considered and
    apparent in whatever the final legislation is.
        Mr. Barton. I understand that part of it, correctly. Mr.
    Baker?
        Mr. Baker. I think the distributors generally feel that
    competition is inevitable, and would be remiss in not
    cooperating in how it is brought about.
        Mr. Barton. Okay. So is that a ``maybe,'' or a ``yes''?
        Mr. Baker. That is a ``yes.''
        Mr. Barton. Okay. Mr. Medford?
        Mr. Medford. Mr. Chairman, TVA believes that Federal
    legislation in this area is necessary.
        Mr. Barton. Okay. So that is a ``yes.''
        Mr. Medford. Yes, sir.
        Mr. Barton. Okay. Let the record show all four witnesses
    said ``yes,'' with different degrees of enthusiasm; but they
    all said ``yes.''
        Now, Mr. Coley, Mr. Morris in his testimony, differed a
    little bit in that some of the provisions he supports on behalf
    of the distributors--and the largest customer--he wants date of
    enactment opportunity, as opposed to a date certain, as in the
    administration bill, which is 2003. Of course, we haven't even
    put together a bill, yet, here at the subcommittee. Would you
    support the provisions that Mr. Morris supported on date of
    enactment, on behalf of the association that you represent?
        Mr. Coley. I simply do not recall all the conditions he
    articulated.
        Mr. Barton. He wants wholesale competition, date of
    enactment. Isn't that correct? As opposed to waiting for 4
    years under the administration bill.
        Mr. Coley. We would be open, whenever Congress decides to
    have open competition, to compete on whatever day wholesale
    competition might take place. Our fundamental issue is that if
    the fence comes down that there be a level playing field among
    all participants in the competitive wholesale market.
        Mr. Barton. Okay. Now, I want to ask--this is a speculative
    question. Congressman Norwood is not here. I wish he were here.
    There is some discussion about privatization of TVA. Now, I
    don't want to get into whether you all are for that or against
    it. But I want ask you, Mr. Coley and you, Mr. Morris, if we
    were to consider privatization, is it practical? I mean, could
    you actually privatize the assets of the TVA in a rational,
    timely fashion, or is that impractical?
        Mr. Coley. I simply couldn't respond to that. Our issues--
    the issues we have been addressing--have been the fence and not
    privatization. Obviously, $28 billion of debt is problematic in
    privatizing the entity.
        Mr. Barton. I mean, you do represent most of the investor-
    owned utilities in the region. I understand Southern Company is
    not part of your coalition.
        Mr. Coley. That is correct.
        Mr. Barton. But with that exception, if we were going to
    have privatization, the assumption would be that it would be
    the investor-owned utilities, either in the region or outside
    the region, that would be most likely to bid on the assets.
        Mr. Coley. That could be. But as markets are being opened
    up today, that is certainly not the case. For example,
    California utilities have purchased assets in New England.
        Mr. Barton. Right.
        Mr. Coley. So that's not a regional issue.
        Mr. Barton. Mr. Morris, would you care to comment on the
    practicality of privatization?
        Mr. Morris. Yes, sir. I will also offer comment that
    certainly, if Mr. Coley can't comment on that, I am not going
    to step out too far on that limb, myself. We believe that there
    is a place in the mosaic of options that should be available to
    our customers for public power. We are committed to that. We
    think it offers additional benefits to the overall fabric of
    our ability to deliver services to our customers--to all of
    America's customers, as a matter of fact.
        TVA is a very complex entity. Without going into great
    detail, I think you are exactly on point in that in addition to
    the issues of the complexity of TVA, and whether it could be
    workable, that there ought to be a consideration of the benefit
    and value of public power as an option that we, for one, would
    want to keep available to our customers.
        Mr. Barton. Thank you. My time has expired. Mr. Wynn is
    recognized for 5 minutes. Mr. Sawyer was just there; then he
    disappeared. So Mr. Wynn is here and we recognize him for 5
    minutes.
        Mr. Wynn. Thank you, Mr. Chairman. Unfortunately, I had to
    step out earlier, so I missed part of the testimony. I was
    noting, Mr. Morris, in your statement, I just need a
    clarification. Again, I apologize for not being present at the
    time. You are calling to repeal the TVA fence and the anti-
    cherry-picking provision. That kind of piqued my interest.
    What, exactly, do you mean by that?
        Mr. Morris. There are two provisions in two different
    pieces of legislation. One restricts TVA and its ability to
    sell power outside of a specific geographic area. The other
    restricts wholesale producers from outside of that same
    geographic area from selling power into the TVA region.
        Essentially, what repealing the fence and the anti-cherry-
    picking provision would do is to open the area up so that there
    could be sales from outside-in, and from inside-out. We believe
    that all of the customers served and affected would benefit. So
    it essentially tears down a wall keeping those on the outside
    from selling into the area, and those on the inside from
    selling outside the area.
        Mr. Wynn. I think I am pretty comfortable with that. I
    think it is the cherry-picking. When you say that you want to
    repeal anti-cherry-picking, that suggests that you are in favor
    of cherry-picking. I don't think that is, probably, what you
    mean. I would like you to clarify.
        Mr. Morris. Well, we simply adopted the general term that
    is used in discussing that provision. It is called the ``anti-
    cherry-picking'' provision. We simply adopted that as, more or
    less, a term of art to communicate--perhaps not quite as well
    as we should have--the concept that we would be in favor of
    permitting entities and parties outside of the Tennessee Valley
    to sell power to customers inside the Valley. At the same time,
    we would be interested in seeing TVA and other parties inside
    the Valley have the ability to sell power to customers outside
    of the Valley.
        Mr. Barton. Could I? Would the gentleman yield?
        Mr. Wynn. Certainly, Mr. Chairman.
        Mr. Barton. I think what you are saying is that you want
    the right--you, your utility, wants the right--to go out and
    try to buy power wholesale.
        Mr. Morris. Yes.
        Mr. Barton. Okay. He is the ``cherry.'' That is what he is
    telling us.
        Mr. Wynn. In that context, I think I am very satisfied. I
    don't have any further questions at this point. Thank you, Mr.
    Chairman.
        Mr. Barton. The gentleman, Mr. Bryant, is recognized for 5
    minutes.
        Mr. Bryant. Thank you, Mr. Chairman. I thank this very
    distinguished panel. I think your views have been presented
    very effectively. I think your views also bring to light the
    extreme difficulties and complexities involved in this type of
    restructuring.
        Mr. Coley, I am particularly interested in you and your
    testimony. It seems to shed light on how difficult this is. At
    one point you say that there is place for TVA in a competitive
    market. Later, I think in your testimony today, you have
    compared TVA to the airlines and the Air Force getting involved
    in competition; almost to say that the Air Force does not
    belong there, and should not be in competition with a private-
    sector industry.
        TVA is here. I don't know. How do you regulate and
    restructure and make it a level playing field--not tilted--when
    you have the private sector in there with the public sector?
        Mr. Coley. Certainly. TVA has done, I think, a marvelous
    job in some development areas within the Valley. I think they
    have done a good job. We certainly have no quarrel with TVA's
    role in flood control and economic development and some of the
    things they have done in the Valley. It has been very positive
    for the people who live there.
        Mr. Bryant. Let me ask you this: Do you think, for
    instance, that ought to be paid for by TVA ratepayers, or
    should it be paid for by this Congress?
        Mr. Coley. I simply could not answer that question. I would
    assume it would be accomplished on the same basis that it is
    accomplished in many other areas of the country.
        For example, in the area in which I serve, my company
    provides that in the operation of our hydroelectric power
    facilities.
        Mr. Bryant. Duke Power pays for the navigation work
    involved with rivers and economic development?
        Mr. Coley. We built the lakes for the hydroelectric
    projects. We manage those consistent with the mandates of FERC,
    and the requirements of the Corps of Engineers--yes.
        Mr. Bryant. In this environment that we would propose,
    again with the private sector competing against the public
    sector, do you think TVA ought to be allowed to build new
    generation facilities?
        Mr. Coley. I think there should be some control on TVA
    building new generation facilities. I think they amassed a
    tremendous amount of debt: $27 billion in building facilities.
        When I read TVA's own plans for new generation, I note that
    there is really no need indicated for new generation for some
    time to come. I think it could be controlled. I think the
    mistakes of the past in investing huge amounts of dollars in
    assets which are not used or useful, should be controlled. It
    should not be repeated.
        Mr. Bryant. Should the fence that has been taken down,
    should that go both ways in a deregulated world? Should TVA be
    allowed to sell outside the fence?
        Mr. Coley. We have no problem with the fence coming down at
    all, as long as we participate in the market on an equal basis.
    For example, TVA has revenues of $6.7 billion a year and makes
    payments in lieu of taxes of $264 million a year. My company
    has two-thirds of TVA's revenue, but I pay 3.5 times the tax
    burden that TVA does. Stated another way, if I had TVA's
    revenue, I would pay $1.1 billion a year in taxes. TVA today
    pays $264 million in lieu of taxes.
        Mr. Bryant. Well, in regard to the level playing field,
    would you be willing, as Duke Power, to operate under TVA's
    mandate that they charge the lowest possible electric rate,
    versus the current standard under the Federal power act with
    you operate under--which is a just and reasonable standard.
    Would you be willing to operate under the same standard: you
    sell at the lowest possible rate, versus the just and
    reasonable rate, that you operate under now?
        Mr. Coley. Well, I would like to think that as one of the
    lowest-cost utilities in the Southeast, we do sell at the
    lowest possible rate. But in doing so, we pay a tremendous
    amount of taxes, and also pay about 365 million shareowners of
    shares of stock, $2.55 a year in dividends. They, too, pay
    taxes on that.
        I think if you talk about moving to a competitive market,
    then ultimately the market will determine the prices that are
    charged.
        Mr. Bryant. Are you advocating that TVA be subject to
    treble damages?
        Mr. Coley. Well, it seems to me that the reason the anti-
    trust laws were passed, and treble damages were included in
    anti-trust laws, was as a deterrent to people violating those
    laws. It would seem to me that if there really is no penalty
    for having violated the laws, then you could expect that people
    would not adhere to them.
        Given the fact that TVA has, at least on three occasions
    confirmed in courts, gone beyond the congressional boundaries
    that were place upon them in 1959, I am not optimistic to
    believe that not having treble damages as part of the anti-
    trust legislation apply to TVA would be effective.
        Mr. Bryant. The usual standard is that governmental
    entities are not subject to punitive damages--treble-type
    damages--because the people themselves would be asked to pay up
    this money. Would not a better relief be simply to allow
    Congress to exercise proper oversight over TVA, and I assume
    that you have made these efforts?
        Mr. Barton. This would have to be the last question from
    the gentleman in this round.
        Mr. Coley. I suggest that it might be difficult for
    Congress to do, simply based upon the fact that TVA's lack of
    adherence to the boundaries imposed by Congress were ultimately
    solved only by being challenged by those of us in the business
    who were injured by that behavior.
        Mr. Bryant. I thank the chairman.
        Mr. Barton. The gentleman from Ohio, Mr. Sawyer, is
    recognized for 5 minutes.
        Mr. Sawyer. Thank you, Mr. Chairman. At the beginning of my
    opening statement I mentioned a couple of questions that I
    wanted to ask about. Let me reiterate those for you now, more
    specifically.
        TVA, and Bonneville in particular, control a large portion
    of the transmission grid. Is it your belief that FERC should
    have jurisdiction equally over all participants in the
    transmission grid? If we could just run down the line, I would
    appreciate it.
        Mr. Medford. Yes. TVA agrees that FERC should have
    jurisdiction over all transmission. And as a matter of fact,
    the TVA title, the administration's bill, and the TVPPA/TVA
    draft legislation contain such a provision.
        Mr. Sawyer. I think each of you were, probably, fairly
    clear. I just want to clarify it for the record.
        Mr. Baker. The distributors support that.
        Mr. Sawyer. Pardon me?
        Mr. Baker. The distributors support that.
        Mr. Morris. Memphis and Knoxville would certainly agree
    that FERC should have jurisdiction over TVA's transmission.
        Mr. Coley. We, likewise, believe that if the fence does
    come down, that TVA should be subject, fully, to all FERC
    jurisdiction just as we are, including price regulation.
        Mr. Sawyer. Let me ask a similar question, then. There are
    several schools of thought with regard to the requirement of
    participants to join a particular RTO. Is it your belief that
    ought to be within their authority to order, or ought it to be
    market-driven and entirely voluntary? Mr. Medford?
        Mr. Medford. I don't hold myself out as an expert on the
    solution to regulation of the transmission grid, as it pertains
    to going with transmission companies, ISOs, a national grid, or
    whatever. We see no reason why TVA should be treated
    differently with regard to the RTO solution which eventually
    comes forward.
        Mr. Sawyer. Mr. Coley.
        Mr. Coley. We certainly support the idea of regional
    transmission organizations, or transmission companies. I
    suspect that in deregulation, you might find those naturally
    form because of economic interests of owners of transmission,
    rather than having a mandated FERC requirement that each owner
    of transmission join a specific RTO.
        Mr. Sawyer. Do you believe that those who choose not to
    join ought to be able to be ordered to take part?
        Mr. Coley. If the form is to be regional transmission
    organizations, it is difficult for me to say that someone
    should be forced to join. I suspect that market power may well
    dictate what happens.
        Mr. Sawyer. I suspect you are right. Mr. Morris?
        Mr. Morris. We are still getting up to speed on that issue.
    I recognize that FERC has made some comments, just this week,
    regarding that matter. We are studying and analyzing it. We
    certainly have great confidence in the FERC to do the right
    thing. We are still getting up to speed on that issue and I
    would defer responding to that at this time and would be happy
    to give something in writing, at a later date.
        Mr. Sawyer. Thank you, Mr. Morris. Mr. Baker?
        Mr. Baker. I would echo Herman's comments there. We are
    looking at that. As you know, the jury is still out,
    nationwide, on what the proper methodology would be. I think
    the process will eventually determine that. I think we would
    certainly support that in the light of open competition.
        Mr. Sawyer. Thank you. Mr. Medford, there is so much
    discussion that has come down around the 10-year contracts and
    the 10-year business plan. The ability to project the kind of
    financial security that a large, capital-intensive organization
    needs to operate is really built around those.
        It seems to me that TVA continues to advocate its 10-year
    business plan, but endorses the administration proposal of
    restructuring by 2003. How do you reconcile those two?
        Mr. Medford. First, Congressman, I would like to observe
    that the administration's proposal does not cause the contracts
    to go away as of January 1, 2003. You are right, though, it
    does admit the possibility that some part of our load could
    leave before the end of the 10 years of the Ten-Year Business
    Plan. If there is stranded investment on TVA's part at that
    time, the administration bill also provides for FERC
    adjudication of stranded investment. We believe that is
    sufficient to allow TVA to meet the aims of the Ten-Year
    Business Plan.
        Mr. Sawyer. GAO calls for a revisitation of that 10-year
    plan, based on what they describe as a more realistic set of
    assumptions. Are you in a position to begin to share that sort
    of reassessment with the work of the committee as we make
    important decisions about the future of this industry in your
    part of the country?
        Mr. Medford. We agree with the GAO in one sense, in that
    regard, in that we view the 10-year plan as a living document.
    There are a number of changes that have occurred since the 10-
    year plan was originally developed.
        Mr. Sawyer. It is sort of a rolling 10-year plan.
        Mr. Medford. Some of them are favorable and some of them
    are not. One that is favorable, for example, is that our debt
    reduction, to date, is ahead of schedule, compared with the 10-
    year plan.
        Mr. Stearns [presiding]. The gentleman's time has expired.
        Mr. Sawyer. I thank the chairman. Thank you, very much. I
    may come back.
        Mr. Stearns. The gentleman from Oklahoma, Mr. Largent, is
    recognized for 5 minutes.
        Mr. Largent. Thank you, Mr. Chairman. Mr. Morris, what are
    the current prices you are paying to TVA for you wholesale
    electricity?
        Mr. Morris. We are paying TVA 4.25 cents per kilowatt/hour.
        Mr. Largent. Okay. Mr. Coley, what does Duke sell wholesale
    electricity at, average?
        Mr. Coley. Our current wholesale price is around 4 cents a
    kilowatt/hour.
        Mr. Largent. So that, Mr. Morris, is why you want to have
    wholesale competition, inside the fence? Because you might have
    the opportunity to purchase wholesale electricity from Duke for
    a lower price than you currently pay for TVA.
        Mr. Morris. Well, to be very candid, the reason we want to
    have wholesale competition is because that is what our
    customers are asking us to do that for them. They are asking us
    to have access to other options. We are very responsive in
    trying to meet and satisfy our customers' needs. If there is
    other power that offers them an opportunity to trim or reduce
    their costs, we want to try to make it available to them.
        Mr. Largent. Okay. Mr. Medford, Mr. Coley talked about
    certain aspects of any Federal regulation dealing with TVA that
    they would like to see. I would just like to kind of run
    through that list as I jotted it down, and find out where TVA
    is on that. I mean, just if you find those agreeable or
    egregious.
        First was FERC regulation. I assume that is over the
    transmission lines, but he also included rate making. What is
    TVA's position on that?
        Mr. Medford. As I have indicated earlier, Congressman, I
    agree with regard to regulation of the transmission system.
    Frankly, we don't see any advantage, with regard to wholesale
    rates, of having one group of commissioners--that being FERC--
    appointed by the President, confirmed by the Senate, regulating
    the activities of another group of federally appointed
    officials--that being the TVA Board. It is antithetical to me
    that, as we go into deregulation generally, we would increase
    regulation of TVA's wholesale rates.
        Mr. Largent. And what about the transparency of the costs?
    In other words, the fear would be that if FERC was not
    regulating your transmission rates, perhaps you would be
    putting some of the costs of your generation into the costs
    that you are charging Duke to run their electricity across your
    transmission lines.
        Mr. Medford. Well, I would argue that if one has that
    concern, you could have that concern about almost any entity.
    The fact is that FERC, in that area, does a very thorough job
    of reviewing rates. By the way, we make available our
    transmission rates to FERC now. It would not be possible to
    funnel costs from one area into the other.
        Mr. Largent. And what about application of anti-trust
    laws--all anti-trust laws--applicable to TVA?
        Mr. Medford. Well, under the administration bill, we have
    agreed to application of parts of the anti-trust law. With
    regard to treble damages, when you are talking about treble
    damages against a privately owned firm, presumably the folks
    that eventually bear the burden of that are stockholders. With
    regard to TVA, the folks who would eventually bear the burden
    of that would be ratepayers, and we don't think that is fair.
        Mr. Largent. Okay, and new generation--limitations on new
    generation apart from your customers assuming liability?
        Mr. Medford. We see ourselves as ongoing into a deregulated
    environment as being primarily a regional player and providing
    facilities to meet regional needs. That having been said, we
    are opposed to some sort of artificial constraint that says we
    can't have any more generation or we can only have this much
    generation. We are willing for the public to see what we do in
    the way of generation. Our plans, right now, are for generation
    to meet the needs of the Tennessee Valley. That is the way that
    we plan to continue to do business.
        Mr. Largent. What about the equity issue on taxes, or
    payments in lieu of taxes?
        Mr. Medford. Well, let me say two things. We have compared
    our in lieu of taxes and the State and local taxes paid by the
    distributors of TVA power with the rate of taxation for large
    private utilities. Those rates are very comparable. In fact, in
    some cases, we and the distributors pay more than they do.
        Mr. Largent. Let me just stop you there for just a second.
    In the testimony by Mr. Coley, he has here that in 1998 TVA's
    gross revenues were $6.7 billion, but its tax expenditures were
    only $264 million. Duke Power's gross revenues were $4.5
    billion, and yet their total share of Federal, State and local
    tax was $854 million. So they did two-thirds of the business
    you did, and paid not quite four times as many taxes.
        Mr. Medford. And the difference between those two is
    Federal taxes, it is true. We do not pay Federal taxes. The
    bulk of Federal taxes are on income. By design, our rates are
    set to have a very low net income. That is the distinction
    between the two. But at the State and local levels, we pay,
    essentially, the same rate of taxes as large private utilities
    do.
        Mr. Largent. Thank you, Mr. Chairman.
        Mr. Stearns. The gentleman's time has expired. The
    gentleman from Michigan, Mr. Dingell, is recognized for 5
    minutes.
        Mr. Dingell. This question to Mr. Baker and to Mr. Medford.
    Gentlemen, does TVA keep its current subsidy for new and old
    facilities? Does it keep its antitrust exemption? Does it keep
    its tax breaks under the administration bill? Yes or no?
        Mr. Medford. Congressman Dingell, let me respond to that
    first. We don't have subsidies for new and old generation, so
    we not only don't keep them, we don't have them.
        Mr. Dingell. You get your money cheaper, don't you?
        Mr. Medford. We enjoy a benefit associated with the Federal
    Government.
        Mr. Dingell. You buy your money at Federal rates, so that
    is a subsidy. Do you keep that under the administration bill?
    Yes or no; you do or you don't?
        Mr. Medford. There would be no change.
        Mr. Dingell. Okay. Now with regard to your anti-trust
    exemptions, do you keep your anti-trust exemptions?
        Mr. Medford. We do not.
        Mr. Dingell. You do not. You lose them all, or do you lose
    part of them?
        Mr. Medford. We lose most of them.
        Mr. Dingell. You lose most of them, but not all of them?
        Mr. Medford. Essentially, we lose all except treble
    damages.
        Mr. Dingell. Okay. Now, do you lose your tax breaks?
        Mr. Medford. I am sorry, Congressman?
        Mr. Dingell. Do you lose your tax breaks?
        Mr. Medford. No we do not.
        Mr. Dingell. You do not.
        Mr. Stearns. Would the gentleman from Michigan just move
    the microphone a little closer to him?
        Mr. Dingell. I will sit as close as I can.
        Mr. Stearns. Okay.
        Mr. Dingell. So you don't lose your tax breaks. Now, let us
    talk about this. We are going to have fair competition, or are
    we going to have preferential competition, in this bill?
        Mr. Medford. We are going to have fair competition.
        Mr. Dingell. Fair competition. You are going to have an
    antitrust break. You are going to have a tax break. And you are
    going to continue your subsidies. That is hardly what I call
    fair, equal competition. You probably would. I understand that
    if I were sitting in your chair I would come to that
    conclusion.
        Now, let me proceed with the next question. Why should the
    new legislation give TVA's traditional customers the best of
    all worlds? They would retain an effective monopoly on
    particular power source, in combination with options for buying
    outside the fence. Others who were not so situated would not
    have that advantage. Why is that a fair resolution of questions
    associated with deregulation?
        Mr. Medford. Customers in the TVA Valley would have the
    same access to power as customers in other parts the region.
        Mr. Dingell. How about customers in other parts of the
    country, would they have access to TVA generated power that
    customers inside the Valley would? The answer to that question
    is ``no,'' is it not?
        Mr. Medford. Their access is limited; that is true.
        Mr. Dingell. That is true. Now, Mr. Medford, the General
    Accounting Office issued a report last month analyzing TVA's
    10-year business plan. This report questioned whether TVA is
    likely to achieve its goals of reducing its debt and being a
    position to compete in the market place by 2007. GAO concluded
    that it is unlikely that the TVA can reduce its debt to the
    extent planned by 2007.
        This means that in the year 2007, if TVA is not able to
    reduce its debt, it is going to be in the position of having
    stranded costs. That leaves TVA in an untenable position, if
    that situation obtains. It means that TVA then, probably, in
    2007 will be coming to the Congress for a bail-out to address
    its problems of stranded costs. Is that not so?
        Mr. Medford. That is not so.
        Mr. Dingell. If you don't make your guess, that you are
    going to dispose of your debt by 2007, you are going to have
    stranded costs. Isn't that so?
        Mr. Medford. No sir. The overriding--I'm sorry.
        Mr. Dingell. If you haven't gotten your debt down, you
    won't have stranded costs?
        Mr. Medford. The overriding goal of the 10-year plan is to
    ensure that TVA's power costs are consistent with market costs.
        Mr. Dingell. I am talking about stranded costs. I am
    talking about facilities that are high-cost that are not going
    to be properly competitive.
        Mr. Medford. If the cost of producing power, including
    capital costs, are competitive at 2007, we will not have
    stranded investment. The overriding of the 10-year plan----
        Mr. Dingell. If you are successful in that particular. But,
    if as GAO says, you are not successful, you will then have
    stranded costs--will you not?
        Mr. Medford. The GAO report also observes the fact that the
    projected cost of power in 2007 is higher, now, than it was
    when the 10-year plan was created.
        Mr. Dingell. We are spending considerable time.
        Mr. Stearns. The gentleman's time has expired.
        Mr. Dingell. Thank you, Mr. Chairman.
        Mr. Stearns. The gentleman from North Carolina, Mr. Burr,
    is recognized for 5 minutes.
        Mr. Burr. Thank you, Mr. Chairman. Does the gentleman from
    Michigan need additional time? I would be happy to yield to
    him.
        Mr. Dingell. I thank my good friend. I have some answers;
    and I have been refused other answers. It is all right. Thank
    you. The record is quite good.
        Mr. Burr. As always, I think the members have gotten a
    great deal out of your questions. After Congressman Largent and
    Mr. Dingell's questions, I think many of mine have probably
    been asked. But let me go further, if I can, Mr. Medford, into
    the GAO report, and just ask you to comment on a couple of
    things.
        The GAO suggested to TVA that they; one, move quickly to
    formally update their plan, and two, periodically report to
    Congress. Is there an attempt to update the 10-year plan at
    TVA?
        Mr. Medford. I envision that at some point we will update
    the plan, Congressman.
        Mr. Burr. Is that this year? Next year? Ten years?
        Mr. Medford. We have not set a definite timetable. We have
    looked at the changes which have occurred since the 10-year
    plan was created, and concluded that it does not need to be
    updated at this time.
        Mr. Burr. So TVA disagrees with the conclusion of the GAO
    that you can't hit your debt reduction by 2007. Therefore, GAO
    has come to the conclusion that you need to move quickly to
    change your plan to reflect the things that have changed.
        Mr. Medford. The GAO report observes a number of things
    that have changed since the creation of the plan, including, as
    I mentioned earlier, the increase in the projected cost of
    power at 2007. We think we are still on track to meet market
    power at 2007. Therefore, right now, there is no need to do an
    update of the plan.
        Mr. Burr. GAO was also nice enough to put in the report the
    things that they thought you left out of your consideration:
    changes to your business that the private sector, if they were
    to put together a business plan, would certainly take; not the
    least of which is the environmental regulations that are going
    to change. Does TVA fall under all those changes?
        Mr. Medford. Yes we do, Congressman. And we pointed out in
    the 10-year plan, itself----
        Mr. Burr. Who enforces that? Who enforces the
    environmental?
        Mr. Medford. We are under the same environmental laws as
    other utilities.
        Mr. Burr. So there are Federal entities that currently
    regulate TVA? If FERC had full jurisdiction over TVA, that
    would not be something new--to have a Federal agency who had an
    accountability or responsibility over this Federal entity?
        Mr. Medford. There are other examples. That is true.
        Mr. Burr. Okay. Let me ask you, also, they said that TVA's
    10-year plans focus on the right issues, but the plan does not
    fully address the certain costs which would foil TVA's planned
    objectives. I will ask you about each one of those because,
    certainly, the GAO thought they were important. The capital
    costs of increasing generating capacity to meet the growth and
    demand for power as is now currently planned, instead it
    provides for meeting the growth and the demand for power by
    purchasing power from other utilities. Do you take that into
    account in your current 10-year plan?
        Mr. Medford. That is correct. Congressman, that is one of
    the things that has changed.
        Mr. Burr. Okay.
        Mr. Medford. Since the creation of the 10-year plan, we
    have seen an increase in the cost of market power from the
    power market and the need to provide additional peaking
    generation.
        Mr. Burr. Do you agree with GAO's statement that TVA
    estimates that its additional costs will total about $1 billion
    over the remaining life of the plan, and will likely be higher?
    I take for granted that GAO did not make that up. They got that
    from TVA.
        Mr. Medford. Congressman, that sounds correct, but I would
    like to respond to that one in writing.
        Mr. Burr. I would appreciate it. Mr. Coley, let me ask you.
    I know Congressman Largent covered taxes. Since North Carolina
    borders TVA, I think it is a legitimate question for me to ask.
    If Duke Power, the supplier in Winston-Salem, pays Federal,
    State and local taxes in our community, under your
    understanding, what would TVA pay if, in fact, they got the
    Winston-Salem market?
        Mr. Coley. If you consider just the Winston-Salem market,
    my company currently pays total taxes--Federal, State and
    local--of about $36 million a year. If I were taxed on the same
    basis as TVA, I would pay $9 million a year.
        Mr. Stearns. The gentleman's time has expired.
        Mr. Burr. Let me just ask if Mr. Medford could comment on
    that at all. Is that accurate to your understanding, or is it
    inaccurate?
        Mr. Medford. I can't comment on that. If you would like, I
    will respond to that one in writing.
        Mr. Burr. I would appreciate it. I thank the Chair.
        Mr. Stearns. Yes. The gentleman from Texas, Mr. Hall, is
    recognized for 5 minutes.
        Mr. Hall. Mr. Chairman, thank you. I thank Mr. Markey, who
    had some questions. I just want to say that I have not been
    here because there is a mark-up in Science. I have been in and
    out of here. I do not know what questions have been asked. So
    with unanimous consent I ask that we place questions in the
    record and they will answer them. Has that been done?
        Mr. Stearns. Without objection.
        Mr. Hall. Bart Gordon is a ranking member on Science and he
    would have been here, especially, to answer to the three
    gentlemen from the Tennessee authorities. I am sure he would
    not exclude Mr. Coley, either, had he been here. He also wants
    the right to submit questions, in writing.
        Mr. Stearns. Without objection.
        Mr. Hall. I yield back. I am going to yield the amount of
    time I have left to Mr. Markey.
        Mr. Stearns. The gentleman from Massachusetts, do you want
    Mr. Hall, to have him recognized for 5 minutes on his own time?
        Mr. Hall. No, I would rather he use mine. Then he would be
    a little obligated to me.
        Mr. Stearns. Okay. The gentleman is recognized for the
    remaining time.
        Mr. Hall. He is twice as inquisitive, and half as courteous
    as I am.
        Mr. Markey. Thank you, Mr. Chairman. I thank Mr. Hall, very
    much.
        Mr. Medford, a few weeks ago TVA's Chairman Craven Crowell
    wrote an Op-Ed in the Boston Globe, in which he proffered up
    advice to Massachusetts that we should, ``Make certain that
    electric utility deregulations end up serving the public
    interest.'' We very much appreciate the advice, up in
    Massachusetts, from TVA as to how we should conduct our
    deregulation. Because in Massachusetts, we pay 10.5 cents per
    kilowatt/hour for our electricity--two-thirds more than the 6.3
    cents paid by Tennesseans.
        This difference is largely attributable to taxpayer
    subsidies from Massachusetts, and other States, that go down
    into TVA. These subsidies began more than six decades ago,
    during the New Deal, to help the impoverished Tennessee Valley
    Area to improve its living conditions through electrification
    and flood control.
        We don't mind, obviously, in Massachusetts. In the mid-and
    late-19th century we were able to harness the power of the
    Merrimac River in Lowell and Lawrence. My grandfather moved to
    Lawrence to work in the mills, to produce the goods that were
    made possible by the generation of electricity along the
    Merrimac River. We appreciate the fact that the Tennessee
    Valley couldn't quite figure out how to harness their rivers.
    As a result, in the Thirties, we didn't mind subsidizing other
    parts of the country who couldn't figure out what we did in the
    late 19th century.
        But now, we are at the beginning of the 21st century, Mr.
    Medford. Advice which we get that we should model ourselves--we
    wish we could and reverse that flow of subsidies--upon your
    system. Our problem, however, is that we don't believe that we
    can find a politically acceptable way of discontinuing those
    subsidies. We feel we have an obligation to closely monitor the
    way in which our subsidies are spent inside of your region.
        Your own Inspector General, last year, criticized the
    agency's six-figure bonuses and secret retirement funds for top
    executives; non-competitive consulting contracts to cronies of
    those officials, and expensive building leases with well-
    connected developers. TVA management offered few responses.
    Instead, it recently ordered an audit of its own IG; something
    which, I find, both peculiar and inappropriate in light of
    TVA's IG's finding that the agency is not well-managed.
        What is TVA doing to address the concerns the IG raised
    about the bonuses and the secret retirement funds for its top
    executives, as well as the non-competitive consulting
    contracts?
        Mr. Medford. First, let me address executive compensation.
    The compensation provisions that were mentioned in the IG's
    assessment are provided to allow TVA to attempt to attract
    management talent consistent with other similar organizations,
    like large private utilities. It is a very competitive job
    market. Without the tools that you mentioned there, we would
    not be able to attract that kind of talent.
        With regard to contracts, we have taken very aggressive
    measures to ensure that our contracting is competitive, and
    that we achieve the best possible value in our contracts for
    TVA and for the customers of TVA power.
        Mr. Markey. What I don't understand, sir, is that if you
    are, as you contend in your testimony, a Federal agency--and as
    a result should be put in a separate category--why the huge
    salaries? Why are you exempt from all the other rules in terms
    of the kinds of salaries we can pay our own staff, or what any
    of the Federal employees can be paid?
        Mr. Medford. Let me talk about the TVA nuclear program, as
    an example. Today, TVA has a nuclear program which, I believe,
    is second to none. We have one of the highest system capacity
    factories in the country.
        Mr. Markey. I guess what I am asking is, why should they
    get paid more than the Nuclear Regulatory Commission engineers,
    who in the case of an emergency would have to come in and help
    your engineers figure out what the problems are? Why should
    your engineers get paid any more than thousands of people that
    work at the Nuclear Regulatory Commission who have equal, or
    superior, credentials?
        Mr. Stearns. The gentleman's time has expired; so that
    would be his last question, I believe.
        Mr. Medford. The answer to that is, if you compare where
    the TVA nuclear program was in the mid-1980's and where it is
    today, a big part of the difference between those two is the
    caliber of nuclear management which has been brought into TVA
    over that period. The tools that you mentioned were used to
    attract that caliber of talent and are necessary to attract
    that caliber of talent.
        Mr. Markey. Thank you, Mr. Chairman.
        Mr. Stearns. The gentleman from Kentucky, Mr. Whitfield, is
    recognized for 5 minutes.
        Mr. Whitfield. Thank you, Mr. Chairman. Mr. Medford, I was
    looking at wholesale rates in Kentucky in 1998. I noticed that
    Louisville Gas and Electric rates decreased by 5 percent; KU by
    8 percent; Kentucky Power by 12 percent, and TVA rates went up
    7 percent--wholesale rates. We hear a lot of comment about low
    TVA rates--rightfully so, in some situations. But I was
    wondering, could you explain what happened in 1998 that made
    that occur?
        Mr. Medford. Well, the rate increase that you mentioned was
    the first rate increase that TVA had imposed in 10 years. We
    went through a period of 10 years without any wholesale rate
    increase.
        I think you raise a good point, Congressman. Our rates are
    low. They are not the absolute lowest in the country. That is
    certainly true. Your State enjoys particularly low-cost power.
    The Southeast, in general, enjoys low-cost power.
        That rate increase that you mentioned, the 7 percent rate
    increase, was necessary to achieve the goals of the 10-year
    plan. It was implemented as we announced the 10-year plan. That
    is the purpose.
        Mr. Whitfield. Okay. Now, my understanding is in the
    administration bill TVA would be exempt from any review for its
    wholesale rates. Is that correct?
        Mr. Medford. That is correct.
        Mr. Whitfield. I would like to ask Mr. Baker; do you feel
    like there should be some review of those rates?
        Mr. Baker. Yes. The distributors have coalesced that there
    should be a review of TVA's wholesale rates.
        Mr. Whitfield. And Mr. Morris, what about you?
        Mr. Morris. I am in agreement with Mr. Baker.
        Mr. Whitfield. Okay. Now, do you all think that FERC would
    be the appropriate agency to do that? Would it be better to
    have an arbitrator? What is your view on that?
        Mr. Baker. TVPPA's position paper asked for a third-party
    binding arbitration, and/or judicial review on it. We feel like
    that given the relationship between TVA and the distributors,
    that is a better route than full FERC control.
        Mr. Whitfield. Okay, what about you, Mr. Morris?
        Mr. Morris. We agree that there should be a third party. We
    are of the opinion the third party best able to handle those
    matters is the FERC.
        Mr. Whitfield. And Mr. Medford, I guess your answer is that
    you have a board that is appointed by the President, so there
    would be more regulation if there was a third party review of
    TVA's wholesale rates. Is that right?
        Mr. Medford. We don't see any added value in FERC review of
    wholesale rates.
        Mr. Whitfield. Okay. Now, in the administration's bill
    there is a mandate, by date certain, to go up to 7.5 percent
    renewables for the production of electrical power. Would that
    be more costly for TVA if they are mandated to do that, Mr.
    Medford?
        Mr. Medford. It probably would.
        Mr. Whitfield. Mr. Coley, what about Duke Power?
        Mr. Coley. Yes, it would.
        Mr. Whitfield. So rates would go up if that mandate stays
    in there? Would that be correct?
        Mr. Coley. Certainly our costs would go up, yes.
        Mr. Whitfield. Now, Mr. Coley, what percent of the power
    that you generate comes from the burning of coal?
        Mr. Coley. Today, approximately 48 percent--45 to 48
    percent of all the power Duke Power generates is coal. The
    remaining is nuclear and hydro.
        Mr. Whitfield. Okay, nuclear and hydro. Mr. Medford, what
    about TVA?
        Mr. Medford. The approximate percentage is 60 percent.
        Mr. Whitfield. Sixty percent coal.
        Mr. Medford. Sixty percent coal.
        Mr. Whitfield. Now, I noticed in the administration bill
    that--while not directly--indirectly, there are some provisions
    that would make it more difficult and more expensive to burn
    coal. Do you think that we should address that issue in this
    deregulation legislation; to put in some sort of protections to
    make sure that you are not penalized for using coal? Do any of
    you have a view on that?
        Mr. Coley. I am not familiar, totally, with that part of
    the administration's bill. But let me say this: it is becoming
    increasingly difficult to comply with all the new and changing
    environmental regulations and continue to burn coal. I would
    think that we are sufficiently regulated in that regard today.
    The restrictions and requirements are many; and they are very
    expensive.
        Mr. Whitfield. I mean, the reality is we have to use coal
    to generate electricity in America.
        Mr. Coley. That is correct.
        Mr. Whitfield. Do you have anything to say on that?
        Mr. Stearns. The gentleman's time has expired. Do you want
    to just answer that last question?
        Mr. Baker. I don't think the distributors feel that
    environmental legislation, as included in the bill, is
    appropriate for a deregulation bill.
        Mr. Whitfield. Do not feel it is appropriate?
        Mr. Baker. Right.
        Mr. Stearns. I recognize myself for 5 minutes.
        Mr. Medford, the question is directed to you. Are you
    confident of TVA's ability to compete with other electric
    suppliers? If so, why hold your wholesale customers to the 10-
    year notice requirement? Why not release them from their
    contracts after they pay their stranded costs?
        Mr. Medford. Well, first let me observe that we have
    customers today--in fact the majority of our customers--who
    have less than a 10-year obligation under the contract. Their
    current obligation is about 8.5 years. In addition to that, we
    have supported two approaches to legislation: the TVPPA/TVA
    agreement and the administration's TVA title, which provide for
    shorter periods than the 10-year contracts.
        Mr. Stearns. Mr. Morris, the administration bill penalizes
    TVA wholesale customers that buy from other electric suppliers,
    by allowing TVA to sell at retail in their service areas. What
    is the purpose of this provision? You said you were willing to
    pay stranded costs, so that can't be the reason. It seems the
    only reason for that provision is to discourage TVA's wholesale
    customers from leaving its system.
        Mr. Morris. I would agree the question is that it would
    represent an issue, or exert pressure, on a TVA customer
    inclined to leave will all, or part, of its load. So I would
    agree with your question.
        Mr. Stearns. Your testimony expressed a concern about
    liability for any future imprudent costs incurred by TVA. What
    is the best way to ensure TVA does not incur new stranded
    costs? Should TVA be able to acquire new generation resources
    at the taxpayers' risk? Should TVA be limited to acquiring new
    resources only if it has contracts where wholesale purchasers
    assume the risks?
        Mr. Morris. I think those are good suggestions. Our concern
    is that, while we don't want to constrain TVA, we do want to
    have some assurance that the decisions that are being made are
    decisions over which there is some oversight. We have concerns
    that absent FERC, or some other third-party review, perhaps
    there will not be the oversight necessary to ensure that those
    decisions are prudent, and don't have a negative impact on our
    customers.
        Mr. Stearns. You testified that amending Federal law to
    eliminate the legal barriers to wholesale competition in the
    Tennessee Valley will not create wholesale competition in the
    Valley, unless Congress also amends TVA's contracts. You also
    say you are prepared to pay your share of TVA's stranded costs.
    Why won't TVA let you out of your contract after you pay your
    stranded costs?
        Mr. Morris. Well, I think that the issue of the contract
    and its current, rolling, 10-year term is one that is basically
    an issue of negotiation leverage. The why is basically an
    example of the disparity in negotiation leverage, or power. We
    believe that in order for us to have access to low-cost power
    and the benefits of wholesale electric deregulation is that we
    have to have the ability to exit those contracts sooner than 10
    years.
        Mr. Stearns. Even if Congress opened up TVA's transmission
    system, and addressed the contract issue, TVA has market power
    in the region, since it controls virtually all generation in
    the Tennessee Valley. Should FERC regulate TVA's wholesale
    sales in the region, or should TVA continue to have unilateral
    discretion to set the wholesale rates under the TVA Act?
        Mr. Morris. Our position is, and has been, that FERC
    oversight of TVA's wholesale rates would be appropriate and
    would benefit our customers.
        Mr. Stearns. My time has run out. I would ask members who
    would like to ask additional question to submit those in
    writing for the panel. So ordered, without objection.
        I would like to thank all of you for your patience and
    taking of your valuable time to come here this morning. We
    appreciate your comments. I would like to, now, ask the third
    panel to step forward.
        Mr. Stearns. I would like the third panel to sit down.
    Those folks that are not involved please leave the room.
        Let me welcome the third panel. Mr. Mazur, from the U.S.
    Department of Energy; Dr. Bradley Eldredge, representing the
    Public Power Council; Mr. John Amos, from Reynolds Metal
    Company; Mr. John Savage, representing the Northwest Energy
    Review Transition Board; Mr. James Litchfield, from Litchfield
    Consulting Group, and Mr. Shawn Cantrell, from Friends of the
    Earth.
        I think that what we will do is start from left and just
    move across. So gentlemen, you are welcome to provide an
    opening statement. You are recognized for 5 minutes. I would
    encourage all of you to give a synopsis of your opening
    statement if you could. Mr. Mazur.

     STATEMENTS OF MARK MAZUR, ACTING DIRECTOR, OFFICE OF POLICY,
       U.S. DEPARTMENT OF ENERGY; ACCOMPANIED BY JACK ROBERTSON,
      DEPUTY ADMINISTRATOR, BONNEVILLE POWER ADMINISTRATION; JOHN
     SAVAGE, ADMINISTRATOR, OREGON OFFICE OF ENERGY, REPRESENTING
    NORTHWEST ENERGY REVIEW TRANSITION BOARD; H. BRADLEY ELDREDGE,
    COUNCIL MEMBER, CITY OF IDAHO FALLS, REPRESENTING PUBLIC POWER
      COUNCIL; JAMES LITCHFIELD, PRESIDENT, LITCHFIELD CONSULTING
    GROUP; JOHN AMOS, GENERAL MANAGER, ENERGY AND HEDGING, REYNOLDS
        METALS COMPANY; AND SHAWN CANTRELL, NORTHWEST REGIONAL
                     DIRECTOR, FRIENDS OF THE EARTH

        Mr. Mazur. Thank you, Mr. Chairman. My name is Mark Mazur
    and I am Acting Director for the Office of Policy at the
    Department of Energy.
        Mr. Stearns. Mark, hold up just a second. We had a few
    people just leaving, here. The door will be closed and it will
    be a little more quiet, so we can hear your opening statement.
    If the staff would help me out by closing the door? All right,
    you may continue.
        Mr. Mazur. Sitting behind me today is Jack Robertson,
    Deputy Administrator for Bonneville Power Administration. The
    Department welcomes the opportunity to testify today about the
    role of Federal utilities in competitive electricity markets.
        On April 15, Secretary Richardson transmitted the Clinton
    administration's proposed Comprehensive Electricity Competition
    Act to the House and the Senate. This legislation contains the
    administration's vision for restructured electric industry. We
    believe that consumer choice and competition among power
    suppliers will lower electricity rates; make American business
    more competitive; spur the innovation of new products and
    services, and reduce the emissions of traditional air
    pollutants and greenhouse gases.
        Mr. Chairman, we are pleased that the subcommittee is
    holding hearings on electric restructuring. While we recognize
    States are leading the way, Federal legislation is essential to
    complement the States' efforts, and address issues which can
    only be resolved by the Federal Government.
        I understand that Secretary Richardson will be testifying
    on the administration's proposal as whole, at a later time. So
    today I want to limit my testimony to the Department's views on
    the role of Federal utilities in a restructured environment.
        The four power marketing administrations: Bonneville Power
    Administration, Western Area Power Administration, Southwestern
    Power Administration, and Southeastern Power Administration,
    which are subject to Department of Energy oversight, and the
    Tennessee Valley Authority, which is generally self-regulated,
    will continue to perform their important functions, even after
    restructuring. However, the administration supports certain
    statutory changes to allow competition to properly develop in
    the regions served by these entities.
        My testimony today will focus on the regulatory changes
    which the administration believes are necessary to ensure that
    federally owned transmission facilities promote competitive
    markets, and also on the role of power sales by the PMAs and
    TVA.
        With respect to transmission, the administration believes
    that one of the most critical elements of competitive wholesale
    and retail electric markets is an open, efficient, reliable
    interstate transmission system. Under current law, most
    cooperative and municipal utilities, as well as the TVA and
    PMAs are exempt from most Federal Power Act regulation of
    transmission services. We believe that it is preferable that
    transmission services provided by all utilities, whether
    publicly or privately owned, are subject to similar rules and
    requirements.
        The administration's proposed legislation, however,
    recognizes the unique structure of Federal utilities that
    require slightly different regulatory treatment than that
    accorded to other utilities. Our proposal would require FERC,
    in setting transmission rates for TVA and the PMAs, to ensure
    amounts collected are sufficient to cover transmission costs,
    and to take statutory and regulatory requirements into account
    in regulating these rates.
        We believe it is important to recognize that the standards
    pursuant to which Bonneville and the other PMAs have been
    setting transmission rates differ from Federal Power Act
    standards. It is possible that in a restructured environment
    some PMA customers will see higher transmission costs, and some
    will see lower transmission costs, under a revised regulatory
    system. Consistent with FERC practice, we believe that any such
    increases should be phased in over a reasonable period, if
    implementing them all at once would be problematic.
        Bonneville and, to a lesser extent, the other PMAs are also
    faced with having to pay the cost for future fish and wildlife
    remediation programs associated with Federal dams. These costs
    are generally recovered as part of the power rates charged by
    the PMAs. Under most estimates of future market conditions, the
    PMAs are expected to be able to recoup all their generation
    costs in power rates.
        However, if market rates are less than PMA cost-based
    rates, the administration has proposed that FERC be given
    authority to impose a limited transmission surcharge, applied
    on a competitively neutral basis, to the extent BPA and the
    other PMAs are unable to recover sufficient amounts in
    generation rates to cover these costs. This surcharge would be
    treated as a loan from customers that would be paid back when
    PMA power costs fall below market rates.
        With respect to power sales, although the rates for most
    power sales would be established by interaction of supply and
    demand in the market, subsequent to restructuring there will be
    a role for cost-based preference power. Preference power has
    helped to provide affordable electricity to developing areas in
    America. While we expect the benefits of competition to reach
    all areas of the country, the Department is concerned that a
    shift from cost-based to market-based rate making for PMA power
    could harm customers in the regions currently served by PMAs.
        Some critics contend that preference customers of PMAs have
    an unfair advantage in a competitive marketplace, because they
    are able to take relatively low-cost power that they receive
    from the PMAs and resell it in the competitive marketplace.
    However, legal and contractual restrictions prevent preference
    power customers from reselling power generated at a Federal dam
    to a customer located outside the preference power customer's
    service territory. The Department intends to ensure the use of
    preference power meets all legislative and contractual
    requirements.
        Mr. Stearns. The gentleman's time has expired. Is it
    possible that you could summarize?
        Mr. Mazur. Sure. Mr. Chairman, we believe the approach
    outlined in the administration's legislation goes a long way to
    providing a competitive environment in the areas served by
    Federal utilities that is appropriate for the 21st century. I
    will be happy to answer any questions you or the other members
    may have.
        [The prepared statement of Mark Mazur follows:]
     Prepared Statement of Mark Mazur, Acting Director, Office of Policy,
                           U.S. Department of Energy
                                  introduction
        Good morning, Mr. Chairman and members of the Subcommittee. My name
    is Mark Mazur and I am the Acting Director of the Office of Policy at
    the Department of Energy. The Department welcomes the opportunity to
    testify today about the role of Federal utilities in competitive
    electric markets.
        On April 15, Secretary Richardson transmitted the Clinton
    Administration's proposed Comprehensive Electricity Competition Act to
    the House and the Senate. This legislation contains the
    Administration's vision for a restructured electric industry. We
    believe that consumer choice and competition among power suppliers will
    (1) lower electricity rates, (2) make American businesses more
    competitive, (3) spur the innovation of new products and services and
    (4) reduce the emissions of traditional air pollutants and greenhouse
    gases.
        Mr. Chairman, we are pleased that the Subcommittee on Energy and
    Power is holding hearings on electric restructuring. Twenty-one states
    either have implemented or are in the process of implementing
    restructuring programs. A number of other states are considering
    similar action. While the states are and should be leading the way on
    retail competition, Federal legislation is essential to complement the
    states' efforts and address those issues which can only be resolved by
    the Federal government. The Administration believes that restructuring
    legislation is needed sooner, rather than later, and we want to work
    with you and the members of your Committee on a bipartisan basis to get
    the job done. I understand that Secretary Richardson will be testifying
    on the Administration's proposal, as a whole, at a later time. I will
    limit my testimony today to the Department's views on the role of
    Federal utilities in a restructured environment.
        The four Federal Power Marketing Administrations (PMAs)--the
    Bonneville Power Administration (BPA), the Western Area Power
    Administration (WAPA), the Southwestern Power Administration (SWPA) and
    the Southeastern Power Administration (SEPA)--which are subject to
    Department of Energy oversight, and the Tennessee Valley Authority
    (TVA), which is generally self regulated, will continue to perform
    their important functions, even after restructuring. However, the
    Administration supports certain statutory changes to allow for
    competition to properly develop in the regions served by TVA and the
    PMAs.
        After providing some brief background information on the PMAs and
    TVA, my testimony will focus on the regulatory changes which the
    Administration believes are necessary to ensure that Federally-owned
    transmission facilities promote competitive markets. Thereafter, the
    testimony will provide the Administration's views on the role of the
    PMAs and TVA in the sale of power subsequent to industry restructuring.
                                   background
    Bonneville
        The Bonneville Power Administration markets wholesale 1
    electrical power and operates and markets transmission services in the
    Pacific Northwest. The power comes from 29 Federal dams, one non-
    federal nuclear plant, and various renewable resources. BPA serves a
    300,000 square mile area including Oregon, Washington, Idaho, Western
    Montana, and parts of Northern California, Nevada, Utah, and Wyoming.
    In addition, Bonneville's transmission system exceeds 15,000 circuit
    miles, provides more than three-fourths of the region's high-voltage
    transmission capacity, and includes major transmission links with
    Canada and other regions within the United States.
    ---------------------------------------------------------------------------
        \1\ BPA also sells retail power to 15 Direct Service Industrial
    (DSI) customers as provided by statute. 16 U.S.C. 839c(d)(2)(A).
    ---------------------------------------------------------------------------
        Bonneville's rates currently are developed through a formal
    regional process pursuant to certain ratemaking standards and filed
    with the Federal Energy Regulatory Commission (FERC) for approval or
    remand under those standards. One of BPA's primary duties is to
    establish power and transmission rates to repay ``the Federal
    investment in the Federal Columbia River Power System over a reasonable
    number of years after first meeting the Administrator's other costs.''
    2 These other costs include (1) amounts attributable to
    efforts to mitigate harm to and enhance fish and wildlife populations
    in the Columbia River Basin (BPA has pledged to spend over $400 million
    annually on this effort) and (2) over $7 billion in Washington Public
    Power Supply System and other Bonneville-backed debt. At the end of FY
    1998, Bonneville's outstanding Treasury repayment obligations was
    approximately $6.6 billion.
    ---------------------------------------------------------------------------
        \2\ 16 U.S.C. 839e(a)(2)(A).
    ---------------------------------------------------------------------------
        Bonneville is obligated by statute to sell power to the preference
    customers--public bodies and electric cooperatives--as well as the
    residential and small farm customers of investor-owned utilities in the
    Pacific Northwest. BPA also has been selling power to the DSIs,
    primarily aluminum companies, in the Northwest. BPA may also sell
    surplus outside the region at market prices.
    Other PMAs
        The remaining three power marketing administrations all market
    power generated at dams constructed pursuant to the Reclamation Acts
    and the Flood Control Act of 1944. WAPA markets approximately 10,000 MW
    of hydro power capacity from Federal dams located in the Colorado,
    Missouri and California's Central Valley River basins to parts of 15
    states. WAPA also owns and operates transmission lines over 16,000
    miles across the West. SWPA markets 2,000 MW of capacity from Federal
    dams located in Oklahoma, Arkansas, Missouri and Texas to parts of six
    states and also owns and operates almost 1,400 miles of transmission.
    SEPA markets a little more than 3,000 MW of capacity from dams located
    throughout the Southeast to customers in parts of nine states. SEPA
    owns no transmission facilities.
        As marketers of Federal power, WAPA, SWPA and SEPA must satisfy
    certain statutory and regulatory requirements. They must give a
    preference in the sale of power to municipalities and other public
    bodies or agencies, and to electric cooperatives. Once the appropriate
    Administrator develops power or transmission rates consistent with
    governing statutes and regulations, the Secretary approves the rates on
    an interim basis, and FERC conducts a review of the rates to determine
    whether they are the lowest possible to customers consistent with sound
    business principles and whether the revenues generated by the rates are
    sufficient to recover the costs of producing or transmitting the
    electric energy and to pay back a significant portion of the Federal
    investment in the dams which provide the hydro power.
    Tennessee Valley Authority
        The TVA Act of 1933 requires TVA to provide electric power, flood
    control, navigational control, agricultural and industrial development
    and other services to virtually all of Tennessee and parts of six
    surrounding states. In 1959 Congress amended the TVA Act to create the
    so-called ``TVA fence'' by limiting TVA to sales of electricity to its
    own wholesale requirements customers and certain industrial retail
    customers inside its service territory and to short-term economy
    exchanges with the fourteen surrounding utilities with whom it already
    did business. While TVA's power sales outside the TVA region are
    limited, contractual arrangements between TVA and its distribution
    customers and certain provisions in the Federal Power Act essentially
    restrict other utilities from selling power in the TVA region.
        TVA owns 28,000 MW of generation capacity 3 and owns and
    controls 17,000 miles of transmission in the TVA region and supplies
    power to 159 municipal and cooperative retail distributors in its
    service territory. Unlike the PMAs, TVA meets all of the power needs of
    the region it serves. The distributors purchase power pursuant to
    contracts that require the distributors to acquire all their power from
    TVA. These contracts also give TVA the right to set retail rates and a
    number contain ten-year notice provisions for termination. TVA also
    sells power directly to 68 large industrial and Federal customers.
    ---------------------------------------------------------------------------
        \3\ TVA's generation mix is approximately 11% hydroelectric, 28%
    nuclear and 61% fossil fuel.
    ---------------------------------------------------------------------------
        TVA is governed by a three member board of directors, appointed by
    the President and confirmed by the Senate. TVA is not subject to either
    Federal or State regulatory commission jurisdiction, except to limited
    Federal Power Act review for energy transmitted through the TVA service
    territory but not consumed inside the territory. In addition, TVA, as a
    Federal agency, is exempt from the antitrust laws.
                                  transmission
        The Administration believes that one of the most critical elements
    of competitive wholesale and retail electric markets is an open,
    efficient and reliable interstate transmission system. Under current
    law, most cooperative and municipal utilities, as well as TVA and the
    PMAs, are exempt from most Federal Power Act regulation of transmission
    services. Although the reciprocity provisions of FERC Order No. 888
    address, to some extent, non-jurisdictional transmission entities, we
    believe it is preferable that transmission services provided by all
    utilities, whether publicly or privately owned, are subject to similar
    rules and requirements.
        The Administration's proposed comprehensive electricity competition
    legislation would subject transmission facilities owned by municipal,
    cooperative and all Federal utilities, including the PMAs 4
    and TVA to Federal Power Act review. In addition, we also would
    authorize FERC to require these utilities to turn over operational
    control of these transmission facilities to an independent regional
    system operator in order to ensure that competitive markets adequately
    develop and flourish. For example, Bonneville owns 75 percent of all
    the high voltage transmission lines in the Pacific Northwest. If access
    to BPA's transmission facilities is not provided to competitors on a
    nondiscriminatory basis and efficiently priced, competition can not
    adequately develop in the Northwest.
    ---------------------------------------------------------------------------
        \4\ Since the Southeastern Power Administration does not own
    transmission facilities, the provisions of the Administration's
    legislation regarding transmission do not apply to SEPA.
    ---------------------------------------------------------------------------
        The Administration's proposed legislation does, however, recognize
    that the unique structure of the Federal utilities requires slightly
    different regulatory treatment than that accorded other utilities. For
    instance, TVA and the PMAs are obligated by statute to recover a
    sufficient amount in rates to offset their related costs, including
    debt repayment. Our proposal would require FERC, in setting
    transmission rates for TVA and the PMAs, to ensure that amounts
    collected are sufficient to cover transmission costs. In addition, the
    PMAs operate within a variety of other statutory and regulatory
    requirements. For example, operations of dams may reflect environmental
    concerns that could impact transmission services. The Administration's
    legislation would require FERC to take these constraints into account
    in regulating the rates for transmission services.
        We also believe it is important to recognize that the standards
    pursuant to which Bonneville and the other PMAs have been setting
    transmission rates differ with Federal Power Act standards. It is
    possible that some PMA customers will see higher transmission costs and
    some will have their costs reduced under the revised regulatory system.
    Consistent with FERC practice, we believe that increases should be
    phased in over a reasonable period if implementing them all at once
    would be problematic.
        Bonneville and, to a lesser extent, the other PMAs, are also faced
    with the problem of having to pay the costs of future fish and wildlife
    remediation programs associated with the Federal dams. These costs are
    generally recovered as part of the power rates charged by the PMAs and,
    under most estimates of future market conditions, the PMAs are expected
    to be able to recoup all of their generation costs in power rates.
    However, if market rates are equal to or are less than PMA cost-based
    rates, an alternative cost recovery mechanism would be needed to avoid
    shifting the responsibility for payment of these costs to the United
    States Treasury. The Administration has proposed that FERC be given the
    authority to approve a limited transmission surcharge mechanism and
    that surcharge would be applied on a competitively neutral basis to the
    extent BPA and the other PMAs are unable to recover sufficient amounts
    in generation rates to pay all the costs attributable to the power side
    of operations. This surcharge would be treated as a loan from customers
    which would be paid back when power costs fall below market rates.
                                  power sales
    PMA Preference Power
        Although the rates for most power sales will be established by the
    market subsequent to restructuring, there will still be a role for
    cost-based preference power. Preference power has helped to provide
    affordable electricity to developing areas of America. While we expect
    the benefits of competition to reach all regions of the country, the
    Department is concerned that a sudden shift from cost-based to market-
    based ratemaking for PMA power could have a deleterious effect on
    consumers in the regions served by the PMAs.
        In addition, the amount of power sold by WAPA, SWPA and SEPA in
    comparison to total power sales in the regions they serve is negligible
    and will not impact competition. While Bonneville's role in the
    Northwest power market is much more substantial, the fact is that the
    BPA's resources are finite. As electricity demand in the region
    continues to grow, the role of new suppliers will increase and
    competition should flourish, especially if the Administration's
    proposed legislative changes to the Bonneville transmission system are
    made.
        Mr. Chairman, some critics contend that the preference customers of
    the PMAs will have an unfair advantage in a competitive marketplace
    because they will be able to take the relatively low-priced power they
    receive from the PMAs and turn around and sell it in the competitive
    marketplace. However, there are both legal and contractual restrictions
    that prevent a preference power customer from reselling power generated
    at a Federal dam to a consumer located outside of the preference power
    customer's service territory. The Department intends to continue to be
    vigilant to ensure that the use of preference power adheres to
    legislative and contractual requirements.
    TVA's Power Sales Activities
        Certain provisions of TVA's contracts with the municipal and
    cooperative distributors and Federal law can act as barriers to
    competition. Even if the states and the municipal and cooperative
    utilities were to provide their consumers the opportunity to choose
    among competing power suppliers, these barriers could prevent
    meaningful competition from occurring. As a result, the
    Administration's comprehensive electricity restructuring legislation
    includes several provisions designed to break down these barriers to
    allow for vigorous competition to take place in the Tennessee Valley.
    These provisions draw heavily on the work of the Tennessee Valley
    Electric System Advisory Committee, which was commissioned by the
    Department in November 1997 to provide advice through a regional
    consensus building process.
        Consistent with the target date for retail competition of January
    1, 2003, the Administration's bill would remove the statutory and
    contractual obstacles that currently prevent other utilities from
    selling power in the Tennessee Valley. We have proposed that the
    Federal Power Act be amended to provide FERC with the authority to
    order TVA to provide transmission access to generators and marketers
    seeking to sell power inside the TVA region. In addition, TVA would be
    required to renegotiate its existing full-requirements contracts with
    its distributor customers within one year of the date of enactment in
    order to allow the distributors to purchase power from other sources
    after January 1, 2003, and to shorten the contract terms.
        Because TVA can expect to lose some load as a result of these
    changes, the Administration also is proposing that TVA be permitted to
    mitigate its stranded costs through power sales outside the TVA region.
    To the extent TVA is not able to fully mitigate its stranded costs with
    power sales outside the region, FERC would be authorized to permit TVA
    to recover its stranded costs from departing customers until October 1,
    2007.
        The Administration recognizes that some are opposed to allowing TVA
    to acquire new customers by selling power outside the TVA region. We
    believe, however, that it is important that TVA be permitted to
    mitigate stranded costs by selling excess power and capacity. Our
    proposal contains several important restrictions on TVA's ability to
    compete for customers outside the Tennessee Valley. First, TVA would
    not be able to add new capacity to serve customers outside of the
    Tennessee Valley because the TVA Act only authorizes TVA to build new
    capacity to meet the power needs of the Tennessee Valley. In addition,
    TVA would, for the first time, be subjected to injunctive penalties
    under the antitrust laws in order to help level the playing field
    between TVA and potential competitors. Furthermore, TVA would be
    prohibited from competing for retail customers outside of the TVA
    region. In this regard, we believe the proposed legislation
    appropriately balances the concerns of TVA and other market
    participants, while promoting a competitive market in the TVA region
    and in other regions of the country.
                                   conclusion
        Mr. Chairman, we believe that our approach, as outlined in the
    Administration's proposed legislation, goes a long way toward providing
    a competitive environment in the areas served by the Federal utilities
    that is appropriate for the 21st century. I would be glad to answer any
    questions which you or the other Committee members may have.

        Mr. Stearns. I thank the gentleman.
        Mr. Savage, you are recognized for 5 minutes.

                        STATEMENT OF JOHN SAVAGE

        Mr. Savage. Thank you, Mr. Chairman. For the record, my
    name is John Savage. I am the Administrator of the Oregon
    Office of Energy. I also represent Oregon Governor, John
    Kitzhaber, on the Northwest Energy Review Transition Board.
    This board is made up of four persons represented by the
    Governors of the four northwest States. Its charge is to
    oversee implementation of recommendations for changes to the
    Northwest power system, developed in what was called the
    comprehensive review. This was a year-long, four-state effort
    sponsored by the Northwest Governors. The comprehensive review
    of recommendations, among other issues, addressed the issue of
    this hearing, which is the role of Bonneville in a competitive
    market place.
        Let me quickly go to the specific questions that I was
    asked to address, particularly as they pertain to Bonneville.
    First, should the transmission systems of Bonneville be
    regulated in a manner comparable to that of other power line
    owners? The comprehensive review said, yes, they should.
    Bonneville operates the vast majority of the region's
    transmission lines. As owner, it sets rates, terms and
    conditions for use of those lines. I think, consistent with the
    move to more competitive wholesale power markets, it should
    operate under the same operating rules and regulations--with
    some exceptions--as other power line owners.
        We have been working with Northwest groups to identify
    specific changes to the Federal Power Act and the other
    statutes that Bonneville operates to achieve this comparable
    regulation. I should point out that there does remain
    disagreements within the region on exactly how to extend FERC
    jurisdiction.
        Second, is there a need to address stranded costs for
    Bonneville? Yes, the comprehensive review said. Bonneville does
    not have stranded costs, I think, in a conventional sense. It
    does face significant revenue and cost uncertainties. For
    example, the variations in the amount of hydropower generated
    translates into swings of revenues of several hundred million
    dollars a year. As a result, the comprehensive review
    recommended that a fair, effective back-stop emergency funding
    mechanism be created, so that we ensure that we meet all of our
    costs.
        Third, should the ability of Bonneville to acquire new
    resources, particularly new power plants, be limited? Today
    Bonneville has the authority to acquire the output of new power
    plants to meet the growing demands in the Northwest. But
    because of the inherent financial risks associated with major
    acquisition, the comprehensive review that that role be curbed,
    and that Bonneville limit its acquisitions to those cases where
    a customer takes on the financial risk of those acquisitions.
        Fourth, should Bonneville sell to retail loads? No. The
    comprehensive review, again, recommended that Bonneville not
    sell directly to retail loads, other than to existing
    industrial customers; or, if it is done, through an
    intermediary. I think one of the central theme of the
    Governors' panel was that Bonneville should not be an active,
    aggressive player in the wholesale power market; but, rather,
    return to its historic role of marketing power generated from
    the Columbia River dams.
        Fifth, how can it be ensured that Bonneville recovers all
    of its costs? I should mention that Bonneville sets its rates
    to cover all its costs, including its debts. At issue is what
    to do in the unlikely event of significant revenue shortfalls,
    or extraordinary costs increases, such as unforeseen fish
    recovery costs.
        We proposed to the Transition Board a staged approach
    consisting of progressively strong action triggered by the
    financial reserve levels of Bonneville. First stage is to draw
    down their financial reserves and to use statutory credits that
    it can apply for its fish and wildlife expenditures. If that
    does not prove sufficient, then to institute cost controls and
    pare whatever necessary expenses that it can. From there, to
    apply a temporary adjustment in power rates. And then, only as
    a last resort, impose a temporary hike in transmission rates
    that are subject to review and approval by FERC.
        I will finish up. Sixth, is legislation required? Yes, I
    think, specifically with regard to the regulation of
    transmission. We are finalizing a report on our work that we
    will submit to the committee for its consideration. Thank you.
        [The prepared statement of John Savage follows:]
      Prepared Statement of John Savage, Administrator, Oregon Office of
         Energy, on Behalf of Northwest Energy Review Transition Board
        Mr. Chairman and members of the subcommittee, my name is John
    Savage and I am Director of the Oregon Office of Energy. I also
    represent Oregon Governor John Kitzhaber on the Northwest Energy Review
    Transition Board. The Transition Board is comprised of four people
    representing the governors of the four Pacific Northwest states.
    Serving with me on the Transition Board are Todd Maddock, representing
    Governor Kempthorne of Idaho; John Etchart, representing Governor
    Racicot of Montana; and Tom Karier, Governor Locke of Washington
    state's representative. All three are current members of the Northwest
    Power Planning Council, and Mr. Maddock is the current chairman of the
    Council. The Transition Board is charged with overseeing the
    implementation of recommendations for the Northwest power system made
    by a task force of energy experts convened by the Governors.
        The topic of this hearing is critical to the Northwest states
    because of the central role the Bonneville Power Administration plays
    in the Northwest power system. It supplies, on average, 40 percent of
    the power consumed in the region. It also owns and operates as much as
    75 percent of region's high-voltage transmission. Bonneville markets
    most of the region's low-cost hydroelectric power. Much of it is
    generated from the Columbia River--a vast, international, multi-purpose
    public resource. Bonneville is also responsible for funding efforts to
    restore fish and wildlife populations in the Columbia River Basin. The
    decisions it makes and those made about it affect every facet of the
    Northwest power market.
        The advent of a more competitive electricity industry raises a
    number of complex questions about Bonneville's future. Bonneville's
    responsibilities under legislation such as the Northwest Power Act and
    the Endangered Species Act pose challenges to the agency in the new
    competitive environment. In addition, Bonneville's ownership of most of
    the region's high-voltage transmission raises questions about the role
    of a federal agency in a competitive market.
            the comprehensive review of the northwest energy system
        In 1996, the Governors of Idaho, Montana, Oregon and Washington,
    acting in response to the changes that were sweeping the electricity
    marketplace, convened a task force of energy experts representing the
    major stakeholders in the region to comprehensively review the
    Northwest power system and make recommendations for change. This effort
    was known as the Comprehensive Review of the Northwest Energy System.
    Each governor had a non-voting representative on the Steering Committee
    to make certain the public was educated about and involved in the
    Comprehensive Review. In establishing the Review, the governors said:
            ``The goal of this review is to develop, through a public
            process, recommendations for changes in the institutional
            structure of the region's electric utility industry. These
            changes should be designed to protect the region's natural
            resources and distribute equitably the costs and benefits of a
            more competitive marketplace, while at the same time assuring
            the region of an adequate, efficient, economical and reliable
            power system.''
        The Steering Committee held 30 daylong meetings. In addition,
    almost 400 people were involved in more than 100 meetings of various
    work groups reporting to the Steering Committee. Hundreds of citizens
    attended the 10 public hearings that were held throughout the region on
    the Committee's draft report. More than 700 written comments were
    received. The Steering Committee's recommendations are a product of
    that work.
        The intent of the Review was to help the Pacific Northwest address
    the electric utility industry's transition from regulation to
    competition and, in particular, provide guidance on the appropriate
    role of the federal power and transmission assets in a competitive
    utility environment.
        At the time of the Comprehensive Review, Bonneville's ability to
    recover sufficient revenues to enable it to meet its financial
    obligations was very much in doubt. As a result of aggressive cost
    control and improving markets, it now appears likely that Bonneville
    will be financially healthy at least through the upcoming 2002-2006
    rate period. However, the volatility of power markets and the
    uncertainties surrounding Bonneville's fish and wildlife mitigation and
    recovery obligations could quickly change that outlook. Moreover, the
    role of federally owned transmission in a competitive power market
    remains an issue.
    Recommendations regarding the Bonneville Power Administration
        The Comprehensive Review's recommendations are wide-ranging,
    encompassing not only the Bonneville Power Administration but also
    issues such as retail competition and sustaining public purposes, like
    investment in conservation and renewable resources. I would like to
    summarize the main features of the Steering Committee's recommendations
    that are of primary interest to you, those pertaining to the Bonneville
    Power Administration.
    Federal Power Marketing: the Bonneville Power Administration
        The Steering Committee's goals for federal power marketing were to:
    1) ensure repayment of the debt to the U.S. Treasury with a greater
    probability than currently exists while not compromising the security
    or tax-exempt status of Bonneville's third-party debt; and 2) align the
    benefits and risks of access to existing federal power; and 3) retain
    the long-term benefits of the system for the region.
        For federal power sales after 2001, the Steering Committee
    recommended that federal power be distributed based on a subscription
    process. Subscribers would purchase specified amounts of federal power
    at cost, with priority rights going to public agencies, followed by the
    residential customers of investor-owned utilities and direct service
    industries.
    The Federal Role in a Competitive Marketplace
        The subscription process should have the effect of successfully
    marketing much, if not all, of the firm power available from Bonneville
    on an intermediate-term basis ``approximately five years. The fact that
    the recommendations call for most of Bonneville's power to be
    subscribed at cost would limit Bonneville's market role. In short, the
    Steering Committee recommended that to the extent consistent with its
    obligation to repay Treasury, Bonneville should return to its historic
    role of marketing power generated by the Federal Columbia River Power
    System, rather than becoming an aggressive marketer of products and
    services in the emerging competitive power market.
        In addition, to limit taxpayer and subscriber risk, the Steering
    Committee recommended that Bonneville not acquire new resources to
    serve its customers' load growth except on a direct bilateral basis
    where the customer takes on the risk of the acquisition. Similarly, the
    Steering Committee proposed that Bonneville should not sell directly to
    new retail loads, beyond its existing direct service industry loads,
    although it may sell through intermediaries whose transactions would be
    subject to state or local jurisdiction.
    Bonneville and Fish and Wildlife Costs
        I would like to highlight one issue related to the subscription
    proposal that likely will be of concern to the committee. That issue is
    funding for fish and wildlife mitigation efforts. The governors
    specifically asked the Review Steering Committee to consider power
    system issues and to avoid making recommendations regarding fish and
    wildlife recovery plans or specific recovery measures.
        In accordance with the governors' guidance, the Steering Committee
    specifically recognized Bonneville's existing fish and wildlife
    obligations, and stated that none of its recommendations should affect
    existing trust obligations or treaty rights. The Steering Committee
    further recognized that the Northwest would need to provide its
    appropriate share of the required fish and wildlife funding.
    Contingent Cost Recovery
        The Review also recognized, however, that Bonneville is subject to
    a great deal of risk. Consequently, it recommended that a mechanism be
    developed to permit Bonneville to recover otherwise unrecoverable
    costs, should they arise. This is necessary to ensure repayment of the
    debt to the U.S. Treasury with a greater probability than currently
    exists, while not compromising the security of Bonneville's third-party
    debt, which is primarily comprised of Washington Public Power Supply
    System bonds. At the same time, this mechanism must also attempt to
    align the benefits and risks of access to federal power.
    Transmission
        If there is to be effective competition among generators, the
    Steering Committee found that transmission facilities should be
    operated independently of generation ownership. The Steering Committee
    determined that the independent operation of Bonneville's transmission
    facilities is particularly important to effective competition among
    generators in the Northwest because Bonneville's facilities make up
    such a large part of the regional transmission system. To ensure this
    independence, the Steering Committee recommended that, if feasible,
    Bonneville be legally separated into two organizations--a power
    marketing organization to market the power from the federal power
    system and a transmission organization to carry out the transmission
    functions. The critical element in separation of these functions is
    that it not jeopardize or diminish the legal obligation and ability of
    Bonneville to meet fish and wildlife and other obligations. The Review
    also recommended that Bonneville be able to participate in a Regional
    Transmission Organization.
        Legislation would be required to accomplish these recommendations.
    In the meantime, the Steering Committee recommended that Bonneville
    move quickly to achieve as much administrative separation as possible.
    It was also recommended that Bonneville's transmission be subject to
    regulation by the Federal Energy Regulatory Commission equivalent to
    the regulation of the transmission assets of investor-owned utilities.
    Columbia River System Governance
        The Steering Committee was asked by the Northwest governors to
    focus on the restructuring of the electricity system and to address the
    financial stability of the federal power system. However, it fully
    recognized that there are other important, related issues and
    decisions, including those affecting fish and wildlife, that must be
    resolved before a truly comprehensive package can be achieved.
        In its recommendations, the Steering Committee concluded that the
    Northwest cannot expect to achieve both the degree of cost stability
    the electricity industry requires to maintain the benefits of the
    Columbia River power system for the region and achieve sustainable fish
    and wildlife restoration unless predictability, accountability and
    effective governance for the fish and wildlife interests of the river
    are ensured. In addition, it was found that an effective conclusion of
    the energy-system restructuring effort in the Northwest will not be
    possible without an improved system of river governance.
        Through its public process, the Steering Committee found that until
    governance deliberations move forward through a government-to-
    government consultation among federal, state and tribal authorities,
    the prospects for a consensus on the response to utility restructuring
    will be diminished and controversial. The Steering Committee
    recommended that the governors initiate a broadly based discussion of
    improvements in river system governance that would provide more
    effective decision-making for this complex ecosystem and all of its
    competing uses. The governors, through a process that I will describe
    later, are attempting to develop a means to do so.
        That completes my summary of the Steering Committee's
    recommendations. Now, I would like to move from the recommendations to
    implementation, and to the Northwest governors' current efforts.
                  the northwest energy review transition board
        As mentioned earlier, the governors appointed representatives to
    the Northwest Energy Transition Board to oversee implementation of the
    Review Steering Committee's recommendations. As with the Review, staff
    from the Northwest Power Planning Council are providing technical and
    logistical support to the Board.
        Since its inception, the Transition Board has convened public
    meetings on a frequent basis throughout the region. In addition, two
    working groups were created comprised of Bonneville customers,
    Bonneville staff, and other interested parties. One group's function
    was to develop a process to carry out the federal power marketing
    subscription. A second group was created to address the issues
    surrounding the separation of Bonneville's transmission and marketing
    functions, subjecting Bonneville's transmission to FERC regulation, and
    developing an emergency cost recovery mechanism.
        I would like to discuss briefly the progress the Transition Board
    is making on the topics of transmission and contingent cost recovery.
    The Transition Board has focused on these issues because they required
    regional leadership and federal legislation. I will also give you a
    brief update on the Governors' efforts to address river governance.
    Transmission
        The Transition Board has focused most of its attention on
    transmission, an area that will clearly require legislation to resolve.
    Moreover, ensuring that power suppliers have fair and open access to
    transmission lines is an essential condition for an efficient wholesale
    power market. One of the clearest ways that Bonneville can be adapted
    to the competitive environment is to ensure that its transmission
    satisfies that condition.
        The Comprehensive Review called for legal separation of
    Bonneville's transmission functions from its power functions, FERC
    regulation of its transmission, and the ability for Bonneville to
    participate in a regional transmission organization (RTO). The
    recommendations are intended to promote effective competition, improve
    system reliability. At the same time, the Review established a goal
    that such separation not jeopardize or diminish the legal authority and
    ability of Bonneville to meet fish and wildlife and other obligations.
        The issues regarding legal separation and FERC jurisdiction are
    complex. This is particularly so because separation has implications
    for the security of Bonneville's third-party debt that need to be
    addressed carefully to ensure that the security is not impaired. After
    careful study, the regional working group that examined the legal and
    other issues related to transmission separation concluded that the
    perceived risks to the security of Bonneville's third party debt are
    such as to make actual legal separation risky. Moreover, the group
    concluded that the same goals could be essentially achieved by
    rigorously pursuing functional separation of Bonneville's power
    marketing and transmission functions combined with FERC regulation. The
    Transition Board agreed with this assessment.
        A somewhat less complex, but important, problem is the removal of
    barriers to Bonneville's participation in a regional transmission
    organization. Participation in a properly designed and executed RTO
    could go a long way toward meeting the Review's goals for transmission.
        Extensive efforts have been made to establish a Northwest RTO.
    Bonneville was an active participant in the organizing discussions.
    Those efforts were eventually failed for a number of reasons. However,
    FERC is actively looking at encouraging or perhaps even requiring RTOs.
    Bonneville's actual participation in an RTO, however, is currently
    problematic. One reason is that Bonneville is believed to be
    constrained from turning over operational control of its transmission
    system to an RTO primarily by the provisions of Section 208 of the
    Urgent Supplemental Appropriations Act of 1986 (Pub. L. No. 99-349, 100
    Stat. 749, July 2, 1986). Section 208 had a broader purpose, but one of
    its consequences is believed to be to preclude Bonneville's
    participation in the regional IGO. These constraints would need to be
    changed.
        Subjecting Bonneville's transmission to FERC regulation equivalent
    to FERC's regulation of the transmission systems of investor owned
    utilities has subsequently been a major focus of the Transition Board's
    activities. Last summer, the Transition Board adopted a set of
    principles for applying FERC regulation to Bonneville. Those principles
    are designed to achieve equivalence to the greatest extent possible
    while at the same time recognizing the legitimate differences of
    Bonneville as a Federal agency. Those principles are:
    (1) FERC's authority over Bonneville's transmission should be based on
            Parts II and III of the FPA.
    (2) Section 201 of the FPA should be amended to make clear that FERC's
            authority is limited to Bonneville's transmission. FERC's
            authority over Bonneville's power should only be expanded to
            the extent required by a contingent cost recovery mechanism.
    (3) Bonneville should be exempt from FERC's authorities under Sections
            204, 207, 209, 214 303 and 305 of the FPA. Section 212(i)
            should be repealed.
    (4) FERC's enforcement authority should be based on Sections 307, 314,
            315 and 316 of the FPA.
    (5) FERC's newly established authority should clearly supersede any
            conflicting provision of Bonneville's organic statutes.
    (6) Total recovery of Bonneville's transmission costs should not be
            compromised. FERC should apply the ``just and reasonable''
            standard, recognizing that Bonneville has no stockholders to
            absorb losses, so that FERC cannot disallow Bonneville costs
            already incurred at the time of any such FERC process.
    (7) Neither the priority of payments nor Bonneville's third party debt
            should be compromised.
    (8) In rare instances, priority access should be made available to
            Bonneville's transmission system to permit federal and non-
            federal users to meet environmental obligations.
    (9) FERC's new authority should become effective on or after October 1,
            2001.
    (10) Bonneville should be permitted to join a FERC-regulated
            independent system operator.
    (11) FERC hearings on Bonneville rates should be held in the Pacific
            Northwest.
        The Transition Board directed staff to work with interests in the
    region to identify the changes in the Federal Power Act and the
    conforming changes in Bonneville's organic statutes necessary to effect
    these principles. There is no consensus within the region on these
    changes. The Transition Board is preparing a report that provides a
    short description of those issues, the positions of various parties
    and, where possible, proposed resolutions. The Board will make the
    report available to you when it is complete.
        Several of the Transition Board's recommendations on transmission
    are incorporated in the Clinton administration's recently released
    ``Comprehensive Electricity Competition Act.'' There are, however,
    differences that could lead to conflicts between the FPA and
    Bonneville's statutes in the future. In addition, the administration's
    draft bill does not provide for FERC hearings in the Northwest.
    Contingent Cost Recovery
        The final report from the Comprehensive Review noted that if its
    recommendations were prudently implemented, the risk that Bonneville
    would be unable to fully recover its costs in power rates would be
    reduced dramatically. Nevertheless, it recommended that an emergency
    cost recovery mechanism be established.
        This issue was and continues to be extremely controversial. When
    all is taken into consideration, however, the Transition Board believes
    a realistic process for dealing with Bonneville's possible inability to
    fully recover its power costs in power rates must be part of the
    package. Moreover, such a process is essential if the Comprehensive
    Review's goal of aligning the benefits and risks of access to federal
    power is to be met. Because the federal power is limited, not all that
    might like to purchase that power will be able to do so. The Transition
    Board believes that those who do not get to purchase federal power
    should not be asked to help pay Bonneville's power costs through
    charges on transmission services except in the most extreme
    circumstances.
        The Transition Board has developed draft recommendations for a
    process of contingent cost recovery. Those principles are:

    (1) First, Bonneville would rely on its cash reserves and any credits
            available under Section 4(h)(10)(c) of the Northwest Power Act.
    (2) If these proved insufficient, Bonneville would identify possible
            cost reductions, take public comment, and implement those that
            are appropriate.
    (3) If it was still projected that reserves would fall below a critical
            level, Bonneville would initiate the first stage of a
            contingent cost recovery mechanism through a power rate
            adjustment. The amount of rate adjustment would be the lower of
            a predetermined market cap or an amount that would assure cash
            reserves were rebuilt to a level sufficient to ensure that
            Bonneville can make its annual Treasury payment.
    (4) If it still appeared likely that the Treasury payment would have to
            be deferred, then the second stage, involving surcharges on
            transmission rates, could be implemented following review,
            possible modification and approval by FERC. The Transition
            Board recommends that FERC approve a mechanism that would
            recover no more than $100 million in any year, up to a
            cumulative total of $600 million and that any such revenues
            recovered from transmission revenues would be treated as a loan
            from transmission to power, to be repaid with interest.
        There is a lack of regional consensus and a great deal of
    controversy surrounding this proposal. Some of the controversy has to
    do with the workings of such a mechanism. Some of the controversy stems
    from disagreement with the mechanism's objectives. A contingent cost
    recovery mechanism has been incorporated into Bonneville's subscription
    proposal. Although not unalterably wedded to its own specific proposal,
    the Transition Board is concerned that Bonneville's proposal is not
    sufficiently robust. It may not provide safeguards against
    unnecessarily imposing a transmission charge equivalent to those
    provided by the Transition Board's proposed mechanism. The Board
    intends to work with Bonneville to ensure that a sufficiently robust
    contingent cost recovery mechanism is instituted.
    River Governance
        The question of river governance--or more accurately, how decisions
    about fish and wildlife restoration and the operation and configuration
    of the Columbia River System are made--is central to the success of the
    recommendations of the Comprehensive Review. Fish advocates demand
    greater certainty about the restoration measures that will be
    undertaken and the availability of funds to carry them out. Utilities
    and others need greater certainty about their obligations to pay for
    such measures. No one is entirely satisfied with the current process.
        There is a shared sense that the states, tribes and federal
    government need to work together to address governance and the fish,
    wildlife, energy and other issues that governance entails. The
    governors are committed to pursue this dialogue, recognizing that they
    have a limited period of time to address these very challenging issues.
        During the last year, the region took important steps to improve
    communication and collaboration on fish and wildlife issues. Two new
    efforts, the Multi-Species Framework Project and the Columbia River
    Basin Forum, are the most important examples of the region's commitment
    to new alternatives for managing the resources of the Columbia River
    Basin. In addition, the governors are actively discussing a set of
    principles that could be used as a basis for river governance
    legislation.
        Mr. Chairman, this concludes my testimony, and I would be pleased
    to answer any questions you or the other Members of the subcommittee
    may have.

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

                    STATEMENT OF H. BRADLEY ELDREDGE

        Mr. Eldredge. Thank you, Mr. Chairman. I thank you for this
    opportunity to testify here. I am representing the Public Power
    Council. We commend you for holding this hearing today.
        BPA has an important role in the Northwest region for
    moving forward the economic vitality of the region, where it
    represents 40 percent of the generation and 70 percent of the
    transmission in the region. BPA is also a mechanism to ensure
    that investments have been made in generation and transmission.
    Those investments have been made by the U.S. Government.
    Ultimately, the U.S. taxpayers bear the burden. Third-party
    bond holders also have an interest in BPA, because of the
    guarantee that BPA made on WPPSS. Finally, BPA is a source of
    funding for public purposes. These purposes include fish and
    wildlife conservation, and renewable and environmentally benign
    energy supplies.
        We feel that changes are needed to adapt BPA to the
    changing structure of the electric industry. PPC's members are
    most at risk from any change in the status quo. We do believe
    changes are appropriate at this time. However, we feel the
    subcommittee should be deliberate in considering these changes,
    because any misstep could have substantial consequences to the
    region and to our country.
        The BPA transmission system should operate under the same
    rules as other utilities, which includes oversight by FERC. But
    the Federal Power Act must not be unconditionally applied to
    BPA's transmission service without regard to prior historical
    circumstances. Such blind application could affect or threaten
    repayment to the Treasury; undermine financial backing of
    third-party bonds; cause substantial cost shifts among
    transmission customers; raise rates to rural users, and
    eliminate regional decisionmaking.
        The PPC urges the subcommittee to be careful in applying
    the Federal Power Act to BPA. This application must be
    accompanied by clear authority for BPA to recover their costs,
    and a conditional and last-resort method that the surcharged be
    capped and time-limited and applied on a uniform basis to all
    transmission users. This will ensure that BPA can continue
    funding public purpose programs, and retain its existing
    priority of payments as set forth in statute, contract, and
    regulation.
        Finally, the changes made should ensure that BPA can
    continue its statutory obligations to extend the benefits of
    the transmission system and develop the widest possible,
    diversified use of energy. FERC does have discretion to
    accommodate these points. However, it is sufficiently important
    that these items not be left in doubt. We are seeking policy
    outcomes that are not inconsistent with FERC's general
    approach, but ask for assurance that FERC will respect BPA's
    unique circumstance.
        BPA's financial outlook is positive at this time. This may
    not always be the case. We need to have a contingent mechanism
    in place in case BPA needs to raise money to satisfy these
    obligations. In essence, the surcharge represents another tool
    in BPA's portfolio that can be used to cover its costs in an
    unusual, high-cost situation.
        Without clear congressional direction, particularly with
    application of the Federal Power Act, cost recovery options for
    BPA may be legally limited and severely inequitable. BPA must
    be granted express authority to impose this uniform
    transmission surcharge as needed as a last resort.
        I greatly appreciate the opportunity to testify today. I
    appreciate the task you have of balancing transmission
    regulation, regional circumstances, history, and priorities. I
    believe the policies that I have articulated in my statement
    today provide this balance. I am pleased that members of the
    Northwest Delegation have spoken here today. They recognize the
    seriousness of these issues, and have devoted considerable time
    toward crafting balanced consensus legislation. I urge members
    of the subcommittee to work closely with the Northwest
    Delegation on these critical issues. Thank you.
        [The prepared statement of H. Bradley Eldredge follows:]
    Prepared Statement of H. Bradley Eldredge, Councilmember, City of Idaho
                  Falls, on Behalf of the Public Power Council
        Mr. Chairman, members of the Subcommittee, thank you for this
    opportunity to testify. I am Brad Eldredge. I am an assistant professor
    of chemical engineering at the University of Idaho, and a member of the
    Idaho Falls City Council. The City of Idaho Falls owns and operates a
    municipal utility, the largest consumer-owned system in the state of
    Idaho with 23,000 customers and peak load of 150 MW. We have been in
    the full service electricity business since 1900. The city owns 50 MW
    of hydroelectric generating capacity that supplies roughly 40 percent
    of our energy needs. We purchase the remainder primarily from the
    Bonneville Power Administration (BPA). I am testifying today on behalf
    of the Public Power Council (PPC). PPC is a regional trade association
    representing municipal utilities, rural electric cooperatives and
    public utility districts on issues related to BPA.
        PPC commends you for holding this hearing today. Considerable
    attention has been focused on the role of BPA in a competitive market
    and what changes, if any, are needed to adapt BPA to the evolving
    structure of the electric industry. PPC's members are most at risk from
    any change to the status quo. Nonetheless, PPC agrees that some changes
    are appropriate. However, we encourage the subcommittee to be cautious
    in pursuing such changes. BPA is a central feature of the Northwest and
    its economic vitality. BPA has diverse and complex statutory, treaty
    and contractual obligations that reach deep into the fabric of the
    region. BPA is integral to the

     maintenance of affordable electric service that has served as
            the economic engine of the region;
     provision of high-quality and affordable transmission and
            energy service for rural and remote electric consumers;
     security of third-party bonds used to finance generation and
            conservation projects;
     coordinated operations of the utility and river systems; and
     restoration of the region's fish and wildlife resources.
        In developing a ``Northwest Title'', it is essential to remember
    and respect these factors.
                                    overview
        Members of this Subcommittee, Administration officials and regional
    policymakers have outlined two central policy objectives for formation
    of a Northwest Title:

    1. Extension of Federal Energy Regulatory Commission (FERC) oversight
            to assure open, non-discriminatory access to the BPA
            transmission system, and
    2. Assurance that the region honor BPA's financial obligations,
            including the obligations for Treasury repayment, third-party
            debt and fish and wildlife measures.
        PPC supports steps to achieve these objectives. Further, we urge
    the Subcommittee to recognize that tensions exist between these
    objectives and BPA's historic mission and statutory obligations. Given
    these tensions, any Northwest Title must be carefully and thoughtfully
    crafted.
                      ferc regulation of bpa transmission
        Nearly every restructuring bill introduced to date includes
    extension of the Federal Power Act (FPA)--in some form--to the
    transmission system of BPA. The purported purpose of such action is to
    ensure competitively neutral access to the BPA transmission network and
    to preclude any manipulation of the transmission system to advantage
    BPA power marketing activities. PPC believes it should be noted that
    BPA has had reasonable access standards and transmission pricing long
    before such requirements were adopted in the Energy Policy Act of 1992.
    Nonetheless, we recognize that additional measures would affirm
    nondiscriminatory access and respond to concerns that BPA not operate
    under a regulatory system different from private transmission
    providers.
        The FPA must not, though, be unconditionally applied to BPA
    transmission service. Such blind application could threaten Treasury
    repayment, undermine the financial backing of third-party bonds, cause
    substantial cost shifts among transmission customers, and raise
    transmission rates to rural users to prohibitively high levels.
    1. Financial Obligations
        Under BPA's statutes, rates for both power sales and transmission
    service must be set to assure total system cost recovery. Revenues from
    both power sales and transmission service are pledged to meet BPA's
    Treasury obligation as well as repayment of third-party bonds used to
    finance both generation and conservation resources in the region.
    Segregating the use of transmission and power revenues--a cornerstone
    of FPA application--could undermine the security of BPA's financial
    obligations.
        Strict and complete FPA application could further diminish the
    financial integrity of BPA. FERC has adopted strict standards for
    collection of stranded costs. Under those standards, all BPA customer
    classes will present legal claims to insulate themselves from any
    stranded cost recovery:

     The large industrial customers--mainly aluminum plants--that
            receive direct service from BPA have contractual provisions
            that they believe may shield them from directed stranded cost
            charges;
     Regional private utilities will claim that--despite a myriad
            of services purchased and received from BPA--they were not
            ``requirements'' customers of BPA and therefore are insulated
            from any stranded costs; and
     BPA's consumer-owned utility customers will argue that their
            BPA power sales contracts--including those that predate FERC's
            Order 888 and those that followed it--do not meet the criteria
            for imposition of stranded cost charges.
        Clearly, it is not desirable to have maintenance of BPA's financial
    obligations mired in numerous and contentious legal challenges.
    2. Affordable Service
        BPA has long served as the economic engine of the Pacific
    Northwest. The availability of affordable electricity has offset the
    higher transportation costs faced by the region.
        BPA has also played a central role in promoting economic
    development throughout the region--not merely in the urban centers and
    up and down the I-5 Corridor. The extensive BPA transmission network is
    an important mechanism in ensuring that broad regional distribution.
    BPA has a specific statutory responsibility to promote the ``widest
    possible diversified use of energy'' and to ``extend the benefits of an
    integrated transmission system.'' Under this authority, rural and
    remote consumer-owned utilities typically receive service at both high
    quality and reasonable price. FPA application to BPA must not dilute
    this current responsibility.
    3. BPA Status as a Governmental Entity
        BPA is a governmental entity. As a result of BPA's ownership
    structure, several differences emerge that deserve special
    consideration:

     BPA has no shareholders receiving a rate of return that
            reflects the risk that certain costs may not be recovered in
            rates;
     If costs have been incurred, but disallowed for recovery,
            Treasury would bear exclusive risk under strict FPA
            application;
     The extensive scope of the BPA transmission system poses
            increased risk of cost shifts among customer classes through
            sudden application of a new system of ratemaking and
            accounting;
     Extensive operational mandates to achieve environmental
            objectives (such as ESA compliance for listed fish species) may
            require priority to the transmission system that would not be
            otherwise justified under the FPA.
        It is thus imperative to recognize, and to account for, BPA's
    status as a government entity in applying the Federal Power Act.
    4. Regional Decisionmaking
        The Northwest has a long and extensive history of regional input on
    BPA policies. BPA's organic statutes establish an involved regional
    public process for setting transmission rates and policies. PPC
    believes that this regional process provides important means of
    considering and reflecting regional policies and objectives. We believe
    that a continued forum for regional input is needed.
    5. Regional Transmission System Operator
        BPA has already taken steps to separate functionally its
    transmission and power marketing activities. In addition, considerable
    discussion has occurred on the future role and shape of an Independent
    System Operator (ISO) or some regional grid management organization.
    PPC recognizes that such a structure can provide a means of further
    advancing open transmission access and increasing separation between
    the merchant function of marketing power and transmission service.
    However, such a structure may also impose substantial new
    infrastructure costs, produce significant cost shifts and discriminate
    against consumers in rural areas.
        PPC is willing to discuss alternate transmission grid management
    organizations under the following initial guidelines:

     The economic benefits of the new system must exceed the costs
            of establishing and maintaining the infrastructure.
     All parties must share in the economic benefits--there should
            be no major cost shifts among users.
     Rate ``pancaking'' should be eliminated.
     The management structure must be regional, independent,
            equitable and accountable.
        PPC suggests authorizing BPA to participate in an ISO and support
    regional discussions on developing an ISO consistent with the
    guidelines outlined above. We would oppose mandating BPA participation
    in an ISO.
                        ppc transmission recommendations
        Having the BPA transmission system operate under the same ``rules
    of the road'' as other utilities is largely appropriate. However, the
    FPA must not be unconditionally applied to BPA transmission service. As
    noted above, such blind application could threaten Treasury repayment,
    undermine the financial backing of third-party bonds, cause substantial
    cost shifts between transmission customers, raise rates to rural users
    and eliminate regional decision-making.
        PPC urges the Subcommittee to be careful in applying the Federal
    Power Act to BPA. Specifically, PPC believes that any application of
    the FPA to BPA must

     Be accompanied by clear BPA cost recovery authority that
            conditional, capped and time-limited and applied on a uniform
            basis to all transmission users (discussed below).
     Apply only to BPA transmission and not allow expansion of FERC
            authority over BPA power rates.
     Include only those FPA provisions that are appropriate given
            BPA's governmental status.
     Be tailored to
    1. Not diminish or otherwise threaten BPA's ability to meet its
                financial obligations to the Treasury and third-party
                bondholders.
    2. Retain existing priority of payments as set forth in statute,
                contract and regulation.
    3. Not undermine BPA's authority to finance system improvements and
                additions.
    4. Ensure continued satisfaction of BPA's statutory obligations to
                provide transmission and power services to consumers
                throughout the region.
    5. Prevent or mitigate unreasonable cost increases and cost shifts.
    6. Preserve opportunities for regional input and BPA Administrator
                discretion in formulating BPA's transmission rates, terms,
                conditions and policies.
        Mr. Chairman, you will hear from some of the witnesses today that
    FERC has discretion to accommodate the points noted above. I agree that
    many of these concerns fall within FERC's discretion; however, I
    believe they are sufficiently important not to be left in doubt. We are
    not seeking policy outcomes inconsistent with FERC's general approach,
    we are merely asking for some needed assurances.
                            cost recovery mechanism
        BPA's financial outlook appears positive at this time. PPC
    recognizes that it may nevertheless be necessary to develop a
    contingent mechanism to assure ongoing satisfaction of BPA's financial
    obligations.
        As noted above, absent clear congressional direction--particularly
    with strict application of the FPA--the cost recovery options available
    to BPA may be legally limited (and severely inequitable). Consequently,
    we believe that BPA must be granted express authority to impose a
    uniform transmission surcharge when needed to meet its financial
    obligations. This authority must be contingent, time-limited and, and
    capped. Specifically, the mechanism must

     Be triggered only by actual--not projected--financial
            shortfalls;
     Include annual ($50 million) and lifetime ($400 million) caps;
     Require that BPA take appropriate and significant steps before
            implementing it;
     Recover only the costs that pre-date enactment of the
            mechanism; and
     Be imposed on a uniform basis applicable to all transmission
            users.
        Other regional witnesses will oppose application of a uniform
    transmission charge, or urge the subcommittee to leave design of the
    mechanism to FERC. PPC strongly disagrees and notes that

     BPA is a regional resource--and all parties in the region have
            benefited from BPA's presence in a variety of ways (including
            requirements power sales, regional preference to surplus energy
            sales, residential exchange cash subsidies, transmission
            development and use, and operational coordination). Therefore,
            it is appropriate for all regional beneficiaries to share the
            burden of any BPA cash-flow problem.
     Any cash-flow problem is likely to result from an inability to
            cover costs associated with historic power supply decisions--
            decisions that benefited all parties in the region.
     A uniform transmission charge provides the greatest ease of
            administration, fewest opportunities to unfairly ``escape''
            financial responsibility and least distortion of the wholesale
            power market.
        Leaving the matter to FERC casts doubt on BPA's ability to take
    needed steps to satisfy its financial responsibilities. Congress must
    clearly articulate the contingent cost-recovery mechanism.
                                   conclusion
        I appreciate the opportunity to testify today--and appreciate the
    difficult task you have in both encouraging consistent transmission
    regulation while respecting regional differences, history and policy
    priorities. I believe the policies articulated in my statement provide
    the right balance.
        I am pleased that the members of the Northwest congressional
    delegation recognize the seriousness of these issues and have
    themselves devoted considerable time toward crafting balanced,
    consensus legislation. I urge the members of the subcommittee to work
    closely with the Northwest delegation on these critical issues.

        Mr. Barton. Now, I would like to hear from Mr. Litchfield.
    Your statement is in the record. We would ask that you
    summarize it in 5 minutes.

                      STATEMENT OF JAMES LITCHFIELD

        Mr. Litchfield. Thank you, Mr. Chairman and members of the
    subcommittee. My name is Jim Litchfield. I am appearing here
    today at the direction----
        Mr. Barton. Can you pull the microphone a little bit
    closer, and speak loudly.
        Mr. Litchfield. Okay. Mr. Chairman, I am appearing today at
    the direction of seven investor-owned utilities that serve 60
    percent of the region's residential, agricultural, and
    industrial customers in the Pacific Northwest.
        My testimony will address the Bonneville Power
    Administration and the need for legislation defining its role
    in developing competitive power markets. BPA is not just
    another player the Pacific Northwest electric power industry.
    It is a player that dwarfs all others. Bonneville controls
    power sales from almost 50 percent of the regions electrical
    generating capability. It owns and operates almost 80 percent
    of the region's high-voltage transmission capacity.
        Because of BPA's dominant position, the 1996 Regional
    Review, convened by four Northwest Governors, recommended
    legislation to subject Bonneville's transmission to FERC
    regulation equivalent to investor-owned utilities. We concur.
    Some may question giving FERC more authority over BPA during an
    era when Congress is relying less on regulation and more on
    competition. However, transmission remains a monopoly service
    that must be regulated in order to achieve competitive power
    markets.
        Today, BPA is a self-regulating transmission monopolist.
    Absent meaningful regulation, BPA can inappropriately limit its
    competitors' access to buyers on Bonneville's transmission
    highway, thereby gaining an unfair competitive advantage in the
    wholesale power market. Thus, FERC regulation under the Federal
    Power Act of BPA transmission is a necessary prerequisite to
    development of competitive power markets.
        We urge this subcommittee to incorporate two key principles
    in Federal Power Act legislation. First, Bonneville's
    transmission rates, terms, and conditions must be subject to
    Federal Power Act regulation by FERC, including application of
    the just and reasonable standard, as it is applied to investor-
    owned utilities. This is necessary to prevent manipulation of
    transmission to frustrate power marketers.
        Second, any BPA power cost recovery provisions must not
    create impediments to the development of competitive wholesale
    power markets; nor should such provisions unfairly assign power
    costs to those in the region that do not benefit from
    Bonneville's low-cost power. Effective legislation would give
    FERC authority to prevent abuses and to ensure fair and open
    access to transmission capability. However, it is impossible to
    expect a fully competitive wholesale power market to develop,
    if BPA legislation is so riddled with exceptions as to make
    FERC regulation illusory and ineffective. The administration's
    bill would enact virtually meaningless FERC regulation of BPA.
        Let me turn to two other questions posed by the committee.
    First, how to assure that the Federal electric utilities
    recover their costs; and a related question: whether there is a
    need to address stranded costs in legislation.
        First, those BPA customers who have the claim to buy power
    at cost, when that cost is below market, have a symmetrical
    obligation to agree to pay cost, if it ever goes above market.
    This principle of aligning the risks and rewards of the Federal
    hydropower system in the Northwest was the basis of the
    Northwest Governors' regional review recommendations.
        There is also no need to address stranded costs in
    legislation, because BPA does not have stranded, historic costs
    in the type defined by FERC in Order 888. Instead, advocates of
    a special recovery provision, such as those included in the
    administration's bill, want to ensure recovery of future,
    rather than past, costs associated with Federal generation.
    Investor-owned utilities oppose special legislation to address
    recovery of potential future costs for BPA, because it is
    unfair and unnecessary. A transmission surcharge would force
    Bonneville's transmission customers to pay a portion of
    Bonneville's generation-related costs, even if they derive no
    benefit from Federal power. This would unfairly shift BPA's
    power costs to our customers, who get little or no benefit.
        It is important for the subcommittee to understand that the
    benefits of low-cost Federal power are not spread equally
    throughout the region, or among retail customer classes. We
    serve more than half of the region's residential customers, but
    our residential customers will only get approximately 20
    percent of the benefits of the Federal system, under the BPA
    subscription plan.
        Thank you very much for your time today. I would be happy
    to answer any questions you may have.
        [The prepared statement of James Litchfield follows:]
         Prepared Statement of James Litchfield, President, Litchfield
     Consulting Group, Inc., on Behalf of the Investor-owned Utilities of
                                 the Northwest
        Mr. Chairman, Members of the Subcommittee: My name is James
    Litchfield, I am President of the Litchfield Consulting Group, Inc. I
    appreciate the opportunity to appear here today representing the
    investor-owned utilities of the Northwest (Investor-owned Utilities).
    These companies include Avista Corporation, Idaho Power Company, The
    Montana Power Company, PacifiCorp, Portland General Electric Company (a
    subsidiary of Enron Corporation), Puget Sound Energy, Inc., and Sierra
    Pacific Resources. We are seven companies that serve the majority--or
    60%--of the region's customers. Most of the remaining retail customers
    are served by public utilities and cooperatives that purchase low-cost
    federal power from the Bonneville Power Administration (Bonneville or
    BPA). The Investor-owned Utilities are also major transmission
    customers of Bonneville.
        Issues surrounding Power Marketing Administrations (PMAs), and BPA
    in particular, will greatly impact the extent to which real competition
    in the wholesale power market can be achieved in the Northwest. We
    commend you for holding this hearing on this important topic. The
    Investor-owned Utilities have been working within the Northwest region
    with the other parties represented here today to try to reach consensus
    on some of these issues, and we look forward to continuing to work with
    you and with the Northwest Congressional delegation as legislation is
    considered this year. I will summarize our thoughts on some of the
    major issues, but would request that my full statement be placed into
    the record. I will also explain our companies' concern that actions BPA
    is now taking may make any Congressional reform ``academic'' for years
    to come.
        By way of background, it is useful to know that, for those of us in
    the Pacific Northwest, BPA is not just another player in our regional
    electricity industry; it is a player that dwarfs all others. Bonneville
    markets about 10,000 average megawatts of low-cost Federal power,
    including 2,000 average megawatts in the open wholesale market at
    negotiated prices. Ten thousand megawatts is enough power to serve all
    the region's residences. These Bonneville wholesale power sales
    directly compete with other utilities' and power marketers' sales
    efforts in the western US and Canada. In fact, Bonneville controls
    power sales from almost 50% of the region's generation. Moreover,
    Bonneville controls almost 80% of the region's high voltage
    transmission capacity which is not meaningfully regulated. BPA's
    dominant position in both the power and transmission provides
    Bonneville with the unique opportunity to distort or prevent the
    development of a robust Northwest competitive wholesale electric power
    market. For this reason, the 1996 Comprehensive Review of the Northwest
    Energy System (``Regional Review''), convened by the four Northwest
    Governors, recommended ``. . . legislation . . . [to] subject
    Bonneville's transmission to FERC regulation that is equivalent to FERC
    regulation of investor-owned utilities.''
        FERC Chairman Hoecker emphasized in his recent testimony before
    this Subcommittee that placing all transmission facilities in the Lower
    48 states within FERC's open access transmission rules is a
    prerequisite to development of a robust competitive wholesale power
    market. Consistent with that, we believe two principles are especially
    important:

     First, Bonneville's transmission rates, terms and conditions
            must be subject to Federal Power Act regulation by FERC. This
            is necessary--in Chairman Hoecker's words--``to prevent
            manipulations of the operation of transmission to frustrate
            power marketing competitors.''
     Second, any BPA power cost recovery provisions must not create
            impediments to the development of competitive wholesale power
            markets, nor assign power costs to those in the region not
            benefitting equally with others from Bonneville's low-cost
            power. This is essential since BPA's subscription plan for
            allocating the benefits of low-cost Federal power after 2001
            severely limits benefits to our residential customers and
            provides no benefits at all for our business customers.
        We urge this Subcommittee to incorporate these key principles in
    legislation.
        We recognize that some may question giving FERC more authority over
    BPA, during an era when Congress is relying less on regulation and more
    on competition. Therefore, it is worth pointing out that FERC
    regulation of BPA transmissions is fully consistent with the goal of
    greater reliance upon competition in wholesale power or retail
    electricity markets. There remains broad agreement that transmission is
    a monopoly service that must be regulated in order to achieve
    competitive power markets. Today BPA is a ``self-regulating
    transmission monopolist'' that can use its largely unrestrained
    monopoly position to gain an unfair competitive advantage in the
    wholesale power market. Thus FERC Federal Power Act regulation of BPA
    transmission is consistent with the objective of relying on competition
    in either wholesale power or retail electricity markets.
    BPA Transmission Rates, Terms, and Conditions Should be Regulated Under
            the Federal Power Act.
        Let me address Federal Power Act regulation of Bonneville first. In
    recent years discussion has focused on placing Bonneville's
    transmission, but not its power marketing, under FERC regulation
    equivalent to that exercised over the Investor-owned Utilities. Absent
    such regulation, BPA will be able to distort the development of
    competitive markets by inappropriately limiting its competitors' access
    to buyers on Bonneville's transmission highway. Given Bonneville's
    dominance in the region's transmission and power markets, preventing
    such anti-competitive activity is particularly important to our
    companies.
        The transmission provisions of the Federal Power Act are the basis
    of FERC's ``open access'' policy and the resulting regulation of
    transmission access and pricing to facilitate competitive wholesale
    electric markets. A key principle of this policy, which was enacted
    into law by the Energy Policy Act of 1992 and is implemented by the
    Federal Energy Regulatory Commission's Orders 888 and 889, is
    ``comparability''; that is, ensuring all wholesale electric power
    marketers have transmission access and pricing comparable to that which
    a transmission owner provides itself.
        Through section 212(I) of the Federal Power Act, Bonneville is
    uniquely exempt from these provisions. While the agency has voluntarily
    agreed to comply with the orders in principle, two key regulatory
    elements are missing--(1) oversight and enforcement of BPA's compliance
    with Orders 888 and 881 by FERC, the agency that ensures compliance by
    most other transmission owners; and (2) independent review by FERC of
    BPA's transmission rates, together with review of its tariff terms and
    conditions. Given that BPA owns and operates 80 percent of the
    transmission in the Pacific Northwest, this unique exemption leaves a
    large gap in FERC's ability to facilitate the competitive wholesale
    power market in the Pacific Northwest.
        Effective legislation should give FERC full authority under the
    Federal Power Act to regulate a Bonneville transmission entity that is
    truly functionally separate from its power business. This would give
    FERC the necessary authority and expertise to prevent abuses and to
    ensure fair and open access to transmission capability. Bringing BPA's
    transmission business under true Federal Power Act regulation should
    assure a level playing field among BPA and all other competitors, thus
    providing the lowest possible prices to consumers.
        However, it is impossible to expect a fully competitive wholesale
    power market to develop in the Northwest if legislation subjecting
    Bonneville to Federal Power Act standards is so riddled with exceptions
    as to make FERC regulation illusory and ineffective. For example, the
    BPA proposal contained in the Administration's bill purports to subject
    Bonneville to the ``just and reasonable'' standard of the Federal Power
    Act. In reality, the exceptions contained in the bill would make FERC
    regulation virtually meaningless.
    The BPA Subtitle of the Administration's Bill Contains Unacceptable
            Exceptions to the ``Just and Reasonable'' Standards of the
            Federal Power Act.
        Section 812 of the bill purports to make BPA transmission subject
    to the Federal Power Act. However, the proposed Section 201A(b)(1) of
    the Federal Power Act is so riddled with exceptions to the Federal
    Power Act's ``just and reasonable'' rate making standard as to totally
    undermine any benefit of BPA being regulated under the Act. In
    addition, many of these exceptions are unnecessary, overlapping and
    will lead to confusing legal interpretations. The following are the
    three most troublesome exceptions.
        The Benefits of Applying the Federal Power Act to BPA are Lost if
    BPA can Escape Regulation Based on the ``Other Laws'' Exception:
    Section 201(b)(1)(C) would make an exception to the ``just and
    reasonable'' standard for compliance with the requirements of other
    laws applicable to the Bonneville Administrator. If the drafters intend
    simply to interpret to the extent possible the Federal Power Act and
    other statutes applicable to BPA in a harmonious fashion, this
    provision is unnecessary. Under accepted rules of statutory
    construction, laws are construed in a harmonious fashion.
        The Courts could construe this provision to require that FERC's
    historic or contemporary construction of the just and reasonable
    standard be altered to give effect to all other existing and future
    statutes governing Bonneville. Moreover, this provision could be used
    to completely undermine meaningful Federal Power Act regulation. If
    Bonneville is successful, the result would be the application of
    regulatory standards to BPA totally unlike those applied to the
    Investor-owned Utilities.
        The Ninth Circuit Court of Appeals has broadly construed BPA's
    authority under those ``other laws.'' Bonneville would argue that FERC
    would be required to find nearly any BPA action ``just and
    reasonable.'' See, for example, the 9th Circuit's 1997 decision in
    Association of Public Agency Customers v. BPA, 126 F.3d 1158, 1175:
    ``We are not to debate the wisdom of any BPA business decision unless
    the decision is so manifestly unreasonable as to rise to the level of
    being arbitrary and capricious.'' So, unless a BPA action or decision
    was ``so manifestly unreasonable as to rise to the level of being
    arbitrary and capricious'' Sec. 201(A)(b)(1)(C) could require FERC to
    find BPAs conduct to be ``just, reasonable, not unduly discriminatory
    or preferential.'' Under the Federal Power Act, FERC is typically the
    agency granted deference to apply the Federal Power Act ``just and
    reasonable standard.'' FERC simply cannot assure equivalent regulation
    of BPA absent deference to construe the Federal Power Act as it applies
    to Bonneville.
        The BPA Rate making Standards Should not be Diluted by
    Bootstrapping Specific Rate Making Approaches into the Law: Section
    201A(b)(1) (D) would require transmission rates to be set according to
    the same standards found in BPA's organic statutes including the
    Northwest Power Act with one exception which I will discuss later.
    Specifically, BPA's rates must now ensure recovery of transmission
    investments over a reasonable number of years and produce revenues
    necessary to assure timely payment of all transmission costs.
    Application of the ``just and reasonable'' standard of investment would
    already assure recovery of transmission costs and render this provision
    unnecessary. If enacted, BPA or others will argue that this provision
    requires FERC to apply Bonneville's historic rate making methodology to
    BPA (and even allow BPA to include speculative future investments in
    its rates), rather than permitting FERC to apply any other methodology
    to recover costs that the Commission may deem more appropriate. The
    addition of the proposed rate making standards would only lead to years
    of litigation as to how the two standards should be interpreted
    together. The one exception to BPA's organic rate making standards is
    that 201A(b)(1) (D) would also provide for recovery of undefined
    ``future Federal investment in the Bonneville Transmission System . .
    .'' This exception gives BPA license to make imprudent future
    transmission investments and charge ratepayers without any regulatory
    review. This provision is troublesome and would exempt BPA from the
    ``prudency requirement'' for inclusion of transmission costs in rates.
    Such an approach does not result in equivalent FERC regulation for BPA.
        An Exception to the Transmission Rules for the Fish Mitigation is
    Not Necessary and Provides a Distinct Competitive Advantage to BPA:
    Section 813 of the bill would create an exception to Order No. 888 to
    assure transmission access for fish mitigation efforts. This provision
    is anti-competitive and unnecessary. Proposed Section 201A(b)(1) (E)
    directs FERC to establish rules to assure transmission access over the
    BPA system ``for hydroelectric power that must be generated and
    transmitted at a particular time in order to reduce spill and levels of
    dissolved nitrogen gas harmful to fish.''
        This provision appears to be competitively neutral because it
    allows power generated at all hydroelectric dams, not just federal
    dams, access to the BPA transmission system. But this provision is not
    neutral because of two other factors. First, the provision only
    provides access to the BPA transmission system, not the portion of the
    Northwest transmission system that is nonfederal. Because all of the
    federal dams are directly connected to the BPA transmission system,
    Bonneville will always benefit from this provision, while some
    nonfederal dams that need access to nonfederal transmission facilities
    will not have the benefit of this provision.
        Second, with this provision in place, BPA would be able to market
    its hydropower as enjoying more reliable transmission access than
    either the hydropower or thermal products offered by nonfederal
    entities. That is a competitive advantage.
        Instead, the Investor-owned Utilities propose that BPA use the
    market to solve this problem. For decades, BPA has marketed its
    hydropower during peak Spring flows by pricing it just below the market
    price of thermal power. Similarly, when transmission capacity is fully
    subscribed and BPA needs to generate instead of spill in order to
    protect fish, BPA should offer that electricity to Bonneville's
    scheduled transmission customers at a competitive price. By doing so,
    the transmission users will purchase BPA's hydropower and displace
    their other energy sources. BPA agreed to use this approach for fish
    during discussions regarding regional transmission organization, and it
    is the right answer.
        Moreover, the Commission has created a pervasive regulatory scheme
    over transmission access in Order No. 888. If the market solution is
    inadequate, FERC has available authority to fashion a ``just and
    reasonable'' proposal for special transmission access for fish
    mitigation. In fact, FERC has already invited Bonneville to work with
    Northwest parties to evaluate the need for special transmission access
    for fish mitigation and make a regional proposal for FERC's
    consideration. Consequently, the resolution of any unanticipated
    problem should be left to FERC.
        If Congress determines that FERC lacks sufficient authority to
    address environmental concerns such as fish mitigation through existing
    regulatory authority, the Investor-owned Utilities urge Congress to
    give FERC authority to determine the just, reasonable and not unduly
    discriminatory preferential scheme for access for fish mitigation to
    all the region's hydro systems. Any exception to open access rules
    should provide equivalent FERC regulation of BPA and others under rules
    of general applicability that provide for appropriate compensation and
    prevent the appropriation of a competitor's markets.
        The Phase-In Exceptions Are Not Necessary: In addition to the
    problematic provisions I have just discussed, the BPA proposal in the
    Administration's bill contains other unnecessary and potentially
    anticompetitive provisions. Proposed Section 201(b)(1)(A) would
    legislatively authorize FERC to phase-in changes to BPA's transmission
    rates. Proposed Section 201(b)(1)(B) would allow the FERC to
    ``mitigate'' ``unreasonable adverse impacts'' on remote transmission
    customers resulting from a change in historic treatment of costs to
    acquire transmission to serve those customers.
        While the Investor-owned Utilities recognize the concerns of rural
    customers and existing transmission customers, there is no need for
    these provisions. The FERC is already authorized to consider and
    mitigate ``rate shock'' pursuant to the ``just and reasonable'' rate
    making standard. There is no need to put extra emphasis on phasing-in
    rates or mitigation for BPA. Further the Section 201(b)(1)(B)
    mitigation overlaps with the phase-in required in Section 201(b)(1)(A).
    The Investor-owned Utilities believe that report language would be
    sufficient to clarify that phase-ins are already within the FERC's
    authority.
        In summary, the Administration's bill does not implement the
    recommendation of the Northwest Governors' Regional Review that
    legislation should ``subject Bonneville's transmission to FERC
    regulation that is equivalent to FERC regulation of investor-owned
    utilities.''
    FERC Should be Given Additional Regulatory Authority Over BPA.
        Other provisions are also needed to ensure meaningful regulation of
    BPA because it is not subject to antitrust laws. FERC must be given
    authority to take action against any anti-competitive conduct by
    Bonneville. The Northwest Governors' Regional Review recommended that
    any form of power not subscribed under long-term contracts and other
    unbundled power products ``be sold at prices regulated by FERC or at
    competitive prices, where FERC determines that competitive markets
    exist.'' The current legislative proposals do not subject BPA's power
    rates to FERC regulation. At a minimum, some regulation to prevent
    anticompetitive effects of BPA power marketing is necessary. There is
    no principled reason to give a federal power marketer license to
    compete unfairly with private businesses. Inexplicably, the
    Administration's bill proposes to subject TVA to the nation's antitrust
    laws, but fails to propose any prohibition on anticompetitive conduct
    by BPA.
        In addition, legislation should include provisions to remove any
    impediments to Bonneville's transmission becoming part of a regional
    transmission organization. Congress's role should not be one that
    mandates any regional transmission organization, but rather one of
    removing impediments to the voluntary formation of regional
    transmission organizations. First, the Congress should pass legislation
    that harmonizes federal regulation of Bonneville's transmission system
    with that of the Investor-owned Utilities--the other major transmission
    operators in the region. Second, legislation should clarify that BPA
    may join any regional transmission organization with FERC approval and
    may fully participate in and be bound by any dispute resolution
    mechanism (such as arbitration) adopted by such an organization.
    Additionally Congress should eliminate some of the impediments to
    Investor-owned Utilities participation in an independent transmission
    organization (i.e., tax treatment of asset spin-offs and lack of
    incentive rate making authority).
        We trust this Subcommittee's bill will provide for true Federal
    Power Act jurisdiction over Bonneville's transmission by eliminating
    unnecessary exceptions to the ``just and reasonable'' standard and
    provide FERC adequate authority to oversee BPA's competitive conduct.
    In short, FERC regulation of Bonneville's transmission that is
    equivalent to regulation of Investor-owned Utilities transmission is
    public-interest protection against the abuse of monopoly power and will
    accelerate development of a robust competitive wholesale market in the
    Northwest.
    Full Recovery of Bonneville's Costs Should Balance the Risks with the
            Rewards of the Federal Hydrosystem.
        Clearly, those BPA customers in the Northwest who benefit from
    Federal power must accept responsibility for paying its full costs.
    None of those costs should be shifted to the nation's taxpayers nor to
    those in the region who do not share equally in the benefits of the
    low-cost Federal power. Those who have the special claim to buy the
    power at cost when that cost is below market have a symmetrical
    obligation to pay the cost if it ever goes above market.
        Happily, a series of long-term analyses conducted by the Northwest
    Power Planning Council concluded few, if any, BPA power cost scenarios
    would result in above-market costs. If well managed, Bonneville can
    continue to sell power at cost-based rates that are below anticipated
    market prices for the next 20 years. Thus, it appears no contingent
    cost recovery policy for above-market costs is necessary.
        This said, the Investor-owned Utilities oppose special legislation
    to address recovery of potential future costs for BPA because it is
    unfair and not necessary.
        It is generally understood that BPA does not have stranded historic
    costs of the type defined by FERC Order 888. These stranded costs
    generally fall into the category of past utility investments that were
    prudently incurred under a regulatory regime to serve the customers on
    an ongoing basis. As the rules of service change from a regulated
    monopoly environment to market competition, FERC policy has recognized
    that utilities should be made whole for any stranded costs, if
    necessary by surcharging transmission rates of the customers for whom
    historic long-term prudent investments were made. FERC has the
    authority under the Federal Power Act ``just and reasonable'' standard
    to address such stranded costs.
        Although BPA has substantial costs--none of which were incurred on
    behalf of Investor-owned Utilities--related to net billing of bonds for
    the terminated nuclear plants of the Washington Public Power Supply
    System (WPPSS), it appears that BPA will be able to pay those bonds by
    about 2011 while selling power at or below market. Consequently, it
    does not face problems recovering the historic investments that were
    incurred to provide electric power to its wholesale customers. Instead,
    legislative proposals to assure Bonneville's transition cost recovery
    are aimed at ensuring recovery of future, rather than past, costs
    associated with federal generation projects.
        From this unique desire to indemnify Bonneville against future cost
    exposures has come proposals that support generally-applicable
    transmission surcharges on Bonneville's transmission system as a
    revenue source to recover generation-related costs. Bonneville and its
    public utility customers have proposed that all those using BPA
    transmission should pay higher rates to pay for BPA power costs in the
    event such costs are ever forecast to exceed Bonneville's power
    revenues. They would apply a surcharge to all transmission users
    without requiring BPA first to raise its rates to recover all its power
    costs, even if BPA's price for power is below the market price.
        Generally-applicable transmission surcharges to recover future BPA
    generation-related costs are troubling for two reasons: First, allowing
    Bonneville to move generation-related costs to transmission will reduce
    pressure on BPA to manage its generation-related costs. Second, it
    would force Bonneville's transmission customers to pay a portion of
    Bonneville's generation-related costs--even if they derive no benefits
    from federal power. That, in turn, would shift BPA power costs from
    those in the region who benefit the most from BPA power to our
    customers who get little or no benefit. Furthermore, Bonneville's
    transmission customers may also be Bonneville's competitors in the
    wholesale power market. Forcing these transmission customers to pay
    Bonneville's generation-related costs would have the totally
    unacceptable result of forcing one power sales competitor to pay the
    power costs of another competitor, improving the latter's
    (Bonneville's) competitive position. FERC would never permit Investor-
    owned Utilities to shift power costs to their competitors in this
    fashion.
        Let me reiterate this point: Bonneville, a government player in the
    competitive market, should not be able to shift power costs to its
    competitors through a transmission surcharge. At the same time, our
    companies are not allowed to shift unrecovered power costs to our
    transmission customers generally because of Federal Power Act
    standards. We find it hard to understand why anyone would seriously
    entertain such a proposal. Some advocates of the transmission surcharge
    have argued that the surcharge is justified because BPA benefits the
    entire Northwest region. Therefore, before I leave this topic, I want
    to be certain the Subcommittee understands that the benefits of low-
    cost Federal power are not spread equally throughout the region or
    among retail customer classes. As I noted earlier, we serve 60% of the
    region's residential customers but our residential customers will get
    little more than 20% of the benefits of the Federal power under BPA's
    subscription plan. And our industrial and commercial customers get no
    low-cost firm BPA power at all.
        To the extent that Bonneville has unrecovered generation-related
    transition costs, the Investor-owned Utilities have proposed
    authorizing the FERC to devise targeted (as opposed to generally-
    applicable) transmission surcharges to recover costs from departing
    customers. We believe FERC has adequate statutory authority to impose
    such a surcharge, if needed. This protection, along with other
    provisions such as loans if necessary between BPA's transmission and
    generation functions, should provide ample protection to meet either
    past stranded or future environmental costs. For future environmental
    cost recovery, the Investor-owned Utilities propose BPA and the
    Investor-owned Utilities themselves be treated comparably. Thus, if
    Congress determines that Bonneville should be able to tax transmission
    service to pay future environmental costs, FERC should be authorized to
    devise equivalent surcharges by other transmission owners to pay for
    their comparable costs.
        Section 813, the cost recovery provision of the Administration
    bill, in contrast, grants BPA broad discretion to propose a
    transmission surcharge as a power-cost-recovery mechanism and requires
    FERC to establish BPA's surcharge proposal without providing for
    meaningful FERC review. For this and other reasons the BPA proposal in
    the Administration bill is unacceptable to us.
    BPA's Authority Should Not Be Extended to Retail Sales.
        BPA should not have any expanded authority to make retail power
    sales and should continue to be limited to wholesale power sales. The
    Northwest Governors' Regional Review considered this question and
    concluded that Bonneville should ``not sell directly to new retail
    loads, beyond the existing direct service industry loads, though it may
    sell through intermediaries whose transactions would be subject to
    state or local jurisdiction.''
    BPA's Subscription Contracts and Rate Case Determinations Should Not Be
            Allowed to Effectively Preempt Legislative Change for Years to
            Come.
        Before I close, let me mention one more significant concern of our
    companies. While Congress debates the appropriate scope and content of
    legislation affecting BPA, Bonneville is offering new power contracts
    for sale of power at ``cost-based'' rates based on a forecast on power
    costs. The duration of these contracts, all effective in 2001, is
    expected to be from three to twenty years. However, based on
    Bonneville's subscription plan, the contracts will not include cost-
    recovery clauses that make power customers responsible for all
    generation-related costs if BPA's fish mitigation or other power costs
    increase. These contracts should require power purchasers to agree to
    pay all of BPA's power-related costs-with subscription power offered
    first to those willing to take longer term contracts. The basic
    ``deal'' envisioned in the Northwest Governors' Regional Review
    recommendations was that customers should agree to pay all of BPA's
    power-related costs in order to maintain the regional benefits of
    Bonneville power sold at cost-based rates. This is a basic fairness
    principle where those that want the benefits of BPA power sold at cost-
    based rates--which are expected to be below competitive power market
    prices--should agree to pay exactly that, all of BPA's power costs.
        Additionally, BPA plans to complete a Wholesale Power Rate case
    during 1999 to set power rates effective for the five-year period from
    October 2001 through October 2006. BPA also plans to complete its
    transmission rate case before October 2001. If Congress passes
    legislation applicable to BPA rates set after 2001, such legislation
    may not apply until rates are set for the period after October 2006.
    During the intervening years, FERC may be unable to correct any power
    costs incorrectly functionalized to transmission, or, worse, exercise
    any new Federal Power Act authority to review BPA rates.
        Congress should act now to ensure that Bonneville does not preempt
    Federal Power Act regulation through contracts. Moreover, any
    legislation subjecting BPA to Federal Power Act regulation should apply
    to any rates charged by BPA for the period commencing October 2001,
    regardless of when such rates were set.
        We appreciate this opportunity to contribute to this very important
    legislative process. As you are aware, national electric power
    restructuring legislation is critical to the Northwest due to the
    large, dominant presence of the Federal government in both competitive
    wholesale electric power markets and in the highways of electric power
    commerce, the majority of the region's transmission grid.
        Thank you very much for your time today. I would be happy to answer
    any questions that you may have.

        Mr. Barton. Thank you, Mr. Litchfield.
        We would now like to hear from John Amos. Your statement,
    again, is in the record in its entirety. We ask that you
    summarize it in 5 minutes.

                         STATEMENT OF JOHN AMOS

        Mr. Amos. Thank you. The Northwest is home to nearly one-
    half of the U.S. primary aluminum smelting capacity. Bonneville
    Power Administration has been instrumental in establishing and
    sustaining the Northwest aluminum industry. The ten Northwest
    smelters provide, directly and indirectly, about 30,000 jobs.
    Aluminum production cannot exist without a large, reliable and
    low-cost source of power. Electricity can, sometimes, approach
    one-third of our production costs.
        When I joined Reynolds in 1973 we had seven U.S. smelters.
    We are now down to three. Rising power costs made casualties of
    the other four, all in the early to mid-1980's. Two of those
    plants, one in Alabama and one in Arkansas, were lost--along
    with several thousand jobs--when Federal PMAs ceased to
    allocate hydropower to us.
        Bonneville encouraged the rapid development of a Northwest-
    based aluminum industry in the early 1940's, and again in the
    early 1950's. The aluminum industry has, essentially, paid the
    mortgage on the BPA system. This has clearly benefited the
    public power utilities. Since the 1980 legislation, it has also
    benefited the residential customers of investor-owned
    utilities. In fact, BPA may well not have survived the post-
    World War II period if the aluminum companies had not
    successfully made the tough transition from war-to peace-time
    production.
        In 1995, BPA was in trouble as competitive power suppliers
    and marketers came in and offered the promise of rates better
    than those being offered by the BPA. Our company, in
    particular, signed a new contract with Bonneville for 100
    percent of our requirements, for the period 1996-2001, thus
    continuing a relationship that we have had with Bonneville for
    over 57 years. Most of the other aluminum companies also
    followed suit for the majority of their loads.
        All of that history of mutual benefit and partnership
    notwithstanding, BPA is currently casting a great deal of
    uncertainty on the Northwest aluminum industry that it
    essentially helped create. In developing its sales policy for
    the year 2001, and beyond, it has essentially told the aluminum
    industry that we are last in line; and has indicated to us that
    there would be little, if any, power for us. When our industry
    objected they did recraft their position slightly, but have not
    made any significant progress, in our view.
        Bonneville was apparently persuaded by some of its public
    power and IOU residential customer groups that Federal power
    had become too precious to share with the direct service
    industries. In doing this, it is shrinking the pool of
    customers. The unlucky cast-offs are some of its oldest and--in
    the case of Reynolds--largest customers. We have paid
    Bonneville over $2 billion since the early 1940's.
        We think Bonneville's long-range future relies in serving
    the needs of existing multiple customer groups. It should not
    be competing with private power for new loads. It should be
    dedicated to serving its historical, regional loads, first. It
    should not be giving priority to selling surplus hydro out of
    the region, at least not until after the requirements of its
    historical customers have been met. Additional surplus--and in
    years of high water there is substantial surplus--can be sold
    out of the region to the wholesale markets.
        Regarding transmission policy, BPA transmission rates must
    be based on actual transmission costs. Power supply cost
    overruns, and the unlikely event that there are any, should not
    be allowed to migrate over to the transmission side, as some
    have suggested. Labeling those costs as ``stranded costs'' does
    not strengthen the case for such wire charges. The other
    utilities in the country regulated by the FERC cannot use their
    transmission systems, which are monopolies, to collect
    subsidies for their generation business. We should not be
    carving out an exception for the PMAs. Their generation
    business must be free-standing if it is to continue at all.
        While protecting the Federal taxpayer is a legitimate
    objective, that can be done through contractual mechanisms
    negotiated with the beneficiaries of PMA-sold power.
    Bonneville, in fact, has a healthy contingency adjustment built
    into its next rate case for power sales. Having the additional
    ability to reach to the transmission system, as the
    administration's bill proposes, to collect dollars for non-
    transmission purposes from those who don't--and probably
    cannot--buy BPA hydro, is simply going too far.
        Moreover, in the next decade, some of Bonneville's heaviest
    debt obligations will begin to retire. It should be an ever
    better bargain. We don't think that the generation side needs a
    helping hand from the transmission service customers.
        We appreciate the opportunity to be here--and the
    invitation. We would be happy to answer any questions.
        [The prepared statement of John Amos follows:]
    Prepared Statement of John R. Amos, General Manager, Energy & Hedging,
                            Reynolds Metals Company
        My name is John Amos. I am General Manager for Energy at Reynolds
    Metals Company, which is headquartered in Richmond, Virginia. Although
    we are perhaps best known in the kitchens of America as the makers of
    Reynolds Wrap aluminum foil, our company is the third-largest producer
    of primary aluminum in the world, behind only the Canadian company
    ALCAN and the U.S.-based ALCOA. As this ``Top 3'' list would suggest,
    the U.S. and North America are home to a substantial portion of the
    world aluminum industry, providing 143,000 family-wage jobs in the U.S.
    alone, including both primary and fabrication plants.
        Importantly--for reasons I'll get to in a moment--the Pacific
    Northwest is home to nearly one-half of the U.S. primary smelting
    capacity. A single PMA--Bonneville Power Administration--has been
    absolutely instrumental in establishing and sustaining the Northwest
    aluminum industry. The 10 Northwest smelters, incidentally, are the
    only smelters in the Western half of the U.S., where much of our
    commercial and military aircraft industry--major consumers of
    aluminum--is concentrated. The Northwest smelters provide about 10,000
    direct jobs and an estimated 30,000 or more indirect jobs.
        Aluminum production, as you probably know, cannot exist without a
    large, reliable, and low-cost source of power. Electricity can be as
    much as one-third of our production cost. With economical power, you
    can compete and justify capital investments virtually anywhere in the
    world--even in North America where other costs, such as labor and
    environmental compliance, are high compared to some of our offshore
    competition.
        When I joined Reynolds in 1973, we had 7 U.S. smelters. We are now
    down to three. Rising power costs made casualties of the other four,
    all in the early to mid-80's. Two of those plants--one in Alabama, and
    one in Arkansas--were lost after Federal PMAs ceased to allocate
    hydropower to us. TVA expanded heavily into coal and nuclear
    production, and the costs of those projects eventually made our Alabama
    smelter uneconomical. And a Reynolds smelter in Arkansas dependant on
    hydropower from the Southwestern Power Administration had to close
    after the agency refused to extend a critical contract. Thousands of
    employees lost their jobs as a result of these PMA actions. The
    economic impact on the communities involved was devastating.
        Reynolds' three U.S. smelters today are in New York--where we buy
    hydropower from a state PMA (The New York Power Authority)--and in
    Oregon and Washington. The two Northwest smelters buy their power
    entirely from BPA, and always have over their nearly 60-year histories.
    BPA has historically maintained a dual mission of meeting rural
    electricity needs and acting as an economic development engine, largely
    for rural communities with limited industry. Bonneville has
    particularly encouraged the rapid development of a Northwest-based
    aluminum industry during times of war--in the early 40's and again in
    the early 50s--when aluminum needs are obvious. In this way, the
    aluminum industry has paid the mortgage on a large part of the BPA
    system--justifying earlier development, and at lower cost, of the
    Columbia River system's tremendous hydro potential. This has plainly
    benefitted the ``public power'' utilities and, since 1980 legislation,
    the residential customers of investor-owned utilities as well.
        In fact, BPA may very well not have survived the post-war era if
    the aluminum companies, which provided so much of the agency's revenues
    in 1941-45, hadn't made the tough transition from war to peacetime
    production when military requirements slackened. To illustrate this
    point, let me quote a Federal analyst in Bonneville's own history book,
    BPA: The Struggle for Power At Cost (p. 259):
            ``The revival of the [aluminum] industries and the restoration
            of [their] power revenues saved the Bonneville system from
            being wrecked by the private utilities . . . Public power,
            protected by the aluminum markets, was able to come in and
            build on top of the Bonneville system.''
        Again, in 1995, BPA was in trouble, as competitive power suppliers
    came in and offered the promise of better rates than BPA's own cost-
    based power offered. Our company signed contracts for 100% of our
    requirements from BPA between 1996 and 2001, feeling the long-term
    survival of both the agency and our relationship with it, mattered more
    than temporary savings. And most of the other aluminum companies
    followed suit for the majority of their power requirements. Recalling
    BPA's precarious position in 1995, I'll quote briefly from BPA's letter
    thanking us for our decision:
            ``I am pleased to inform you that BPA has decided to accept
            your very attractive offer . . . The amount of business to
            which Reynolds Aluminum committed in its offer will be
            important to BPA's successfully managing its affairs during
            this period of transition.
        All that history of mutual benefit and partnership notwithstanding,
    BPA is currently casting a great deal of uncertainty on the Northwest
    aluminum industry it essentially created. In developing its sales
    policy for year 2001 and beyond, it has essentially told the aluminum
    industry, ``You are last in line,'' and indicated that likely meant
    little or no BPA power. When our industry responded that it was
    astonished and deeply disappointed, BPA recrafted its position
    slightly, but not yet significantly. It apparently was persuaded by
    some of its public power and its IOU residential customer groups that
    Federal power has become too ``precious'' to share with us. But by so
    crafting its new sales policy, BPA would be nullifying, by
    Administrative action, the very Federal law of 1980 that authorized BPA
    to augment Federal power to meet historic customer needs. Now, instead
    of doing that, it is shrinking the pool of customers--the unlucky
    castoffs being some of its oldest and, in the case of Reynolds, its
    largest and most reliable, customers.
        We think there is a more balanced role this PMA can play, more
    consistent with its historic dual mission. Public power--all of whose
    requirements would be met under BPA's proposal--is a load that's in
    itself 40% industrial. In a sense, BPA is selecting out among
    industrial customers, ironically carving away those who are the most
    dependent on cost-based hydropower, and who paid the most for the
    system. Reynolds alone has paid over $2 billion since the 1940's.
        Yes, there is a wholesale market the companies can access, but that
    market is still evolving, and so far is not projecting for 2001 low
    enough rates to be feasible for this industry. That may change, but it
    may not. BPA is in a position to make a concrete difference--without
    putting at risk its other customers' enjoyment of some of the lowest
    rates in America. We are urging them to do so.
        We think BPA's long-term future lies in serving the needs of its
    multiple customer groups, with the regional and historical limitations
    grounded in statute still honored. It should not be competing with
    private power for new loads. It should be dedicated to serving these
    regional needs first, and its surplus power in good water years--which
    is quite considerable--should be marshalled for that task. It should
    not be giving priority to selling surplus hydro to out-of-region
    markets for the highest possible profit before the requirements of
    current in-region customers such as Reynolds have been met. By using
    non-firm hydro when available to serve us and other current aluminum
    industry customers, BPA need not actually buy external power to meet
    our needs. Additional surplus, for which there is no authorized
    regional need, can be sold into out-of-region wholesale markets.
        In this way, BPA can be most relevant and beneficial to the people
    and economy of the Northwest into the next century.
        One last point regarding transmission policy and the relationship
    with its power supply marketing. Fundamentally, BPA transmision rates
    must be based on real transmission costs. Power supply cost overruns,
    in the unlikely event that's ever an issue, should not be allowed to
    migrate over to the transmission side, as some have suggested.
    Labelling them as ``stranded costs'' does not strengthen the case for
    such a ``wires charge.'' The other utilities in this country, regulated
    by FERC, cannot use their transmission systems, which are monopolies,
    to collect subsidies for their generation business--which is being
    separated and de-monopolized under the new competitive model. We should
    not be carving out an exception for the PMAs. Their generation business
    must be free-standing, if it is to continue at all. While protecting
    the Federal taxpayer is always a legitimate objective, that can be done
    through contractual mechanisms negotiated with the beneficiaries of
    PMA-sold power. BPA, in fact, has a healthy contingency adjustment
    built into its next rate case for power sales. Having the additional
    ability to reach out to the transmission system--as the
    Administration's industry restructuring bill proposes--to collect
    dollars for non-transmission purposes from those who don't and probably
    can't buy BPA hydro is simply going too far.
        Moreover, in the next decade, some of Bonneville's heaviest debt
    obligations will begin to retire, and it will be an even better
    bargain. We just don't think it needs a helping hand from transmission
    services customers in the unlikely scenario where BPA power rates
    exceed market alternatives for a few years. It's just bad policy, and
    an unfair advantage vis a vis private power.
        The philosophy of public preference is deeply engrained in BPA, and
    while we are not today proposing a wholesale reconsideration, we have
    to question the freedom of public utility load to drop off the system--
    into the market--as some of them did in 1996, and then to drop in
    again, demanding system power at system costs for that returning load.
    This creates obvious planning problems for the PMA, and the
    ``solution'' to the problem they've come up with is to bump off our
    load, which stayed with BPA through thick and thin. I'm sure BPA does
    not like having to do this, but they evidently feel they are
    constrained by public preference doctrine. This dilemma may require
    examination by Congress.

        Mr. Barton. Thank you, Mr. Amos.
        Our last witness for this panel and the hearing today is
    Mr. Shawn Cantrell, from the Friends of the Earth. We put your
    statement in the record in its entirety. We recognize you for 5
    minutes.

                       STATEMENT OF SHAWN CANTRELL

        Mr. Cantrell. Thank you, Mr. Chairman. I appreciate the
    opportunity to be here. Going last is sometimes both a blessing
    and a challenge in trying to keep anybody's attention. But at
    least I, in theory, get the last word. I will try to summarize
    my comments.
        For the record, my name Shawn Cantrell. I am the Northwest
    Regional Director for Friends of the Earth, based in Seattle,
    Washington. Friends of the Earth has had a deep and
    longstanding commitment to developing economically sound and
    environmentally sustainable energy policies. We have worked on
    energy-related issues with Bonneville Power Administration for
    over 25 years.
        I would like to highlight today in my oral comments just a
    few of the numerous environmental impacts of BPA operations,
    and how electric restructuring legislation can, and should,
    address some of these impacts.
        As Mr. Dingell pointed out earlier today, the Columbia
    River Federal Power System, which supplies most of the
    electricity marketed by BPA, causes significant environmental
    impacts on the natural resources of the Pacific Northwest. The
    series of dams inflicts 80 percent of all the human-caused
    mortalities on endangered salmon runs that spawn in the Snake
    River. These dams also contribute to the water quality problems
    in both the Columbia and Snake Rivers, which have been listed
    under the Clean Water Act as being limited in water quality.
        It is, therefore, essential that as Congress looks at
    enacting comprehensive legislation to restructure the electric
    utility industry, that you make reforms to the Federal electric
    utilities. So that, in combination with continuing
    congressional oversight, BPA can improve how it is operated. It
    just does not make sense for BPA to continue selling
    electricity at below-market rates, while failing to adequately
    address the environmental impacts of its Federal power plants.
    Transition to market-based rates could reduce taxpayer
    liability; inject greater fiscal responsibility, and improve
    the environmental performance of Bonneville Power
    Administration.
        Chairman Barton, you had asked earlier regarding whether or
    not legislation is needed this year, or this Congress, as
    regards to electric utilities. Friends of the Earth recognizes
    that this is an incredibly complex, difficult issue.
    Legislation may or may not actually pass. Nonetheless, there
    significant steps that, we think, can be taken immediately by
    this Congress to try to reform PMAs--and Bonneville,
    specifically.
        For example, BPA is currently establishing its power rates
    for the next 5-year period with its wholesale customers. These
    rate decisions will determine BPA's revenues through the year
    2006, and will also position the agency for its long-term
    financial health. At a minimum, it is vital that BPA establish
    financing mechanisms that assure it will meet all of its
    financial costs and obligations. Yet BPA's proposed rates for
    this 5-year period pose a real danger that BPA will not collect
    sufficient revenues from its utility and industrial customers
    to cover the full cost of potential changes to the operation of
    the Federal power system, in order to comply with the Clean
    Water Act or the Endangered Species Act. It may not comply with
    the treaty obligations to Native American tribes; obligations
    to Treasury payments, and a number of other important issues.
        For instance, recent analysis by Federal, State, and tribal
    biologists show that partial removal of the four Federal dams
    on the lower Snake River offer the single best chance to
    restore ESA-listed salmon in that basin. Yet, BPA's own
    computer models indicate that the agency's rate proposal has a
    low probability of generating enough revenue to meet Treasury
    payments, if such an alternative is selected later this year.
        In contrast, if Bonneville raised its proposed rates to
    include the costs of potential fish and wildlife measures, such
    as partial dam removal, BPA's power rate could still be 25
    percent below the projected market rate for electricity. Paying
    for fish and wildlife protection and restoration measures
    associated with hydroelectric dams should be fully incorporated
    as a regular cost of doing business for Bonneville Power.
    Numerous non-Federal utilities in the Pacific Northwest have
    successfully addressed the fish and wildlife impacts of dams
    they own and operate. BPA must live up to the same standards
    required of these non-Federal utilities.
        In addition, since major cost-related decisions,
    particularly those related to ESA and the Clean Water Act
    requirements, likely will occur after BPA sets its rates for
    this case, the agency's reserve target must be robust enough to
    assure that BPA has ample resources to meet these future
    obligations without disruptive change. The agency cannot afford
    to set such low rates in the upcoming 5-year subscription
    period that it is unable to meet its obligations in the next 5-
    year period.
        In summary, Friends of the Earth urges the committee to
    reform BPA, as well as other PMAs, and to address the
    significant impacts these agencies have on the electric market,
    the natural environment, and U.S. taxpayers.
        I would be happy to answer or respond to questions. Thank
    you for the opportunity to testify.
        [The prepared statement of Shawn Cantrell follows:]
      Prepared Statement of Shawn Cantrell, Northwest Regional Director,
                              Friends of the Earth
        Good morning Mr. Chairman and members of the Committee. My name is
    Shawn Cantrell, and I am Northwest Director for Friends of the Earth
    based in our regional office in Seattle, Washington. I appreciate the
    opportunity to testify today regarding the role of Federal electric
    utilities--particularly the Bonneville Power Administration (BPA)--in
    competitive electric markets.
        Friends of the Earth (FoE) is a national environmental membership
    organization dedicated to protecting the planet from environmental
    degradation; preserving biological, cultural and ethnic diversity; and
    empowering citizens to have an influential voice in decisions affecting
    the quality of their environment--and their lives. We have a deep and
    long-standing commitment to developing economically sound,
    environmentally sustainable energy policies. FoE's staff and volunteers
    have worked on energy issues related to BPA for over 25 years.
        As this Committee develops Federal legislation to restructure the
    electric utility industry, there is a pressing need to address the
    issues associated with federal Power Marketing Administrations (PMAs).
    By their nature, PMAs are beyond the means of state legislatures and
    utility boards to regulate. Furthermore, U.S. taxpayers have a
    significant interest in how the PMAs are operated. According to a 1997
    General Accounting Office study, the federal government has $24.4
    billion in financial exposure from PMAs liabilities. BPA alone has over
    $17 billion of debt for which taxpayers are at risk.
        BPA currently sells electricity at rates significantly below the
    national wholesale average rate, and plans to continue doing so; its
    proposed rates for the next five year contract period are 35% below the
    projections for future market rates. Residential electricity usage in
    the Pacific Northwest is 30% higher than the national average, in large
    part because BPA's low rates encourage customers to waste electricity
    and the resources which produced that electricity.
        In addition, the Columbia River Federal Power System, which
    supplies most of the electricity marketed by BPA, causes significant
    environmental impacts on the natural resources of the Pacific
    Northwest. This series of dams inflicts 80% of all the human-caused
    mortality on endangered salmon runs that spawn in the Snake River
    basin. These dams also contribute to water quality problems in the both
    the Columbia and Snake Rivers, which have been listed as water quality
    ``limited'' because temperatures exceed limits prescribed by states in
    accordance with the Clean Water Act.
        As Congress moves forward with electricity restructuring
    legislation, it is essential that you address the problems with the
    PMAs, including BPA. FoE urges the Committee to consider making market-
    based reforms that, in combination with continuing Congressional
    oversight, can improve how these federal electric utilities are
    operated. It just doesn't make sense for PMAs to continue selling
    electricity at below market rates while failing to adequately address
    the environmental impacts of the federal power plants. A transition to
    market-based rates can reduce taxpayer liability, inject greater fiscal
    responsibility into the PMAs, and improve their environmental
    performance.
        It is for this reason that Friends of the Earth supports the Power
    Marketing Administration Reform Act (H.R. 1486). This bipartisan bill
    directs the PMAs to sell federally produced electricity at fair market
    value, provides additional funds for restoration of the natural
    resources degraded by federal power plants, and fosters the development
    of new renewable energy resources. H.R. 1486 recognizes and addresses
    the harm caused by PMAs to both the environment and federal taxpayers
    under the current system.
        FoE recognizes that electric utility restructuring is a complex
    process and that comprehensive legislation will not be enacted
    immediately. None-the-less there are significant steps the PMAs can and
    should take in the interim to ensure that pending agency decisions do
    not foreclose future options. For example BPA is currently establishing
    its power rate levels for the next five year contract period with its
    wholesale customers. These rate decisions will determine BPA's revenues
    through 2006 and will position the agency for its longer term financial
    health.
        FoE is deeply concerned that not only is BPA proposing rates
    significantly below market rates, the agency's proposed new rates for
    the next five years will likely be insufficient to fully cover all its
    costs and obligations. Such a revenue short fall would mean that either
    U.S. taxpayers or the environment of the Northwest are left to pay for
    BPA's short-sighted decisions.
        At a minimum, it is vital that BPA establish financing mechanisms
    that ensure it will meet all of its financial costs and obligations.
    Yet BPA's proposed five year rates pose a real danger that BPA will not
    collect sufficient revenues from its utility and industry customers to
    fully cover the costs of:

     changes in the configuration and operation of the Federal
            Columbia River Power System in order to comply with
            requirements of the Endangered Species Act (ESA) and the Clean
            Water Act (CWA);
     treaty obligations to Native American Tribes;
     the agency's debt repayment obligations to the U.S. Treasury;
     other potential new expenses such as major repairs or shut
            down at the Washington Public Power Supply System's (WPPSS)
            Nuclear Power Plant; and
     the agency's obligations under the Northwest Power Planning
            Act to encourage energy conservation and develop renewable
            resources within the Pacific Northwest;
        For instance, recent analysis by federal, state and tribal
    biologists shows that partial removal of the four Federal dams on the
    lower Snake River offers the best chance to restore ESA-listed salmon
    runs in that basin. Yet BPA's own computer models indicate that the
    agency's rate proposal has a low probability of generating enough
    revenues to meet Treasury payments if such an alternative is selected
    later this year.
        In contrast, if BPA raised its proposed rates to include the cost
    of potential fish and wildlife measures such as partial dam removal,
    BPA's power rate would still be 25% below the projected market rate for
    electricity. Instead of adopting such a prudent business-like approach
    to setting its rates, however, BPA is playing a risky game of chance
    that threatens the region's environment and U.S. taxpayers dollars.
        Paying for fish and wildlife protection and restoration measures
    associated with hydroelectric dams should be fully incorporated as a
    regular cost of doing business. Numerous non-federal utilities in the
    Pacific Northwest have successfully addressed the fish and wildlife
    impacts of dams they own and operate. For example the Avista
    Corporation recently reached a settlement agreement for two large dams
    it owns on the Clark Fork River which generate roughly 60% of the
    investor owned utility's total hydropower. The settlement agreement
    provides for the relicensing of the dams, with Avista funding 27
    specific environmental protection and restoration measures to mitigate
    impacts caused by those dams. BPA must live up to the same standards
    required of nonfederal utilities.
        In addition, since major cost-related decisions, particularly those
    associated with ESA and CWA requirements, likely will occur after BPA
    sets its initial rates, the agency's reserve target must be robust
    enough to assure that BPA has ample resources to meet these future
    obligations without disruptive rate changes. BPA has not provided any
    detailed analysis of its ability to fund long-term fish and wildlife
    costs and meet it treasury payment obligations after 2006. The agency
    cannot afford to set such low rates in the upcoming five year
    subscription period that it is unable to meet its obligations in the
    next five year period.
        As recent headlines in Northwest newspapers have highlighted, there
    is intense competition among investor owned utilities, public
    utilities, and direct service industry customers for the ``right'' to
    purchase power from BPA. This strong demand positions BPA to ensure
    that its rates for the upcoming five year contract period cover all its
    costs and accumulate ample reserves to meet its future costs. BPA can
    and should raise its rates enough to fully fund all its potential
    obligations while still remaining extremely competitive in the
    marketplace.
        In summary, FoE urges the Committee to reform the operations of BPA
    and the other PMAs to address the significant impacts these federal
    agencies have on the electric market, the natural environment, and U.S.
    taxpayers.
        Thank you again for the opportunity to present our views, and I
    would be happy to respond to any questions the committee may have.

        Mr. Barton. Thank you, Mr. Cantrell.
        The Chair recognizes himself on behalf of the entire
    subcommittee, to ask questions of this panel.
        As our DOE representative, Mr. Mazur, we have looked at the
    administration bill that has been proposed. I would assume that
    you either had input into it, or are at least cognizant what is
    in it with respect to the Bonneville Power Administration.
        We understand that the Regional Review Commission, who was
    put together by the four States and their Governors, made a
    decision that Bonneville should not be able to sell to
    additional retail consumers. That Commission also made a
    decision that Bonneville should not be able to acquire new
    generation capacity, except where its wholesale customers were
    willing to assume the risk of the investment of that new
    capacity.
        However, in the administration bill, neither of those
    recommendations--as we read the administration bill--are
    adopted. Can you comment on why not?
        Mr. Mazur. I think the administration bill adopts a large
    fraction of the recommendations that were included in the
    report. In this case, we think there is no need for those
    restrictions in this legislation. This legislation is intended
    to create the climate for competition in the electricity
    industry. We think Bonneville has no plans to acquire assets,
    or to expand their operations. The Department has sufficient
    oversight of Bonneville--and so does Congress, for that
    matter--to ensure that occurs. So it is not necessary to have
    such restrictions in the legislation.
        Mr. Barton. Again, we understand the conditions you are
    here under. You are not the Secretary of Energy, the President,
    or the Vice President. Based on what you just said, we can
    assume that the Clinton administration's position is that the
    Federal Government should sell at retail, because Bonneville is
    a Federal agency.
        Mr. Mazur. Hmmm.
        Mr. Barton. I promised you before the hearing that there is
    a friendly audience here. So we are not trying to get into
    anything that causes a big issue. There are a lot of members of
    the subcommittee that think, to the extent possible, we ought
    to get the Government out of generation and transmission and
    selling electricity. We know that is not going to be totally
    possible.
        So you have the Governors of four States make
    recommendations that, at least, prospectively tend toward the
    situation that any new generation is going to be privately
    owned. At the retail level, you are not going to have
    additional retail sales from the Federal agency. It just seems
    odd that the administration would--if not go against those
    positions--not adopt them.
        Mr. Mazur. I guess I don't see it as odd in the sense of
    crafting legislation to restructure the entire electricity
    industry.
        Mr. Barton. You really need to speak into the microphone.
        Mr. Mazur. Crafting legislation to restructure the
    electricity industry, you don't need to nail down every single
    detail as you go along. Part of what we are doing here is to
    try to have a set of rules for the road that would encourage
    competition for the entire industry. The expectation is that
    Bonneville, over time, will not expand their generating
    resources. And as additional competitors come into the market,
    Bonneville will become a relatively smaller player in the
    region. We didn't think there was need to legislate that.
        Mr. Barton. Okay. Mr. Amos, are you just representing
    Reynolds Aluminum, or do you represent a larger industrial
    consumer group?
        Mr. Amos. No, sir. I am here just for Reynolds.
        Mr. Barton. Okay. Now, I just scanned your written
    testimony, but I listened fairly closely to your oral
    testimony. If I understood your oral comments, I would conclude
    that Bonneville has basically said, ``We appreciate what you
    have done for all these years, but we are not going to go out
    of our way to work with you in the future.'' Is that a fair
    summarization of what you said?
        Mr. Amos. I think that on behalf of Reynolds Metals
    Company, we want to build on a relationship with Bonneville
    where we have bought all of our requirements from them from day
    one. I think that we will be successful in continuing to do
    business with Bonneville. But the bottom line is that we were
    told last fall, and certainly up through February, that the DSI
    load--the direct service industry load--would not be served
    until the public and others got what they wanted.
        Mr. Barton. So now do you support in the pending issue?
    Hopefully it is going to result in legislation that becomes
    law. Reynolds wants the right to go outside Bonneville and
    directly contract, or at least negotiate, for wholesale
    electricity.
        Mr. Amos. I will be forced to if I cannot buy from
    Bonneville. My preference is to continue.
        Mr. Barton. I want to know if you want that right. If I
    were to tell you, right now, we will draft the bill however you
    want it and the President will sign it, what would you want me
    to draft?
        Mr. Savage. I would want the freedom to buy wherever I
    could get the lowest-cost energy.
        Mr. Barton. That is the right answer.
        I want to go back to Mr. Mazur, here. Under the current
    law, the FERC has limited authority to review the wholesale
    rates charged by Western, Southwestern, and Southeastern power
    marketing administrations. FERC's authority is limited to
    approving or disapproving a proposed wholesale rate. That
    authority is delegated to FERC by the Department of Energy.
        Under current law FERC lacks statutory authority to approve
    rates, generally. Is it the administration's position that the
    FERC should have statutory authority to set PMA wholesale
    rates, including the ability to modify proposed rates in order
    to ensure full cost recovery?
        Mr. Mazur. No, is not the administration's position.
        Mr. Barton. I beg your pardon?
        Mr. Mazur. No.
        Mr. Barton. It is not the administration's position.
        Okay, this is to Mr. Savage and Mr. Cantrell. There are
    some in the Bonneville service region that oppose a
    transmission surcharge on the grounds that the preference
    customers receive more benefits from Bonneville's low-cost
    hydropower system than they did. Were preference customers the
    only beneficiaries of the Bonneville system; or did the
    independently investor-owned utilities and DSI's also benefit
    significantly? That is a staff question. You can tell when I am
    reading a question. But I have asked it. I hope you all can
    understand it to give me an answer.
        Mr. Savage. Mr. Chairman, I think historically the DSI's
    have received power from Bonneville. The residential customers
    of the investor-owned utilities have received benefits in the
    form of sort of a bill-credit mechanism called the residential
    exchange. It is a cash credit, as opposed to direct power,
    which is being proposed under the current proposal. To that
    extent, I think, there have been historical benefits associated
    with those two entities, just as with the public agencies.
        Let me go back to the proposal. Let me start with the
    premise. Being a Transition Board member, one of my charges is
    to forge consensus----
        Mr. Barton. Good luck.
        Mr. Savage. [continuing] including the parties. So we have
    been working with the parties to continue to winnow down the
    differences, particularly in these emergency costs funding. I
    want to make the statement that if we do all this right, none
    of these--whether it is a transmission surcharge or a power
    rate adjustment--should ever be triggered.
        I think, right now, the difference is that we believe a
    power rate adjustment should go first, if there is one. I think
    what is at issue is where is it capped? Beyond that, at least
    with our initial proposal--and we are still working with
    parties; still exploring other options--is that a transmission
    surcharge would be subject to review and approval by FERC. They
    would take a look on how that charge is set and what form of
    charge. I don't know if that answers your question.
        Mr. Barton. Yes, that is helpful. Let me ask you another
    question. Your testimony talks about some river governance
    issues. That is really outside the scope of our legislation,
    No. 1. No. 2, there is no consensus on that issue. So is it
    appropriate--and I hope the answer to this is, ``yes''--that we
    go ahead some of the electricity issues, and leave the river
    governance issues to other people?
        Mr. Savage. I raised the river governance issue because it
    was a fundamental part of the discussions in the comprehensive
    review. But for purposes of your discussion, no.
        Mr. Barton. Okay. I want to ask Mr. Amos, because I don't
    understand this, define for me what a preference customer is
    under the Bonneville definition?
        Mr. Savage. I would really rather defer that to Jack
    Robertson, who is here from Bonneville.
        Mr. Barton. If you will state your name and your title for
    the record.
        Mr. Robertson. Good afternoon, Mr. Chairman. I am Jack
    Robertson. I am Deputy Administrator of Bonneville. Preference
    was created, by statute, in the Congress. Under Federal law, we
    give preference to public utilities, municipalities, and co-ops
    for first right for the power from the Federal Columbia River
    Power System. Over the course of time, preference and access to
    DSI's have changed under contracts and under provisions of law.
        Mr. Barton. Thank you. So now that I know what a preference
    customer is, I have one before me here. Mr. Eldredge, I think
    represents a city in Idaho. I assume you are a preference
    customer?
        Mr. Eldredge. We are, indeed.
        Mr. Barton. Okay. Some would argue that preference
    customers, like yourself, should be responsible for
    Bonneville's debts, because they receive most of the benefits
    of Bonneville's low-cost hydropower system. What do you say to
    that?
        Mr. Eldredge. Well, we have been paying the debt for 40
    years. The debt on Bonneville's system consists of two parts.
    One is the part, of course, for the generation. The other is
    the part for the transmission system. We have been paying our
    part of the generation debt for as long as we have had a
    contract with BPA. We also are paying part of the debt for the
    transmission system, although my particular city does not get
    Bonneville transmission service. Our transmission comes through
    Pacificorp.
        Mr. Barton. But you do get power transmitted to you that is
    generated by Bonneville, is that correct?
        Mr. Eldredge. That is correct. So we are what is know as a
    GTA customer--general transfer agreement--customer. So we are,
    perhaps indirectly, paying both sides of the debt.
        Now as far as who should pay the debt, I think all
    customers of BPA, including those who use the transmission
    system, have benefited from BPA, and therefore, should be
    responsible for paying the debt for that system.
        Mr. Barton. Now, was your city a part of this regional
    review?
        Mr. Eldredge. Yes, we were.
        Mr. Barton. Okay. Does your city council wish to have the
    same right that Mr. Amos said that his company wishes to have--
    that is, the right to go out and try to find the best deal
    possible, whether it is inside or outside the current system?
        Mr. Eldredge. Well, as a matter of fact, we do. BPA
    renegotiated our contract a couple of years ago. At that time
    they allowed us to buy up to 25 percent of our net needs on the
    open market. We have been doing that now, for almost 2 years.
    We have found that, oftentimes, the lowest cost alternative
    supplier is, in fact, BPA.
        Mr. Barton. Right.
        Mr. Eldredge. We have also found that it is sometimes an
    IOU. We have developed relationships with other utilities. We
    have joined a group in Utah called Utah Associated Municipal
    Power Systems. We have been exploring, in the market, different
    ways to reduce our costs. So we have been doing that.
        Mr. Barton. Okay. If you notice a pattern, I am kind of
    working my way down here. I am trying to be an equal
    opportunity questioner.
        Mr. Litchfield, your testimony expresses concern that
    Bonneville's subscription process will preempt legislative
    change. I quote, ``Congress should act now to ensure that
    Bonneville does not preempt Federal Power Act regulation
    through contracts.'' So what do you suggest that we do?
        Mr. Litchfield. I suggest that this process, and in the
    process of drafting the legislation, it is important to make
    sure that Bonneville is aware of the changes and is not doing
    things in its contracting that would interfere with
    implementation of the restructuring legislation that you are
    debating.
        There is a great number of business decisions that
    Bonneville is forced to make and has to make in the near
    future. We understand that. We are just particularly concerned
    that if they do them very expansively, by contract they could
    significantly constrain implementation of Federal statutes
    restructuring Bonneville.
        Mr. Barton. Could you briefly--and I mean briefly--either
    you or the gentleman who is the Deputy Administrator, explain
    the Bonneville subscription process? I am not real familiar
    with it.
        Mr. Litchfield. I would be happy to do that, Jack.
        Basically, Bonneville enters into power contracts to sell
    power to customers in the Northwest. With the passage of the
    Northwest Power Act in 1980, they entered into 20-year
    contracts for sale of power. In 2001, those contracts expire.
        The contracts, at that time, were a general umbrella
    contract. They involved no longer than 5-year rate commitments.
    So the customers in the Northwest that signed up for Bonneville
    power--primarily the DSI's and the preference utilities--had
    access to it. My clients did not. They signed contracts where
    they would pay the cost of power set by Bonneville in their
    rate cases, over the 20-year period.
        In 2001, the deal is up. And everyone needs to redefine who
    is going contract for Bonneville power. The preference
    customers will be offered first subscription right. So the word
    ``subscription'' is meant to convey that you are given an
    opportunity to subscribe for Bonneville Power under certain
    statutory restrictions. If you take that right, you can sign
    and contract and get service from Bonneville. If you decline to
    take the right, then it will move on to some other class of
    customers.
        What Bonneville has proposed is to deal first with the
    preference customers, the public utilities that desire power
    from Bonneville. When they have satisfied their requirements,
    they will then move to 1,000 megawatts of customers of
    investor-owned utilities. Residential and small farm customers,
    will then be allowed to contract for power. When they have been
    satisfied, if there power remaining, they will then offer it to
    the DSI's for sale. So that subscription process is what
    Bonneville is proposing to implement here, shortly.
        Mr. Barton. Well, what percent of Bonneville's current
    generating capacity is committed to these subscription
    contracts that are in effect right now? Do you know the answer
    to that?
        Mr. Robertson. All of our firm generating capacity is
    basically committed to the northwest region. There are some
    surplus sales that go outside the region that will be
    recallable within a certain number of years, by law. The real
    question here is how is the reallocation, or the
    resubscription, of that power is going to occur in the 5 years
    from 2001-2006. Actually, I think Mr. Litchfield's description
    is quite good.
        Mr. Barton. But you have 100 percent of available, plus
    peak capacity, committed on a 20-year contract, with a 5-year
    renegotiation for price?
        Mr. Robertson. We sell power on a firm basis, assuming
    critical water. In other words, we assume the worst water years
    on record--a sequence of them--and we say that we will have
    that reasonably available on a firm basis. What we sell in that
    subscription is that firm amount of water available in critical
    years. If you add it all together, it is about 8,000 megawatts.
    We have presold some of that amount.
        There is a big question about average water years. In an
    average water year, another 2,000 megawatts of power comes down
    the river. In a really heavy year, another 2,000 can come down
    the river. So, basically we subscribe the critical or
    guaranteed water condition of the river. Anything that is left
    over, we sell to regional parties.
        Mr. Barton. What percent of your generating capacity is
    hydroelectric? You have some nuclear capacity.
        Mr. Robertson. Ninety percent is hydroelectric;
    approximately 10 percent is nuclear with one nuclear plant.
        Mr. Barton. How do you sell your non-hydro-based power?
        Mr. Robertson. The nuclear plant is considered part of the
    Federal Columbia River Power System. It is sold as part of an
    integrated group, on a firm basis too, in the sequence
    described by Mr. Litchfield.
        Mr. Barton. Okay. I was going to ask Mr. Cantrell a
    question. You talk about that you think the power ought to be
    sold at market rate. How does your group define market rate?
        Mr. Cantrell. The market rate would be defined--there is a
    number of ways. There are commodity markets in electricity.
    There is what is called the ``COB''--the California/Oregon
    Border--where there is a price set on a regular basis. So
    similar to what if one of Mr. Litchfield's clients went and
    wanted to sign a contract with an energy supplier over a long-
    term basis, they would negotiate a contract. They would put out
    a requests for bid, or what have you.
        We are suggesting that Bonneville can adopt a similar
    approach. We are not talking about privatizing Bonneville. As
    was pointed out, there would be a hugely complex process of
    trying to completely privatize the Federal electric utilities.
    But having them sell their electricity at market rates is, we
    feel, a useful and valuable step toward not only making the
    price of the power reflective of the cost going into it, but
    also generating revenues that could go toward a number of
    things.
        Again, H.R. 1486, sponsored by Mr. Franks and Mr. Meehan,
    talks about the difference between the costs and the market
    rate. Half of that would go toward the Treasury repayment; 35
    percent would go to fish and wildlife mitigation and
    restoration costs; and 15 percent would go into renewable
    energy development.
        Mr. Barton. Well----
        Mr. Eldredge. Mr. Chairman, if I might add there? I think
    that your question is a fundamental one, in that the rate that
    is set in the region is primarily set in reaction to what rate
    Bonneville has set. When you own 40 percent of the generation
    in the region with one entity, you essentially make the market.
    So I think that it is going to be much more difficult to
    establish what the market rate is, when Bonneville owns so much
    of it.
        Mr. Barton. Well, the point that I was trying to make is a
    market rate is based on cost, and God blessed the Northwest
    with hydroelectric resources that the Federal Government saw
    fit to utilize. Even in a privatized situation, there are going
    to be lower-cost generators in the Northwest. So the market
    price will be lower.
        I mean, Texas was blessed with oil and gas. I can buy
    gasoline for 90 cents a gallon in Texas because it is pumped
    out of the ground there; refined there, and we don't pay the
    transportation charges. Each region has a natural advantage. In
    the Northwest region it is hydroelectric power. I don't see a
    problem with low costs in the region where the power is
    generated.
        So when we talk about these market averages, we start
    throwing in national averages and stuff. Some of the regions of
    the country don't have the natural resources that the Northwest
    does. I don't want there to be a lot of extraneous factors put
    into what a market price is. That is why I was asking what Mr.
    Cantrell's organization defined as market price. That is all.
    But I think your point is an excellent one.
        We have a vote on the floor.
        Mr. Robertson. Mr. Chairman? I just wanted to add a comment
    on the market-based issue.
        Mr. Barton. Okay.
        Mr. Robertson. It is a complex issue for a hydro system as
    we have. There are many, many products, and many, many markets.
        Just 2 years ago, Bonneville, you may have heard, faced
    significant market challenges and was in some trouble. We cut
    $600 million in costs and really tried to get lean and mean
    again. We think we succeeded.
        Mr. Barton. Well not mean; lean.
        Mr. Robertson. We are meaner than we were. I resent, by the
    way, the Ronald McDonald analogy earlier.
        But, the point is, 2 or 3 years ago, if you had asked the
    question about us going to market; the market was below our
    price, at that point. Had BPA been at the market price, it
    would have generated substantially less revenue. So, we hope we
    will stay below market. We expect that, but it is a volatile
    market on the West Coast. No one can be certain, in a complex,
    volatile market with a hydrosystem included, just exactly what
    the market will look like.
        Mr. Barton. I actually think that if we went to market--to
    use his term--the price would go down. I think that anybody
    that has a monopoly, no matter how lean--and to use your term--
    mean you try to be, you are going to have some costs that would
    not be there if you were in a truly competitive environment. So
    market price of the Northwest--you are probably going to have
    lower prices.
        Mr. Cantrell. Mr. Chairman? If I may just add one thought.
    Regardless of how one chooses to define market price and ease
    or difficulty of achieving it, at minimum--as I think I tried
    to convey in my testimony--we feel strongly that there are a
    number of costs: the actual costs to Bonneville; current ones
    that are being incurred that are passed on to either
    ratepayers, or at the expense of the environment, through fish
    and wildlife, air quality or water quality, as well as the
    potential future costs.
        One example is that for fish and wildlife there are 13
    different alternatives being considered for Endangered Species
    Act restoration activities in the Snake River. Bonneville's own
    analysis says of those 13, under their current rate proposal,
    only one of those would be able to have been funded, and have
    the Treasury payment made in high likelihood. They have a
    probability rating. They are still working through this. The
    most recent computer model that Bonneville generated, dated
    April 21, indicated that only one of the 13 would meet the
    Treasury repayment probability that I think all Members of
    Congress, as well as Bonneville, want to achieve.
        Mr. Barton. Good, thank you. Okay. Last question to Mr.
    Mazur.
        Mr. Robertson. Mr. Chairman, could I just pick up on that
    point? It is important that you understand that. We would like
    to submit to the record the data associated with our
    probabilities of meeting fish and wildlife obligations. We take
    our fish and wildlife obligations quite seriously.
        [The following was received for the record:]

        The Boneville Power Administration is planning its power
    rate case based on the Fish and Wildlife Funding Principles
    adopted as administration policy in September of 1998. These
    Principles guide Bonneville to set its rates to ensure a
    statistical probability of meeting its Treasury payments of 80
    to 88%, while considering the full range of thirteen
    alternatives noted by Mr. Cantrell.

        Mr. Barton. Well, that is outside. You are welcome; we will
    put in the record--that is outside the scope of our committee
    and our hearing. Those are significant issues. I would be very
    surprised if we addressed those kinds of issues in this bill.
        Mr. Robertson. The most important point is that we feel
    confident that we can meet our obligations for fish and
    wildlife. Therefore, we feel that we will not, in all
    likelihood, be triggering some of the aspects that are put in
    the provisions of the bill that have controversy in the region.
    That is really how it connects.
        Mr. Barton. Okay. I want to ask the last question--I have
    got to go vote here in about 10 minutes--to Mr. Mazur: Do you
    support a public preference for the Bonneville Power
    Administration to sell outside the region of the Bonneville
    region?
        Mr. Mazur. We believe that Bonneville should be able to
    maintain its existing preference power customers: the
    municipalities, the co-ops, and so on. We also think they
    should be able to sell retail to their existing retail
    customers.
        Mr. Barton. Okay, now I also want to ask you that same
    question on the Tennessee Valley Authority. I know this is a
    Bonneville panel, but you do represent the Department of
    Energy. Should the TVA be able to have power sales outside the
    region to public preference customers?
        Mr. Mazur. The administration's bill is pretty clear on
    TVA. We support a symmetric treatment for competition in TVA,
    where in 2003 the fence goes down in both directions.
        Mr. Barton. So you have a different position on Bonneville
    than you do on TVA?
        Mr. Mazur. In part, that reflects the fact that TVA would
    like to expand their operations, and Bonneville seems fairly
    content.
        Mr. Barton. But if we want to be consistent in a national
    comprehensive bill, shouldn't we be consistent in how we
    approach the various Federal electric utilities, and their
    various marketing strategies and abilities?
        Mr. Mazur. I think what we tried to do in this bill was to
    acknowledge the different historical situations that all the
    different PMAs find themselves in. Bonneville is in a somewhat
    different situation than TVA. We think our proposal reflects
    that.
        Mr. Barton. Okay. I want to thank this panel. We will have
    additional written questions. We ask that you reply very
    quickly, because we have several more hearings; but we hope to
    begin to put together a comprehensive package within the next
    month, or month-and-a-half.
        The next hearing is next Thursday. Our working group is
    next Tuesday. This hearing is adjourned.
        [Whereupon at 1:43 p.m., the subcommittee was adjourned.]

                   PURPA, STRANDED COSTS AND THE ENVIRONMENT

                                  ----------

                             THURSDAY, MAY 20, 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 of the subcommittee) presiding.
        Members present: Representatives Barton, Bilirakis,
    Stearns, Largent, Burr, Whitfield, Norwood, Shimkus, Wilson,
    Shadegg, Pickering, Bryant, Ehrlich, Bliley (ex officio), Hall,
    McCarthy, Sawyer, Markey, Pallone, Brown, Rush, Wynn,
    Strickland, Deutsch, and Dingell (ex officio).
        Staff present: Cathy Van Way, majority counsel; Joe
    Kelliher, majority counsel; Curry Hagerty, majority counsel;
    Jeff Krilla, majority counsel; Miriam Erickson, majority
    counsel; Donn Salvosa, legislative clerk; Sue Sheridan,
    minority counsel; and Rick Kessler, minority professional staff
    member.
        Mr. Shimkus [presiding]. Will the Subcommittee on Energy
    and Power come to order. I would like to welcome you all here.
    Mr. Barton will be a few minutes late, so he has left the
    committee in able hands, or at least in Republican hands, and
    we would like to thank you all for attending.
        The subject of this hearing is electricity competition,
    PURPA, stranded costs and the environment. And I would like to
    recognize myself for 4 or 5 minutes. Chairman Barton is very
    specific on these 5 minutes.
        I am looking forward to the testimony today, particularly
    the witnesses who are clamoring for more environmental
    regulations in the restructuring effort. I think it is
    important to acknowledge that those who are quick to attack the
    so-called grandfathered coal plants in Illinois and the Midwest
    also coincidentally have high-priced generation of their own.
    It just makes me wonder if the so-called environmentalists are
    really interested in protecting our air quality or making a
    buck.
        I think this is a good hearing today because I think what
    we will find out is that in a restructured environment, when
    efficiencies are going to be required of the utilities to
    compete, that that will bring more environmental benefits than
    what we can do by legislating on our own. I think the record
    will speak for that.
        With that, I am going to close my opening statement and
    then ask for Mr. Hall, the ranking member, for his statement.
    He is recognized for 5 minutes.
        Mr. Hall. Mr. Chairman, I thank you and members of the
    committee. Today, of course, is another in a series of
    hearings, one that is particularly important, I think, dealing
    with issues involving the thing that we have talked about from
    the beginning, stranded costs, repeal of PURPA, and
    environmental issues, as the chairman has pointed out.
        On stranded costs, I note that our witnesses vary widely in
    their views on the appropriateness of stranded cost recovery.
    However, I have noted that as the States have acted, and for
    the most part acted responsibly, in their determination on
    stranded costs recovery, the arguments have become less vocal
    at the Federal level.
        I have great faith in the States to do the right thing, and
    we ought to be the least intrusive that we can be in this issue
    on the States. It seems to me that our guiding principle ought
    to be that if we are responsible for the incurring of the
    costs, then we have an obligation for the incurring of the
    stranded costs, costs that are legitimately, verifiably, and
    prudently incurred. This has gone on long enough for all of the
    them out there to have looked at their stranded costs. They
    have due notice that stranded costs and how they are proved up
    is going to be very important. It is the largest financial
    issue that we have had since I have been in this Congress,
    which means that there is enough money to be fair with the
    people that have provided us gracious living back through the
    ages pursuant to the contract that they had with this
    government.
        So I don't see any reason not to be fair with them. I don't
    see any reason to be overly generous with them. I see a reason
    to take the testimony that we are taking here, to listen to the
    testimony. And for those of you who are here who have different
    opinions, you are rendering us a great service because then we
    get to look at all issues as folks that are more conversant
    with the facts of this legislation than we are. That is the way
    that we put a bill together.
        I think, Mr. Chairman, we can largely remove ourselves from
    this obligation if we bury once and for all time this notion of
    imposing mandates on the States and a date certain by which
    they have to be carried out. PURPA presents a special case.
    Utilities incur significant obligations under a Federal law
    carried out by the States. We need to examine carefully how the
    States are providing for PURPA, stranded cost recovery, and
    what needs to be done to ensure that appropriately incurred
    costs are recovered. Then we will turn our attention to
    environmental issues, and the acting chairman addressed that
    very well.
        Finally, Mr. Chairman, I want to take note of two close
    cases that bear close scrutiny by this committee, the decision
    last week by the DC Circuit Court of Appeals that ruled that
    the EPA has exceeded its authority in issuing certain air
    quality standards and that Congress has unconstitutionally
    delegated too much authority to the EPA, and a decision from
    the Eighth Circuit Court of Appeals in which the court raised
    the question of whether States can favor a utility's native
    load and curtailment situation without being in conflict with
    interstate commerce laws or whether they have to treat all
    transmission equally.
        I think those are important cases. I tend to agree with the
    position that the court at this level has taken and would be
    anxious to follow it. The latter case that I discussed, which
    will likely have more direct implications on any utility
    restructuring legislation we might address, may raise a number
    of important questions about the extent of FERC's authority to
    bring about a workably competitive wholesale electricity
    market. If it is our intent to legislate before all appeals are
    exhausted, and I assume that it is, then we need to take the
    time to carefully consider the questions raised by the eighth
    circuit before we assume that we know what FERC's authority is
    now and what needs to be done to change it if it needs to be
    changed. As this court decision indicates, the ground may be
    shifting from us.
        I think as a committee we have all of the questions that
    need to be addressed clearly in mind. We just don't have the
    answers. Let's be sure that we are right and go ahead. I yield
    back the balance of my time.
        Mr. Barton.  Thank you, Congressman Hall, for that opening
    statement. I appreciate you and Congressman Shimkus starting
    the hearing on time. I was uncharacteristically delayed.
        The Chair would recognize the distinguished full committee
    chairman, Mr. Bliley, if he wishes to make an opening
    statement.
        Chairman Bliley. Thank you, Mr. Chairman. I commend you for
    holding this hearing focusing on three issues, the Public
    Utility Regulatory Policies Act of 1978, PURPA; stranded costs;
    and the environment. All thee issues are important and must be
    considered when drafting a comprehensive electricity bill.
        PURPA grew out of the oil crisis that gripped our country
    in the early 1970's. It was one of five pieces of legislation
    enacted as the National Energy Act of 1978 with the intent to
    encourage both energy efficiency and greater diversity in the
    supply of electricity.
        Those were and are laudable objectives, yet some provisions
    of the act had unintended consequences. One such consequence
    was an incremental change from traditional cost-based to
    market-based pricing of electricity supplies, at least in the
    wholesale markets. That was a good consequence, disproving the
    myth that generation was a natural monopoly.
        Implementation of PURPA has not been entirely successful.
    As we move to enact the comprehensive restructuring, a bill
    reforming PURPA is in order.
        With respect to today's focus on stranded costs, I am
    interested to hear from the witnesses. Stranded costs are costs
    that could not be recovered in a competitive market.
    Competition doesn't create uneconomic costs, it just makes them
    apparent. As I understand it, the 21 States that have opened
    their markets to competition have provided a fair opportunity
    for utilities to recover their stranded costs. They have
    already done all the heavy lifting on this issue, and that is
    proper as they are in the best position to make these
    determinations. I commend the States for this.
        Finally, I do not believe allowing consumers to choose
    their power supply would be harmful to the environment. In
    fact, the opposite is true. Innovation is a fundamental benefit
    of competition. I am convinced that retail competition leads to
    new environmental innovations. Today's electric power industry
    is not as efficient as it can be. Competitive markets will
    foster competitive and flexible generators, such as gas-fired
    turbines that burn cleaner. Competition will also stimulate the
    use of technologies and services. The marketing of green power
    to consumers is one such innovative service made possible by
    competition. In addition, new technology such as real-time
    metering allow consumers to adjust their consumption pattern
    based on price. This helps the cost of conservation. A
    competitive electricity power market is good for the
    environment.
        I thank you, Mr. Chairman, and again commend you for
    holding this hearing I look forward to hearing the testimony of
    the witnesses.
        Mr. Barton. Does that conclude your statement?
        Chairman Bliley. Yes.
        Mr. Barton. The Chair would recognize the distinguished
    ranking member of the full committee, Mr. Dingell, for an
    opening statement.
        Mr. Dingell. I thank you for your courtesy.
        Mr. Barton. You need to make sure your microphone is on,
    Mr. Dingell.
        Mr. Dingell. Since I said something else, I will say it
    again. Mr. Chairman, I want to thank you for your courtesy to
    me. I am always appreciative of your kindness.
        Mr. Barton. Do you ever not say something nice, Mr.
    Dingell?
        Mr. Dingell. I have said not nice things. I don't remember
    ever saying it to you.
        Having made those observations, I believe that you are to
    be commended for holding this hearing because there are many
    controversial issues and most contentious questions involved in
    the debate over legislation to restructure the electric utility
    industry, none more difficult than those which lie before us.
        Stranded costs have been an important element of nearly
    every State retail competition plan to date. In all but one
    State, we should note, stranded costs recovery has been an
    essential part of the bargain. There is one noteworthy
    exception: New Hampshire. The decisions of New Hampshire are
    now tied up in litigation over this very issue. I think that is
    a good warning to us.
        When States address stranded costs, there are no difficult
    jurisdictional issues to resolve. Retail rates have long been
    considered the responsibility of the States. State competition
    plans bring together all affected parties; consumers,
    utilities, State regulators of all disciplines in the same
    forum at the same time to address the questions which are
    involved here. Negotiations ensue, and the parties have a
    natural interest in identifying and accommodating each other's
    concerns. As a result the best forum and the best decision are
    provided there.
        But at the Federal level, we find that the issue is
    different. Stranded costs pose quite a dilemma. Federal
    legislation to mandate or simply encourage retail competition
    directly or indirectly can give rise to stranded costs and
    quite possibly some Tucker Act questions, something with which
    this committee is becoming increasingly familiar, but it may
    seem logical to require that such problems may be addressed in
    the same legislation.
        The States have serious questions about federally mandated
    treatment of stranded costs. They may not indeed like what it
    is that we tell them to do, nor may the utilities, but it may
    seem logical to require such problems to be addressed in the
    same legislation. The States, I think, are to be properly
    commended for their worry over this matter, and we should
    listen to them.
        There are further significant legal and policy questions
    about how the Congress might provide for recovery of stranded
    costs that are currently recoverable in State-regulated retail
    sales. All of this is puzzling to me. The stock conclusion
    amongst those who would mandate retail competition is to
    require the States to adopt competition and then to courteously
    defer to the expertise and the responsibility of the States in
    cleaning up the resulting mess. This is a most curious
    approach. We say, go out and make a mess, and then we will let
    you clean it up. Or we might say, we will make the mess, and we
    will let you clean it up.
        I question the wisdom of this approach, and I am sure this
    issue is going to figure prominently in the committee's further
    consideration of restructuring legislation.
        With respect to the environment, there have been a number
    of major developments since this committee last visited these
    issues in March 1996. Since that time 18 States have
    restructured their electric utility industry; the
    administration, the former subcommittee chairman, and many
    others have introduced Federal restructuring legislation
    including legislation specifically addressing environmental
    issues; and EPA and FERC have had key actions under the Clean
    Air Act and the Energy Policy Act overturned by the courts
    which is going to leave something probably of a mess either for
    those agencies, for the State utility regulators and the State
    environmental regulators, but also for this committee probably
    and the Congress.
        Two fundamental questions are raised when we consider the
    environmental issues that relate to utility structuring: First,
    what are the environmental consequences, whether intended or
    not, of specific deregulating proposals? Second, should there
    be an explicit environmental component of restructuring
    legislation, and of what should it consist?
        As to specific issues, what is the role of renewable energy
    technologies in a competitive market? Those who would like to
    see the Federal Government continue to support the use of such
    technologies have argued for the inclusion of a new device, the
    Renewable Portfolio Standard, RPS, in Federal restructuring
    legislation that would require a certain percentage of any
    supplier's electricity to be generated by renewable resources.
    This approach has gotten the support of the administration, the
    former chairman of this subcommittee, some States, and many
    others. Many others oppose this concept for a variety of
    reasons, not the least of which is that it is not well
    understood.
        But even amongst those who have adopted this approach,
    there is a fair amount of disagreement over the details of a
    renewables standard. Such providers would be required to have
    what percent of their electricity supply to be from renewable
    resources? We could have a grand battle over that; 2, 7, 10, 20
    percent? What will be the number? Should there be a required
    percentage increase over time? And if so, what is the
    appropriate rate for increase? Should an RPS be a permanent
    fixture in the law, or should it sunset? Should an RPS count
    waste energy or hydroelectric projects as renewables? Should
    TVA, the PMAs, municipal utilities and rural cooperatives be
    covered by RPS? What would be the relationship between the
    investor-owned utilities if--and the munis and the co-ops and
    the publics if we go this direction?
        I would remind you that I was a major sponsor of PURPA,
    which had a lot of this in and which has aroused wide criticism
    not only of the substance, but of the fact that the Congress
    did this. I would hope that the panels today would be able to
    shed light on this matter and that those who are pushing this
    idea will perhaps be able to defend it. It would be interesting
    to listen to.
        Another interesting issue is whether or not the
    restructuring legislation should require electricity providers
    to disclose certain information about their generation sources
    and their impact on the environment. This is called green
    labeling. Some States, some sectors in the industry, and others
    have supported it, but here, too, there are disagreements about
    the scope and the depth of the information being disclosed and
    how should it be disclosed and by whom. And if we have all of
    this disclosure, are we going to need some truth-in-labeling
    requirement so that we can tell who is lying and who is telling
    the truth? I am interested in how or if our panels will think
    that green labeling should be pursued.
        A third issue is the future of programs to promote energy
    efficiency and conservation, or what we would call the demand
    side of management. While many States require utilities to
    undertake programs that promote energy efficiency, the fate of
    these programs is unclear in a competitive electricity market.
    One proposed solution is a charge that would be placed on all
    customers and used to fund energy efficiency and conservation
    programs. The administration's legislation, which is largely a
    reregulation bill, has such a proposal, and it proposes that
    revenue from such a charge be placed into a public benefit fund
    which would be dispersed to the States so that they could pay
    for energy efficiency and conservation programs.
        This raises a lot of interesting questions. Are we looking
    here at another source of revenue that could be diverted by the
    appropriators and by the budgeteers and to not be spent on what
    we have intended it should be spent for?
        Mr. Barton. Will the gentleman yield? The Chair would
    remind the distinguished gentleman that opening statements are
    supposed to be 5 minutes or less.
        Mr. Dingell. You have been most generous, Mr. Chairman. I
    hope that some of these questions will be read in my statement.
    I will ask unanimous consent that it be inserted into the
    record, because I know that you are concerned that we get a
    good record. And I hope that all here, including the audience,
    will read it because there is much wisdom here, and it would be
    helpful.
        Mr. Barton. We will put the next 10 minutes of questions
    into the record, Mr. Dingell.
        Mr. Dingell. It will be helpful, I think, in sinking this
    bill. Thank you, Mr. Chairman.
        Mr. Barton. Your questions are well put. We understand. We
    hope it floats the bill also.
        [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
        Mr. Chairman, today's hearing explores some of the most contentious
    and controversial issues in the debate over legislation to restructure
    the electric utility industry.
        Stranded costs have been an important element of nearly every state
    retail competition plan to date. In all but one state, stranded cost
    recovery has been an essential part of the bargain. (The exception, New
    Hampshire, is tied up in litigation over this issue.)
        When states address stranded costs, there are no difficult
    jurisdictional issues to resolve. Retail rates have long been
    considered a matter for the states, and state competition plans bring
    together all of the affected parties--consumers, utilities, and state
    regulators--in the same forum at the same time. Negotiations ensue and
    parties have a natural interest in identifying and accommodating each
    others' concerns.
        But at the federal level, the issue of stranded costs poses quite a
    dilemma. Federal legislation to mandate or simply encourage retail
    competition--directly or indirectly--can give rise to stranded costs.
    While it may seem logical to require that such problems be addressed in
    the same legislation, the states have serious questions about
    federally-mandated treatment of stranded costs. There are further and
    significant legal and policy questions about how Congress might provide
    for recovery of stranded costs that are currently recoverable in state-
    regulated retail rates.
        All of this is very puzzling, and the stock conclusion among those
    who would mandate retail competition is to require the states to adopt
    competition, and then courteously ``defer'' to their expertise in
    cleaning up the resulting mess. I question the wisdom of this approach,
    and I'm sure this issue will figure prominently in the Committee's
    further consideration of restructuring legislation.
        With respect to the environment, there have been a number of major
    developments since this Subcommittee last visited these issues in March
    1996. Since that time, 18 states have restructured their electricity
    industry; the Administration, the former Subcommittee Chairman, and
    many others have introduced federal restructuring legislation,
    including legislation specifically addressing environmental issues; and
    EPA and FERC have had key actions under the Clean Air Act and the
    Energy Policy Act overturned by the Courts.
        Two fundamental questions are raised when we consider the
    environmental issues that relate to utility restructuring. First, what
    are the environmental consequences--whether intended or not--of
    specific deregulation proposals? Second, should there be an explicit
    environmental component of restructuring legislation, and what should
    it consist of?
        As to specific issues, one is the role of renewable energy
    technologies in a competitive market. Those who would like to see the
    federal government continue to support the use of such technologies
    have argued for the inclusion of a ``Renewable Portfolio Standard''
    (RPS) in federal restructuring legislation, that would require a
    certain percentage of any supplier's electricity be generated by
    renewable sources.
        This approach has gained support from the Administration, the
    former Chairman of this Subcommittee, some states, and many others.
    Many oppose this concept for a variety of reasons, but even among those
    who have adopted this approach, there is a fair amount of disagreement
    over the details of a renewables standard. Should providers be required
    to have two, seven, ten or twenty percent of their electricity supply
    be from renewable resources? Should the required percentage increase
    over time, and if so, what is the appropriate rate of increase? Should
    an RPS be a permanent fixture in law or should it sunset after a number
    of years? Should an RPS count waste-to-energy or hydroelectric projects
    as renewables? Should TVA, the PMA'S, municipal utilities and rural
    cooperatives be covered by the RPS? I hope the panel will share their
    views on these matters today.
        Another issue is whether or not restructuring legislation should
    require electricity providers to disclose certain information about
    their generation sources and their impact on the environment. This is
    often called ``green labeling.'' Some states, some sectors of the
    industry, and others have supported it, but here, too, there are
    disagreements about the scope and depth of the information that should
    be disclosed, how it should be disclosed, and by whom. I am interested
    in how or if our panelists think green labeling should be pursued.
        A third issue is the future of programs to promote energy
    efficiency and conservation, or what we call demand side management.
    While many states require utilities to undertake programs that promote
    energy efficiency, the fate of these programs is unclear in a
    competitive electricity market. One proposed solution is a charge that
    would be placed on all customers and used to fund energy efficiency and
    conservation programs. The Administration's legislation proposes that
    the revenue from such a charge be placed into a ``public benefits
    fund'' that would be disbursed to states so that they can pay for
    energy efficiency and conservation programs. This prompts a number of
    questions. How would the rate be calculated initially? Could it be
    adjusted and, if so, when and how? I'd also like to get a better
    understanding of the formula that would be used to redistribute such
    funds to the states, whether some states would benefit more than
    others, who would administer such a grants program, and the cost of
    administration.
        The fourth environmental topic that we are being asked to look at
    is the impact of deregulation on utility emissions and whether federal
    electricity restructuring legislation should be used as a pretext to
    further reduce emissions of pollutants and control greenhouse gases.
        The Executive Branch has not always spoken with a unified voice on
    these matters. For instance, FERC in issuing its wholesale competition
    orders, declined to address these issues. The Administration's bill, on
    the other hand, is advertised both as a vehicle to pay the costs of the
    Kyoto Accord and a vehicle that would achieve a portion of the
    emissions reductions under Kyoto and the Clean Air Act. EPA has issued
    a SIP call that would impose a strict ``cap and trade'' program on
    utility NOx emissions under authority they already believe
    they have, yet the Administration's electricity bill contains
    legislative language to ``clarify'' that EPA can implement a
    NOx trading program. This is very confusing and leaves me
    with many unanswered questions that I hope our witnesses can shed some
    light upon.
        I am also interested in hearing our witnesses' views on the
    implication of the recent ruling by the DC Circuit that called into
    question EPA's implementation of the Clean Air Act. I have not fully
    reviewed the decision yet, but I suspect it will drive more people to
    conclude that federal restructuring legislation is the best avenue for
    curing the problems raised by the courts.
        I hope our panelists can shed light on the reasoning behind their
    positions on this issue. I have heard both economic and environmental
    reasons for addressing emissions issues on a restructuring bill. I am
    not sure that there is agreement even among supporters of tighter
    emissions controls that something needs to be done in the context of a
    federal restructuring bill. For instance, Governor Whitman of New
    Jersey, an advocate of increased restrictions on coal-burning
    utilities, chose to pass on addressing these issues in the context of
    utility restructuring, while the Governor of Texas just endorsed the
    inclusion of emissions caps in their electricity deregulation
    legislation. While some companies and environmentalists support
    pollution and carbon controls in federal legislation, others who are
    equally concerned about emissions have stated their belief that these
    matters are more germane to the Clean Air Act and should therefore be
    addressed in that forum. Still others have stated their concern that
    restructuring legislation not be ``held hostage'' to environmental
    issues.
        Mr. Chairman, a significant number of interests will try very hard
    to turn electricity restructuring into a debate over Clean Air Act
    issues. They may succeed. But we need to consider whether emissions
    provisions are better addressed in restructuring legislation or as
    amendments to the Clean Air Act. How would any new emissions provisions
    in a restructuring bill work along side programs being implemented
    under the Clean Air Act? Given the North American Electric Reliability
    Council's concern about the potential adverse effects of EPA's SIP call
    on reliability, what impact would additional emissions restrictions and
    federally mandated competition have on reliability?
        I look forward to hearing answers to these questions from our
    witnesses, and to learn more about their perspectives on all these
    matters. I yield back the balance of my time.

        Mr. Barton. The Chair would recognize Mr. Norwood of
    Georgia for an opening statement.
        Mr. Norwood. Thank you very much, Mr. Chairman. I know that
    we are going to be hearing testimony about the Public Utility
    Regulatory Policies Act and environmental concerns from our
    witnesses today. I understand the importance of these issues,
    and I am glad that we are going have an opportunity, Mr.
    Chairman, to discuss them. However, I would like to take just a
    minute or 2 and focus my remarks on the third topic of our
    agenda, and that is stranded costs.
        To be perfectly honest with you, I am very interested in
    this issue because it has such a large impact on the
    constituents of the 10th District of Georgia. To me, stranded
    cost is such an important topic that I believe we should have
    perhaps a hearing just on that alone. It is so important to me
    because if we don't handle this correctly, we could literally
    force dozens of towns and several companies in Georgia into
    bankruptcy.
        Let me give you an idea of the magnitude of the problem
    that we face in Georgia. One of our nuclear plants, Plant
    Vogtle in Burke County, Georgia, is owned collectively by the
    Municipal Electric Association of Georgia; the Oglethorpe Power
    Company, which is a collection of cooperatives; and the Georgia
    Power Company, which is an investor-owned utility. Four towns
    in my district alone which are a part of MEAG, Elberton,
    Washington, Sandersville and Monticello, are in debt with Plant
    Vogtle to the tune of $150 million. Each of these cities has
    less than 7,000 people. If we leave these people stuck with a
    stranded cost of Plant Vogtle when we deregulate the industry,
    we will place a tax of over $5,000 on each person in each of
    these small towns.
        Oglethorpe Power owes $2.7 billion on Plant Vogtle. It
    currently provides power to $3 million of Georgia Electric
    customers. If we pull the rug out from underneath them, 39 of
    42 electric memberships in Georgia will most likely be forced
    to go out of business. Mr. Chairman, that is no way to increase
    competition in the marketplace.
        Finally, Georgia Power, the State's largest supplier of
    electricity, would lose between $2 billion and $4 billion to
    stranded costs with Plant Vogtle alone. We all know who would
    be forced to pick up that tab. To be honest with you, I am not
    inclined to let that happen to Georgia ratepayers.
        I said it before and I will keep saying it during these
    hearings, we have to address the issue of stranded costs in
    this country, especially nuclear stranded costs. We simply
    cannot leave these companies hanging out to dry.
        I want you to understand, Mr. Chairman, that I have no
    interest in stranded costs that have occurred because of
    foolish mistakes made by the companies, but we were one of the
    last nuclear power plants built in the country at a time when
    the interest rates were 21 percent, at a time when the Federal
    Government moved to Georgia with regulations regarding building
    the nuclear industry. I can assure you, Mr. Chairman, we would
    have shut that plant down cold rather than pay 21 percent
    interest rates had it not been for the Federal Government. So I
    would just simply ask you with this hearing to let's really
    have one just on stranded costs so we can air out those issues.
        I thank you very much, Mr. Chairman.
        Mr. Barton. I thank the gentleman from Georgia.
        The gentleman from New Jersey, Mr. Pallone, is recognized
    for an opening statement.
        Mr. Pallone. Mr. Chairman, could I yield to the gentleman
    from Ohio, and then I will go after him?
        Mr. Barton. We will recognize the gentleman from Ohio.
        Mr. Brown. Thank you, Mr. Chairman, and thank you, Mr.
    Pallone. I thank you, Mr. Chairman, for holding this series of
    hearings on the future of the electricity industry.
        In this session and the previous one, members have put
    forward a number of interesting proposals which have
    implications for the environment. Public benefits charge would
    provide funds for energy efficiency and renewable energy
    programs as well as assistance to low-income families. A
    Renewables Portfolio Standard would support a gradual increase
    in the use of renewables such as solar, wind, and biomass for
    electricity generation. Product labels that provide information
    on the source of generation and on the air emissions could give
    customers the opportunity to factor environmental or local
    economic criteria into their choices among electricity
    providers. Cap and trade programs for air pollutants could
    deliver benefits similar to the sulphur trading program. This
    committee should carefully review these and other options as we
    proceed, especially in light of the recent Supreme Court
    decision on EPA's implementation of the Clean Air Act.
        Community choice is a new approach that I feel has the
    potential to benefit the environment. Community choice will
    allow governments to shop for electricity and energy services
    on behalf of their citizens. Basically, a level of government
    would act as an aggregator for its citizens after receiving
    approval through a vote of its governing body or through
    referendum. Towns, cities and counties are experienced in
    contracting for services and can obviously obtain greater clout
    in the marketplace than can an individual or a small business.
    Many local governments would be likely to respond to their
    citizens' environmental concerns by including electrical energy
    efficiency and renewable energy in their contracts with
    electricity suppliers. Any resident or business could also opt
    out and go shopping for a different electricity supplier on
    their own.
        In conclusion, Mr. Chairman, a word on stranded costs. A
    number of electric utilities made decisions in the regulatory
    environment that have resulted in sizable stranded costs. For
    these companies to be competitive in deregulated markets,
    stranded costs must be dealt with appropriately. It is probable
    that States can handle this issue as they have been doing over
    the past several years, but we should consider whether a
    Federal role is necessary.
        Mr. Chairman, thank you.
        Mr. Barton. Thank you, Mr. Brown.
        Mr. Whitfield is recognized for an opening statement.
        Mr. Whitfield. Mr. Chairman, thank you very much for
    continuing these hearings on this important subject matter. I
    have certainly not made a decision on what my overall view is
    on the restructuring issue, and these hearings are quite
    helpful in that regard, but one thing that I am quite certain
    about is that the legislation should not include any
    environmental title that imposes additional controls on
    electric power plants or attempts to penalize the coal industry
    any more.
        I take this position because I believe that the existing
    Clean Air Act is working quite well. In fact, some of us
    believe that EPA has been too aggressive and has exceeded its
    legal authority quite frequently. In fact, the Federal court of
    appeals on May 14 agreed with us and overturned the EPA's well-
    publicized air quality standards.
        There are many people, particularly in the Northeast, that
    are concerned that energy deregulation might lead to increased
    power production at low-cost coal-fired power plants in the
    Midwest, but I noticed that in a letter to my colleague Mr.
    Pallone, dated June 15, 1998, Mrs. Browner and then Energy
    Secretary Pena stated that increased competition spurred by the
    Clinton administration's plan will itself strengthen incentives
    to use fuel more efficiently at both existing and new
    generating plants, thereby cutting emissions, costs, and fuel
    use.
        Much of the concern about the increase of power plant
    emissions stems from the notion that emissions in ozone
    transport is a major problem for the Northeast in meeting air
    quality standards. I reject this argument, and I notice that
    Senator John Chafee of Rhode Island, who is considered one of
    the leading environment advocates in the Senate, really agrees
    with my position. Senator Chafee in a letter to EPA
    Administrator Browner dated April 16, 1997, which I will submit
    for the record, states, ``contrary to a public belief too
    readily accepted without any evidentiary foundation, our
    problem does not come primarily from distant smokestacks in the
    Ohio River Valley. These charts and a similar analysis
    performed by the State of New Hampshire show that 67 percent or
    more of the ozone pollution affecting Rhode Island originates
    in the corridor of highly urbanized cities from Washington, DC,
    to Hartford, Connecticut. On the other hand, less than 10
    percent of the ozone transport problem comes from the States
    located in the Ohio River Valley.''
        Now it seems to me that if the transport issue is not real,
    then something else is driving this idea of additional
    environmental controls. I believe these environmental issues
    stem from the high cost of electricity in other regions of our
    country. I believe this is an attempt to increase electricity
    costs in my part of the country to somehow level the playing
    field. I don't think this is good energy policy, good economic
    policy, or good environmental policy, and I for one will oppose
    the inclusion of these types of provisions in any comprehensive
    electrical deregulation legislation.
        I yield back the balance of my time.
        Mr. Barton. We thank the gentleman from Kentucky.
        Does the gentleman from New Jersey, Mr. Pallone, wish to be
    recognized now?
        Mr. Pallone. Yes, Mr. Chairman, thank you. I guess taking
    me out of order was actually maybe appropriate since I am now
    following my colleague from Kentucky, and I listened to what he
    had to say very carefully.
        First of all, let me thank you, Mr. Chairman, for holding
    this important hearing. And I also appreciate you having
    invited the witness that I requested, Mr. Larry Codey of PSE&G,
    to testify before us today.
        Today I am going to focus my remarks on environmental
    issues in the context of restructuring. Affordable, reliable,
    clean energy is essential for the economic and social well-
    being of our society. We must ensure that any and all decisions
    that we make with respect to restructuring at the Federal level
    do not require consumers to choose between cheaper energy and a
    degraded environment.
        As you know and has been mentioned, a loophole in the Clean
    Air Act exempted older, dirty coal-fired power plants from
    complying with clean air standards. Consequently, emissions
    from these plants have traveled to the Northeast and negatively
    affect our air quality and public health.
        My home State of New Jersey recently enacted restructuring
    legislation that will enable all State residents to choose
    their electricity supplier by August 1. The New Jersey plan
    recognizes the nexus between the electric power industry and
    the environment through a renewable energy mandate and
    environmental disclosure rules for energy providers. But it
    does not go far enough, in my opinion, to protect the
    environment and consumers. That is why the Federal Government
    must, in my opinion, as part of its overall restructuring
    efforts provide some national measures to protect the health,
    welfare, and environment of our Nation.
        In the 105th Congress, I introduced legislation aimed at
    implementing uniform environmental standards that would apply
    to all electric generators. I plan to reintroduce an expanded
    version of my bill in the near future. The core of the bill is
    an emissions trading scheme that would establish caps to lower
    emissions nationwide and enable utilities to use market-based
    mechanisms, in other words, credit trading, to achieve these
    reductions in a cost-effective manner.
        In the last Congress, every member in the New Jersey House
    delegation cosponsored my bill, and the bill attracted more
    cosponsors and bipartisan support than any other electric
    industry restructuring bill. I mention this because I think
    that support reflects the fact that consumers want to realize
    the economic benefits of electric industry competition, but not
    at the expense of being exposed to dirtier air.
        Mr. Codey and other witnesses will elaborate upon the need
    for uniform Federal environmental measures when they testify as
    part of the second panel.
        Mr. Chairman, I want to say that the congressional action
    to reduce emissions nationwide appears even more critical
    following a ruling that has been mentioned by some of my
    colleagues from last Friday by a U.S. appeals court involving
    the U.S. EPA's National Ambient Air Quality Standards for
    particulate matter and ozone. The decision indicates that the
    Clean Air Act may not provide sufficient authority for the EPA
    to establish these particular standards. Legislation such as my
    emissions training bill would provide EPA with this authority
    regardless of the impacts of this ruling. I would, however,
    like to hear from all of our witnesses in the second panel as
    to their thoughts on the potential impacts of this ruling.
        The bill that I am to introduce also remains necessary for
    NOX emission reductions despite the issuance of
    EPA's NOX ``sip call'' rule. For example, the rule
    only applies to 22 States. My bill would be consistent with
    this rule and would ultimately create a level playing field for
    reducing emissions nationwide without yielding unfair price
    advantages to older, dirtier power plants. Moreover, the bill
    that I will be introducing will include meaningful and
    enforceable disclosure provisions, a kind of truth-in-labeling
    law for electric energy, among other provisions. Consumers want
    and, in my opinion, deserve to know the price, source, and
    environmental content of the energy products and services that
    they are purchasing.
        Finally, Mr. Chairman, I have heard frequent complaints
    that environmental compliance must adversely affect electric
    system reliability. I have long believed that taking steps to
    protect public health and the environment would not adversely
    affect electric system reliability, and our recent hearing on
    reliability did not provide any information to the contrary.
        In addition, I am pleased that the Ozone Attainment
    Coalition is undertaking a study examining the impact of sip
    call compliance on electric system reliability. That study
    demonstrates that the needed NOX reductions can be
    achieved in a cost-effective manner without jeopardizing
    reliability of the power grid.
        I just want to thank you again, Mr. Chairman, for holding
    this important hearing, and I look forward to hearing from our
    witnesses. Thank you.
        Mr. Barton. Thank you.
        The Chair recognizes Congresswoman Wilson for an opening
    statement.
        Mrs. Wilson. Mr. Chairman, I ask unanimous consent that my
    statement be included in the record.
        Mr. Barton. Gladly, without objection.
        The Chair would recognize Mr. Bryant for an opening
    statement.
        Mr. Bryant. Thank you, Mr. Chairman.
        I am pleased that we are having this hearing on the
    important issues of PURPA, stranded costs, and the environment.
    I think that we need to carefully consider what the Federal
    role should be in these issues and how we can best handle them
    in an environment.
        PURPA was enacted in 1978, as was earlier said, when we as
    a Nation were concerned about the possibility of diminishing
    energy supply and our dependence on foreign oil. Since 1978, we
    have developed technology which has enabled us to produce
    energy much more efficiently. PURPA played a role in that.
    However, I believe that PURPA has served its purpose, and it
    may well be time to repeal this legislation and move on to a
    competitive environment based on market prices.
        Also, I do not want to see PURPA replaced by mandates
    forcing people to buy higher-cost renewable energy. I am,
    however, encouraged by the marketing of green energy, which
    allows customers to choose to buy energy from renewable
    sources.
        I must also say that I would join with my colleague from
    Kentucky in his remarks about this subject and also from my
    colleague from Georgia and his remarks about stranded costs. I
    believe that we do have to consider as a part of our
    consideration of the stranded cost issue how individual States
    which have enacted restructuring legislation have dealt with
    stranded costs and, in doing so, evaluate what the Federal role
    should be. Certainly I would stand with my colleague from
    Georgia that these communities should not be hit with
    assessments that would be affected by handling these stranded
    costs in a wrong-headed way.
        With that, Mr. Chairman, in the interest of time, I will
    yield back my time and look forward to these witnesses
    testifying today.
        Mr. Barton. I thank the gentleman from Tennessee.
        We will now recognize the gentlelady from Missouri for an
    opening statement.
        Ms. McCarthy. Thank you very much, Mr. Chairman. No one has
    to yield to me.
        I want to thank you, by the way, for this very important
    hearing and particularly for the panel that you have put
    together, because when we look at the context of restructuring,
    and particularly this industry, the electric industry, we
    really have to take a look at the current regulatory structure
    that keeps us from having true competition. As you and I, Mr.
    Chairman, have talked many times, if we have that true
    competition and it thrives, then we will have efficiencies, and
    we will have a stronger economic opportunity, and we also will
    have a better environment, and our economy will continue to
    perk along, so it becomes a win-win for everyone.
        So the hearing that you have put together today to take a
    look at the potential barriers in PURPA and with stranded costs
    and possibly outdated environmental regulations I think are
    critical. I am looking forward in particular to some of the
    topics addressed by the second panel that we will deal with.
    Restrictions that are going to hinder and already hinder
    efficient and environmentally cleaner fuels being used and
    whether that is going to take Federal legislation or whether
    the States themselves can handle that, I think, is a critical
    issue for us to determine on this subcommittee.
        So I look forward to that and to addressing the laws such
    as the Clean Air Act and PURPA and others that are meant to
    encourage the development of more efficient and cleaner and
    better-burning fuels, but in some cases have become impediments
    to that. I think that if we can resolve that particular issue,
    the larger question of deregulation will become an easy one for
    us because we would have put together the structure that we
    need to make sure that we have the economic incentives there to
    make this again a win-win.
        So thank you very much, Mr. Chairman, for the opportunity
    to participate in this today.
        Mr. Barton. Thank you.
        The Chair would recognize Mr. Largent of Oklahoma for an
    opening statement.
        Mr. Largent. Thank you, Mr. Chairman. I would make a brief
    statement and thank you for holding this hearing.
        I think these issues that we are dealing with this morning
    are very important; PURPA, stranded costs, and the environment.
    I am particularly interested in the second panel hearing from
    Mrs. O'Neill from Green Mountain Energy to hear exactly why
    they are in business. There is no government mandate that they
    be in the renewable business up in Burlington, Vermont, and yet
    they have, it seems to me, a very innovative product that a
    number of their customers enjoy and appreciate without any
    government mandate. So I think that will be enlightening
    testimony.
        Also, I want to welcome Denise Bode, one of our
    commissioners from Oklahoma, one of my political heroes, a very
    articulate, energetic, free-market competition regulator from
    the State of Oklahoma. I think that hearing her testimony this
    morning will be interesting in that, and I have heard many of
    my colleagues in their opening statement talk about the low
    cost in their States and wanting to protect their low rates
    whether they be in Idaho or Kentucky or wherever. What is
    interesting is that Oklahoma, as many folks know, is a low-cost
    State, yet has been a leader in this move toward electric
    competition. In fact, as is often the case, we now see that
    Texas and Arkansas are following the lead of Oklahoma in moving
    toward electric restructuring.
        So, Mr. Chairman, I thank you for holding this hearing and
    look forward to the testimony.
        Mr. Barton. We are always encouraged to follow Oklahoma in
    our State.
        The gentleman from Ohio, Mr. Strickland, is recognized for
    an opening statement.
        Mr. Strickland. Thank you, Mr. Chairman.
        I would just like to take a moment to associate myself with
    remarks made by both Dr. Norwood and my good friend from
    Kentucky Mr. Whitfield. We know what the questions are. I look
    forward to hopefully getting some answers from our witnesses
    today. With that, I yield back the balance of my time.
        Mr. Barton. We thank you.
        The distinguished vice chairman Mr. Stearns for an opening
    statement.
        Mr. Stearns. I thank you, Mr. Chairman. I ask unanimous
    consent that my opening statement be made part of the record.
        Mr. Barton. Without objection.
        Mr. Stearns. As you know, Mr. Chairman and my colleagues, I
    have a bill dealing with PURPA reform. It is H.R. 1138, the
    Ratepayer Protection Act of 1999. I am pleased this morning to
    announce that we have 19 members that also see the need for
    this reform and have joined me in cosponsoring this
    legislation.
        I won't go into the history of PURPA, but it started under
    the Carter energy plan. Basically, back then everyone was
    convinced that we had run out of natural gas and that the price
    of oil would soar to $100 per barrel or even more by the year
    2000. So in a sense we have not seen that happen, and
    competition has brought the price down.
        Congress sought in drafting PURPA to ensure that the
    customer would pay no more for PURPA power than it would have
    to pay for other power. This did not work out that way. PURPA
    has been responsible, unfortunately, Mr. Chairman, for scores
    of long-term contracts. Over 60 percent of PURPA contracts will
    not expire until after the year 2010 at prices far in excess of
    what it would cost utilities to generate to purchase the same
    amount of power. According to one study PURPA is costing
    consumers nearly $8 billion per year in excess electricity
    costs.
        I think PURPA, as my colleague from Oklahoma pointed out,
    stands in the way of a more competitive electric industry. A
    natural gas-fired project was found to qualify for PURPA's
    benefit because it produced distilled water in addition to
    electricity, even though the distilled water was flushed down
    the drain. So there are examples of people gaming the system
    out there.
        Requiring utilities to purchase new PURPA power when they
    may no longer have retail customers to whom they can resell
    power absolutely makes no sense. We have had 20 years of
    experience behind us, and it is clear that PURPA has outlived
    its usefulness.
        So, Mr. Chairman, I applaud you for this hearing. I look
    forward to hearing from our distinguished panel on PURPA as
    well as the issues of stranded costs and the environment. Thank
    you for your courtesy, Mr. Chairman.
        [The prepared statement of Hon. Cliff Stearns follows:]
    Prepared Statement of Hon. Cliff Stearns, a Representative in Congress
                           from the State of Florida
        Thank you, Mr. Chairman. I am pleased that we are holding this
    hearing today to obtain feedback on the issues of stranded costs, the
    environment, and PURPA. I am particularly interested in the PURPA
    aspect of this hearing. In fact, I am a sponsor of PURPA reform
    legislation, HR 1138, the Ratepayer Protection Act of 1999. Nineteen
    members also see a need for PURPA reform and have joined me in
    cosponsoring this measure.
        More than 20 years ago, the Public Utility Regulatory Policies Act
    (PURPA) was enacted as one of the original components of the Carter
    Energy Plan. Convinced that we were running out of natural gas and that
    the price of oil would soar to $100 per barrel or even more by the year
    2000, Congress passed PURPA to encourage conservation and promote the
    use of renewable fuels to generate electricity. It did this by
    establishing a special class of power generators known as qualifying
    facilities (``QF's'') and it required utilities to buy all the
    electricity that these facilities wished to sell at a price determined
    generally by federal regulators and specifically by state regulators.
        Congress sought, in drafting PURPA, to ensure that customers would
    pay no more for PURPA power than they would have to pay for other
    power. It did this by providing in PURPA that the maximum price for
    electricity from QF's would be the cost that the purchase utility would
    have incurred if it had generated the electricity itself or had
    purchased it from a source other than the QF.
        Today, we know better. Natural gas supplies are abundant. Oil
    prices are not skyrocketing, and the vast majority of QF's use coal or
    natural gas, not solar, wind, or geothermal energy to generate
    electricity. Meanwhile, PURPA has been responsible for scores of long-
    term contracts (over 60 percent of PURPA contracts will not expire
    until after the year 2010) at prices far in excess of what it would
    cost utilities to generate or purchase the same amount of power.
    According to one study, PURPA is costing consumers nearly $8 billion
    per year in excess electricity costs.
        PURPA also stands in the way of a more competitive electric
    industry. By granting special status to some electricity generators,
    but not others, PURPA encourages the creation of uneconomic projects
    just to qualify for PURPA benefits. In one recent case, for example, a
    natural-gas fired project was found to qualify for PURPA's benefits
    because it produced distilled water in addition to electricity, even
    though the distilled water was flushed down the drain.
        Moreover, PURPA was premised on utilities continuing to be the
    exclusive suppliers of electricity to all consumers within their
    franchise territories. In many states today, customers have the ability
    to choose their own electric supplier. Requiring utilities to purchase
    new PURPA power when they may no longer have retail customers to whom
    they can re-sell power makes no sense.
        With 20 years of experience behind us, it is clear that PURPA has
    outlived its usefulness. I believe we should do three things to reform
    PURPA: (1) prospectively repeal PURPA's mandatory purchase obligation
    on the date of enactment, so that there would no longer be any new
    obligations to purchase this power; (2) respect the sanctity of
    existing PURPA contracts; and (3) ensure that purchasing utilities
    would continue to be permitted to recover the costs of existing PURPA
    contracts as long as these contracts are in effect.
        I know we all seek to achieve the most efficient and most cost-
    effective means of electric generation for America's consumers and I
    believe my measure represents a broad based consensus on the important
    issue of PURPA. I would urge that the principles in HR 1138 be included
    in whatever electric industry legislation might be considered by this
    Congress.
        I look forward to hearing from our distinguished panelists on the
    PURPA question, as well as the issues of stranded costs and the
    environment. Thank you, Mr. Chairman.

        Mr. Barton. Thank you, Congressman Stearns.
        The Chair would recognize Mr. Pickering for an opening
    statement.
        Mr. Pickering. Mr. Chairman, thank you. I would commend you
    again for having this hearing and also putting together the
    working group that is making progress as we try to complement
    the work being done by the committee in these hearings.
        The hearing today is very important as we look at the best
    way to go forward. I think on PUHCA and PURPA, as well as other
    barriers to competition, the question is have they outlived
    their usefulness; is it time for them to be put aside or
    repealed; and then, if anything, what is put in its place.
        On the stranded costs, the question is who is best able
    from a jurisdictional point of view to address those issues,
    and from an environmental perspective, is a pro-market-
    competitive policy more efficient and effective and more
    quickly able to bring us the environmental benefits that we all
    hope to see?
        I look forward to the testimony of the panel and continuing
    to work with the consensus on this issue as we go to a
    competitive policy.
        Again, thank you, Mr. Chairman.
        Mr. Barton. Thank you.
        The Chair recognizes the distinguished gentleman from
    Arizona for an opening statement.
        Mr. Shadegg. Thank you, Mr. Chairman. I would ask with
    unanimous consent that my statement be placed in the record.
        Beyond that let me simply say that I commend you for
    holding this hearing. I think it is vitally important that we
    look at the barriers to competition which the Federal
    Government has erected. I believe PURPA to be one of those
    barriers. I think that as technology is pushing restructuring
    forward, it is important that the Congress move and move
    expeditiously to get those Federal barriers out of the way. I
    think that is an obligation on the Congress for the benefit of
    the American people.
        Another topic of this hearing is a question of
    environmental concerns. I think several of my colleagues have
    already raised the point that while we would all agree that it
    is our goal to protect the environment and to ensure it is not
    damaged in any way, there is a legitimate question as to what
    is the best mechanism to achieve that goal. I think you can
    look at many mandatory policies which the government has
    imposed and discover that though well-intended, they have, in
    fact, done more harm than good.
        I am very interested to hear from those today who are
    involved in providing green power, power which protects the
    environment, but not doing so as a result of a government
    mandate. I am anxious to hear how the absence of mandates might
    lead to a more innovative answer to some of those environmental
    concerns.
        Again, Mr. Chairman, I commend you for holding the hearing
    and yield back the balance of my time.
        Mr. Barton. Thank you.
        The Chair would recognize the distinguished chairman of the
    Subcommittee on Health and Environment, Mr. Bilirakis, for an
    opening statement.
        Mr. Bilirakis. Thank you, Mr. Chairman, and good morning.
        Mr. Chairman, I certainly associate myself with Mr. Stearns
    comments particularly, but, Mr. Chairman, I also want to
    commend you and thank for not only this hearing, but the many
    in a series of hearings that you are holding. There are an
    awful lot of questions, and the only way that we could even
    have any opportunity to learn is to sit in on hearings. I just
    hope that we all can be open-minded, otherwise what is the
    sense of holding hearings?
        And having said that, Mr. Chairman, I look forward to some
    of the testimony of the witnesses. Thank you.
        Mr. Barton. The Chair would see no other member present who
    has not been recognized. The Chair would recognize himself for
    an opening statement and apologize in advance for its brevity.
    I am not up to the standards of some of the statements that we
    have heard this morning, but I will get better at the next
    hearing. We want to increase the length of my hearing and my
    statement.
        I would like to welcome everyone today for our hearing on
    PURPA, stranded costs, and the environment. This is the fifth
    hearing in a series of hearings on electricity deregulation or
    restructuring. These hearings will hopefully serve as a
    framework to produce a comprehensive bill to reform the
    electricity industry in the United States of America.
        I might say that our next hearing next week is going to be
    on consumer protection. That will be next Wednesday, May 26,
    which is somewhat unusual because most of our hearings have
    been on a Thursday.
        After many decades of operating in a competitive, but
    regulated market structure, the electricity utility industry is
    facing significant changes today both from new generating and
    transmission technology, but also from shifting public policy
    perspectives with respect to competition and regulation.
        The current system of the utility regulation is untenable,
    in my opinion. I am convinced that market forces can and should
    replace the existing regulatory structure wherever possible.
    Existing regulation is an imperfect substitute for a true
    marketplace and real self-regulating market forces will result
    in a more efficient allocation of the country's resources and
    should provide customers with lower prices than we have today.
        But before we abandon regulation for competition, it is
    important and imperative that we examine the Federal and State
    laws which may be barriers to an efficient marketplace. One of
    those laws that we will look at today is the Public Utility
    Regulatory Policy Act. Although competition was not its primary
    purpose, without PURPA we would not be discussing competition
    in the electric industry today. However, some of the things
    that PURPA did to promote competition may no longer be
    necessary in today's marketplace. So as we move to promote full
    retail competition in the comprehensive bill, reform of
    portions of PURPA is in order.
        Similarly, transitional issues like stranded costs must
    also be addressed in moving to retail competition. My studies
    indicate that States that have acted or are considering acting
    on electricity are addressing stranded costs, but it appears
    that some Federal role may still be necessary.
        Again, I want to thank our witnesses today. I appreciate
    all of the opening statements. I think the sincerity and the
    length of the opening statements does indicate that people are
    taking this issue seriously, and I think that is a very, very
    good thing.
        The Chair does recognize that we have a vote on the floor.
    Seeing no members present to make an additional opening
    statement, we are going to recess, as it would not be fair to
    our witnesses to have no one here but whoever is actually in
    the Chair. So we are going to recess until 11:15. I would
    encourage all members to be back by 11:15, at which time we
    will commence our first panel.
        [Brief recess.]
        Mr. Barton. The subcommittee will come to order. Before we
    impanel our first panel, there are two members here who weren't
    here at the end of the opening statements. The Chair will
    recognize Mr. Wynn and then Mr. Markey for what will hopefully
    be brief opening statements.
        Mr. Wynn.
        Mr. Wynn. Thank you, Mr. Chairman, for your courtesy. In
    the interests of time, I will defer opening statement, and I
    would like to submit one for the record at a later time.
        Mr. Barton. Thank you, Congressman.
        Mr. Markey.
        Mr. Markey. Thank you, Mr. Chairman, very much. And I thank
    you for putting together this excellent panel today. As we
    know, electrical generating facilities create one-third of the
    greenhouse gases that are produced in the United States. I
    think for some people that oftentimes comes as a surprise that
    such a small number of plants in each State, compared to the
    number of automobiles and industrial facilities and homes,
    create such a huge percentage of the greenhouse gases.
        Much of what we talked about in the 1970's during the
    development of the Energy Policy Act then and right through the
    1990's has tried to focus upon this issue so that we can make a
    transition in the 21st century to a day where by the end of
    this coming century we really do have a renewable strategy that
    can supplant the fossil fuel dependency which the 20th century
    was so renowned for.
        So my hope is that as we discuss any restructuring
    legislation, that we find ways in which to promote new, more
    efficient, less polluting technologies so that as we move
    forward, we have articulated a strategy that continues the
    progress which we made so far. Who could have predicted in the
    1970's that renewable technologies would have made so much
    progress over the last 20 years, but simultaneously the cost of
    fossil fuels would have dropped so much? That is just so
    completely contrary to everything which we heard in the 1970's.
    They have made the progress which they thought that we could
    make, but another unpredicted event occurred simultaneously.
        So I am interested in exploring ways in which we can
    develop emerging renewable sources through a renewables
    portfolio standard, through tax credits, through public
    benefits charge; some way in which we as public policymakers
    continue to advance the progress which we made over the last 20
    years and then export these technologies around the globe,
    which clearly, looking at China, India, Africa, South America,
    are going to be needed in order to avoid an environmental
    catastrophe.
        I thank you, Mr. Chairman, for holding this hearing, and I
    yield back the balance of my time.
        Mr. Barton. Thank you, Congressman Markey.
        We would now like to ask our first panel to come forward.
    We should have name plates for you. We have Ms. Denise Bode,
    who is a commissioner on the Oklahoma Corporation Commission.
    We have Mr. Richard Andelman, who is with BJ's Wholesale Club.
    He is their energy systems and utility manager. We have Mr.
    Ross Ain, is that correct, who is president of the East Coast
    Power; and we have Mr. Arthur Adelberg, who is the executive
    vice president of the CMP Group.
        The Chair would recognize Mr. Largent to introduce more
    formally Commissioner Bode.
        Mr. Largent. Thank you, Mr. Chairman. Again, I would just
    say what I said earlier, that Denise and I have been friends
    for a number of years. We met first when she was working with
    the IPAA. She is a very energetic advocate for a variety of
    causes, but most importantly is very much a procompetition,
    free-market thinker, and somebody whose opinion I really value
    and is now a corporation commissioner in the State of Oklahoma,
    as I said earlier, a low-cost State moving to a restructured
    electricity market, which I think is an interesting phenomenon
    given the anxieties that I hear a number of our members from
    low-cost States, as they talk about moving to a restructured
    environment, worried about the ability to maintain their low
    rates, and yet Oklahoma is leading in that area.
        So again, I want to welcome Denise and look forward to her
    testimony.
        Mr. Barton. Thank you, Congressman.
        We are going to recognize each of you in turn. Your entire
    statement is in the record in its entirety. We are going to ask
    that you try to summarize sides them in 7 minutes. That is what
    the little lights are all about.
        So, Ms. Bode, we recognize you, and we welcome you to the
    subcommittee.

         STATEMENTS OF DENISE A. BODE, COMMISSIONER, OKLAHOMA
     CORPORATION COMMISSION; RICHARD ANDELMAN, ENERGY SYSTEMS AND
         UTILITY MANAGER, BJ'S WHOLESALE CLUB, INC.; ROSS AIN,
    PRESIDENT, EAST COAST POWER; AND ARTHUR W. ADELBERG, EXECUTIVE
                    VICE PRESIDENT, CMP GROUP, INC.

        Ms. Bode. Thank you so much, Mr. Chairman. I am Denise
    Bode, and I am a member of the Oklahoma Corporation Commission.
        Mr. Barton. You really need to put the microphone very
    close to you because they don't pick up very well.
        Ms. Bode. Thanks.
        The Oklahoma Corporation Commission is a three-member panel
    elected statewide that regulates all utilities, oil and gas
    exploration, and production and transportation, underground
    storage tanks among other things. I am here at the request of
    the committee to discuss the progress toward the electric
    industry restructuring.
        Before I discuss our initiative on electricity, though, I
    want to mention that Oklahoma has promulgated new rules to
    restructure the natural gas industry to bring competition and
    choice to consumers. In fact, we are in the unbundling process
    right now with competitive bidding starting this year. I raise
    this issue because I believe the unbundling of the gas industry
    will increase competition in our gas utility industry and will
    poise the gas industry in our State to supply the fuel of the
    future, which we believe is natural gas, for electrical
    generation. So we really believe that this is an important step
    forward in terms of preparing our State and our energy resource
    base to help also provide energy resources in the future. I
    know Chairman Bliley's keen interest in this issue and want to
    offer to keep the staff and committee updated on our initiative
    in this area.
        Let me share with you a little background. Oklahoma is the
    third largest gas-producing State in the Nation, yet we only
    use 30 percent of the gas that we produce. We export 70 percent
    of our natural gas. So we believe that we are perfectly
    positioned with an abundant feed stock to fuel new higher-
    efficiency gas-fired electric generation facilities. In fact,
    we have several such new facilities on the drawing board right
    now in Oklahoma.
        Oklahoma also has, as Congressman Largent mentioned, one of
    the lowest costs for electricity in the country. Currently
    electricity prices in Oklahoma are approximately 19 percent
    below the national average and more than 50 percent lower than
    such States as California and Pennsylvania. Although the prices
    charged by electric providers are among the lowest in the
    Nation, we believe that the issues driving restructuring in
    Oklahoma are a little different than those found in States
    where prices are higher, and thus we believe that there is a
    need to move ahead cautiously and make sure that we are better
    off as a result of what we do.
        But we do believe that it is vital, and that is why our
    legislature and our commission has taken the lead among low-
    cost States in not standing on the sidelines and, in fact,
    providing leadership for the restructuring effort. We passed
    our electric restructuring law on April 25, 1997. We hope to
    have choice in place by July 1, 2002. And we have ongoing right
    now a series of task forces looking at over 100 issues
    including operations, market structure, territorial and
    competitive issues, regulatory, legal, revenue and taxation.
    Many of those key issues will be dealt with, and we will be
    issuing a report on the task force by October of this year,
    October 1999.
        One of the key areas that they have been working on, one of
    the first things that came out, is with regard to the creation
    of an independent system operator. I mention that because I
    believe that this issue is one of the key issues in terms of
    system reliability. I want to share with you that we have just
    learned in Oklahoma that reliability is particularly critical.
    With the tornado that hit--or tornadoes, I should say, that hit
    Oklahoma, it was interesting because one of the tornadoes went
    right up the power line to one of our major power plants and
    knocked down some 17 steel towers going up there to our senior
    power plant, which, by the way, is a coal-powered plant in the
    northern part of the State. It required quick action on the
    part of the system operator at Oklahoma Gas and Electric to
    back off that power and to use a peaking plant, a gas peaking
    plant near Seminole, to provide that power. That, in fact, will
    be the case. Until August of this year, there will be a gas
    fired-plant providing much of the electric power until they can
    get those lines back on.
        But again, that underscores for me and I think for everyone
    here the importance of making sure that whoever is managing
    that system and is managing how those give and takes in the
    electric generation facilities work, making sure we have a good
    system in place, because it did work very well this time, and
    we need to make sure whatever new system is put in place does
    work equally well.
        In Oklahoma we probably have one of the most difficult
    problems with taxation of local facilities. That is an issue
    that we need to deal with. I fully support the concept of
    restructuring to provide competition and customer choice. I
    believe we must have a reasonable transition of our electric
    industry from monopoly regulation to one of not just
    competition, but managed competition. Restructuring of the
    electric industry will be valuable to all consumers in the long
    run if it is allowed to occur properly.
        So what is the role for Federal legislation in this
    process? The Federal Government should focus its effort on
    those issues and policies beyond the grasp of State
    authorities. Of paramount concern should be the establishment
    of clear and consistent regional transmission policies.
    Congress should also remove existing barriers to restructuring
    in current law, not by piecemeal effort, but as part of the
    total Federal legislative effort.
        The Public Utilities Regulatory Policy Act, PURPA, should
    be repealed, but it should be repealed as part of a broader
    policy effort. The Federal role should be to enforce the
    concept that markets and not governments should determine our
    Nation's fuel choices. PUHCA must be reformed to reflect
    today's market structure and to allow tomorrow's more
    competitive model to more fully develop. Rural utility service
    policies must also be changed to allow rural electric
    cooperatives to successfully transition to competitive markets.
        However, removing barriers may not be enough. Congress may
    also consider ways to enhance the development of competitive
    electric markets. An important part of allowing the market
    forces is that we need to make sure that consumers will make
    choices with which you or I as a policymaker might disagree. I
    urge you to resist the temptation to impose your own views of
    fuel choice on the marketplace by mandating fuel choices or
    allowing prior law to advantage one fuel choice over another.
        We need to also make sure that the Federal Government does
    not work on issues like stranded costs in terms of mandating.
    We believe in Oklahoma we are better positioned to take care of
    those issues, and we would like the flexibility to manage those
    changes in our marketplace.
        I guess my time is up, so let me just allow others to move
    on.
        Mr. Barton. If you are going to say something good about
    the comprehensive bill, we will give you another minute or 2.
        Ms. Bode. Well, I do think that a comprehensive bill is
    important.
        I guess the final thing I would say is that I think we have
    all learned a lot as regulators the way in which the
    deregulation and transition from monopoly to competition in the
    telephone industry has occurred. I just urge us all to sit and
    look at what has happened in terms of the way that transition
    has occurred and make sure that we use those lessons to make
    sure as we restructure the electric industry that it is done in
    a more structured, less piecemeal effort and so that education
    of consumers is paramount.
        [The prepared statement of Denise A. Bode follows:]
     Prepared Statement of Denise A. Bode, Oklahoma Corporation Commission
        Mr. Chairman, I am Denise Bode, a member of the Oklahoma
    Corporation Commission (OCC). The OCC is a three-member panel elected
    statewide that regulates public utilities, oil and gas production and
    exploration, and transportation in the state of Oklahoma. I am here at
    the request of the Committee to discuss Oklahoma's progress towards
    electric industry restructuring.
        Before I discuss our initiative on electricity, I want to mention
    that Oklahoma has promulgated new rules to restructure the natural gas
    industry to bring competition and choice to consumers. We are in the
    unbundling process now with competitive bidding starting this year.
    This is important because in looking to restructure the electricity
    industry to better America's future, we must begin to look outside of
    ``the box'' and consider energy as a whole. I know Chairman Bliley's
    keen interest in this issue, and I want to offer to keep the committee
    and staff updated on our initiative in this area as well.
        Let me share with you a bit of background. Oklahoma is the third
    largest gas producing state in the nation, yet we only use 30% of what
    we produce, so we are perfectly positioned with an abundant feedstock
    to fuel new higher efficiency gas fired electric generation facilities.
    It is also important to understand that Oklahoma already has one of the
    lowest costs for electricity in the country. Currently, electricity
    prices in Oklahoma are approximately 19% below the national average,
    and are more than 50% lower than such states as California and
    Pennsylvania. When prices charged by electric providers are among the
    lowest in the nation, the issues driving restructuring are different
    from those found in states where prices are much higher. Thus, there is
    a particular need to move ahead cautiously to ensure we don't end up
    worse off after all is said and done. It is vital, however that low
    cost states such as Oklahoma not stand on the sideline while electric
    restructuring is debated.
        More than three years ago, the Oklahoma legislature created the
    Joint Electric Utility Task Force to examine electricity restructuring
    issues. This Task force revealed a multitude of issues that would
    require legislative and regulatory review before restructuring can
    become a reality.
        On April 25, 1997, the Electricity Restructuring Act of 1997 was
    signed into law in Oklahoma. As amended, the new law gives the OCC a
    clear mandate to move quickly over the next four years to develop an
    appropriate regulatory framework to allow for competition in the
    electricity industry. The law directs the Joint Electric Utility Task
    Force, with the assistance of the Oklahoma Corporation Commission, to
    study and propose both regulatory and statutory changes to the
    legislature on how to best restructure the electricity industry.
        This Act recognizes that it will take some time to unwind the over
    60 years of public policy that have resulted in our current electricity
    industry. The act provides the means for the legislature to receive the
    data and proposals needed to ensure electric restructuring occurs in
    Oklahoma in a timely manner while safeguarding the current economic
    advantages we enjoy. For example, electric rates for all consumer
    classes may not rise above the level in place on the date of enactment
    of the Bill until direct access by retail consumers is in place, July
    1, 2002. The magnitude of this legislation's impact on Oklahoma's
    economic future cannot be understated both from the standpoint of
    attracting business to our state, because we are a reliable supplier of
    low cost energy, as well as from the standpoint of being one of the
    largest suppliers of natural gas for electricity generation inside and
    outside our state. The changes that will flow from the Oklahoma
    legislation, as well as any legislation at the federal level, will
    materially affect every Oklahoman's future in the next century.
        The new Oklahoma law mandates that the Joint Utility Task Force,
    with the assistance of the OCC and the Oklahoma Tax Commission,
    undertake research in five separate areas. Based upon the results of
    the research the Joint Electric Utility Task Force will prepare a
    report to the legislature with recommendations for restructuring in
    Oklahoma. Six working groups, with participation from all parties, have
    been created to pursue research on the over 100 issues thus far
    identified. These groups are: operations; market structure; territorial
    and competitive; regulatory; legal; and revenue and taxation.
        The first area of research, the creation of an independent system
    operator (ISO), is the cornerstone for restructuring. Each subsequent
    area of research builds on that ISO cornerstone. Technical issues
    research will provide the regulatory and legislative recommendations
    that will address system reliability, unbundling of generation,
    transmission and distribution, and market power. Financial issues
    research will focus on issues such as stranded investment, access fees
    and utility financing. Consumer issues research will address such vital
    consumer protection issues as distribution service territories, the
    obligation to connect and licensing of retail electric energy
    suppliers.
        In Oklahoma, taxation may be the most difficult aspect of
    deregulation to resolve. The issue of tax equity will be studied and
    solutions developed to make sure that Oklahoma's state, county and
    local government needs are continually met and that the Oklahoma
    electric customer is not inappropriately taxed for electric energy use.
    It is important to know that under the Act, customer choice will not
    occur until tax parity is achieved.
        When restructuring is completed in Oklahoma on or before July 1,
    2002, the necessary regulatory and legislative solutions will be in
    place to ensure that rural electric cooperatives, investor-owned
    utilities, entrepreneurs, and all of our citizens will benefit from
    these efforts.
        I fully support the concept of restructuring of the electric
    industry to provide competition and customer choice. I believe we must
    have a reasonable transformation of our electric industry from one of
    monopoly regulation to one of competition. Restructuring the
    electricity industry will be valuable to all consumers in the long run,
    if it is allowed to occur properly.
        So, what is the role for federal legislation in this process? The
    Federal Government should focus its' efforts on those issues and
    policies beyond the grasp of states' authority. Of paramount concern
    ought to be the establishment of clear and consistent regional
    transmission policies. Congress should also remove existing barriers to
    restructuring in current law, not by piecemeal but as part of the total
    federal legislative effort. The Public Utilities Regulatory Policies
    Act (PURPA) should be repealed. The federal role should be to enforce
    the concept that markets, and not governments, should determine our
    nation's fuel choices. The Public Utility Holding Company Act (PUHCA)
    must be reformed to reflect today's market structure and to allow
    tomorrow's more competitive model to more fully develop. Rural
    Utilities Service (RUS) policies must be changed to allow rural
    electric cooperatives to successfully transition to competitive
    markets. Rural electric cooperatives must not be burdened with
    government mandated all-requirements contracts in a fully competitive
    generation market. Federal tax policies establishing ``private use
    restrictions'' for tax exempt bond proceeds should be amended to
    reflect the realities of emerging competitive markets for municipal
    electric services.
        However, removing barriers may not be enough. Congress must also
    consider ways to enhance the development of competitive electric
    markets. An important part of allowing in market forces is that often
    times consumers will make choices with which you or I as a policy maker
    might disagree. I urge you to resist the temptation to impose your own
    views of fuel choice on the market place either by mandating certain
    fuel choices or by allowing prior law to advantage one fuel choice over
    another. I would also ask that you allow the states to manage the
    issues that we are so well suited and staffed to manage as we wrestle
    with opening up our markets to competition. A cookie cutter approach by
    the federal government does not work on issues like stranded costs. As
    I mentioned in the beginning, Oklahoma is a low cost state and needs
    the flexibility to manage these changes in our marketplace. What may be
    a reasonable, prudent and necessary expense in California may not be
    the same in Oklahoma. I urge you not to become bogged down in the
    quagmire of stranded costs. Those kind of fact-specific decisions can
    best be made on the state level.
        In Oklahoma, as well as elsewhere in the country, competition in
    the electric marketplace is coming. Many in the electric industry are
    well ahead of government in moving that process along, as should be the
    case. The key is managing the restructuring in a steady and careful
    fashion. We should learn from the restructuring of the telephone
    industry and not surprise consumers, but get their input and spend time
    educating them about what choice in electricity will mean for them, or
    no reform will work. And by addressing expeditiously those issues that
    are uniquely federal in nature, Congress will go a long way towards
    enhancing the development of competitive electric markets. I would like
    to commend the chairman for the effort he and his staff have expended
    to hold this hearing and for asking for input from the states. Working
    together as a team, I know that state and federal policy makers can do
    the job of boosting the American economy by bringing greater choice and
    lower electric costs to all Americans.

        Mr. Barton. Thank you.
        We now recognize Mr. Andelman. Again, your statement is in
    the record in its entirety, and try to summarize in 7 minutes.

                     STATEMENT OF RICHARD ANDELMAN

        Mr. Andelman. I am Richard Andelman, energy systems and
    utilities manager of BJ's Wholesale Club. Thank you, Chairman
    Barton, and the rest of the committee for the opportunity to
    speak to you today.
        I would like to address two important issues related to the
    restructuring of the electric utility industry, namely the
    issues of stranded costs and green power. BJ's is a member of
    the International Mass Retail Association, an association whose
    members are characterized by high sales volume, extremely low
    profit margins, and a commitment to providing the best possible
    value to its customers. BJ's is a membership-based wholesale
    club chain which currently has 96 locations, most of which are
    108,000 square feet with a few locations with the smaller
    68,000-square-foot size. BJ's operates in 13 States primarily
    along the east coast, and this year we will spend about $27
    million on utilities. Since utilities are the third largest
    controllable cost for BJ's, the issue of electric restructuring
    is extremely important to our company and our 4.5 million
    members.
        In some of the States which have restructured thus far,
    namely Massachusetts, Rhode Island, and Pennsylvania, we have
    seen greatly increased levels of customer service and attention
    from the local utilities, innovative new products, the
    persistence of demand-side management programs in the
    northeastern States, and the beginnings of a competitive
    marketplace. However, we are particularly concerned about the
    distribution of so-called stranded costs to utilities which has
    been prevalent thus far in restructuring settlements.
        Stranded costs refer to past investments made by utilities
    that must be written off because these assets are obsolete;
    that is, they cannot generate electricity at competitive
    prices. It is important to remember that competition for
    generation supply, brought about by restructuring, did not
    bring about the obsolescence of older generation facilities.
    Rather, it is advances in new technologies of higher operating
    efficiencies, such as combined-cycle natural gas generators,
    that have made the older equipment obsolete. The question is
    not whether restructuring should be a basis for subsidizing
    utilities' past investments, but whether utilities under a
    regulated monopoly system should be reimbursed due to
    technological advances.
        Three Supreme Court cases provide clear support for denial
    of stranded costs in these case. Charles River Bridge, Market
    Street Railway, and Duquesne Light. The decision in Charles
    River Bridge makes it clear that the Court believes mandated
    recovery for obsolete assets would significantly and unfairly
    hinder technological and economic progress. In your
    documentation are copies of the executive summary of a study
    commissioned by IMRA that goes into more detail about these
    cases.
        Another subtler attempt by the utilities to use stranded
    costs recovery to restrict technological progress is the
    concept of exit fees and other penalties to commercial
    customers for using onsite generation. These fees are often
    inescapable as they are attached to the transmission and
    distribution charges on the tariffs. Fearful of losing revenue,
    the utilities are placing extreme fees on customers who wish to
    complement the existing grid-based supply by generating some
    electricity on their own.
        However, the advantages of onsite generation far outweigh
    the fears for three main reasons. First, the many forms of
    onsite generation under consideration, such as microturbines,
    are a much cleaner and more environmentally friendly source of
    electricity production. Second, onsite generation provides the
    opportunity to peak-shave, reducing peak electrical demand
    during highest periods, such as on the hot summer days when the
    electrical system is straining for resources and brownouts are
    more prevalent. Last, using onsite generation to complement the
    electrical grid allows for real-time pricing mechanisms to
    become effective, helping customers to manage costs and helping
    the utilities by providing more consistent demand on the
    electrical grid.
        My last thought on the subject of stranded costs pertains
    to the ever-elusive regulatory compact that utilities point to
    for verification that stranded costs were prudently incurred.
    It is my sincere wish that such a document existed, for if it
    did, all parties involved would know and understand how the
    restructuring of the electric utilities industry affects them,
    and this discussion would be moot. However, such a clear
    document does not exist. A prudent businessperson realizes
    there are inherent risks in large capital investments.
    Utilities would have been wise to adopt the terms and
    conditions of retiring obsolete assets before making
    significant capital expenditures on behalf of their
    shareholders.
        I would now like to turn my attention to the issue of green
    power and discuss our participation in green power projects.
    BJ's is involved with a solar energy project in cooperation
    with the not-for-profit group SunPower Electric, and green
    energy marketers such as Green Mountain Energy and AllEnergy.
    Stated simply, the relationship is such that SunPower owns and
    installs the solar equipment; BJ's donates its roof space as
    the location for the solar-electric generating plant and helps
    with the engineering and installation; and Green Mountain,
    AllEnergy, or other green marketers buy the green power to mix
    into their portfolios and sell to environmentally conscious
    consumers. We currently have two solar installations, one being
    the largest in Pennsylvania, and we will soon have a third
    which will be the largest in Rhode Island.
        BJ's is also working through the final details of procuring
    green power for a store in Pennsylvania and considering other
    green power options for the rest of our Pennsylvania locations.
        The solar projects would never have happened without the
    restructuring of the electric utility industry in
    Massachusetts, Pennsylvania and Rhode Island. SunPower, Green
    Mountain, and AllEnergy are risking their resources because
    they believe there is a strong market for green power and
    believe in the concept of sustainable energy production as part
    of the healthier future for the United States.
        It has been interesting to work through the different
    issues related to green power as both a consumer and in
    cooperation with producers. For instance, one Pennsylvania
    utility who feared the presence of onsite generation tried to
    impose an uneconomic auxiliary tariff on BJ's for having the
    solar installation on the roof, whereas they should have
    economically rewarded us for helping reduce peak demand on hot,
    sunny days.
        We have also struggled with how to present the concept of
    green power to consumers and the press, as most others don't
    understand how the electricity grid works and are confused by
    the concept of green electricity mixing with brown electricity
    throughout the grid.
        It is also equally clear that BJ's would not purchase green
    power if it comes at a premium. We are only able to purchase
    the green power at our Pennsylvania location because it was at
    a price cheaper than the existing utility tariff and coincided
    with the work that we were trying to do with the solar
    projects.
        I believe that while many residential consumers will see
    the value of green power to the health and sustainability of
    the United States, the majority of businesses will not choose
    green power unless it is provided at a price equal to or below
    the existing utility rates. Most will not choose green power at
    all unless it becomes the very cheapest form of electricity
    production.
        There is concern in the environmental community that,
    should restructuring take place, people will opt for the
    lowest-price power available, which means turning to
    environmentally unfriendly coal and oil plants. Should these
    older inefficient plants continue to be subsidized by stranded
    cost recovery and not be penalized for their contributions to
    environmental degradation, I would share their concern.
    However, if truly appropriate pollution penalties are applied,
    and market forces are free to operate, I believe the cheapest
    forms of electricity will also be the cleanest, and their use
    will satisfy both environmentalists and businesses alike.
        I have run out of time. Thank you.
        Mr. Barton. We are giving each witness a little extra time
    even. Even though I am not sure I appreciate totally everything
    that you are telling me, I will give you the time to tell it if
    you want to take another minute.
        Mr. Andelman. I will summarize with a few recommendations.
    From the perspective of the mass retailer, let me offer these
    comments. First, to pass Federal legislation which restructures
    all States in the Nation such that utilities competing to
    provide electricity supply throughout the Nation must also
    allow competition in their own territory as well, but all
    people should have the freedom to choose their electric
    supplier; second, to deny so-called stranded costs as they
    impede technological and environmental progress; and third, to
    ensure that hidden stranded costs, such as exit fees, are not
    allowed. The shortsightedness of these policies discourage
    clean energy production, real-time pricing, and cooperative
    efforts to maintain consistent demands on the electrical grid.
    On-site generation reduces the need for peak-capacity power
    plants allowing all utilities to be more economical and operate
    more efficiently.
        Thank you, Mr. Chairman.
        [The prepared statement of Richard Andelman follows:]
      Prepared Statement of Richard Andelman, Energy Systems & Utilities
                       Manager, BJ's Wholesale Club, Inc.
    Introduction
        I am Richard Andelman, Energy Systems & Utilities Manager of BJ's
    Wholesale Club, Inc. (``BJ's''). Thank you, Chairman Barton, and the
    rest of the Committee for the opportunity to speak to you today. I
    would like to address two important issues related to the restructuring
    of the electric utility industry, namely the issues of ``Stranded
    Costs'' and ``Green Power''.
        BJ's is a member of the International Mass Retail Association
    (IMRA), an association whose members are characterized by high sales
    volumes, extremely low profit margins, and a commitment to providing
    the best possible value for consumers. BJ's is a membership-based
    wholesale club chain, which currently has 96 locations, most of which
    are 108,000 ft\2\ with a few locations at the smaller 68,000 ft\2\
    size. BJ's operates in thirteen states, primarily along the East Coast,
    and will spend approximately $27M on utilities this year.
        Since utilities are the third-largest controllable cost for BJ's,
    the issue of electric restructuring is extremely important to our
    company and the effect it will have on our 4.5 million Members. In some
    of the states which have restructured thus far, namely Massachusetts,
    Rhode Island, and Pennsylvania, we have seen greatly increased levels
    of customer service and attention from the local utilities, innovative
    new products, the persistence of demand-side management programs in the
    Northeastern states, and the beginnings of a competitive marketplace.
    However, we are particularly concerned about the distribution of so-
    called ``stranded costs'' to utilities, which has been prevalent thus
    far in restructuring settlements.
    Stranded Costs
        Stranded costs refer to past investments made by utilities that
    must be written off because these assets are obsolete--that is, they
    cannot generate electricity at competitive prices. It is important to
    remember that competition for generation supply, brought about by
    restructuring, did not bring about the obsolescence of older generation
    facilities. Rather, it is the advances in new technologies with higher
    operating efficiencies, such as combined-cycle natural gas generators,
    that have made the older equipment obsolete. The question is not
    whether restructuring should be a basis for subsidizing utilities' past
    investments, but whether utilities under a regulated monopoly system
    should be reimbursed due to technological advances.
        Three Supreme Court cases provide clear support for the denial of
    ``stranded costs'': Charles River Bridge (1837), Market Street Railway
    (1945), and Duquesne Light (1989). The decision in the Charles River
    Bridge case makes it clear that the Court believes mandated recovery
    for obsolete assets would significantly and unfairly hinder
    technological and economic progress. In your documentation are copies
    of the executive summary of a study commissioned by IMRA that goes into
    more detail about these cases and the problems associated with stranded
    cost recovery.1
    ---------------------------------------------------------------------------
        \1\ For more information, see Brough and Maloney's Promise for the
    Future, Penalties from the Past: The Nature and Causes of Stranded
    Costs in the Electric Industry, a study commissioned by the
    International Mass Retail Association and Citizens for a Sound Economy.
    Contact IMRA (703)841-2300.
    ---------------------------------------------------------------------------
        Some utilities are spending tremendous amounts of money fighting
    for as much subsidization as possible, money which is eventually repaid
    by consumers and businesses. In contrast, utility shareholders have
    been responsible for very little of the transition to competitive
    generation supply; in fact, most utility stocks are doing even better
    than they had been previously, as investors are excited by the
    opportunities presented by huge amounts of incoming cash flow.
        Another subtler attempt by the utilities to use stranded costs to
    restrict technological progress is the concept of ``exit fees'' and
    other penalties to commercial customers for using on-site generation
    sources. These fees are often inescapable as they are attached to the
    transmission and distribution charges of the tariffs. Fearful of losing
    revenue, the utilities are placing extreme fees on customers who wish
    to complement existing grid-based supply by generating electricity on
    their own. However, the advantages of on-site generation far outweigh
    the fears for three main reasons:

    1. Many forms of on-site generation under consideration, such as
            microturbines, are a much cleaner, more environmentally
            friendly source of electricity production.
    2. On-site generation provides the opportunity to ``peak-shave',
            reducing peak electrical demand during high use periods, such
            as on hot summer days when the electrical system is strained
            for resources and brownouts are more prevalent.
    3. Using on-site generation to complement the electrical grid allows
            for real-time pricing mechanisms to become effective, helping
            customers to manage costs and helping utilities by providing a
            more consistent demand on the electrical grid.
        Rather than punishing commercial customers who seek to improve
    reliability and help stabilize electrical demands, utilities should
    provide incentives for such complementary behavior.
        My last thought on the subject of ``stranded costs'' pertains to
    the ever-elusive ``regulatory compact'' that utilities point to for
    verification that stranded costs were prudently incurred. It is my
    sincere wish that such a document existed, for if it did, all parties
    involved would know and understand how the restructuring of the
    electric industry affects them, and this discussion would be moot.
    However, such a clear document does not exist. A prudent businessperson
    realizes there are inherent risks in large capital investments--
    utilities would have been wise to document the terms and conditions of
    retiring obsolete assets before making significant capital expenditures
    on behalf of their shareholders. As with any business, there are risks
    to any profit-making venture, and utilities and their shareholders must
    now absorb the costs of their risks.
    Green Power
        I would now like to turn my attention to the issue of green power,
    and discuss our participation in green power projects. BJ's is involved
    with a solar energy project in cooperation with the not-for-profit
    group SunPower Electric, and green energy marketers such as Green
    Mountain Energy Resources and AllEnergy. Stated simply, the
    relationship is such that SunPower owns and installs the solar
    equipment, BJ's donates its roof space as a location for the solar-
    electric generating plant and helps with the engineering and
    installation, and Green Mountain, AllEnergy, or other green marketers
    buy the green power to mix into their product portfolios and sell to
    environmentally conscious consumers. We currently have two solar
    installations, one being the largest in Pennsylvania, and will soon
    have a third which will be the largest in Rhode Island. BJ's is also
    working through the final details of procuring green power for our
    store in Conshohocken, Pennsylvania and is looking at green power
    options for the rest of our Pennsylvania locations.
        The solar projects would never have happened without the
    restructuring of the electric utility industry in Massachusetts,
    Pennsylvania, and Rhode Island. SunPower, Green Mountain, and AllEnergy
    are risking their resources because they believe there is a strong
    market for green power, and believe in the concept of sustainable
    energy production as part of a healthier future for the United States.
    I doubt that they are expecting stranded cost recovery should the
    political or economic landscape change.
        It has been interesting to work through the different issues
    related to green power, as both a consumer and in cooperation with
    producers. For instance, one Pennsylvania utility who feared the
    presence of on-site generation tried to impose an uneconomic auxiliary
    tariff for having the solar installation on our roof, whereas they
    should have economically rewarded us for helping to reduce peak
    electrical demand during hot, sunny days. We have also struggled with
    how to present the concept of green power to consumers and the press,
    as most do not understand how the electricity grid works, and are
    confused by the concept of green electricity mixing with ``brown''
    electricity throughout the grid.
        It is also equally clear that BJ's would not purchase green power
    if it comes at a premium. We were only able to purchase the green power
    at our Conshohocken location because it was at a price cheaper than the
    existing utility tariff, and coincided with the work we are trying to
    do with the solar projects. I believe that while many residential
    consumers will see the value of green power to the health and
    sustainability of the United States, the majority of businesses will
    not choose green power until it is provided at a price equal to or
    below existing utility rates. Most will not choose green power unless
    it becomes the very cheapest form of power production.
        There is concern in the environmental community that, should
    restructuring take place, people will opt for the lowest price power
    available, which means turning to environmentally unfriendly coal and
    oil plants. Should these older, inefficient plants continue to be
    subsidized by stranded cost recovery, and not be penalized for their
    contribution to environmental degradation, I share their concern.
    However, if truly appropriate pollution penalties are applied, and
    market forces are free to operate, I believe the cheapest forms of
    electricity will also be the cleanest, and their use will satisfy both
    environmentalists and businesses alike.
    Recommendations
        From the perspective of a mass retailer, I would like to offer the
    following recommendations:

    1. To pass Federal legislation which restructures all states in the
            nation, such that utilities competing to provide electricity
            supply throughout the nation must allow competition in their
            own territory as well. People should have the freedom to choose
            their electric supplier.
    2. To deny so-called ``stranded costs'', as they impede technological
            and environmental progress.
    3. To ensure that hidden ``stranded costs'', such as ``exit fees'', are
            not allowed; the short-sightedness of these policies discourage
            clean energy production, real-time pricing, and cooperative
            efforts to maintain consistent demands on the electrical grid.
            On-site generation reduces the need for peak capacity power
            plants, allowing all utilities to become more economical and
            operate more efficiently.
    4. To penalize polluting power plants or credit non-polluting ones,
            encouraging a more level playing field where market forces can
            support sustainable forms of energy production. If it is
            reasonably economic to do so, I believe it is in the national
            interest to promote technologies that reduce global warming,
            acid rain, and the numerous other negative effects
            traditionally associated with electric power production.
    5. To recognize that, although many residential consumers will likely
            choose green power products, most industrial and commercial
            customers will not, until the price of green power drops to a
            threshold consistent with their internal purchasing policies.

        Mr. Barton. Thank you.
        Mr. Ain, we would like to hear your statement now.

                          STATEMENT OF ROSS AIN

        Mr. Ain. Good morning, Mr. Chairman, and members of the
    subcommittee. My name is Ross Ain, and I am president of East
    Coast Power. East Coast Power, formerly Cogen Technologies, is
    developing new merchant power plants and operates more than
    1,000 megawatts of gas-fired, combined-cycle power plants that
    serve three utilities and multiple industrial steam users
    including the largest East Coast refinery.
        I might add that my personal history includes the honor of
    serving as counsel to this distinguished committee from 1976 to
    1979.
        Mr. Barton. Those were the glory years. Glad you are back.
        Mr. Ain. I am also here today representing the Electric
    Power Supply Association. In my written testimony I comment on
    the issues of utility stranded costs and the environment. With
    the few minutes that I have now, I would like to focus on
    PURPA.
        Quite simply, PURPA is the instrument that brought
    competition to an industry that was dominated historically by a
    vertically integrated monopoly structure. Today because of
    PURPA, a significant sector of the industry, the independent
    private power producers, must meet market standards for
    performance rather than regulatory prudence reviews and almost
    automatic pass-through of costs incurred.
        Costs plus investment recovery has given way to
    performance-based criteria driving enhanced efficiency,
    reliability, and technological innovation in this industry. In
    the decade before PURPA, the average electricity plant actually
    decreased in efficiency. When PURPA was being considered, the
    average efficiency of electricity-generating plants used in the
    United States was around 33 percent, which meant that your
    conversion of BTU input to electric output was about 33
    percent. Our new combined-cycle plants today, those figures are
    about 60 percent, to give you a feel for the technological
    changes.
        Since PURPA, electricity prices have declined in real terms
    by about 25 percent, and we look forward to even lower prices
    in a fully competitive marketplace. Plants now cost about half
    as much per kilowatt of capacity as they did 20 years ago and
    are 50 to 100 percent more efficient in converting BTUs into
    electric power.
        The central element of PURPA's success was its focus on
    costs. The target to beat for any successful new project became
    the cost of power that the utility would have paid had it gone
    forward itself. If a competitor could beat these utility
    avoided costs, it was given an opportunity to succeed and
    perform. At the time these projects were built and longer-term
    contracts were signed, these projects were considered by State
    regulatory bodies that reviewed them as the most cost-effective
    addition to existing generation capacity that the utilities had
    on their drawing board. In fact, for our large project in New
    Jersey, when the New York Public Service Commission reviewed
    it, they determined that we were 8 percent below what the
    utility would have charged consumers over the life of that
    contract.
        Obviously a review of the these projects today with 20-20
    hindsight might produce a different conclusion. This is not
    surprising. In any industry that faces long lead times for
    plant construction and high capital costs per unit of output,
    there is a substantial risk that economic conditions will
    change between the time that capital is committed and the end
    of the plant's useful life. In the private sector, contracts
    are used to hedge these risks for investors and for customers.
    PURPA followed this market practice, and project developers and
    utilities relied on long-term contracts to hedge their risks on
    both sides and finance billions of dollars of new plant
    improvements.
        In a real sense PURPA has been the victim of its own
    success. When States calculated utilities' avoided costs, no
    one predicted that the cost of new plants would be cut in half
    and that power plant efficiencies would nearly double. The
    legacy of PURPA, in fact, is a lesson that competitive markets
    and innovation will drive down costs to consumers faster and
    further than we can imagine.
        While the long-term legacy of PURPA is competition and
    lower costs, the engine for this innovation has historically
    been the mandatory purchase requirement of section 210. For
    many years this requirement was the battering ram to get into
    the generation marketplace. This is what gave access and open
    monopoly markets to entrepreneurs. In its historic context the
    requirement has had a profound and positive effect on the
    industry.
        Recently, however, the mandatory purchase requirement has
    largely been rendered moot by events occurring in the
    marketplace. To the extent that utilities are becoming
    distribution companies that deliver power for others and have
    no supply obligations themselves, they have no PURPA
    requirement to buy energy from others. Because of this, few
    States, if any, today guarantee new PURPA facilities rates that
    are higher than utilities' variable costs or fuel costs or
    provide any allowance for capital recovery.
        For this reason the committee should realize that if the
    mandatory purchase requirement is repealed prospectively, there
    will be no consumer savings. In fact, I don't even know of one
    example of a PURPA contract imposed on utilities in the last 2
    years. Granted, there still continue to be PURPA contracts
    signed; however, these are freely negotiated deals between the
    developer and the utility buyer, often in response to a
    competitive solicitation.
        Let me close with a few recommendations for the
    subcommittee on how to consider PURPA in restructuring
    legislation. First, any amendment to PURPA should acknowledge
    explicitly the sanctity of existing legal contracts. Parties to
    a legal contract should have their valid expectations and
    legitimate rights honored. To the extent that the contracts are
    honored, risks are reduced, and costs go down. The
    congressional action honoring contracts will reduce costs for
    your constituents by having a more stable investment
    environment. We don't need to create Third World contract risk
    in the United States.
        Second, we encourage you to consider removing the ownership
    restrictions on PURPA power plants. Originally these
    restrictions were included to prevent self-dealing by
    integrated monopolies and to encourage new market entrants. As
    retail competition takes hold, these restrictions no longer
    have much relevance.
        Finally, a number of members of this committee, including
    the subcommittee vice chairman Cliff Stearns, have endorsed
    provisions to guarantee the recovery by a utility of PURPA
    contract costs. Because these costs were created with the
    encouragement of a Federal program, it is appropriate for the
    Congress to clearly state these costs should be recovered in
    rates and not burden shareholders. In this regard we urge you
    to consider this cost recovery is contingent on the good faith
    of utilities in honoring the contract rights which are the very
    subject of that recovery.
        We appreciate this opportunity to testify before the
    subcommittee. We look forward to working with you as you craft
    legislation that can create a robust competitive national
    market place for electricity.
        Thank you, Mr. Chairman.
        [The prepared statement of Ross Ain follows:]
              Prepared Statement of Ross Ain, East Coast Power LLC
        Good morning, Mr. Chairman and members of the Subcommittee. My name
    is Ross Ain and I am the President of East Coast Power, LLC, a
    developer of merchant electric and steam cogeneration plants in the
    northeast United States. East Coast Power, formerly Cogen Technologies,
    Inc., operates more than 1000 Mw of gas-fired combined-cycle power
    plants that serve three utilities and multiple industrial steam users,
    including the largest east coast oil refinery. I might add that my
    personal history also includes the honor of having served as Counsel to
    this distinguished full Committee between 1976 and 1979.
        I am also here today representing the Electric Power Supply
    Association (EPSA). EPSA is the national trade association representing
    competitive power suppliers--including independent power producers and
    power marketers--active in U.S. and global energy markets. EPSA members
    include many of the pioneering firms that responded to the rules made
    possible by PURPA and built a new breed of power plants, where payment
    depended on performance and binding contracts. Today, EPSA represents
    many of the leading power marketers and power plant developers who are
    committed to competitive markets.
        In my testimony, I will address three important issues associated
    with the restructuring debate that are the focus of today's hearing--
    the Public Utility Regulatory Policies Act of 1978 (PURPA), stranded
    costs and the environment.
                      purpa--the beginning of competition
        This committee is considering legislation to reform or repeal
    PURPA. While we support prospective reform of elements of PURPA in a
    federal comprehensive bill (as opposed to stand-alone legislation), it
    is important for the Committee to understand the law, its
    implementation and its impact.
        Quite simply, PURPA has been the instrument to bring competition to
    an industry that has been dominated historically by vertically
    integrated monopolies. Because of PURPA, this industry, which was built
    on the premise of regulatory reviews and the near automatic pass-
    through of costs, is learning the discipline of the private sector.
    Fuel adjustment clauses are being replaced by long-term contracts for
    risk hedging. ``Cost-plus'' investments are giving way to a new and
    powerful emphasis on increasing efficiency, reliability and technical
    innovation.
        Without PURPA, we would never have begun to realize the massive
    consumer benefits that can come from increased competition in power
    markets. In the decade before PURPA, the average electricity plant
    actually decreased in efficiency. Since PURPA, power plants of all
    varieties have become cleaner and dramatically more efficient. Since
    PURPA, every electric power provider in the country has come to realize
    that cost counts and that customers no longer have to be captive to
    vertically integrated monopoly structures. Since PURPA, electricity
    prices have declined in real terms by about a quarter, and we look
    forward to even lower prices in a fully competitive marketplace.
    The Concept of Avoided Costs
        The central element to PURPA's success was its focus on costs. The
    benchmark for any successful new project became the competitive cost
    for power that would otherwise be paid by ratepayers to the utility
    alone. If an entrant could beat the utility's expected costs, it was
    given a chance to succeed. At the time these projects were built and
    any long-term contracts signed, these projects were considered by the
    state regulatory bodies that reviewed them as cost-effective additions
    to existing generation capacity.
        Below are some statistics 1 that compare the price paid
    under PURPA contracts to the average system cost and the cost of
    alternative power supplies in several regions at the time these
    commitments were made. Needless to say, PURPA projects look very good
    in this historic context.
    ---------------------------------------------------------------------------
        \1\ Source: National Independent Energy Producers, 6/1/95

    Electricity Costs:

    Niagara Mohawk vs. IPPs, 1988 to 1994
     (average power costs).
    IPPs......................................  6.0 cents per Kwh
    NiMo Oswego Station.......................  7.95 cents per Kwh
    NiMo Nine Mile 1..........................  10.39 cents per Kwh
    NiMo Nine Mile 2..........................  14.10 cents per Kwh
    Houston Lighting & Power vs. IPPs, 1990
    IPPs......................................  4.7 cents per Kwh
    HL&P average..............................  6.4 cents per Kwh
    HL&P South TX Project.....................  12.67 cents per Kwh
    Central Maine Power Co. vs. IPPs, 1993
     costs
    IPPs......................................  8.91 cents per Kwh
    CMP utility units.........................  9.44 cents per Kwh
    CMP utility units & canceled plants.......  17.77 cents per Kwh

        Obviously, a review of these projects today might produce a
    different comparison and conclusion. This is not surprising. In any
    industry that faces long lead times for plant construction and high
    capital costs, there is a substantial risk that economic conditions
    will change between the time capital is committed and the end of the
    plant's anticipated lifetime. In the private sector, contracts are used
    to hedge these risks for investors. PURPA created no exception to this
    rule, and project developers relied on long-term contracts to finance
    billions of dollars for new plant investments.
        In a real sense, PURPA has been a victim of its own success. When
    states calculated the utility's ``avoided costs,'' who would have
    predicted that the costs of a new plant could be cut in half, and that
    power plant efficiencies could nearly double? The legacy of PURPA, in
    fact, is the lesson that competitive markets and innovation will drive
    down costs to consumers faster and further than we can probably
    imagine. While, at some point, there will be limits to how low prices
    can go, it seems safe to say that we're not there yet. This should
    provide some comfort to this Committee as it considers bringing full
    competition to power markets.
        As in other industries, suppliers of goods and services to
    customers must respond to market conditions. Even holders of long-term
    contracts are not blind to opportunities for negotiated cost reductions
    and customer benefits. In many states, we have seen the voluntary
    renegotiation of existing contracts to the benefit of all parties.
    Additionally, in most states where competitive restructuring has
    occurred, the issues associated with these contracts have been
    addressed explicitly and adequately. We expect these trends to
    continue.
    Section 210 and the Mandatory Purchase Requirement
        While the long-term legacy of PURPA is competition and lower costs,
    the engine for this innovation has been historically the mandatory
    purchase requirement within Section 210. For many years, this
    requirement was the legal foundation for entrants in the marketplace.
    This is what gave access and opened monopoly markets to entrepreneurs.
    Without this provision, it is safe to say that PURPA would have had a
    greatly diminished effect. Without the purchase requirement, we
    probably would not be having this hearing today, you would not be
    considering competitive restructuring and 22 states would not have
    already moved forward to provide electricity consumers a choice in
    their power provider.
        In its historic context, this requirement has had a profound and
    positive impact on the industry. Recently, however, the mandatory
    purchase requirement has largely been rendered moot by events unfolding
    in the industry. To the extent that utilities are becoming distribution
    companies that deliver power for others, this issue becomes less and
    less relevant. If a generator is able to contract with customers for
    power sales, either directly or through a marketer, a mandatory
    purchase contract with a distribution utility becomes unnecessary.
        Today, few states, if any, guarantee new PURPA facilities payment
    rates that are higher than the utility's fuel costs, or provide an
    allowance for capital expenses. These rates do not drive new
    investment, but only allow power plants that have excess supply to sell
    under rates and conditions that may benefit all parties.
        The Committee should realize that, if the mandatory purchase
    requirement is repealed prospectively, there will be no great customer
    savings because this aspect of the law is no longer a focus of industry
    activity. In fact, we know of not even a single example of a
    significant high-cost PURPA contract ``mandated'' on utilities in the
    last two years. Granted, there continue to be PURPA contracts signed.
    However, these are freely negotiated deals between a developer and a
    utility buyer, often in response to a competitive Request for Proposal
    (RFP).
    Legislative Recommendations on PURPA
        PURPA is often at the center of any federal debate on how best to
    restructure the electric power industry. Below are some recommendations
    on how we believe the Committee should consider PURPA the context of a
    comprehensive a restructuring bill:
        First, any amendment of PURPA should acknowledge explicitly the
    sanctity of existing legal contracts. Parties to a legal contract
    should have their valid expectations and legitimate rights honored.
    Just as if you were dealing with water rights or contracts for land or
    natural resources, Congress needs to minimize the possibility that its
    actions will have an adverse impact on the private sector and our
    tradition of markets and contracts.
        Second, we encourage you to consider allowing the unrestricted
    ownership of PURPA power plants. Originally, these ownership
    restrictions were included to prevent self-dealing by integrated
    monopolies and to encourage market entrants. As retail competition
    takes hold, these restrictions make less and less sense. Market power
    is being dealt with in a number of ways, including the divestiture of
    assets and regulatory oversight. Ownership restrictions on a few assets
    do little to prevent abuses. In a competitive market place, these
    provisions mainly serve to complicate the purchase and sale of existing
    facilities.
        Third, a number of members of this Committee, including
    Subcommittee Vice Chairman Cliff Stearns, have endorsed provisions to
    guarantee the recovery by utilities of PURPA contract costs. Since
    there is a clear federal nexus here--PURPA--it is appropriate and
    helpful for the Congress to state clearly that these costs should be
    recovered in rates and not burden shareholders. However, we urge you to
    ensure that this cost recovery is contingent on the good faith of the
    utilities and the actual honoring of contracts. We have seen examples
    where a utility is allowed the full recovery of costs despite the fact
    that it is attempting to breech a legitimate PURPA contract.
                   stranded costs--honoring past commitments
        For many years, utilities had a legal obligation to satisfy the
    full electricity load in their service territories. To do so, they had
    to incur significant costs. They had to buy land, build generating
    units, enter into power purchase agreements with other owners of
    generating plants and hire staff to plan, operate and monitor these
    units. Because these investments were designed to last many years,
    often as long as 40 years, regulators required the utilities to recover
    the related costs gradually during the lifetime of the investment.
    Consequently, at any point in time, a utility will have recovered some,
    but not all, of its investment in these items.
        When competition is introduced, regulators no longer set
    electricity prices; the competitive market does. Because generating
    plants coming into the market today tend to be less costly than those
    planned long ago, it is possible that, in some regions, market prices
    will be lower than the price a regulator would have established to
    ensure that the utility can continue to recover the costs of the
    obligations undertaken when it was a monopoly. This risk of under-
    recovery is often referred to as the ``stranded-costs'' problem.
        A successful transition to fully competitive electricity markets
    requires that stranded-cost issues be addressed and resolved at the
    earliest possible date. We believe a successful transition to a
    competitive electric industry should include the recovery of all
    legitimate, verifiable and prudently incurred stranded costs, including
    regulatory commitments and contractual obligations. Honoring existing
    commitments and agreements is central to the successful transition, in
    part because a restructured electric market will be increasingly
    dependent on the strength of contracts for power purchase, fuel supply,
    construction, financing and energy services. Yesterday's contracts must
    be honored if tomorrow's are to have the necessary credence to allow a
    competitive market to mature.
        Utilities should have a reasonable opportunity to recover all of
    their costs if they meet the following criteria:

     Legitimate: The utility must have incurred the costs for
            legitimate purposes in carrying out its public service
            responsibilities. Costs associated with expansion into foreign
            markets, failed non-utility ventures, or golden parachutes
            should not be recoverable. In addition, costs that were not
            recovered because a customer departed to build a PURPA-
            qualifying facility might not be legitimate, if self-generation
            by customers was the type of risk historically born by the
            utility.
     Verifiable: The utility must be able to prove that it actually
            incurred the costs in the past and will not be able to recover
            them through vigorous action in future competitive markets. A
            vague argument that ``market pressures will keep prices down''
            does not make a stranded-costs claim verifiable. The utility
            must provide real evidence of future market prices.
     Prudently incurred: A utility should recover only those costs
            that represent PUC-approved least-cost service. Just as a
            competitive market imposes cost accountability on participants,
            so must a stranded-investment policy. Otherwise, the utility,
            when competition begins, would be able to use government-
            assisted cost recovery to amass cash flow exceeding that of its
            competitors, while operating less efficiently.
     Non-mitigable: As a condition of stranded-investment recovery,
            the utility must take all possible actions to reduce its
            stranded costs. For example, if the stranded costs include
            surplus land or plant, the utility must try to find buyers
            willing to pay a fair price.
     ``Net'' stranded costs: The recoverable stranded costs should
            be net stranded costs. The term ``net stranded costs'' covers
            the possibility that, in some regions or for some utility
            assets, the market value might exceed book value.
        Some utilities argue that their estimates of future revenues under
    market competition will fall short of their book costs by large
    amounts. Disputes about utilities' claims are, in part, disputes about
    the proper technique for determining stranded costs. These techniques
    fall into two main categories: administrative estimates and market-
    based assessments.
        Administrative estimates require analysts to project future market
    prices, based on fuel costs, capital costs, costs of environmental
    compliance and site remediation, as well as less tangible factors, such
    as changes in technology. Projection of future market prices proved to
    be an extremely difficult task during the administratively determined
    avoided-cost proceedings that implemented PURPA. These projections are
    inherently uncertain, giving rise to a need for ``true-up'' mechanisms
    at a later date.
        Market-based realizations, either through sales, spin-offs or
    appraisals, minimize regulatory guess work. They determine the market-
    value by using the market. The generation that is the source of the
    stranded-investment claim is auctioned at market to the highest bidder.
    That bid price establishes the market value for purposes of stranded
    investment recovery. In making its bid, the purchaser is the one who
    must analyze and assume the risk of future price changes. It is
    important to note that experience shows that the marketplace often
    values generating assets more highly than an administrative review
    would indicate. In fact, recent generating asset auctions have netted,
    on average, 1.9 times the book value of the assets. We strongly urge
    lawmakers and regulators to require market-based valuations for
    stranded-cost recovery calculations.
                 environmental issues--market driven solutions
        Driven by market forces at the wholesale level, the competitive
    power supply industry has brought significant environmental and
    efficiency improvements to the power-generation sector during the past
    20 years. With the right market structure, full retail competition can
    bring even greater environmental and energy-efficiency benefits.
        The Committee needs to realize fully that legislation that drives
    fully competitive power markets is pro-environmental legislation. While
    there are many environmental issues that might be added to a
    comprehensive restructuring bill, it is critical that these provisions
    not delay the development of competitive markets.
        In general, environmental policies, if designed to reflect and
    enhance competitive forces, will produce improved environmental quality
    at the lowest cost. Environmental policies should complement--rather
    than compromise--the environmental benefits of competition. These
    policies should be market-based, incentive-driven, equitable to all
    participants and available to market entrants. Such policies should
    provide clear price signals for the value of the environmental benefits
    of newer, cleaner sources of power.
        Environmental policies should neither skew the competitive
    marketplace nor determine the success of market participants. In order
    for competitive markets to realize their full potential, they must
    provide an open, level playing field where all firms--including market
    entrants--can compete. Firms should not gain a competitive advantage
    simply because their plants' age or ownership characteristics allow
    them to escape certain regulatory requirements.
        In the long run, competition will favor cleaner and more efficient
    facilities. Competition will accelerate the turnover and upgrading of
    existing power plants, many of which are 30 or more years old. The
    Subcommittee should take note that, in the last week, two EPSA members
    have announced programs at a cost of hundreds of millions of dollars to
    clean up older utility power plants which were acquired in divestiture
    sales. This trend will continue. Additionally, given a chance, most
    consumers will demand clean power. Competition makes environmental
    quality a marketing necessity to the successful developer and seller of
    electricity.
                                   conclusion
        Members of the Subcommittee, I have appreciated the opportunity to
    appear before you today and address these very important issues.
    Congress needs to move without delay to implement full and fair
    competition in the electric power industry. PURPA got us started down
    the road to competition and should be dealt with appropriately as we
    move forward. Failing to resolve stranded-cost issues or adopting
    policies that ignore, abrogate or force the renegotiation of contracts
    could mean an unnecessary and costly delay in the movement towards
    competition. As for environmental policies, they should complement, not
    obstruct, the rapid transformation of the electric power industry into
    a fully competitive marketplace. Thank you.

        Mr. Barton. Thank you, Mr. Ain.
        We would now like to hear from Mr. Adelberg.

                     STATEMENT OF ARTHUR W. ADELBERG

        Mr. Adelberg. Thank you very much, Mr. Chairman, members of
    the committee. I am Arthur Adelberg, executive vice president
    of CMP Group, Inc., which is the parent company of Maine's
    principal electric utility company, Central Maine Power
    Company, as well as gas companies and telecommunications
    companies and other ventures.
        I am here today to speak on behalf of the PURPA reform
    group of which I am cochair as well as the Alliance for
    Competitive Electricity and the Edison Electric Institute, of
    which my company is a member. I am pleased to have this
    opportunity to offer remarks on both the issues of PURPA and
    stranded costs.
        Let me begin with PURPA. I think it is safe to say that
    while Mr. Ain, the previous speaker, and I may disagree over
    the benefits or harms that PURPA may have created over its
    life, we seem to be in full agreement that the time is now here
    both to repeal prospectively the mandatory purchase requirement
    as a requirement that has no place in a competitive market and
    to ensure cost recovery for the costs incurred by utilities
    under the PURPA contracts.
        Dealing briefly first with the mandatory purchase
    requirement, it is important for this committee to understand
    that many utilities such as mine, but many others as well, in
    compliance with State restructuring requirements have gone out
    of the business of furnishing energy to their customers. What
    do I mean by that? What I mean is we are becoming pure delivery
    or distribution companies. We own no generating resources. We
    have no obligation to supply the energy that goes over our
    wires to our customers, and indeed our customers have no
    obligation to buy energy from us.
        In that context a requirement that we buy energy from a
    PURPA-qualifying facility, from a PURPA project, simply makes
    no sense. We have no use for that energy. All we can do with
    it, if we are required to buy it, is to resell it typically at
    a loss in the marketplace. So it is a requirement that is
    clearly out of date, and it is time, it is overdue to remove
    that requirement from the books. It can only be a source of
    mischief.
        Turning to the question of cost recovery, as Mr. Ain just
    pointed out, cost recovery to the utilities who have entered
    into these contractual obligations is crucial. Now, you heard
    the previous speaker make the point that we should defer acting
    on PURPA reform until we have comprehensive legislation, the
    implication being that there is really no harm in waiting for
    this to occur. I would disagree, and I would disagree very
    strenuously with that position for this reason. The failure of
    the government, of Congress, which imposed the requirement to
    sign these contracts in the first place, to articulate and
    enunciate clearly in the law that these costs will be recovered
    has had very definite identifiable credit impacts on the
    utilities who are burdened by these costs.
        My company is a good example. We had a higher percentage of
    PURPA contract power in our energy mix than any other utility
    in the United States. At its peak that amounted to about 40
    percent of our costs. Our stranded costs associated with above
    market costs associated with those contracts at their peak
    approached 3 to 4 times the entire equity that we had in our
    company.
        When the credit review agencies, who determine the cost
    that we pay to borrow funds to maintain our system, look at a
    company such as mine and see the questions about our ability to
    recover these costs over the full life of these contracts,
    which can extend another 20 years, that raises concerns with
    them, and they reflect those concerns by downgrading our debt.
    For many, many years as the rating agencies looked at the
    quality of our company they cited our burden of these contracts
    and the questions about recovering these costs as a reason to
    maintain other debt at below-investment grade levels, which in
    turn raised our costs of attracting and sustaining, having the
    capital available to investment in maintaining a reliable
    system.
        So this is not an academic exercise. This is not an area
    where we can simply turn a blind eye and wait for another
    however long it takes, years, to get comprehensive legislation.
    Having the absence of a Federal provision such as reflected in
    H.R. 1138, the Stearns bill, the absence of such a provision is
    causing harm to consumers today. It needs to be addressed, and
    it can be addressed. The Stearns bill has tremendous bipartisan
    support, and I would urge the committee to examine the
    possibility of moving forward with legislation as quickly as
    possible to address that need.
        Let me turn to the issue of stranded costs and emphasize a
    few points. First of all, it is critical to recognize that what
    we look at as stranded costs and what is complained about as
    the burden of allowing utilities to recover costs, these are
    costs that are typically end rates today so that recovering
    these costs, affording utilities the ability to recover these
    costs, is not a matter of raising rates, it is a matter of
    retaining rates at the levels that they are, and these rate
    will decline as these costs are amortized and paid down.
        Many of these costs are generation costs, but as you can
    see from this chart, many of the costs are associated with
    social programs such as reflected in regulatory assets. For
    example, my company has a substantial volume of costs
    associated with State-ordered conservation programs. Those are
    part of our stranded cost burden. We need to recover those
    costs.
        Another significant category of costs which is directly
    traceable to Federal policies is decommissioning costs, the
    cost of decommissioning nuclear plants. Those costs tend to run
    in the hundreds of millions of dollars for each plant. Again,
    the Congress has, through the Nuclear Regulatory Commission,
    enforced this regulation over these plants. It enforces
    regulation that requires the funding and proper handling of
    decommissioning these plants. That is a very responsible thing
    which is done, and it is very important for society that this
    funding be available, but by the same token there is no
    provision in the law today which says to the utilities that
    they will have the mechanism to recover those costs in rates.
        Again, so long as this is so, this becomes a burden on the
    utility. It becomes an uncertainty which is reflected in the
    utility's borrowing costs, and that in turn becomes a penalty
    to the consuming public.
        It has been suggested here this morning that utilities
    should have thought about these issues when they made these
    investments, that they should have made provisions to ensure
    that they would have the ability to recover the investments
    when the investments were made. The fact of the matter is as
    has been recognized by the Supreme Court since the 1940's and
    was reaffirmed in the Duquesne case, utilities invested under a
    system where the benefits and burdens of investments were all
    placed on the consumer and not on the utility, and consumers
    have benefited tremendously from that system. We had, for
    example, a nuclear plant that operated in Maine for 25 years.
    It saved customers over a billion dollars compared to what
    power would have cost in a competitive marketplace. The
    investors in that plant did not get one cent of that billion
    dollars. It all went to the consumers.
        So that was the system under which we were regulated.
    Concomitant with giving the consumer benefit or our good
    investments was the consumers were to take the risk of the
    investments, which in hindsight turned out to be uneconomic.
    That is what is known as the regulatory bargain.
        In the Duquesne case the Court said perhaps regulators
    could choose a different method of regulating, but if they
    choose a system such as allowing prudent investments to be
    recovered, they can't switch back and forth and then say, we
    would like a different system which is a heads-I-win-and-tails-
    you-lose proposition for the investor.
        So there is a requirement, a constitutional requirement, a
    fairness requirement and a matter of efficiency in allowing
    stranded costs to be recovered. I believe there is a very
    distinct Federal role for ensuring particularly those costs
    that are traceable to Federal policies are made recoverable.
    Thank you.
        [The prepared statement of Arthur W. Adelberg follows:]
    Prepared Statement of Arthur W. Adelberg, Executive Vice President, CMP
                                  Group, Inc.
                                  introduction
        Mr. Chairman and Members of the Subcommittee, I am Arthur W.
    Adelberg, Executive Vice President of CMP Group, Inc., parent of
    Central Maine Power Company. I also serve as Co-Chair of the PURPA
    Reform Group, an association of utilities from across the country
    dedicated to the elimination of PURPA as a barrier to restructuring
    electric markets. Central Maine Power also is a member of the Alliance
    for Competitive Electricity and the Edison Electric Institute. My
    comments are consistent with the positions these organizations have
    taken on the issues of PURPA reform and utility cost recovery. Thank
    you for allowing me the opportunity to appear before you today to
    discuss the two separate and distinct issues that are the subject of
    this panel: reform of PURPA, including assurance of PURPA cost
    recovery; and secondly, the responsibility Congress and the states have
    to address recovery of prudently incurred utility costs that might
    become non-recoverable as we transition to competitive electricity
    markets.
        Quite honestly, when the PURPA Reform Group was formed back in
    1995, we believed that the case for repeal of the mandatory purchase
    obligation and recovery of federally-compelled PURPA costs was so
    strong that this would be a short-lived coalition.
        My presence before you today shows how wrong we were, not about
    PURPA, but about the ability to gain passage of any legislation in this
    area, no matter how modest and consensus-backed certain provisions
    might be.
        We commend you, Mr. Chairman, and wish you well in your efforts to
    formulate a broader bill to promote competition in electricity markets.
    We strongly encourage you to include the Stearns bill, H.R. 1138, now
    with 19 Democratic and Republican co-sponsors, as the PURPA component
    of any comprehensive legislation you develop. Mr. Burr's comprehensive
    electric restructuring bill (H.R. 667) contains nearly identical PURPA
    reform language, as did last year's Paxon-Largent draft restructuring
    bill. Similar legislation has been introduced again in the Senate this
    year by Senators Mack and Graham (S. 282). There is widespread
    agreement that PURPA needs to be reformed and we believe that a
    legislative consensus exists on how to do it, including assurance that
    the costs associated with this ill-fated federal mandate be recovered.
    The sooner Congress eliminates this federal barrier to more competitive
    electric markets, the better it will be for consumers and those who
    seek to supply them.
        With respect to stranded costs, utilities should be given a fair
    opportunity to recover fully their prudently incurred costs. While this
    is not yet a consensus position, as I believe PURPA reform and recovery
    of PURPA mandated costs is, experience shows that the fair recovery of
    these costs actually expedites successful restructuring. The FERC
    adopted this position in Order No. 888 with respect to recovery of FERC
    jurisdictional wholesale costs and virtually all of the 20 states that
    have acted to open their markets to retail competition have given
    utilities a reasonable opportunity to recover fully their prudently
    incurred, non-mitigable retail costs that otherwise may not be
    recoverable in a competitive market. The one state that hasn't, New
    Hampshire, has found itself embroiled in protracted litigation, while
    its neighbors have moved forward.
        Rather than an impediment to restructuring, as some have contended,
    the fair recovery of stranded costs actually facilitates expeditious
    and successful restructuring.
                        i. purpa: the $42 billion legacy
        Central Maine Power Company is Maine's principal electric utility,
    serving over half a million customers, and representing 80 percent of
    the state's population. Central Maine Power also has the dubious
    distinction of having the largest share of its energy resource mix made
    up of PURPA generation of any electric utility in the United States.
        In 1997, Maine enacted legislation restructuring its electric
    industry. In response to that legislation, which we supported, we
    recently divested all of our non-nuclear generation and will provide
    all of our customers with their choice of electricity supplier
    beginning March 1, 2000. We look forward to participating in a market
    which rewards efficiency, good business judgment and marketing skills.
    We believe that our customers and the economy of our state will benefit
    from a more market-oriented approach.
        We have found in Maine, however, that favoring customer choice and
    greater competition in the electric industry is the easy part.
    Resolving the dozens of complex subsidiary issues, including how one
    deals with the legacy of past government policies which have been at
    variance with the market, is far more challenging. None has proved to
    be more difficult than dealing with the legacy of the Public Utility
    Regulatory Policies Act of 1978, more commonly known by it acronym,
    ``PURPA.''
        Congress enacted PURPA as one of the original components of the
    Carter Administration's Energy Plan to alleviate the perceived oil and
    natural gas shortages of the late 1970's. The intent of PURPA was to
    encourage conservation and promote the development of renewable fuels.
    It did this by establishing a special class of power generators, known
    as qualifying facilities (``QFs''), and it required utilities to buy
    all the electricity that these qualifying facilities wished to sell. In
    general, a QF must be of a certain size, burn certain renewable or
    waste fuels, or produce steam for commercial or industrial use as well
    as electricity.
        Congress sought, in drafting PURPA, to ensure that consumers would
    pay no more for PURPA power than they would have to pay for other
    power. It did this by providing in PURPA that the maximum price for
    electricity from QFs would be the cost that the purchasing utility
    would incur if it generated the electricity itself or purchased it from
    a source other than the QF. Thus, Congress assumed that the cost of QF
    power would generally be at or below the cost of the utility's self-
    generated power, or of other power available for purchase by the
    utility. Unfortunately, this has not proven to be the case.
        FERC's regulations implementing PURPA give QF project developers an
    option to ``lock in'' at the time the purchase contract is signed the
    price that the QF will receive over the life of the project. This can
    only be done by using predictions about what the price of power will be
    ten, twenty or even thirty years in the future. These predictions have
    proven to be no more accurate than the PRG's 1995 legislative
    predictions or the $125 a barrel oil price projections emanating from
    DOE in the late 1970s. In addition, purchasing utilities were largely
    denied the ability to include renegotiation and other clauses typically
    included in long-term contracts to help manage market risks. As a
    result, most QF power is now significantly more expensive than the
    market price at which power can be purchased. The PRG filed a petition
    at FERC to repeal the lock-in rule in the Spring of 1995, but the
    Commission has never acted on it.
        According to a study by the Utility Data Institute (``UDI''), a
    division of The McGraw-Hill Companies, PURPA is costing electricity
    consumers nearly $8 billion a year in excess power costs.1
    The UDI study found further that PURPA, not nuclear powerplant
    construction or fuel use restrictions, is the single largest factor in
    explaining the regional disparity in electricity prices. High prices
    and large numbers of PURPA projects go hand in hand. By contrast, you
    won't find many PURPA projects in low-cost states.
    ---------------------------------------------------------------------------
        \1\ Utility Data Institute, Measuring the Competition: Operating
    Cost Profiles for U.S. Investor-Owned Utilities 1995 (1996).
    ---------------------------------------------------------------------------
        Resource Data International (``RDI'') released a study in 1997
    which places the net present value cost of above market non-utility
    generator obligations at $42 billion.2 In California and
    many Northeastern States, including Maine, PURPA is the largest single
    category of above market costs which are likely to become non-
    recoverable in a market where utilities are required to provide
    competitors access to their wires. Similarly, a number of utilities
    would have no above market costs, but for PURPA costs.
    ---------------------------------------------------------------------------
        \2\ The RDI study also found that while non-utility generation
    constituted only about seven percent of all electricity delivered to
    the grid in 1996, it represents nearly 30% of utility above market
    costs. The average price of NUG power was more than 70% higher than the
    cost of generation by utilities. Resource Data International, Power
    Markets in the U.S. (1997).
    ---------------------------------------------------------------------------
        The State of Maine and the customers and shareholders of Central
    Maine Power Company have suffered inordinately as a consequence of
    PURPA. Central Maine Power has been required to purchase as much as 40
    percent of its power needs from QF projects at an average cost of 9
    cents per kwh. This cost is some 200% to 300% higher than what we could
    purchase this power for in the wholesale market today. According to the
    1997 RDI report, Central Maine Power faced above market costs of over
    $1 billion, more than twice the entire equity of our shareholders.
    Nearly all of these above market costs can be traced directly to PURPA.
        Importantly, for purposes of today's hearing, PURPA's goal of
    protecting the environment has also backfired in Maine. The only coal
    used in electric generation in our state is burned by a PURPA
    generator. And the high cost of electricity resulting from our PURPA
    generators has driven many of our customers to substitute dirtier
    fuels, such as diesel oil and wood, for electricity in their homes and
    businesses.
    A. PURPA Is Impeding The Transition To a More Competitive Electricity
            Market
        PURPA's mandatory purchase requirement was premised on the key
    assumption that utilities would continue to be the exclusive suppliers
    of electricity to all consumers within their service territories, thus
    assuring retail buyers for the electricity generated by the QFs.
    Clearly, the authors of PURPA did not envision a restructured electric
    industry where exclusive franchise territories no longer exist. Without
    exclusive franchise territories, the costs associated with high-cost
    PURPA power will not be recoverable. Yet, utilities and state
    regulators are powerless to alter QF power purchase contracts, unless
    the QF voluntarily agrees to do so.
        Many utilities in restructuring States have decided to divest their
    generation assets. Central Maine Power has already sold its generation
    and has decided that it will not be in the power marketing business
    once retail choice begins. Thus, we will become essentially a ``wires''
    company with no generation of our own, and no need for power to market
    to our existing customers. Many other utilities are following a similar
    path. However, utilities continue to be obligated to purchase over-
    priced PURPA power under contracts that extend well into the future.
    Even worse, utilities remain legally obligated to enter into new PURPA
    contracts. This and unresolved questions about how utilities will
    ensure payment of these PURPA obligations, which continue well past the
    year 2010, are greatly complicating utility restructuring efforts.
    B. Congress Should Repeal PURPA Promptly and Provide for Recovery of
            PURPA Costs
        As this subcommittee knows well, there are a number of complex
    issues involved in restructuring the $200 billion U.S. electric
    industry. PURPA, however, is not one of them. PURPA reform is really
    quite simple. Continuation of PURPA's special privileges for one
    particular class of electricity generators is inconsistent with today's
    competitive electricity marketplace. There is no justification for
    continuing a requirement that utilities sign long term contracts to buy
    energy from PURPA projects, when those utilities are facing competition
    in wholesale markets and are, or soon will be, facing competition in
    selling energy to their retail customers. PURPA is costing consumers
    billions of dollars in excess electricity costs and it is contributing
    to the over-market cost problem. Congress should repeal the mandatory
    purchase provisions of PURPA now.
        Congress also should ensure that utilities are able to recover the
    costs associated with PURPA obligations, the majority of which will
    continue well into the next century.3 Utilities had no
    choice but to enter into these contracts and never have been permitted
    to earn a rate of return on them, unlike other utility investments. It
    is only fair, then, for Congress to ensure that these costs are
    recovered since the original decision to impose them rests with the
    Congress. If recovery of these costs is not addressed legislatively, it
    would be tantamount to Congress leaving the scene of an accident that
    it created.
    ---------------------------------------------------------------------------
        \3\ According to Resource Data International, over 70% of PURPA
    contracts will not expire until after the year 2010. Resource Data
    International, Power Markets in the U.S. (1997).
    ---------------------------------------------------------------------------
        In addition to being the ``fair'' thing to do, we believe that as a
    legal matter, utilities are entitled to recovery of PURPA contract
    costs. Section 210 of PURPA requires utilities to purchase electricity
    at wholesale from certain electric generators. Section 210(b) requires
    that the prices paid to these generators be ``just and reasonable to
    the electric consumers of the electric utility and in the public
    interest.'' The Federal Energy Regulatory Commission (``FERC'') has
    determined that prices meet this ``just and reasonable'' standard if
    they equal a utility's avoided costs. Indeed, FERC has required that
    utilities pay PURPA generators a price equal to this avoided cost rate.
        Under the Federal Power Act, the FERC has exclusive jurisdiction
    over wholesale sales of electricity. PURPA does not change this. Under
    the Supremacy Clause of the Constitution, states are required to follow
    the final decisions of a federal agency that has jurisdiction over a
    matter. Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953 (1986);
    Mississippi Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S.
    354 (1988). In addition, PURPA itself, has been interpreted by the
    courts to preclude state ``utility type regulation'' of PURPA contracts
    that would deny the passthrough of contract costs. Freehold
    Cogeneration Assocs. v. Bd. of Regulatory Comm'rs of N.J., 44 F. 3d
    1178 (3rd Cir. 1995).
        Despite what we believe is a strong legal position favoring
    recovery, future litigation over this question is possible should
    recovery not be allowed. In the meantime, continuing uncertainty about
    the government's commitment to ensure full recovery of these costs is
    damaging utilities' credit ratings, and forcing them to incur
    substantially higher costs of borrowing. This translates to higher
    electric rates.
    C. PURPA Has Been of Little Benefit to Renewables
        One of the most enduring fallacies associated with PURPA is that
    PURPA is needed to encourage electricity generation from renewable
    sources of energy. Although this was one of the stated purposes of
    PURPA, it has done little with respect to that objective. As of
    December 31, 1997, wind turbines, solar and geothermal units together
    comprised only 4.7 percent of all installed non-utility generation
    capacity.4 Because of their intermittent nature, these
    facilities generated only 3.3% of all non-utility power generated in
    1997. Biomass and waste comprised another 21 percent of installed non-
    utility capacity. Natural gas, coal and oil made up over two-thirds of
    installed non-utility generating capacity.5 Thus, non-
    renewable sources of energy have been the primary beneficiaries of the
    PURPA mandatory purchase requirement, not renewables.
    ---------------------------------------------------------------------------
        \4\ Edison Electric Institute, Capacity and Generation: Non-Utility
    Sources of Energy at 57 (1998 ed.).
        \5\ Id.
    ---------------------------------------------------------------------------
      ii. recovery of utility costs ``stranded'' by end of utility sales
                                   franchise
        Whether utilities should be given a reasonable opportunity to
    recover fully their prudently incurred costs is one issue in the
    restructuring debate that has generated more heat and less light than
    almost any other. Although FERC and the states' regulators, for the
    most part, have dealt responsibly with recovery of utility investments
    made and approved under the previous regulatory regime, there is an
    important role for Congress to play here, particularly since Congress
    has enacted federal energy policies that led to many now uneconomic
    utility investments.
        ``Stranded costs'' are those costs which have been prudently
    incurred by utilities to meet what was then understood to be a service
    obligation to customers, but which cannot be recovered in a market in
    which the government compels utilities to provide competitors access to
    their wires. Stranded costs include the costs of uneconomic federal and
    state mandates; ``regulatory assets,'' such as deferred taxes and
    demand side management obligations; generation, the cost of which may
    exceed future market prices; and other costs, such as nuclear
    decommissioning costs, which are required by the federal government but
    which may not be reflected fully in rates.
        Stranded costs are, to a significant degree, attributable to ever
    changing state and federal mandates and policies. These mandates and
    policies largely determined what fuels utilities were allowed to use
    and the social obligations they were required to undertake to meet
    their primary regulatory obligation--the obligation to serve. It would
    be unlawful and inequitable to address the demand for competitive
    choices without acknowledging the extent to which prior government
    policies contributed to the current problem.
        Over the past twenty years, utilities have been told in federal
    legislation what fuels they could or could not use, who they had to buy
    power from, and at what prices. Similarly, utilities have been used as
    stealth tax collectors and as surrogates for funding programs that, in
    other times, would have been supported by taxes, not electric rates.
    These programs include conservation, research and development, and
    special discounts for low-income customers and favored customer
    segments. The federal and state proponents of these programs assumed
    that utility customers were captive and that the utility would
    eventually be made whole while these public policy goals were met ``off
    budget.''
        The examples below demonstrate how utility investment decisions
    have been skewed by U.S. energy policy:

     Natural Gas Wellhead Price Controls and Curtailment Policies--
            Prior to the 1970's, many utilities, particularly those in the
            South and Southwest, were using significant amounts of natural
            gas to generate power. In the late 1960's, however, shortages
            of natural gas began to appear. These shortages were the
            consequence of the federal wellhead natural gas price controls.
            As a result of these government-created shortages of natural
            gas, the Federal Power Commission (predecessor agency of the
            FERC) required interstate pipelines to curtail delivery of
            natural gas to electric utility boilers so that gas would be
            available for higher priority residential and small commercial
            users. By the 1970's, curtailment plans substantially limited
            utilities' ability to use natural gas to generate electricity.
            In the Winter of 1973, severe cold weather and chronic natural
            gas shortages led to massive curtailments of natural gas
            shipments to electric powerplants. It was not until five years
            later that Congress was finally able to pass legislation
            gradually phasing-out these destructive natural gas wellhead
            price controls.
     Energy Supply and Environmental Coordination Act of 1974
            (ESECA)--In 1974, in response to growing natural gas shortages
            and the Arab Oil Embargo, Congress passed ESECA, which
            prohibited any powerplant from burning natural gas or petroleum
            products as its primary fuel source. If possible, it also
            required the conversion of existing powerplants to coal.
     The Fuel Use Act--Building on ESECA, in 1978, Congress passed
            the Powerplant and Industrial Fuel Use Act of 1978 (``The Fuel
            Use Act''). The Fuel Use Act prohibited utilities from using
            oil and natural gas to generate electricity and required
            utilities to replace oil and gas units with alternative fuel
            sources. In response to the Fuel Use Act, utilities were forced
            to shut down perfectly functioning and efficient oil and gas
            units. Utilities were required to consider new fuels for base
            load generation consisting almost exclusively of coal and
            nuclear energy. Many of the coal units that were built were
            subject to costly air pollution control requirements mandated
            by the Clean Air Act. Additionally, in some parts of the
            country, the number of coal units which could be built was
            limited by air quality and coal transportation concerns.
     Public Utility Regulatory Policies Act of 1978 (PURPA)--
            PURPA's primary goals were to encourage efficiency and the use
            of alternative sources of fuel for generation of electricity.
            To achieve this goal, PURPA required utilities to purchase
            power from non-utility generators at a rate that reflected the
            utilities ``avoided cost'' of having to build its own
            generation facilities or purchase power from another source. At
            the option of the project developer, prices could be locked-in
            for the duration of the contract, often 25-30 years. When many
            of these contracts were signed, future energy prices were
            estimated to be much higher than what they are today. As noted
            above, PURPA alone is responsible for an estimated $42 billion
            in utility above market costs.
     The Energy Policy Act of 1992 (EPAct)--EPAct gave FERC the
            authority to order wholesale transmission access and opened up
            the generation market to virtually all firms. By allowing
            utilities and other power generators to ``wheel'' power across
            utilities' transmission facilities, EPAct dramatically
            increased competition, which, in turn, has resulted in state
            efforts to expand competition to retail markets.
    A. Components of Utility Above Market Costs
        There is a great misconception regarding the makeup and origin of
    utility above market costs. The 1997 RDI study found that total above-
    market utility costs nationally are about $202 billion. While the
    largest share of these costs is related to generation ($86 billion),
    power purchase contracts from other utilities ($54 billion), regulatory
    assets, including deferred taxes and demand side management programs
    ($49 billion), and PURPA costs ($42 billion) make up over half of
    utility above market costs.6 I do not consider PURPA costs
    as ``stranded costs'' because of their unique legal status. They
    nonetheless are a significant component of utility above market costs,
    and they undermine the argument that utility above market costs are
    associated with ``bad management decisions,'' unless it was a bad
    management decision to comply with a federal law. I also submit that
    paying one's taxes and complying with state-mandated conservation
    programs is something that management should be encouraged to do.
    Moreover, state PUCs have disallowed billions of dollars of imprudently
    incurred utility costs over the past twenty years. What costs utilities
    currently have in rates have been determined to be prudently incurred
    costs.
    ---------------------------------------------------------------------------
        \6\ Resource Data International, Inc., Press Release announcing
    Power Markets in the U.S. study (February 7, 1997).
    ---------------------------------------------------------------------------
        The RDI study also found that stranded costs are not just an
    investor-owned utility problem. Investor-owned utilities account for
    $147 billion, government-owned utilities $33 billion, and rural
    cooperatives $22 billion of utility above market costs.
    B. Reasons Why Congress Should Provide Reasonable Opportunity for
            Utilities to Recover Previously Approved Costs
        There are five major reasons why Congress and the states should
    provide a reasonable opportunity for utilities to recover fully their
    stranded costs.
        First, stranded costs are not new costs. They have been previously
    approved by regulators and are already reflected in existing utility
    rates. Allowing recovery of prudently incurred stranded costs will not
    result in rate increases.
        Second, recovery of all costs, other than PURPA contracts and
    nuclear decommissioning costs, can occur over a reasonably short
    transition period. This is not a long-term issue, but it is one that
    must be responsibly addressed for a smooth transition to a fully
    competitive electricity market.
        Third, denying utilities recovery of prudently-incurred costs will
    only delay competition by encouraging litigation and adversarial
    regulatory proceedings. A case in point is the State of New Hampshire,
    which originally was scheduled to have retail customer choice by
    January 1, 1998.
        Fourth, there are strong Constitutional and legal arguments for
    this position, which have been widely recognized. The Supreme Court
    held in Loretto v. Teleprompter CATV Corp., 458 U.S. 419 (1982), that
    the right to exclude others is one of the most essential property
    rights. If the government compels utilities to surrender this right,
    and open their wires to competitors, the government must be prepared to
    pay fair value, not only for the wires, but for the damage to the
    associated generation investment. At least since FPC v. Hope Natural
    Gas Co., 320 U.S. 591 (1944), it has been clear that a taking occurs if
    regulatory authorities interfere with the utility's opportunity to earn
    a fair return on prudently incurred investment to carry out regulatory
    obligations.7 As noted by the Supreme Court in Duquesne
    Light Co. v. Barasch, 488 U.S. 299, 309 (1989):
    ---------------------------------------------------------------------------
        \7\ See J. Gregory Sidak and Daniel F. Spulber, Deregulatory
    Takings and the Regulatory Contract at 115 (1997).
    ---------------------------------------------------------------------------
            Under the prudent investment rule, the utility is compensated
            for all prudent investments at their actual cost when made
            (their ``historical'' cost), irrespective of whether individual
            investments are deemed necessary or beneficial in hindsight.
            The utilities incur fewer risks, but are limited to a standard
            rate of return on the actual amount of money reasonably
            invested.
        Fifth, as the Electric Power Supply Association has pointed out,
    there are very practical reasons why utilities should be given a
    reasonable opportunity to fully recovery their stranded costs:
            [B]ecause these purchases fulfilled a public service
            obligation, it is reasonable for the utilities to recover the
            costs. To deny the utilities an opportunity to recover the
            costs would signal that contracts entered into reasonably, and
            often under a legal mandate, can be ignored. Abrogation of
            contracts will create a serious disincentive to newcomers
            considering whether to enter competitive markets which will be
            built extensively upon contracts.
                                    *  *  *
            Today's contracts must be honored to ensure that tomorrow's
            contracts can provide the confidence needed for a robust
            market.8
    ---------------------------------------------------------------------------
        \8\ Electric Power Supply Association, Retail Electric Competition:
    Getting it Right, at 23-24, 35-36 (January, 1999).
    ---------------------------------------------------------------------------
        The argument has been made that no one reimburses manufacturing or
    other firms that are forced to write off facilities made obsolete when
    they lose customers. Therefore, utilities should be treated no
    differently. This argument ignores, however, the special history of the
    electric utility industry in this country. As was explained in the
    Economic Report of the President, transmitted to the Congress in
    February 1996:
            In unregulated markets the possibility of stranded costs
            typically does not raise an issue for public policy--it is
            simply one of the risks of doing business. However, there is an
            important difference between regulated and unregulated markets.
            Unregulated firms bear the risk of stranded costs but are
            entitled to high profits if things go unexpectedly well. In
            contrast, utilities have been limited to regulated rates,
            intended to yield no more [th]an a fair return on their
            investments.
                                    *  *  *
            . . . [R]ecovery should be allowed for legitimate stranded
            costs. The equity reason for doing so is clear, but there is
            also a strong efficiency reason for honoring regulators'
            promises. Credible government is key to a successful market
            economy, because it is so important for encouraging long-term
            investments. Although policy reforms inevitably impose losses
            on some holders of existing assets, good policy tries to
            mitigate such losses for investments made based on earlier
            rules, for instance, by grandfathering certain investments when
            laws and regulations change.
    PP. 187-188.

        The high stakes associated with the government ``keeping its
    promises,'' even to utilities, were eloquently stated by James Q.
    Wilson, professor of management and public policy at UCLA, in an
    article in the Wall Street Journal:
            Free economies, with all of the benefits they produce, require,
            at a minimum, free markets, property rights, and reliable
            contracts. Property and contracts express our society's
            commitment to equity as well as to investment. Government will
            infringe on property and contracts, sometimes for good reasons
            and sometimes for bad ones. When it does so on the basis of a
            promise to allow the cost of that infringement to be recovered,
            it has an obligation to honor that promise. A healthy economy
            and a healthy society require that the government keep its
            word--even to utilities.9
    ---------------------------------------------------------------------------
        \9\ James Q. Wilson, ``Don't Short-Circuit Utilities' Claims,''
    Wall Street Journal, August 23, 1995, at A12.
    ---------------------------------------------------------------------------
    C. The Role of Congress in Providing for Recovery of Utility Costs
        The States have an important role to play in ensuring recovery of
    retail stranded costs. I believe, however, that the Congress has a
    particular obligation to address those costs over which the states do
    not have primary jurisdiction, or that arise as a consequence of
    overriding federal policies or decisions. Two examples illustrate why
    Congress should provide for stranded cost recovery: (1) nuclear
    powerplant decommissioning cost recovery, where the federal government
    has an overriding interest in ensuring that adequate funds are being
    collected in order to safely decommission nuclear powerplants at the
    end of their useful lives; and (2) wholesale costs stranded as a
    consequence of EPAct and FERC's open access policies, or state open
    access policies, where the states do not have adequate jurisdiction to
    address recovery. Federal legislation should address the issue of
    stranded cost recovery in order to eliminate jurisdictional uncertainty
    and potentially years of litigation. While I can understand the desire
    of some to avoid this issue altogether, experience with other recent
    industry restructuring legislation should have taught us that
    legislative ambiguity only serves to slow the transition to
    competition.
        Because policy makers create transition costs when they promote
    competition, they have the responsibility of ensuring that utilities
    can recover these legitimate costs. Stranded cost recovery goes hand-
    in-hand with restructuring--as each successful state and the FERC have
    shown. Congress should establish a strong stranded cost recovery
    standard, recognizing the primary role of the States in deciding retail
    stranded cost issues and of the FERC in deciding stranded cost issues
    where the states lack jurisdiction, or where there are overriding
    federal interests.
                                iii. conclusion
        Reforming PURPA is not sufficient, in and of itself, to accomplish
    the transition to a fully competitive electric market, but PURPA must
    be dealt with, and soon, if we are to make a successful transition to
    competition. Waiting to address PURPA reform until all other market
    reforms are in place is counterproductive and harmful to consumers. I
    strongly urge this Subcommittee to start quickly down the road to
    eliminating this, and other federal barriers, to a fully competitive
    electric market. There is widespread agreement that PURPA needs to be
    reformed and we believe that a legislative consensus exists on how to
    do it. This consensus includes ensuring that utilities have the
    opportunity to recover the costs associated with federally-mandated
    PURPA contracts. The sooner Congress eliminates this federal barrier to
    more competitive electric markets, the better it will be for consumers
    and those who seek to supply them.
        Congress also has the responsibility to address the stranded cost
    consequences of the electric industry restructuring that it has
    undertaken. While states have the primary role in addressing retail
    stranded costs, including the mechanism for their recovery, leaving to
    the states all stranded cost decisions would be an abdication of the
    responsibility that the federal government bears for many of the
    investments that may now be stranded by industry restructuring. It also
    would ignore the role of the federal government in the very
    restructuring that is placing recovery of these costs at risk. Finally,
    it fails to account for the jurisdictional gaps and overriding federal
    policy interests in recovery of certain costs. For all these reasons,
    for reasons of fundamental fairness and to move ahead in the transition
    to more competitive markets, I urge that Congress provide a reasonable
    opportunity for utilities to recover their prudently invested costs.
    Failure to address this issue will only slow the move to competitive
    generation markets.

        Mr. Barton. Thank you, Mr. Adelberg.
        The Chair is going to recognize himself for the first 5
    minutes. Before I turn the clock on, I want to hand out a
    chart. There is a larger version. This is the chart that is
    entitled ``States Are Addressing Stranded Costs.'' So let's
    give all of the members a smaller copy and give our panelists a
    copy of this chart.
        The Chair is going to recognize himself for the first 5
    minutes. The argument is assuming, and I know all of the
    panelists don't agree, that we should address stranded costs.
    Mr. Andelman's testimony says he doesn't think it should be
    addressed. But assuming that you are on the other side of that
    argument, that we should address stranded costs, this chart,
    which has been prepared by the majority subcommittee staff
    based on data that is publicly available, shows the States and
    the latest estimates as to what the stranded costs are. The
    green are States that are opening their retail markets, the
    blue are the States that are moving toward retail markets, and
    the yellow are States that show no interest or are making low
    progress.
        My question is, and I am going to address it directly to
    Ms. Bode, but any member of the panel can tackle it, what
    happens in a State that is a net consumer of electricity that
    does restructure or deregulate and does address stranded costs
    if the power is generated in a State that is not addressing
    deregulation and doesn't allow for stranded costs? In other
    words, is it possible upon a purely State-by-State basis to
    address stranded costs given the fact that power moves in most
    States across State boundaries?
        That's a fairly complex question right off the bat, but I
    am told that you are a very smart lady. Mr. Largent speaks
    highly of you.
        Ms. Bode. That is one of the big issues that we all have to
    deal with. I think that it would be extraordinarily difficult
    without an across-the-board addressing of electric
    restructuring by the Congress. It would be difficult, I think,
    for competition to move forward on a comprehensive basis and
    have electric restructuring being done.
        The idea of doing comprehensive electric restructuring
    legislation at the Federal level allows the States, both those
    that want to restructure and those that don't want to
    restructure, more of an option. If you don't do anything at the
    Federal level, and it is done--restructuring is just done on a
    State-by-State basis, you do have extraordinarily unequal
    treatment. I think that is the point that you may be trying to
    address.
        In Oklahoma we are doing electric restructuring legislation
    where we are not waiting for the Congress to act, but we are
    hoping that the Congress will act so there will not be problems
    in us restructuring our market and our neighboring States not
    restructuring their markets, because there would be
    tremendously unequal treatment. Our system would be open, and
    others would be closed. I think that would cause an unequal
    treatment.
        So I think you must have an overarching in terms of dealing
    with how you deal with stranded costs on a Federal level versus
    allowing the States to determine how they deal with stranded
    costs. I think that is something that we are best able to deal
    with. It may require working together with other States. Right
    now what we are doing, for example, we just signed off on an
    order last week that allowed for a public service company of
    Oklahoma which is a subsidiary of Central and Southwest, which
    is going to be a new subsidiary of another bigger company
    basically allowing that merger to occur, and that electricity
    is going to be flowing nationwide in a much broader fashion. So
    we are having to work with all of these other States in getting
    that accomplished.
        Mr. Barton. As a public utility commissioner in Oklahoma,
    you can't mandate stranded cost recovery in Georgia, for
    example, which, according to this chart, shows $6.3 billion,
    since is it is a yellow State, according to our analysis not
    likely that they are going to address electricity
    restructuring. You can do it within your own State, but you
    can't tell the Georgia Public Utility Commission that they can
    allow stranded costs in Georgia if there is a Georgia utility
    that wants to transfer power to Oklahoma. Isn't that correct?
        Ms. Bode. That is correct. Absolutely.
        Mr. Barton. My time has expired on the first question, it
    is amazing, but we are going to appear in regular order. So we
    are going to recognize Mr. Hall for 5 minutes.
        Mr. Hall. Thank you, Mr. Chairman.
        For fear that I run out of time before congratulating Ms.
    Bode, I want to thank her for her appearance here and for her
    input to this committee for several years. When you left here,
    it was our loss and Oklahoma's gain, but I thank you for the
    good help that you have been to my office and to the Texas
    delegation as a neighbor in Oklahoma.
        Ms. Bode. We want to sell power into your markets
    eventually, so we are eager to have you open it up----
        Mr. Hall. Competition is the name of the game. We want to
    deal with all of the territories.
        Ms. Bode. I had that coming. I clearly had that coming.
        Mr. Hall. Let me talk to Mr. Andelman, because I just don't
    understand your position. Maybe I will after you answer some of
    my questions. You stated a prudent businessperson realizes
    their inherent risks in large capital investments. You get
    around to saying, as with any business there are risks to any
    profit-making venture, and utilities and their shareholders
    must now absorb the costs of their risk.
        Are you saying they shouldn't pay any stranded costs; is
    that what you are saying?
        Mr. Andelman. That would be the best position, yes.
        Mr. Hall. That is the way that I read it. I have read it,
    gone back over it, and had it read to me.
        Let me ask you. There is some obvious distinction between a
    regulated utility and an unregulated business; are there not?
    Is yours an unregulated business?
        Mr. Andelman. Sure.
        Mr. Hall. How do you justify your statement that utilities
    and their shareholders must now absorb the costs of their risk?
    Which risk are you referring to?
        Mr. Andelman. Mostly the risk of the capital investments
    that they decided to make during construction of those plants.
        I think if you look at some of the cost-based rate-making
    States versus the performance-based rate-making States, in
    other words, where the more assets that a utility had, the
    larger their revenue, you will see that there was a lot of
    pushing and trying to get more utility plants built and a lot
    of drive through the public utility commissions to get these
    capital assets on the books. I think that is inherent in a lot
    of the States that have cost-based rate-making, whereas those
    who have performance-based rate-making where they have to live
    up to efficiency standards and things like that, I think it is
    slightly less prevalent.
        I think overall that if you look at the stocks of one of
    the utilities, you will see that they are doing quite well. If
    you look at some of the activity that is going on, you will see
    that a lot of the companies that are getting stranded cost
    recovery are then taking those funds, buying up other
    utilities, purchasing power plants overseas. It doesn't seem to
    be as bad as they are making out, because they are really
    taking other capital risks and other capital investments, and
    so I am concerned about that.
        Mr. Hall. Let me ask you, would you deny recovery of a
    utility's legitimate, prudently incurred costs?
        Mr. Andelman. I think that depends on your definition of
    what is prudently incurred.
        Mr. Hall. The courts will do that.
        I thank you, for if we take your advice, I would leave here
    immediately and go back to practicing law. You are really going
    to make it good for all of the trial lawyers across the
    country. You are going to be most congenial and Mr. America and
    all with them. When it comes upon litigation, it is
    unbelievable if we would take your advice and say, well, there
    is not going to be any stranded cost recovery. I think they
    ought to be reasonable and prudent. That is a question the
    courts are going to decide.
        We don't want the courts to have to decide that. We would
    like to write a bill that delineates it. As I have said before,
    they have had so much time to prepare their costs and get ready
    to submit and show that these costs were prudently--I don't
    think they have to be geniuses. You can look back rather than--
    they could look forward at that time, but I am just naive
    enough to want to believe that a board of directors responsible
    to their investors and shareholders and to the public at large
    and to the State or Nation that they are contracting with, that
    they want to be reasonable, and they want to make the best deal
    they could make.
        I just have a hard time--Mr. Chairman, I need to go just
    another half a minute if I could.
        If the government subjects these businesses and their
    shareholders to risks not undertaken at the time of capital
    investments were made to fulfill a franchise utility
    obligation's to serve, why do you object to providing for
    recovery of the stranded costs that result from this change in
    governmental policy when the government caused them to do that,
    and they in response tried to give a gracious living? How can
    you do that? How can you be that indifferent?
        Mr. Andelman. I would look to some of the other industries
    that have restructured; trucking, railroad, airlines, et
    cetera. Telephone.
        Mr. Hall. There have been mistakes made there.
        Mr. Andelman. This term of stranded costs wasn't really
    seen at that time when those industries were restructuring. It
    seems as if it is a newly invented term to try and recover the
    costs.
        I don't blame the utilities. I think they are doing the
    right thing by their shareholders. I think if I was them and I
    held a lot of stock, I would do the same thing. But you haven't
    seen these sort of stranded cost recoveries in the other
    industries that have restructured. I am not sure why all of a
    sudden we need to exempt the electric industry as well.
        Mr. Hall. I thank for your testimony and thank you for your
    courtesy. I yield back the balance of my time.
        Mr. Whitfield [presiding]. Mr. Shimkus, you are recognized
    for 5 minutes.
        Mr. Shimkus. Thank you, Mr. Chairman.
        I am going to follow up with Mr. Andelman real quick and
    then to the rest of the panel.
        Mr. Andelman, the company that you are speaking of as a
    wholesale club, BJ's Wholesale Clubs, so there is memberships?
    I am trying to get an idea----
        Mr. Andelman. Yes, sir.
        Mr. Shimkus. It is kind of like in our area we have Sam's
    Clubs. Would that be a similar operation?
        Mr. Andelman. We are much better, of course.
        Mr. Shimkus. If in Collinsville, Illinois, my home town, I
    had a company, Shimkus TVs, and it was American-made, and we
    passed Federal regulation that said, okay, now, BJ Wholesale
    has to sell Shimkus TVs, and you had to take the TV and sell it
    for a loss, would that be a position that the wholesale company
    would like? I mean, would you accept or the company would
    accept that proposition, that proposal?
        Mr. Andelman. Would they accept it?
        Mr. Shimkus. Yes. Would you say, all right, we will do it?
        Mr. Andelman. I would think that would not be a very
    popular position.
        Mr. Shimkus. Thank you.
        Let me follow up on a question on stranded costs. Most of
    the panelists believe that stranded costs should be recovered.
    I want to ask the question on the PURPA stranded costs. In
    Illinois part of the recovery plan also has an equation for the
    PURPA stranded costs. Do you think that there is any role for
    the Federal Government to recover the PURPA stranded costs? And
    if we go to Ms. Bode first and just go down the table. Mr.
    Andelman, since you don't agree that they should recover
    stranded costs, we can kind of skip over you.
        Ms. Bode. The question is----
        Mr. Shimkus. Should PURPA be handled any differently?
    Should there be a role by the Federal Government in recovering
    PURPA stranded costs other than the States?
        Ms. Bode. I guess my view is that the States should be in
    charge of all stranded cost issues with regard to the utilities
    which they regulate, because I think that we have a better way
    of determining what was freely entered into than does any
    Federal agency in looking at these issues.
        Mr. Shimkus. Thank you.
        Mr. Andelman, if you want to answer that, but I don't think
    that you will agree that there is any stranded cost recovery
    should be done.
        Mr. Andelman. I just want to go back to your previous
    statement.
        Mr. Shimkus. No. I am done with that. I have 5 minutes.
        Mr. Ain.
        Mr. Ain. I think that PURPA delegated to the States what
    was formally relegated by the Federal Government under part two
    of the Federal Power Act, which is sales or resale and
    interstate commerce. They asked the State pursuant to Federal
    law to create a program with Federal standards, and now they
    are changing the rules of the game.
        It seems to me that the Congress was the one who designed
    this program initially, who had the FERC come up with the
    rules, and required the State to implement it. Therefore it
    seems to me that the Federal Government should assure the
    buyers of that power that they not be burdened by that
    purchase.
        Mr. Shimkus. Mr. Adelberg.
        Mr. Adelberg. Yes. I would agree with Mr. Ain. I would just
    add this. Ms. Bode suggested that it was appropriate for the
    States to be examining the prudence of costs incurred and
    associated with PURPA contracts. In fact, those costs are
    wholesale costs by definition. They are costs of power that is
    being being sold for resale by the utility. The FERC has
    nationwide authority, Federal authority over those costs. It
    has been held by the Third Circuit Court of Appeals that the
    States cannot disobey an order of the FERC determining if those
    costs are just and reasonable. So I don't believe it is
    appropriate for the State.
        And again, I would also add that while the States may
    handle the issue responsibly, we need to remember those costs
    will go out for another 20 years or more. That is a tremendous
    period for the utilities to be subjected to the risks of
    decisions when State policies will change.
        Mr. Shimkus. Let me go back to both of you, again bringing
    in Illinois's equation, because Illinois already in their
    recovery has the PURPA stranded cost recoveries. So you are
    proposing that we have an additional layer when the States have
    already taken that into consideration?
        Mr. Adelberg. Absolutely. Again, the problem is you are
    looking at costs that are very large. We are talking about some
    $8 billion a year to date. They go on for a long period of
    time. It is almost----
        Mr. Shimkus. Can I cut in? I don't mean to cut you off, but
    in the Illinois law there is a severability issue in which if
    you change one action of the Illinois law, the whole dereg law
    in Illinois goes out the door. In our move to competitive
    energy strategy with the aspect that PURPA has been considered,
    do you want to throw the baby out with the bath water?
        Mr. Ain. I think the Federal Government should consider a
    standard that would allow for full and timely recovery and
    leave it to State interpretation as to the full and timely
    recovery judging against the very details of the contracts, the
    cost incurred by the utilities. I would hope that that would
    not do harm to Illinois's restructuring legislation.
        Mr. Shimkus. Mr. Chairman, can I just ask on the same line
    just to see if Ms. Bode has any response?
        Mr. Whitfield. This would be the last question. Ms. Bode,
    do you want to answer the question?
        Ms. Bode. As stated, there have been States that have taken
    on issues, and I guess our interpretation as to whether FERC
    has exclusive jurisdiction or whether the States also have a
    role to play is different. I think we would exert the authority
    over making those decisions as part of our process that we are
    undergoing in Oklahoma, our electric restructuring process. We
    are looking at all issues across the board and not assuming
    that FERC has that kind of jurisdiction.
        Mr. Shimkus. Thank you.
        Thank you, Mr. Chairman.
        Mr. Whitfield. Yes, sir.
        Mr. Pallone, you are recognized for 5 minutes.
        Mr. Pallone. Thank you, Mr. Chairman.
        Just following up on some of the comments that have already
    been made, I want to ask a question of Mr. Adelberg. From a
    legal standpoint, do you think that States could deny
    compensation for stranded PURPA costs?
        Mr. Adelberg. I believe based on the Freehold case, which
    is cited in my testimony, that it would be illegal for a State
    to deny recovery of a PURPA contract cost that met the FERC
    standard of justice and reasonableness, which means simply that
    the contract price is below the utility's avoided costs. The
    concern that we have is that that is one court. As you have
    heard, there are States that don't necessarily believe that
    they are bound by that. I would hate to see this issue continue
    to be litigated over the next several years.
        Mr. Pallone. Let me ask you another question about PURPA
    costs, whether PURPA costs have had an effect on your company's
    Wall Street bond rating. In other words, is there a concern
    that Wall Street believes there is some risk that you will not
    be able to recover these costs?
        Mr. Adelberg. The answer to that question is yes. It is
    quite explicit. You need only go review the rating reports, the
    published rating reports by the rating agencies, Duff & Phelps,
    Standard & Poor's, and Moody's, over the past several years.
    They talk specifically about the burden of these costs, the
    length that we will continue to bear them, and the
    uncertainties associated with having those contracts in place.
    So it was an explicit consideration that the rating agencies
    used in downgrading our debt, and that raised our costs for our
    consumers.
        Mr. Pallone. I wanted to ask Mr. Ain if you believe that--
    well, I guess two parts. First, do you believe that PURPA has
    stimulated renewable energy development; and then second, if
    PURPA is repealed, do we need something like a renewable energy
    portfolio to ensure that it continues?
        Mr. Ain. I think two things that the Congress did, two at
    least, that greatly stimulated renewable energy development,
    certainly having the market for the power was a critical
    element in the 1980's. But second, the Congress had passed a
    series of tax incentives in the form of tax credits and 5-year
    depreciation. That was extremely valuable. I worked on large
    solar projects, wind projects, geotherm projects, hydro
    projects, and they all benefited.
        What really destimulated, if you will, the renewable energy
    projects was when you put out a renewable project, you are
    basically building it and capitalizing 30 years of gas reserves
    on day one. And if the future forecasts it, the forward price
    curve of natural gas is very low, you can't finance a renewable
    project against that forward price curve because you don't
    think that you will have a market. So either you have to lower
    the capital costs of that project through tax incentives, or
    you have to raise the market price that you can get for your
    output. It is very simple. So those are the two things.
        I think that I agree with some of the things that the
    gentlemen have stated. I think Mr. Markey stated we have made
    terrific progress on the efficiency and reliability of
    renewable industry technologies. But frankly, the forward price
    curve of natural gas and coal and alternate fuels is so low
    that it makes it very difficult to invest in a 30-year
    capitalization when you talk about a renewable energy project.
        Will the renewable portfolio approach be the answer? It
    would certainly force people to buy at some price from
    renewable energy projects. It would be a way, if you will, of
    creating a market for that power and raising the price because
    people would be having to buy it. I think that Congress should
    look at that and look at alternatives like tax incentives,
    which have worked well in the past. It is a capital problem.
        Mr. Pallone. Now, your response makes me ask another
    question, if I dare, but I see Mr. Dingell is not here. So
    maybe I can ask this question, since Mr. Dingell is not here.
    If he were here, I might not want to ask this, but since he is
    not, I will ask it. Does that mean that Ways and Means needs to
    be a part of this electricity restructuring bill?
        Mr. Ain. I was merely addressing the incentive necessary to
    commercialize available renewable energy projects. And the
    Congress as a whole has alternatives. You can certainly try to
    fill that gap and do what you can here, and other committees
    and other agencies have other mechanisms under their
    jurisdiction.
        Mr. Pallone. That was a nice way to get around that
    question.
        Let me ask--this is something--oh, my time is up. I am
    sorry. Thank you, Mr. Chairman.
        Mr. Whitfield. I gave everyone else one additional
    question.
        Mr. Pallone. This is one that comes up all the time, but I
    will ask Ms. Bode this. It is the question of whether you think
    that PURPA should be repealed by itself or whether it should be
    part of a comprehensive package.
        Ms. Bode. I think it should be a part of a comprehensive
    package, to answer your question directly. But responding to
    what you said previously, I do believe PURPA has played an
    important role in terms of allowing people to see what a
    competitive marketplace could look like. It allowed people to
    move forward and see what these merchant power plants could
    look like. I think it gave people a taste of what competition
    could be.
        I think now as we are looking at comprehensive
    restructuring of the electric industry, I think it is
    appropriate to eliminate that one provision that sort of gave
    us a little leap forward and look more comprehensively on
    allowing competition across the board.
        I wanted to respond to the other part of it because I think
    it is important in answering your question to kind of see where
    we have been and look at where we are going forward. I think
    PURPA alone being repealed versus as part of a more
    comprehensive package, it is a matter of timing, but I think it
    would be better done as part of a more comprehensive package
    addressing all competition.
        Mr. Pallone. Thank you.
        Thank you, Mr. Chairman.
        Mr. Whitfield. Mr. Pickering, you are recognized for 5
    minutes.
        Mr. Pickering. Thank you, Mr. Chairman.
        I would just like to clarify some of the questions that
    come to my mind on the jurisdiction, who should be responsible
    for stranded costs. As I understand it, Ms. Bode recommends
    that the States should have total jurisdiction over stranded
    costs, both PURPA and other State-related issues; while Mr.
    Adelberg and Mr. Ain, you would recommend, at least on the
    PURPA portion of stranded costs, which represents about 30
    percent of stranded costs, that FERC would have that
    jurisdiction. Is that a correct understanding of your
    positions?
        Mr. Adelberg. In my case, what is important is that the
    Federal Government, the Congress, pass legislation that assures
    the recovery. The administration could be done in various ways.
    But I believe it is a Federal issue because they are federally
    mandated wholesale costs. I also, by the way, would, as I
    mentioned----
        Mr. Pickering. You would say if we did Federal legislation,
    as long as we said the States shall be responsible for both
    stranded costs and the cost of State regulatory action as well
    as PURPA, any Federal action, as long as the State administered
    it, would you still be supportive of that?
        Mr. Adelberg. You have to proceed with a certain amount of
    finesse here. When PURPA was enacted, there was some
    legislation that went to the Supreme Court that raised that
    very question of where was the proper dividing line between
    Federal Government policy and what the Federal Government could
    require States to do. The Supreme Court found in a 5 to 4
    decision that PURPA did not violate the 10th amendment. There
    is some question as to whether the Court would go that way
    today. So I think the prudent thing to do is to impose it at
    the Federal level, require that it be FERC standards that
    ensure the recovery, and then the States would be bound by
    those FERC standards.
        Mr. Pickering. But if you gave the States the
    jurisdictional authority and the administrative authority with
    consultation with the FERC and due deference to FERC
    recommendations?
        Mr. Adelberg. Again, if it was drafted carefully, it might
    survive constitutional scrutiny.
        Mr. Pickering. Mr. Ain, your view?
        Mr. Ain. It is certainly in the national interest that
    there be financially viable transmission and distribution
    companies in the United States that can serve the public.
    Anything this Congress does should not injure that financial
    viability. The question comes to the nature of the stranded
    cost recovery.
        Mr. Pickering. Mr. Ain, if I could just get to the
    jurisdictional issue, because that is the core of our question
    here. Would you support--would you say that the FERC should
    administer all of the stranded costs related to PURPA, or, if
    we could, keep it at the State?
        Mr. Ain. I think it should, and I think it is
    administerable, and it is clear, and you could tell what costs
    are incurred and what you could pass through.
        With regard to stranded costs with regard to power plants,
    it is not a science, it is really an art form. It is a very
    difficult evaluation process. I think certainly the States have
    a role, since they were the ones in many cases who authorized
    these plants to be built, who did the prudence reviews, not the
    FERC.
        I think, going back to the national interest, you want to
    make sure that you don't have an industry that can't carry out
    a vital public function.
        Mr. Pickering. Mr. Ain, I am not sure if I understand your
    answer. Did you say that the State could handle both PURPA and
    all other stranded costs?
        Mr. Ain. No. I said there should be a Federal standard that
    mandates that PURPA-incurred costs, since they are easily
    verifiable, should be passed through to the customers of the
    utilities incurring those costs.
        Mr. Pickering. But can the States do that?
        Mr. Ain. The States are doing that. The States will be the
    ones actually doing that. The question is are they doing that
    under a Federal requirement.
        Mr. Pickering. So we could require the States to do it
    without having the FERC actually do it?
        Mr. Ain. That is correct.
        Mr. Pickering. Thank you very much.
        Mr. Whitfield. Thank you, Mr. Pickering.
        Mr. Wynn, you are recognized for 5 minutes.
        Mr. Wynn. Thank you, Mr. Chairman.
        Mr. Adelberg, is it your position that stranded costs
    beyond PURPA should also be handled at the Federal level?
        Mr. Adelberg. I think the answer is certainly for certain
    categories of stranded costs, the answer is yes.
        Mr. Wynn. What categories would that be?
        Mr. Adelberg. Well, the most clear case would the nuclear
    decommissioning costs that are associated with a Federal
    regulatory system. I believe that it is appropriate for
    Congress to address those costs.
        Mr. Wynn. What about costs other than those that were
    incurred, as Mr. Ain indicated, as a result of a State process?
        Mr. Adelberg. I believe that the issue has to turn on the
    Federal Government's role both in causing the costs to be
    stranded in the first place. In other words, if Congress
    imposes a date certain and says by a certain date everyone will
    have a retail choice, then I believe Congress's responsibility
    to provide for standard cost recovery is greater. That is the
    first point.
        The second is you need to look again as the particular
    costs in questions. There is sort of a widespread myth that the
    Federal Government had no role in the generation fuel decisions
    made by utilities over the past 25 or 30 years, but, in fact,
    if you look at the record, Congress was very active in the
    1960's, 1970's, and 1980's in setting policy that affected
    utilities' decisions as to what fuels were burned in power
    plants.
        Mr. Wynn. But essentially the State regime, regulatory
    regimes, made the ultimate decisions with respect to non-PURPA
    and nondecommissioning decisions.
        Let me direct this question to both you and Mr. Ain. Would
    it be your position that even where States have calculated and
    negotiated stranded costs, that this ought to be redone under a
    Federal system? My State of Maryland, for example, has
    essentially negotiated this issue and taken into consideration
    PURPA costs, and I think the argument I presume some of my
    colleagues would make is why should we redo this, and why is
    the Federal Government better at doing this than the States who
    have already done this?
        Mr. Adelberg. My State has also done it.
        I would not advocate a Federal standard that would undo the
    work that is done because I think a State like mine and yours
    that have done it properly would find that there would be no
    further action required.
        What is of concern to us is that 5 years down the road,
    that there is a Federal standard in place that discourages the
    State from reopening the question under some political pressure
    or pressure from some consumer groups to lower electric rates.
        Mr. Wynn. Mr. Ain.
        Mr. Ain. I would tend to agree with that answer.
        Mr. Wynn. Mr. Ain, how do you respond to the argument that
    Mr. Adelberg made that these electric companies are simply
    becoming delivery systems and therefore should not be under a
    purchasing mandate?
        Mr. Ain. It is interesting. I addressed in my earlier
    remarks, and I will make it clear one more time if I could,
    under the avoided cost standard in place today at FERC, under
    the PURPA legislation which says that the utilities should pay
    no more than they otherwise would have paid had they done it
    themselves, if they are not doing it, there is nothing they are
    required to pay. If they are not actually in the supply
    business, PURPA doesn't say that you have to buy what you don't
    need. It says you have to buy what you could avoid. If they not
    avoiding anything----
        Mr. Wynn. Mr. Adelberg makes the argument that they would
    be forced to purchase it and then resell it----
        Mr. Ain. I don't believe that is technically or legally or
    in any way correct.
        Mr. Wynn. Thank you.
        Ms. Bode, I am impressed with as a low-cost State you have
    moved to deregulation. Do you believe that consumers will save
    in a low-cost State such as yours under a deregulation scheme,
    and if so, approximately what would be your rough estimate of
    the consumer savings?
        Ms. Bode. I think that is one of the most difficult issues
    that, frankly, we face. That is why in my testimony I stated
    that I think some of the issues that we look at are a little
    different, and the reasons for going forward with electric
    restructuring are a little different.
        Mr. Wynn. Not based on consumer savings?
        Ms. Bode. What we are hopeful for is that the consumer
    savings will come down the line. We realize that electric
    restructuring is coming all around us. We want to be positioned
    to protect and to compete in that marketplace.
        We believe because we have one of the largest resource
    bases that is really going untapped in terms of gas supply,
    that we can increase electric generation in the State of
    Oklahoma by using that gas supply in the future, and that we
    can maintain an abundance of electric generation capacity in
    Oklahoma that will keep electric prices at a reasonable level.
    And we are, I guess, looking right now and making sure as part
    of this restructuring processes that electric prices for
    residential consumers will not go up and making sure that,
    hopefully, with commercial and industrials, that they go down
    as well, that they kept level, and that they will go down. So
    it is the idea of doing no harm and with the hopes that we can
    do even better in the future by positioning ourselves as
    opposed to not----
        Mr. Wynn. Can I get in one extra question, Mr. Chairman?
        Mr. Whitfield. Yes, sir.
        Mr. Wynn. I think that you indicated in your testimony that
    there was several new gas-fired facilities for electricity
    generation either being built or have been built in your State?
        Ms. Bode. They are on the drawing board.
        Mr. Wynn. On the drawing board.
        If you don't go to full deregulation until 2000, are they
    subject to a stranded cost problem at some point?
        Ms. Bode. No. In fact, they are not being built by our
    investor-run utility.
        Mr. Wynn. Who are they being built by?
        Ms. Bode. They are being built by independent power
    marketers, companies like his, with the hope that because they
    are being built close to major transmission line facilities,
    and they are also close to major gas pipelines, so they know
    that they will have a sure source of fuel in the future, and
    they are going to be very, very efficient plants. At least they
    are on the drawing board to do that right now.
        Mr. Wynn. Thank you for your testimony.
        Thank you, Mr. Chairman.
        Mr. Whitfield. I just have a couple of brief questions for
    Mr. Andelman. I know it has been a long day, and that we will
    conclude with panel one, and we will move on to panel two. But
    BJ is a warehouse?
        Mr. Andelman. Wholesale club.
        Mr. Whitfield. I think you indicated that you have about 98
    or 96 facilities. Could you give me a breakdown right now of
    the fuel that is used to generate the electricity that you
    purchase; what percent is green, what percent is coal, what is
    percent is----
        Mr. Andelman. I can't give you those exact figures at the
    moment. We are not purchasing green. We are just working on the
    final details of it right now and looking into other green
    sources. I couldn't tell you the mix in each of the 13 States.
        Mr. Whitfield. So you don't know the mix?
        Mr. Andelman. Not to the kind of detail that you are
    looking for.
        Mr. Whitfield. Okay. I want to thank you very much--oh, Mr.
    Pickering, you have another question?
        Mr. Pickering. If I could just ask Ms. Bode one quick
    question.
        Ms. Bode, as you know, we are looking at two different
    approaches. One would be a date certain, and one would be an
    approach that would remove all barriers, whether it is PUHCA,
    PURPA, established reliability, transmission, those types of
    issues that would set the rules for competitive policy, but not
    have a date certain as part of that or an opt-out, some
    flexible date certain. From your point of view, from the State
    perspective, do you support one approach over the other?
        Ms. Bode. We have a date certain in our legislation in
    Oklahoma, which is July 1, 2002, but we have flexibility in
    that date if we don't get the problems solved that are
    critically important to the State of Oklahoma. That is not a
    drop-dead date. So I think in answer to your question, I think
    it is critically important to have flexibility in that date so
    that you make sure that you get the problem solved as opposed
    to being held firm to a date certain.
        Mr. Pickering. To that objective of flexibility, does that
    argue for a date certain from a Federal perspective or from a
    removal of barriers?
        Ms. Bode. I think removal of barriers and addressing the
    issues is what critically important. I do think it is important
    to give people an idea of what you are shooting for, but with
    the flexibility of not having it be a drop-dead date.
        I think it is important for the States to have some
    certainty in knowing what we are doing, what target you all are
    trying to meet. I don't know that that necessarily needs to be
    a drop-dead date where once that date is passed, it goes into
    effect automatically.
        These issues, we have got to work in partnership together.
    Let me tell you, this is a real scary proposition, having
    worked through the whole telecommunications issue where we are
    dealing with things, slamming, and consumer issues that are
    really serious. If we go to this same sort of process, put this
    in place, and we have those problems with our electric service,
    it could have incredibly serious consequences. We have got to
    work as a team. There needs to be flexibility built in, and I
    really welcome and thank you for the opportunity to have this
    dialog.
        Mr. Pickering. Thank you, Ms. Bode.
        Mr. Whitfield. I want to thank panel one for your time and
    patience. Your testimony was particularly important. We
    appreciate you coming down and look forward to working with you
    through this process.
        I would like now to call panel two. Mrs. Karen O'Neill with
    Green Mountain Energy; Mr. Donald Niemiec with Union Pacific
    Resources; Mr. Paul Agathen with Energy Supply Services; Mr.
    Tom Casten with Trigen Energy Corporation; Mr. Armond Cohen,
    Clean Air Task Force; and Mr. Lawrence Codey with the Public
    Service Electric and Gas Company.
        I would recognize the gentleman from New Jersey for the
    purpose of introduction.
        Mr. Pallone. Thank you, Mr. Chairman. I just wanted to
    mention the presence on our panel of Larry Codey as one of the
    witnesses. Larry is someone who really has built the reputation
    as one of the most respected and well-liked business leaders in
    our State of New Jersey, not just on utility issues, but just
    in general. He has been the president of PSE&G, Public Service
    Electric and Gas, since 1991. And, basically, it has been his
    vision for the company and for the business community--his
    whole vision, I should say, is built on a philosophy that
    economic growth and environmental progress are objectives that
    are entirely compatible, and that sustained economic progress
    will not be possible without prudent stewardship of our States'
    and our Nation's environmental resources.
        I think that many people know that New Jersey is very
    concerned about the need to bring economic growth and
    environmental progress together. He has basically driven his
    company to a leadership role within the industry on improving
    its environmental standing, and he has been an outspoken
    proponent for the electric power industry to embrace change in
    terms of competition and restructuring as well as coordinating
    that with environmental policies.
        I also wanted to say, Mr. Chairman, that with Larry's
    active support, New Jersey is implementing one of the Nation's
    most comprehensive and, I think, progressive electric industry
    restructuring plans, which includes significant rate cuts,
    shopping credits for all classes of customers, and tough
    consumer protection and environmental disclosure provisions.
    Beginning August 1 of this year, all New Jerseyans will be able
    to choose their energy suppliers.
        I guess that I could also add that he is a constituent of
    mine, which probably ultimately is the most important thing.
        Thank you for being here, Larry.
        Thank you, Mr. Chairman.
        Mr. Whitfield. Thank you.
        We have a distinguished panel here. We are looking forward
    to the testimony of all of you. I do want Mr. Casten to know
    that we have his book here, so we are going to be reading that.
    In fact, some of it has already been read.
        Each of you will have 5 to 6 minutes for your opening
    statement, and we will begin with Ms. O'Neill.

    STATEMENTS OF KAREN O'NEILL, VICE PRESIDENT, NEW MARKETS, GREEN
       MOUNTAIN ENERGY; DONALD W. NIEMIEC, VICE PRESIDENT, UNION
      PACIFIC RESOURCES ENERGY MARKETING; ARMOND COHEN, DIRECTOR,
      CLEAN AIR TASK FORCE; PAUL AGATHEN, SENIOR VICE PRESIDENT,
    ENERGY SUPPLY SERVICES; LAWRENCE R. CODEY, PRESIDENT AND CHIEF
    OPERATING OFFICER, PUBLIC SERVICE ELECTRIC AND GAS COMPANY; AND
     THOMAS R. CASTEN, PRESIDENT AND CEO, TRIGEN ENERGY CORPORATION

        Ms. O'Neill. Good afternoon. I am Karen O'Neill, vice
    president of new markets at Green Mountain Energy, the Nation's
    leading retailer of cleaner and renewable electricity. Thank
    you for inviting me to testify today.
        Mr. Chairman, Green Mountain Energy supports and
    appreciates your leadership and the work of other committee
    members on this important issue. We feel strongly that Congress
    should pass legislation that requires the States to embrace
    meaningful competition and offer leadership and direction on
    the important issues.
        To understand our position, you need a little information
    about our company. Green Mountain has a simple, yet ambitious
    mission, to use the competitive market to change the way that
    electricity is made. The generation of electricity is the No. 1
    source of industrial air pollution in this country. Power
    generation contributes to smog, acid rain, and climate change,
    to list just a few.
        Green Mountain believes and has evidence that if consumers
    were given the ability to choose their electric supplier, many
    will select power sources that include generation from
    renewable and cleaner resources as a way to improve the
    environment. Market forces can and will deliver cleaner
    electricity to the grid as customers use their purchasing
    powers to fight air pollution. Green Mountain is built on this
    principle of aligning the market economy with the customers'
    environmental values.
        Our company was founded in 1977 to sell electricity from
    renewables and cleaner energy resources, primarily to
    residential customers in States that opened up to competition.
    We have signed up more than 100,000 customers in California and
    Pennsylvania, the first two States to create competitive
    markets. Our long-term plan is to sell cleaner electricity in
    each State where a viable competitive market is created.
        There is already ample evidence that informed consumers
    want cleaner energy. In Pennsylvania, the most competitive
    market in the country today, one-third of residential customers
    have switched since the market fully opened to competition,
    have chosen green energy products even though these are not the
    cheapest options available on the market. This experience
    provides compelling evidence that there is a significant market
    for green energy if competitive marketplaces are created.
        Consumers' choices are already having an impact in
    California and in Pennsylvania. In direct response to
    customers' demands, Green Mountain has contracted for existing
    renewables and has begun to bring new cleaner sources to the
    market. In Pennsylvania we have contracted to have 130
    kilowatts of solar generation built. In California three wind
    turbines totaling two megawatts are under construction to serve
    our customers.
        This is a small, but significant new generation. The
    decisions our customers have made will eliminate more than
    100,000 pounds of nitrogen oxide and sulphur dioxide emissions
    and millions of pounds of carbon dioxide emissions. This first
    step on the journey to a cleaner electricity future was made
    possible by a competitive market. We know that when consumers
    are educated and empowered, a large number will choose
    environmentally preferable sources of electricity. As our
    company grows in the years to come, we expect to spend hundreds
    of millions of dollars educating consumers.
        We have, by the way, already spent a considerable amount of
    money educating consumers about the environmental consequences
    of electricity production. And I have with me, and would be
    happy to pass these around later on for you to look at, copies
    of billboards and advertisements that have run in both the
    States that we are operating now. They provide a good deal of
    education as well as advertising for environmental resources.
        We ask Congress to help empower those consumers to use
    their purchasing dollars to support those resources. Congress
    should make a strong public expression of support for true
    competitive markets for all consumers. We need fair and easy
    access to the transmission and distribution facilities owned by
    State-regulated utilities. It is also critically important that
    States adopt market structures that produce meaningful price
    competition; that is, that the market structures allow new
    entrants to come in and compete successfully on the basis of
    price with the default service that is provided to consumers
    who don't switch electricity providers most frequently by
    utilities.
        Other elements that are important to a vibrant retail
    market include a strong wholesale market; rules that make it
    easy for customers to switch suppliers; standardized data
    transactions; consumer education; and strong affiliate rules
    for utilities.
        There are as well several things that Congress could do to
    strengthen the market for green energy specifically. First, it
    can require utilities and retailers alike to disclose the
    environmental attributes of electricity they sell. This will
    empower consumers to select cleaner products and, one customer
    at a time, build the demand for new renewable generation.
        Congress could also create a systems benefits charge to
    support the development of new renewables, energy efficiency
    programs, and consumer education. Other environmental
    provisions that Congress could consider include emissions
    standards for older generation plants that are comparable to
    those in place for newer plants and a renewables portfolio
    standard.
        Green Mountain is working with a diverse group of
    stakeholders to develop a mix of environmental and other
    policies that would be acceptable to all parties as part of a
    comprehensive restructuring bill.
        To summarize, we at Green Mountain believe that Congress
    can play a strong role in ensuring a viable competitive market
    for electricity. If a market is created, we are confident that
    a large number of customers will choose environmentally
    preferable sources of energy and, as a consequence, can make a
    significant difference in the quality of our environment. Thank
    you.
        [The prepared statement of Karen O'Neill follows:]
    Prepared Statement of Karen O'Neill, Vice President, New Markets, Green
                                Mountain Energy

        Good Morning: I am Karen O'Neill, vice president of New Markets at
    Green Mountain Energy, the nation's leading retailer of cleaner
    electricity. We are based in Burlington, Vermont. Thank you for
    inviting me to testify today. My testimony will touch on several
    issues, but will focus primarily on the tremendous opportunity we have
    to significantly improve the environment as we move toward a
    competitive market for electricity.
        Mr. Chairman, Green Mountain Energy supports and appreciates your
    leadership and the work of other committee members on this important
    issue. Electrons follow the laws of physics, not the laws of our 50
    states. They flow across state lines in interstate commerce. We feel
    strongly that Congress should pass legislation that requires the states
    to embrace meaningful competition and offer leadership and direction on
    several important issues. I'll touch on some of these later in my
    presentation.
        To understand our position, you need a little information about our
    company. Green Mountain Energy has a simple yet ambitious mission: To
    use the competitive market to change the way electricity is made. The
    generation of electricity is the number one source of industrial air
    pollution in this country. Power generation contributes to smog, acid
    rain, excessive nutrient loading to our streams, rivers and lakes,
    climate change and mercury pollution to list just a few.
        Green Mountain Energy believes and has evidence that if customers
    are given the ability to choose their electric supplier they will
    select power products that include generation from renewables and other
    cleaner sources as a way to improve the environment. Market forces can
    and will deliver cleaner electricity to the grid and customers can and
    will use their everyday purchasing dollars to fight air pollution.
    Green Mountain is built on this principle of aligning the market
    economy with customers' environmental values.
        New, cleaner generation is the best way to reduce industrial air
    pollution.
        Green Mountain Energy was founded in 1997 to sell electricity from
    renewables and cleaner sources primarily to residential customers in
    states that deregulate and embrace competitive markets. We have signed
    up more than 100,000 customers in California and Pennsylvania, the
    first two states to create a competitive market. This summer we will
    enter New Jersey, the next competitive market to open. We have been
    active in the development of legislation and/or rules in New England,
    New York, Maryland, Texas and other states, and our long-term plan is
    to sell cleaner electricity in each state where a viable competitive
    market is created.
        Competitive markets have attracted both retailers that compete on
    price and those that offer ``green energy,'' or electricity from
    cleaner sources. There is already ample evidence that informed
    consumers want cleaner energy. In Pennsylvania one third of the
    customers that have switched have chosen green energy products even
    though they are not the cheapest option. We believe there is a
    tremendous market for ``green energy'' if a real competitive
    marketplace is created.
        We have found that cleaner energy options can be cost competitive
    as well when the market is structured properly. Green Mountain Energy
    offers three products in Pennsylvania including one that is priced
    competitively with products offered by existing utilities. Green
    Mountain's participation in the market has already produced results.
        In direct response to customers' demand in Pennsylvania, Green
    Mountain has contracted for existing renewables and has begun to bring
    new, cleaner sources to the market. Green Mountain has contracted to
    have 130 kW of solar generation built there. The first of the solar
    facilities being built to serve Green Mountain began generating power
    on April 22 in Conshocken. This 43kW solar array is by far the largest
    in the Commonwealth.
        In California, three wind turbines totaling two megawatts are now
    under construction to serve our customers there. These are the first
    wind turbines built as a result of customers choosing renewable energy
    in a competitive market.
        Soon we expect to have new wind turbines built to serve our
    customers in Pennsylvania. We have a contract with a wind developer to
    assess sites in Pennsylvania. The developer has reviewed more than 20
    sites throughout the state, and we are narrowing our search to a few
    locations. We expect to have brought the first commercial wind
    generation to Pennsylvania by early 2000.
        The 43kW solar array in Pennsylvania and two megawatts of new wind
    in California were developed because customers voted with their wallets
    to have them built. These facilities are going up in record time. It
    took just a few months to get the solar array operational. In
    comparison, it takes years to permit and site a fossil fuel plant and
    nuclear plants can not be sited at all.
        This is small, but significant, new generation. The decisions our
    customers have made in California and Pennsylvania will eliminate more
    than 100,000 pounds of nitrogen oxide and sulfur dioxide emissions, and
    millions of pounds of carbon dioxide emissions. This first step on the
    journey to a clean electricity future was made possible by Green
    Mountain and a competitive market. We know that when consumers are
    educated and empowered, a large number will choose environmentally
    preferable sources of electricity. As our company grows in the years to
    come, we expect to spend hundreds of millions of dollars educating
    consumers. We ask Congress to help empower them.
        What can be done to improve the competitive market and the market
    for green energy?
        First Congress should make a strong public expression of support
    for competitive markets for all customers. We need fair and easy access
    to all the transmission and distribution facilities owned by state-
    regulated electric utilities. It is also important that states adopt
    market structures that produce meaningful price competition. Inevitably
    in a competitive market, a standard offer price, or what is sometimes
    called the ``default price'' or ``price to beat,'' is created. This is
    the price customers who do not switch will pay for the electricity they
    buy. Often, but not always, the existing utility becomes the standard
    offer provider and retains the customers who choose not to switch.
        The ``standard offer'' price should include all costs of generation
    and retail service. In some states some of these are categorized as
    distribution costs. In a competitive market distribution costs are
    still regulated and are included as a separate charge on customers'
    bills. So it is to the utilities' advantage to shift as many costs as
    they can to the distribution side of its business. This artificially
    lowers the standard offer and gives the utilities an unfair advantage
    over the new entrants in the market who have to include these costs in
    their retail rates.
        When the standard offer is priced properly, as it was in much of
    Pennsylvania, competition is fierce. When it is set artificially low,
    as it was in Massachusetts, there is no competition. Customers do not
    win if the price is set artificially low. They lose the cost savings,
    innovation, and environmental benefits that will flow from competition.
        Other elements that are important to a vibrant retail market
    include a strong wholesale market, rules that offer customers easy
    access to the market, standardized data transactions, consumer
    protection and strong affiliate rules for the utilities. I'll touch on
    just the last one here.
        The electricity market needs real competitors. Utilities should not
    be able to create shadow affiliates that presume to offer competition,
    but are really designed to protect market share. Clearly defined
    affiliate rules that mandate a meaningful arms-length relationship
    between a utility and its stepchild are critical to the success of the
    market.
        There are several things Congress can do to strengthen the market
    for green energy specifically.
        First, it could require utilities and retailers alike to disclose
    the source and cost of the electricity they sell. Consumers purchasing
    electricity in a competitive market need more information about the
    environmental characteristics of the power that they buy. This will
    empower them to select cleaner products and one customer at a time
    build the demand for new renewable generation to be built.
        Second, Congress should create a system benefits charge to support
    the development of new renewable resources, energy efficiency programs
    and the development of consumer education programs that alert customers
    to the important issues addressed in deregulation.
        Consumer education is key to a successful competitive market. It is
    essential to a successful green market. Green Mountain Energy's
    advertising and marketing have played an important role in California
    and Pennsylvania. Marketing is information. Our marketing is a major
    environmental education campaign, alerting people to the problems that
    result from making electricity. We've found that most people have no
    idea that electric generation is a major pollution source. So first we
    have to tell them that and then give them information they need to make
    an informed choice.
        There are other environmental provisions that Congress should, and
    no doubt will, consider as part of the restructuring debate, including
    a Renewables Portfolio Standard and emissions standards for generation
    plants built before 1977 that are comparable to standards in place for
    newer plants. While Green Mountain is enthusiastic about the potential
    for the competitive market to produce environmental benefits, the
    market does not obviate the need for sound environmental policies.
    Green Mountain is working with a diverse group of stakeholders to
    develop an appropriate mix of environmental and other policies that
    should be part of a comprehensive restructuring bill.
        We believe that to develop a market that is exciting, viable and
    attractive to consumers, we must work effectively with a wide variety
    of interested parties. We urge Congress to continue creating processes
    that are inclusive and consider the needs of all the players in the new
    competitive market.
        Thank you

        Mr. Whitfield. Thank you, Ms. O'Neill.
        Next will be Mr. Niemiec.

                     STATEMENT OF DONALD W. NIEMIEC

        Mr. Niemiec. Thank you, Mr. Chairman, good afternoon, and
    members of the committee. I appreciate the opportunity to be
    here today to participate in today's hearing and thank you for
    the invitation.
        I am Don Niemiec, vice president of marketing for Union
    Pacific Resources Group. Union Pacific Resources Group is one
    of the largest exploration and production companies in the
    United States, and it is the No. 1 driller among both
    independents and majors for the past 7 years in the United
    States. Our company is located in Fort Worth, Texas. For the
    record, let me note that I reside in Arlington, Texas, which is
    in the prestigious Sixth Congressional District, which is ably
    represented in Congress by Congressman Barton.
        Mr. Chairman, my company and organizations that I represent
    support comprehensive Federal legislation that restructures the
    electric industry and ensures open and nondiscriminatory access
    for all market participants.
        There are three issues that I would like to discuss today.
    The first is PURPA. NGSA members have long opposed energy
    mandates. Consequently, we favor the repeal of PURPA as one
    aspect of restructuring legislation. PURPA was instituted at a
    time when the U.S. believed that we were running out of fossil
    fuels. Many believed that PURPA would provide the boost that
    would make alternative fuels, especially renewables, cost-
    competitive. We now know that fossil fuels remain abundant and
    cause competition. For most, renewables remain an elusive goal.
        PURPA repeal should not be retroactive. Any restructuring
    bill should guarantee the sanctity of existing contracts and
    apply to all fuels. A restructuring bill should not repeal
    PURPA with regard to gas-powered generation while putting in
    place new PURPA mandates of the use of renewables.
        The second issue is stranded costs. Five years ago many saw
    the utilities' stranded costs as large and their potential
    Waterloo. Today that is no longer the case. Estimates of the
    size of stranded costs have shrunk rapidly as States realize
    that they can be mitigated through the sale and appropriate
    valuation of existing utility assets.
        NGSA members support utilities in their quest for recovery
    of verifiable stranded costs. Although not every State has a
    sterling record on stranded costs, there is a general trend
    toward reasonable State action. As a consequence, NGSA believes
    Congress should not dictate a single nationwide approach, nor
    should it place unreasonable roadblocks in the path of States
    working toward a just resolution of the stranded costs problem.
        The last issue that I would like to discuss pertains to
    limiting electric restructuring impact on the environment. We
    believe that market-based approaches are the best way to
    protect the environment.
        I will discuss two; first, a fuel-neutral standard. These
    standards can play a critical role in environmental policy
    since they require all fuels to achieve the same level of
    emissions. Currently, cleaner burning fuels are disadvantaged
    because past regulations do not require all fuels to meet the
    same standard. Fuel neutrality removes the preferential
    treatment that dirty fuel sources have enjoyed for the last two
    decades.
        The second example of market-based approach is the use of
    output-based standards as promulgated in the new source
    performance standards. An output-based approach requires
    industry to meet emission levels based on each unit of energy
    produced regardless of the fuel used.
        Competition and open markets offer excellent opportunities
    to establish protocols that will benefit the environment.
    However, the Nation will not reap all of the benefits that
    natural gas and other clean fuels can provide if the Federal
    rules governing the electric power industry create an unlevel
    playing field. Congress must ensure that the marketplace, not
    the Federal Government, chooses the winners and losers.
        It would be counterproductive for Congress to create a
    preference among fuels used for electric generation. The
    renewable portfolio mandate that several bills have advocated
    runs counter to the premise behind deregulating the electric
    industry. Mandates reduce customer choice and unjustly result
    in increased costs to consumers. Natural gas producers do not
    oppose renewable energy. Rather, we oppose mandatory use of any
    fuel.
        Recently we have seen the advent of green power, giving
    consumers the choice to purchase electricity from renewable
    energy sources. This is a market-based solution that is working
    to help renewables penetrate the market. It is now time for
    Congress to open the markets and let competition and customer
    choice determine the national generation portfolio. Thank you.
        [The prepared statement of Donald W. Niemiec follows:]
    Prepared Statement of Donald W. Niemiec, Vice President, Union Pacific
                                Resources Group
        Good morning Mr. Chairman, members of the committee. I appreciate
    the opportunity to participate in today's hearing and thank you for
    your invitation. I am Don Niemiec, Vice President of Union Pacific
    Resources Group. Union Pacific Resources is one of the nation's largest
    independent gas and oil exploration and production companies, as well
    as the #1 domestic driller for the past seven years. I am also the
    chairman of the Natural Gas Supply Association's (NGSA) demand
    committee and the gubernatorially appointed chair of the Texas Energy
    Coordination Council.
        Mr. Chairman, my company and the organizations that I represent
    support comprehensive federal legislation that restructures the
    electric industry and ensures open and nondiscriminatory access for all
    market participants.
        Today I would like to discuss three issues that will affect the
    debate over restructuring the electric industry. The first is PURPA.
        As you are undoubtedly aware, NGSA members have long opposed energy
    mandates. Consequently, NGSA favors repeal of the public utilities
    regulatory policies act as one aspect of federal restructuring
    legislation. PURPA was instituted at a time when the U.S. believed we
    were running out of fossil fuels. Many believed that PURPA would
    provide the boost that would make alternative fuels--especially
    renewables--cost-competitive. Of course, we now know that fossil fuels
    remain abundant, and cost competition from most renewables remains an
    elusive goal.
        Nonetheless, we should not condemn PURPA as a total failure. it
    had, in fact, several largely unanticipated benefits:

     PURPA demonstrated that independently produced power could
            contribute significantly to energy resources.
     PURPA provided a prototype for open transmission access--a
            cornerstone of a restructured electricity industry.
     PURPA also permitted efficient, low-emission natural gas to
            compete for the electricity generation market in the wake of
            the misguided fuel use act.
     PURPA opened the marketplace to increasingly efficient
            technologies that in many circumstances make natural gas second
            only to hydropower as the low-cost generation fuel.
     As a result, gas-fired capacity has increased dramatically in
            recent years, and generation has become the gas industry's
            fastest-growing market.
     And use of gas instead of coal has spared the environment
            billions of tons of air pollutants.
        PURPA repeal should not, of course, be retroactive. A federal
    restructuring bill should guarantee the sanctity of existing contracts.
    But repeal should apply to all fuels, across the board.
        A federal restructuring bill should not, in essence, repeal PURPA
    with regard to gas-fired generation while putting in place a new PURPA
    that mandates use of renewables.
        The second issue I would like to discuss is stranded costs. Five
    years ago, when national leaders began to move seriously toward
    electricity restructuring, many saw utilities' large stranded costs as
    their potential waterloo. Today, that is no longer the case. estimates
    of the size of stranded costs have shrunk rapidly as states realize
    they can be mitigated through the sale and appropriate valuation of
    existing utility assets.
        NGSA members support utilities in their quest for recovery of
    verifiable stranded costs, and we applaud the initiatives many have
    taken to mitigate them. We recognize that stranded-cost actions have
    not been the same in every state because issue surrounding stranded
    costs vary from state to state. what we are seeing is that a number of
    states are handling the stranded cost issue with compromise and
    consensus appropriate to their specific situations.
        Although not every state has a sterling record on stranded costs.
    but there is a general trend toward reasonable state action. As a
    consequence, NGSA believes Congress should not dictate a single
    nationwide approach, nor should it place unreasonable federal
    roadblocks in the path of states working toward a just resolution to
    the stranded cost problem.
        The last issue I will discuss regards limiting electric
    restructuring's impact on the environment. Market-based approaches are
    demonstrably the best method for protecting the environment. Congress
    must ensure that electric restructuring legislation and environmental
    regulations result in all generating fuels competing on a comparable
    basis in a competitive electric power market.
        I will briefly discuss two examples of how market-based solutions
    are currently being used to protect the environment. First, are fuel-
    neutral standards. Through the NGSA, natural gas producers have played
    an active role in the development of these standards in the rules
    governing ozone transport, also know as the NOX sip call.
        Fuel-neutral standards are critical in environmental policy because
    it requires all fuels to achieve the same level of emissions.
    Currently, cleaner burning fuels are disadvantaged because past
    regulations do not require all fuels to meet the same standard. Fuel
    neutrality removes the preferential treatment that dirty fuel sources
    have enjoyed for the last two decades. This approach also reduces the
    regulatory burden on companies and enables industry to make efficient,
    cost-effective decisions.
        The second example of a market-based approach is the use of output-
    based standards as promulgated in the new source performance standards.
    An output-based approach requires industry to meet emission levels
    based on each unit of energy produced, regardless of which fuel is
    used.
        Natural gas producers support output-based standards because they:

    1. assure a more flexible market-based system,
    2. help industry meet emissions targets at lower cost, and
    3. tend to increase the use of cleaner fuels.
        This approach has the collateral effect of reducing the emission of
    other air pollutants. Competition and open markets offer excellent
    opportunities to establish protocols that will benefit the environment.
        However, the nation will not reap all of the benefits that natural
    gas and other clean fuels can provide if the federal rules governing
    the electric power industry create an unlevel playing field.
        Congress should ensure that the marketplace, not the federal
    government, chooses the winners and losers. New policies adopted by the
    congress should not guarantee market share to any fuels nor insulate
    any fuels from the challenges of a fully competitive marketplace.
        It would be counterproductive for congress to create a preference
    among fuels used for electric generation. The renewable portfolio
    mandate that several congressional bills have advocated, runs counter
    to the premise behind deregulating the electric industry. Mandates
    reduce customer choice, and unjustly result in increased costs to
    consumers.
        Natural gas producers do not oppose renewable energy, rather we
    oppose the mandatory use of any fuel or generating source. In support a
    position mandating renewable energy, some have suggested that we are
    running out of fossil fuels. let me assure you, this is definitely not
    the case.
        The potential gas committee, in a report released just last month,
    estimates that the United States has an estimated 1,205 trillion cubic
    feet of natural gas resources, including proven reserves. That
    represents about 60 times current annual production. We have more than
    enough natural gas reserves to meet current and projected demand.
        Thus, it is difficult, if not impossible, to justify forcing
    consumers to pay for the deployment of expensive renewable technologies
    on this basis.
        Perhaps Congress feels that renewables are not able to compete in
    today's market and won't be built without a mandate. Once again, let me
    assure you that this is not the case.
        In a recent resource for the future study, researchers found that
    during the last 30 years, wind and biomass sources have exceeded market
    penetration projections. The study also found that all renewable
    technologies have succeeded in meeting expectations with respect to
    cost.
        In addition, we have seen the advent of green power in deregulated
    states, giving consumers the choice to purchase electricity from
    renewable energy sources. Green power is a market-based solution that
    promotes the use of renewable energy. Green power is working, and has
    experienced tremendous growth in the past few years.
        Given these trends, it is difficult to understand why renewable
    energy needs mandate protection. Congress has already enacted
    tremendous tax incentives for the development of renewable energy,
        And due to the fact that renewables are well on their way to making
    significant penetration into the market, we feel that mandating a
    renewable portfolio standard would be inappropriate and unnecessary.
        It is now the time for congress to open the markets and let
    competition and customer choice determine the national generation
    portfolio. In conclusion, the natural gas industry encourages and
    embraces competition.
        We are prepared to meet the challenges of a competitive and growing
    electric power market. Competitive commodity prices, low transportation
    costs, and highly efficient generation technology make natural gas
    affordable and cost competitive with other fuels.
        It is also a preferred energy source because of its environmental
    attributes. We believe that an open and nondiscriminatory electric
    power market will maximize the use of natural gas and that, in turn,
    will result in substantial economic and environmental benefits to the
    United States.
        Our biggest concern is centered on the potential of preferential
    treatment of one fuel versus another. Mandates and regulations that
    allow different emission levels for different types of fuels will not
    work in a competitive market. Ultimately, consumers will bear the added
    costs of inefficiency and waste.
        We urge you to let the market work and to defeat any legislation
    that arbitrarily favors one fuel over another.
        Thank you.

        Mr. Shimkus [presiding]. Thank you.
        Next we will hear from Mr. Armond Cohen, the director of
    the Clean Air Task Force. Welcome, and you are recognized for 5
    minutes.

                        STATEMENT OF ARMOND COHEN

        Mr. Cohen. Thank you, Mr. Chairman and members of the
    subcommittee. My name is Armond Cohen, I am the director of the
    Clean Air Task Force, which is a project that works with about
    50 environmental groups around the country, including all of
    the major national environmental groups and a number of State
    and local regional groups, with an especially large
    concentration in the Southeast U.S. and the Midwestern U.S.,
    which are areas that are really most heavily impacted by power
    plant air pollution.
        Earlier today, it was suggested that maybe this is just a
    Northeast issue or regional war of some kind between the
    Midwest and the Northeast. I want to assure you that an awful
    lot of our constituency is based in the Southeast, States like
    Georgia, Tennessee, South Carolina, Florida; and in the Midwest
    in the arc of the Ohio Valley, which contains a large number of
    the grandfathered coal plants.
        This is very important, because, again, I think there is a
    mythology out there that somehow this is just about the
    transport of air pollution from the Midwest to the Northeast.
    In fact, some of the greatest impacts from soot, smog, acid
    rain, flying particle emissions, and other environmental
    problems that stem particularly from the power sector and some
    of the highest asthma emergency admission rates on bad summer
    days are in the Ohio valley and in Midwestern States like
    Illinois, Indiana, Ohio, and in Southeast States like Tennessee
    and Georgia.
        So the issue that I want to address today, which is the
    persistence of these disparate environmental standards, is
    really fundamentally a national issue; it is not a regional
    issue. I think that is an important point to make because it is
    often spun very much the other way.
        The other point that I want to make is that as a result of
    that geographic distribution of damage from power plant
    emissions, this is an issue that has a lot of resonance outside
    the Beltway. There are a lot of environmental groups in States
    like Illinois, Florida, Ohio, Georgia, Michigan, Texas that are
    focusing on this problem.
        We are beginning to see some leadership on this
    grandfathered power plant issue from States. I included in my
    testimony, for example, Governor Cellucci in Massachusetts has
    gone forward, with the staff, of degrandfathering older power
    plants in Massachusetts. Just last week Governor bush in Texas
    indicated his support for a bill that would at least provide
    some partial degrandfathering for gas and coal plants in the
    State of Texas. Now, it is not a full degrandfathering, but
    recognized that there are very significant problems with public
    health and the environment from power plant emissions and the
    persistence of these disparate emission standards.
        The focus of my testimony, which I am not going to repeat
    at length here, is, of course, how do we go about addressing
    this disparate emissions problem, and what is its relationship
    to restructuring. We really make two arguments. The first is
    that this is an unprecedented reshuffling of the deck, if you
    will. Once in a century probably, reorganization of this
    industry and the environmental regulatory picture for that
    industry is intimately bound up with the marketplace. It is
    important as we pursue restructuring to make sure that we
    really are addressing the full range of costs and benefits that
    flow from the system.
        The second point is a more specific one, and I think my
    colleagues can probably make more credibly, and I think Mr.
    Niemiec did in his testimony, which is that allowing this
    grandfathered power plant two-tiered regulatory system to
    persist where plants built before 1977 can pollute at 4 to 100
    times the rate of new plants is really a recipe for a failed
    market. Fundamentally what we are talking about is very limited
    market entry for newer plants, newer, cleaner efficient plants,
    certainly as compared with what those entry levels would be and
    those efficiency levels would be if we leveled the playing
    field, as the previous witness suggested, by requiring equal
    environmental performance standards across the board.
        That is really the thrust of the testimony. By making that
    point, I don't mean to scant the need for other environmental
    policies, although my testimony does not address those points.
        Just finally, a brief and maybe anticipatory word on the
    American Trucking decision from the DC circuit last Friday. Our
    analysis is this is very much an aberrant decision that is very
    much out of the mainstream, the jurisprudence surrounding
    administrative law. However, I would argue that, if anything,
    that case and the uncertainty it creates argues for Congress to
    more directly address air emissions issues in legislative hard-
    wired fashion, particularly appropriate as part of a
    restructuring bill, rather than allow the uncertainty that that
    decision will no doubt create to persist.
        Thank you very much, and I would be happy to take any
    questions.
        [The prepared statement of Armond Cohen follows:]
       Prepared Statement of Armond Cohen, Director, Clean Air Task Force
        Mr. Chairman, and Members of the Subcommittee: My name is Armond
    Cohen.1 I am Director of the Clean Air Task Force, a project
    of Pace University's Center for Environmental Legal Studies. The Clean
    Air Task Force assists and works with more than 50 state, regional and
    national environmental organizations in the United States to educate
    the public and policymakers about the need to reduce air pollution from
    the nation's power plants. These organizations work in all 50 states,
    with especially strong concentration in the Midwest and Southeast--
    regions that bear a disproportionately large environmental impact from
    power plant air emissions. Today, however, I am testifying solely on
    behalf of the Clean Air Task Force.
    ---------------------------------------------------------------------------
        \1\ My resume is Attachment 1 to this testimony.
    ---------------------------------------------------------------------------
                               scope of testimony
        Your hearing today focuses on, among other things, electricity
    competition and the environment. My focus will be on direct air
    emissions concerns rather than other environmental concerns in
    restructuring such as the development and commercialization of
    renewable energy and energy efficiency; environmental disclosure; and
    other structural issues which have potential environmental
    consequences, such as the structure of stranded investment recovery.
                 electric power production and the environment
        The quality of the nation's air and environment in the next century
    will depend significantly on the environmental profile of the nation's
    electric power sector. Simply put, the electric industry is the
    nation's largest industrial air polluter. It stands at the center of
    the major environmental problems dominating today's front pages and the
    environmental agenda for the next several decades. For example,

     Power plants contribute about a third of the nation's smog-
            causing chemicals, and as much as 50% in states such as Ohio
            where chronic smog exposures are some of the worst in the
            nation.
     Power plants contribute about two-thirds of the nation's
            sulfur dioxide, producing acid deposition and haze which has
            reduced visibility in the Central and Eastern United States by
            50% or more in recent decades, and by up to 80% in some
            national parks. See Attachment 2.
     Power plants contribute a third to half of the deadly fine
            soot particles in the Central and Eastern United States.
     Power plants likely contribute 30% or more of the emissions of
            toxic substances such as mercury.
     Power plants are responsible for roughly a third of the
            nation's man-made carbon dioxide emissions, which are likely
            contributing to long-term global climate change.
        The nation's electric power industry has made some environmental
    progress over the last two decades, in part due to technological
    improvements and in part due to new laws such as the acid rain
    provisions of the 1990 Clean Air Act amendments. At the same time,
    however, in part due to demand growth, in part due to changing fuel mix
    and an aging power plant fleet, total emissions of key power plant
    pollutants such as nitrogen oxides, CO2 and mercury have
    risen substantially over that period.
        It is also important to understand that, environmentally, all power
    plants are not the same. There is a huge disparity in environmental
    performance among fossil-fired power plants--a disparity that, as we'll
    discuss in a moment, has significant competitive implications.
        At the heart of this disparity is plant age. The vast majority of
    power sector air pollution in the United States comes from power plants
    licensed prior to the 1980's, when tight ``new source review''
    procedures for emissions were made fully applicable.2 As a
    result, even after the Clean Air Act Amendments of 1990 are fully
    implemented, older coal plants will be allowed to emit at roughly four
    times the rate required of new coal plants--and as much as fifty to one
    hundred times the rate of new gas plants. See Attachment 3.
    ---------------------------------------------------------------------------
        \2\ See D. Wooley, ``Environmental Comparability.'' Natural
    Resources & Environment (American Bar Association Section of Natural
    Resources, Energy, and Environmental Law), Spring 1998 .
    ---------------------------------------------------------------------------
        At the time this ``old source'' exemption was granted, it was
    arguably without long-term significance. Plants historically were
    retired and replaced every 20-30 years. However, a variety of factors,
    including changes in the energy market place in the last two decades
    have lengthened coal and oil plant lifetimes considerably over what was
    expected. Today, for example, about 70% of our nation's coal units
    predate the 1970 Clean Air Act, and fully 50% are forty years old or
    older--having long outlived their predicted engineering and accounting
    lives. See Attachment 4.
        As a result, America really has three power plant fleets--two
    actual, and one potential. We have a large fleet of Vietnam-,
    Eisenhower-, even Truman-era plants running on older technology with
    high emission levels. We have a smaller fleet of modern, high-tech
    plants built in the last decade, which are four to a hundred times
    cleaner. struggling to break further into the market. And, finally, we
    have a third, potential fleet of modern, high-tech plants that are
    poised to enter the market and compete, but in a substantial number of
    cases are being kept out by environmental subsidies for the first fleet
    mentioned.
          the nexus between the environment and electric restructuring
        Why are these environmental facts relevant to federal electric
    industry restructuring?
        Harmonizing Restructuring and Environmental Policy. First, as a
    matter of common sense, policies affecting the shape of the electric
    power industry, and environmental policy, should be sensibly linked.
    The shape which this industry takes under competition--its starting
    rules, its operating procedures, its financial regulation--will have
    profound impacts on the quality of the nation's air, water, land, and
    even its scenic views. The debate underway before this Subcommittee,
    and eventually the full Congress, could determine the course of
    electric power production for perhaps the next century. If there are
    ways to harmonize restructuring policy with the environment, and to set
    the nation's most polluting industry on a more environmentally
    sustainable course, this is the moment to do it. Otherwise, we are
    condemned to be making piecemeal policy, much of it with unintended and
    possibly perverse consequences.
        As noted, the environmental footprint of the electric industry is
    enormous. But requiring older plants to meet modern emissions standards
    faced by new coal plants--put aside cleaner gas-fired plants--would
    reduce the power sector's impact substantially, knocking down power
    sector nitrogen and sulfur emissions by 75-80%, for example. Reductions
    at this level--or greater--are likely to be needed over time to meet
    the nation's serious respiratory problems, and to address other
    persistent unsolved environmental problems such as acid rain, nitrogen
    saturation of estuaries and coastal waters, and haze.
        Putting the industry on a swifter clean-up path is especially
    appropriate on grounds of public policy and efficiency as the industry
    is comprehensively reorganized and generating assets change hands.
    Buyers want to know what their environmental obligations will be. New
    competitors have a right to know what environmental rules will govern
    the new market so they can make rational investment decisions. Sellers
    are entitled to fair compensation for their units--but not more than
    the units are worth taking into account reasonably anticipated
    environmental burdens and the considerable costs already borne by
    ratepayers to amortize such units through the regulated rate base. And
    finally, but not lastly, the breathing public has a right not to see a
    fleet of incumbent, dirty plants for which they have already largely
    paid through their rates to recapitalized through asset sales at
    enormous ``premium'' sums which then lead to cries of poverty from
    buyers who claim they lack the means to meet modern air pollution
    performance standards.
        In short, 1990's restructuring is a once-in-a-lifetime moment of
    capital and asset liquidity in the electric industry. It is not
    unreasonable public policy to expect that, as the nation's generating
    fleet is minted anew, a fraction of this capital flow should be
    allocated to redeem the environmental performance promises of decades
    past which were never realized.
    Market Power
        Second, the environmental disparities discussed above have direct
    consequences for the health and vigor of the new electric markets.
    Because the nation's older coal-and oil-fired power plants do not have
    to meet new plant standards, they enjoy a significant competitive
    advantage over new market entrants that must meet those tight
    standards. Recent quantification suggests that this ``pollution
    subsidy'' for NOX and SOX alone--ignoring
    CO2--can confer as much as a 2 cent/kwh advantage to an
    older coal plant over a new combined cycle gas unit, for example. See
    Attachment 5.
        This implicit environmental subsidy for older plants will slow
    market entry, retard the development of a fully functioning competitive
    marketplace for electric generation and entrench the market power of
    incumbent plant owners. That's not good for competition, and it's not
    good for consumers.
        In March of 1997, a group of some 150 electric power producers,
    along with more than 20 environmental organizations, made this point to
    the Administration in a joint letter. See Attachment 6.
    Consumer Benefits
        Third, power plant emissions have significant impacts on the
    consumer and small business pocketbook. Direct affects include
    increased hospitalization and health costs, reduced worker
    productivity, increased health insurance premiums, and the reduced
    value of agricultural and tourism resources. Indirectly, failing to
    curb power plant emissions will require emissions reductions to come
    from other sectors of the economy, such as manufacturing, small
    business, and transportation, where it is likely that they will be far
    more expensive to make. If the intent of electric restructuring is to
    provide consumer benefits, we cannot ignore the enormous economic
    opportunities that would come from substantially reducing power plant
    emissions as part of the restructuring process.
    The Federal Role
        Many issues have been addressed in federal restructuring
    legislative proposals. But the one issue in addition to transmission
    policy that is indisputably of federal concern is the environment. Air
    emissions from power plants cross state lines--sometimes hundreds and
    thousands of miles. Along with federally mandated comparability for the
    price and service terms and conditions for access to the interstate
    transmission system as part of restructuring, we should also create
    comparability for the environmental terms of access to that
    transmission system.
        This is one issue on which states cannot effectively act by
    themselves in the state restructuring process. Although some limited
    provisions for environmental comparability have been made in states
    such as Rhode Island and Massachusetts, and are presently under
    consideration in Texas and Illinois, it will be hard for states to act
    alone. Typically, plant owners and some state officials argue that air
    emissions are a federal policy concern, especially were they are
    intertwined with the production of an interstate commodity like
    electricity. Aside from the possible local economic consequences of
    acting unilaterally to require power plant clean-up, many argue that it
    does little good for a state to clean up its local plants if upwind
    generators are still allowed to emit at grand fathered levels. While
    these arguments lack merit in many respects 3, there is a
    grain of truth in them: the federal level is surely the optimal place
    to act to harmonize environmental and electric market policy.
    ---------------------------------------------------------------------------
        \3\ Plant clean-up within states will typically reduce levels of
    key harmful medium-range pollutants such as smog and soot.
    ---------------------------------------------------------------------------
                           recommendations for action
        As I noted earlier, my testimony today was not intended to cover
    the full gamut of policies that should be pursued in electric
    restructuring. Instead, I have focused on one important policy emerging
    from the above discussion: creating a new electric market in which
    modern environmental performance standards for key pollutants such as
    nitrogen, sulfur, C02 and air toxics must be met any generator
    regardless of age, grandfathered status, location, or generation
    efficiency. Sometimes called ``environmental comparability,'' such a
    policy would not only move the nation considerably forward towards
    meeting its principal air quality and environmental goals. Such a
    policy would also ensure that the new electric markets are robust and
    vital, with many new market entrants--and not simply the domain of an
    aging fleet of former monopoly plants now hoarding the rents of
    environmental grandfathering.
        Several bills were introduced into the House and Senate in the
    105th Congress that, in various ways, attempted to accomplish this end.
    This issue has become a major priority for environmental and public
    health organizations nationally. It is a bipartisan issue--everyone
    breathes the air! Indeed, a Republican, Massachusetts Governor Paul
    Cellucci, has been the nation's leading governor in championing this
    idea at the state level; and Texas Governor George W. Bush has recently
    signaled his support for some power plant de-grandfathering in Texas as
    well. See Attachment 7. The time to act is now.
                                  conclusions
        Electric industry restructuring offers a one-time opportunity to
    reconcile environmental policy with the emerging competitive market
    policy, and to get the environmental price signals right. De-
    grandfathering the power plant fleet and requiring all generation
    players to meet modern environmental performance standards should be
    the center of any restructuring-related environmental policy.
        Thank you again for the opportunity to testify. I would be happy to
    answer any questions the Committee may have.
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        Mr. Barton. Thank you Mr. Cohen.
        We would now like to hear from Mr. Agathen.

                        STATEMENT OF PAUL AGATHEN

        Mr. Agathen. Thank you, Mr. Chairman and members of the
    committee. This has really been a very productive hearing so
    far, and having said that, I hope I may be getting 2 more extra
    minutes to my testimony.
        My name is Paul Agathen. I am a senior vice president for
    Energy Supply Services for Ameren Corporation. We supply
    electricity to 1.5 million customers in the States of Illinois
    and Missouri. Today I am here representing the Energy and
    Environment Coalition, or EEC, a group of 12 of the Nation's
    largest electric utility and fuel providers. We are working
    constructively with Congress, the executive branch, and other
    stakeholders on the environmental issues that are expected to
    rise in the consideration of Federal electricity restructuring
    legislation.
        I want to emphasize that the EEC's membership includes
    several companies that are seeking prompt enactment of Federal
    restructuring legislation as well as others that prefer a more
    deliberate route. Thus, while our members may not agree on the
    scope or pace of Federal legislation, they unanimously agree
    that Federal restructuring legislation should not become a
    vehicle for environmental initiatives.
        The EEC believes that the transition to competitive
    electricity markets can and must be accomplished without
    compromising public health or the environment. The correct
    question for Congress, however, is will retail competition in
    and of itself result in degrading air quality. We recognize
    this as a serious inquiry that deserves serious analysis. In
    fact, two government agencies have undertaken exhaustive
    studies and concluded that the impact on air quality would
    likely be negligible; in fact, possibly positive.
        In the absence of air quality impacts, electric
    restructuring should not be linked to environmental proposals.
    Such proposals should and are being addressed in more
    appropriate forums. Making this vicious will only complicate an
    already complex debate.
        We don't agree that the Clean Air Act needs to be amended,
    but more importantly we believe in the notion of statutory
    integrity, and proposals for new regulation of criteria
    pollutants should be considered within the context of the Clean
    Air Act, not restructuring. Further, consideration of any
    CO2 controls in restructuring legislation is
    premature at this time and inappropriate.
        Ongoing administration dialogs and EPA regulatory
    initiatives continue to offer the prospect of resolving
    emissions issues outside the legislative process. It is clear
    that EPA has ample evidence to address air quality issues
    outside the context of restructuring.
        Some suggest that Midwestern and Southeastern power plants
    are somehow grandfathered, exempted, or uncontrolled. Not true.
    Starting with a 1970 act, the record shows that Congress did
    not exempt any sources from emission controls. Existing sources
    were required to make whatever reductions were necessary,
    including closing facilities, to obtain air quality standards.
    New sources were required to install the best available to
    avoid deterioration in air quality. There were and are no
    specific deals for utilities. In fact, Title IV of the 1990
    amendments to the Clean Air Act required all coal-fired
    electric power plants to make significant reductions in sulphur
    dioxide and nitrogen oxide.
        Electric utilities now contribute less than 17 percent of
    all ozone precursor emissions. Further cuts in NOX
    emissions already required under the Clean Air Act amendments
    will reduce that contribution even more.
        We recognize our role and our future obligations in
    achieving clean air. We are proud of our record to date. In
    fact, EPA found that utility emissions of sulphur dioxide in
    1995 had already been reduced to 39 percent below the level
    allowed by the Clean Air Act. Ameren UE, my employer, is an
    example of how significant emission reductions from coal-fired
    units have been achieved through existing programs. Since the
    late 1970's, our SO2 emissions have dropped nearly
    70 percent, and our NOX emissions rate has dropped
    over 50 percent in the last 7 years.
        With regard to carbon dioxide, utilities have done more
    than any other industry sectors anywhere in the world to reduce
    emissions. This is the result of our voluntary partnership with
    DOE called the Climate Challenge Program. According to DOE, our
    industry expects to control more than 170 million metric tons
    of greenhouse gas emissions by the year 2000.
        The primary purpose for restructuring is to achieve market
    pricing of electricity and to create economic benefits for all
    customers. The best available analysis shows no likely negative
    air quality impact. Even so, some want to use this as an
    opportunity to mandate even additional controls on the electric
    utility industry.
        Perhaps the best way to place in perspective some of the
    ideas that you will hear today is to note that the
    administration has specifically considered and rejected this
    kind of new multipollutant regulatory program in its
    restructuring legislation. As EPA administrator Carol Browner
    has said, responding to inquiries about including carbon
    controls in the administration's bill, this is the wrong time
    and the wrong place for such linkages. Thank you.
        [The prepared statement of Paul Agathen follows:]
       Prepared Statement of Paul Agathen, Senior Vice President, Energy
        Supply Services, Ameren Corporation on Behalf of the Energy and
                             Environment Coalition
        Mr. Chairman, my name is Paul Agathen--I am the Senior Vice
    President for Energy Supply Services for Ameren Corporation. We supply
    electricity to 1.5 million customers in Missouri and Illinois.
        I am appearing before the Subcommittee today on behalf of The
    Energy and Environment Coalition (EEC) a group of twelve of the
    nation's largest electric utilities and fuel providers that are working
    constructively with Congress, the Executive Branch, and other
    stakeholders on the environmental issues that are expected to be raised
    during the consideration of federal electricity restructuring
    legislation.
        At the outset, I want to emphasize that the EEC's membership
    includes several companies that are seeking the prompt enactment of
    federal legislation, as well as companies preferring a more deliberate
    route. Thus, while EEC members may not all agree on the shape or pace
    of federal legislation, they unanimously agree that federal
    restructuring legislation should not become a vehicle of opportunity
    for those seeking a back door re-write of federal Clean Air Act
    requirements.
        The members of the EEC at this time are: Allegheny Power; Ameren
    Corporation; American Electric Power; Cinergy; Consumers Energy;
    Detroit Edison; Illinois Power; James River Coal Company; Kansas City
    Power and Light; MidAmerican Energy Company; Peabody Holding Company;
    and Southern Company.
        Let me also emphasize that the EEC believes that any transition to
    competitive electricity markets can and must be accomplished without
    compromising public health or the environment. The correct question for
    Congress to consider, therefore is ``Will retail competition, in and of
    itself, result in degrading air quality?'' This is a serious issue; it
    deserves serious analysis. Two government Agencies have undertaken
    exhaustive studies which are relevant:
        1) The Federal Energy Regulatory Commission (FERC), in evaluating
    the environmental impact of its open access rule (Order No. 888)
    deregulating the wholesale electricity market, concluded that the
    impact on air quality--while related to future fuel pricing--would
    likely be negligible.
        2) The U.S. Department of Energy (DOE), in its assessment of
    emissions trends associated with retail competition has reached much
    the same conclusion. Quite apart from the Administration's aggressive
    Renewable Portfolio Standard (RPS) and Public Benefits Fund (PBF)
    mandates, the DOE work cites non-regulatory market forces such as the
    increased incentive for heat rate improvement and the projected growth
    of green power as lowering emissions in a competitive scenario.
        Given the likely absence of air quality impacts, utility
    restructuring should not be used as a vehicle to re-write the Clean Air
    Act or to prematurely consider carbon reductions related to global
    climate change. Such proposals will further complicate an already
    difficult debate and should be properly considered within the context
    of the Clean Air Act, or in other appropriate forums.
        Some proponents of a Clean Air Environmental Title of Restructuring
    legislation argue that this legislation ought to be used for the
    following purposes:

     Impose nationwide caps on all fossil fuel power plant
            emissions reducing NOX and SO2 emissions
            far beyond the requirements of the Clean Air Act Amendments of
            1990.
     Achieve power sector CO2 reductions of a scope
            similar to those required by the Kyoto Protocol.
     Mandate sharp reductions of mercury emissions from coal-fired
            power plants.
        In fact, some Members in the past have suggested that a
    ``moratorium'' be placed on retail competition until the Clean Air Act
    is amended to ``significantly reduce'' utility emissions Of
    CO2, Mercury, NOX, and SO2.
        While we do not agree that now is the time to amend the Clean Air
    Act, we do at least share the notion of ``statutory integrity''; that
    is that these proposals for new regulation of criteria pollutants
    (NOX, NOX) and air toxics (mercury) should be
    properly considered within the context of the Clean Air Act--not
    restructuring legislation. Consideration of any CO2 control
    program within restructuring legislation is premature and
    inappropriate.
        Having said that, I want to emphasize that ongoing administrative
    dialogues and EPA regulatory initiatives continue to offer the prospect
    of resolving emissions issues outside the legislative process. For
    example, most members of the EEC are actively involved in discussions
    with EPA on reform of the Clean Air Act's New Source Review (NSR)
    procedures with an eye toward achieving certainty for the industry and
    long term emissions reductions sought by EPA. Other examples of the EPA
    initiative to address related issues include its 23 state regional
    ozone control program (NOX SIP Call), the recently proposed
    Regional Haze regulations, and its analysis for Congress regarding
    utility Mercury emissions. EPA has ample legal authority to regulate
    all significant pollutants from utility boilers, including any that
    might arise from utility restructuring.
       the grandfathering argument and the record on emissions reductions
        It has become popular among some environmentalists and high cost
    energy producers to refer to Midwestern or Southeastern utility plants
    as ``grandfathered,'' ``exempted'' or ``uncontrolled.''
        The historical record, starting with the 1970 Act, shows that
    Congress has not singled out utilities for favorable treatment. On the
    contrary, Congress did not exempt any sources from emission controls,
    but did differentiate between existing sources and new sources.
    Existing sources were required to make whatever level of emission
    reductions were necessary, including facility closure, to attain
    national ambient air quality standards. New sources were required to
    install the best available control technology to guard against
    deterioration in air quality. There was no special deal for utilities
    under the Act. They were treated just like any other industrial sources
    (e.g., chemical manufacturer, petroleum refiner, steel maker,
    automobile assembly, etc.) Subsequently, Title IV of the 1990
    amendments to the Clean Air Act (CAA) required all coal-fired power
    plants to make reductions in sulfur dioxide emissions (50% below 1985-
    87 levels) and nitrogen oxide emissions (approximately 40% below
    existing levels) under the acid rain program.
        Electric utilities now contribute less than 17% of all ozone
    precursor emissions while the transportation sector contributes 41% and
    the industrial sector about 37%. Further cuts in NOX
    emissions from utilities mandated by the Clean Air Act Amendments (CAA)
    will reduce that contribution to 11% of all ozone precursor emissions
    by 2003. Power plants contribute roughly one-third of U.S.
    CO2 emissions.
        We recognize our role and our future obligations in achieving clean
    air; we are also proud of our record to date. According to data
    collected by EPA, the utility industry achieved 100% compliance with
    the 1995 SO2 reductions mandate. In fact, EPA found that
    utility emissions had been reduced to 39% below the level allowed by
    the Clean Air Act. Ameren UE, one of our operating companies, is an
    example of how significant emission reductions from coal-fired units
    have been achieved through existing legislative and regulatory
    programs. SO2 emissions have dropped by nearly 70% from our
    coal-fired units since the late 1970s. The NOX emissions
    rate on our system has dropped over 50% in the last 7 years.
        With respect to carbon dioxide (CO2), utilities have
    done more than other sector of industry anywhere in the world to
    achieve emissions reductions. The Climate Challenge Program, a
    voluntary partnership with the Department of Energy (DOE), involves the
    participation of over 600 utilities representing more than 60% of
    electric power generation and CO2 emissions. According to
    Department of Energy projections, our industry expects to control more
    than 170 million metric tons of greenhouse gas emissions by the year
    2000. The Climate Challenge Program is the world's largest and most
    successful voluntary environmental initiative.
                                   conclusion
        Maintaining healthy air quality has been and will continue to be an
    important national objective. It is a goal that EEC members embrace and
    have been responsibly addressing for several decades.
        The primary purpose for restructuring the electric utility industry
    is to achieve market pricing of electricity, creating economic benefits
    for all customer classes. The best available analysis shows no likely
    negative air quality impact. Still, some stakeholders want to mandate
    additional controls on the electric utility industry as a condition for
    moving forward with retail competition.
        Perhaps the best way to place in perspective the ideas put forward
    today by the Clean Air Task Force and others is to note that the
    Clinton Administration has specifically considered and rejected as part
    of its restructuring legislation, this kind of new multi-pollutant
    regulatory program during each of the last two years. These decisions
    were recently criticized by environmental groups in a sharply worded
    letter to Vice President Gore, but as EPA Administrator Carol Browner
    has said in responding to inquiries about the appropriateness of carbon
    controls in the Administration bill, ``this is the wrong time and the
    wrong place'' for such linkages.

        Mr. Barton. Thank you.
        We now would like to welcome Mr. Codey.
        I asked Mr. Pallone if he wanted to introduce you, and he
    said that he already did that. So you are recognized for 5
    minutes.

                     STATEMENT OF LAWRENCE R. CODEY

        Mr. Codey. Thank you, and thank the Chair and the committee
    for the opportunity to testify here today.
        A little bit about PSE&G. It is the main subsidiary of
    Public Service Enterprise Group. As a utility we serve
    approximately 2 million customers, 70 percent of the State of
    New Jersey, about 5 million in population. We are also the
    largest gas LDC on the east coast and about the third largest
    combined company in the country. Our sister subsidiaries are
    involved in the generation and distribution of energy in China,
    in India and Argentina. We own distribution companies in Chile,
    Peru, as well as Brazil. In addition, we operate about 15,000
    megawatts worldwide; 2,000 megawatts of that are coal in New
    Jersey; 1,000 megawatts in New Jersey and about 1,000 in
    western Pennsylvania. So we are also a coal utility.
        I guess I am here really to disagree with my colleague to
    the right, because I think it is very appropriate and, in fact,
    indispensable that we consider environmental issues as we look
    to total restructuring of the environment.
        I think I would like to just indicate, as Congressman
    Pallone has indicated, New Jersey is on the eve of
    restructuring. We have legislation passed. We have a commission
    order. All 2 million of our customers will have choice. As of
    August, power will flow in a completely deregulated market to
    industrial, commercial, and residential customers as of August
    1 of this year.
        How did we get there? Back about the early 1990's, given
    our experience with natural gas, we as a company recognized
    that, in fact, electricity would be deregulated and should be
    deregulated for our customer base. We also recognized almost
    immediately that there was a conundrum, a public policy
    conundrum, which would pit low-cost energy in a free market
    against environmental rules.
        Unlike air and unlike kilowatt hours that flow across State
    lines, the problem with the regulatory patchwork of
    environmental rules was that they stopped at State lines. That
    was a fundamental inconsistency with the creation of a level
    playing field in terms of a competitive environment. Dirtier
    power plants were cheaper power plants, and a free market would
    have the market choose those cheaper power plants. In fact,
    what would happen would be electricity would become dirt cheap.
        We did not believe that that was a good public policy way
    to go; that we had to establish a level playing field where the
    ability to pollute was not a competitive advantage. The only
    way, we believed, to do that was to start raising this public
    policy issue, supporting deregulation, and moving forward very
    aggressively. We wanted to create an efficient marketplace, and
    we couldn't do that unless we linked environmental and energy
    policy together. We would not get efficiency. We would get
    subsidies because of the State lines where environmental rules
    change. We would also get a backtrack of all of the progress
    that we made in terms of cleaning up the air. In fact, dirtier
    power plants would produce more and put more in the air, and it
    tends to go west to east and south to north. That is a
    particular problem for the Northeast, but frankly it is a
    problem for Missouri as to what happens in Arkansas and
    Oklahoma and Texas. Transport is an issue.
        I believe it is incomprehensible, recognizing how much the
    electric industry is involved with our air in terms of--you
    have heard the statistic 60 percent of the SO2, 30
    percent of the CO2, 25 percent of the
    NOX--that we think about restructuring this industry
    without addressing the environmental issue at the same time.
        I think the technology is there. We have proven it. In New
    Jersey we used to be, a few years back, 1992, 27 percent of the
    NOX in New Jersey. We are now 5 percent. Using
    technology, using fuel switching, et cetera, et cetera, we have
    been able to make that reduction. We just agreed with the
    Whitman administration to reduce that to 90 percent of what we
    used to be.
        Rates are going down through restructuring. In New Jersey
    our rates with this bill that was just introduced are going
    down 20 percent; 14 percent on our account, 6 percent in taxes.
    That is $2 billion being put in the State of New Jersey in
    terms of restructuring over the next 4 years.
        Now is the time to take some of those savings and to invest
    in clean air, and still have net reductions. It also is a time
    because we are dealing with comprehensive issues of
    restructuring. PURPA has to be reformed. PUHCA has to be
    reformed. We need to restructure. We also need to have the
    environmental issue put on the table where all of the parties
    can come to a comprehensive solution and form a consensus as to
    how we are going to deal with energy and environmental policy
    in the next century.
        What should we do. Fuel neutral uniform standards, output
    based standards as you heard about before, that is the way to
    go. Robust trading mechanisms, we should encourage early
    reductions and we should encourage new technologies of
    renewables. And it hasn't been said here today, we need to
    invest in clean coal technologies. It is an important resource,
    and we need to do a lot of R&D on clean coal.
        Thank you very much for your time.
        [The prepared statement of Lawrence R. Codey follows:]
    Prepared Statement of Lawrence R. Codey, President and Chief Operating
                Officer, Public Service Electric and Gas Company
        Mr. Chairman, I am Larry Codey, President and Chief Operating
    Officer of Public Service Electric and Gas Company. I very much
    appreciate the opportunity to testify today before this committee. The
    impact and interrelation of electric industry restructuring and the
    environment is a topic of vital interest and concern to my company, the
    customers we serve, and citizens and energy consumers in New Jersey and
    throughout the nation.
        PSE&G is the largest electric and gas utility in New Jersey and one
    of the largest combined electric and gas companies in the nation. The
    utility is part of Public Service Enterprise Group (PSEG), a family of
    companies that in addition to traditional utility operations in New
    Jersey, includes PSEG Energy Technologies, a marketer of wholesale and
    retail energy and energy services in the Northeast/Mid-Atlantic region
    of the U.S., and PSEG Global, which develops and operates power
    production and energy distribution companies on an international basis.
    As an entity, PSEG owns and operates approximately 15,000 megawatts of
    electric generation. This includes PSE&G's 10,000 megawatts of domestic
    generation, 2,000 megawatts of which is coal-fired capacity based in
    New Jersey and Pennsylvania, and 5,000 megawatts in PSEG Global's
    overseas portfolio. Global's generation facilities are located in
    Argentina, Venezuela, China, and India. The company also owns electric
    and gas distribution companies in Argentina, Brazil, Chile, and Peru.
    Together, PSE&G, PSEG Energy Technologies, and PSEG Global serve
    approximately 11 million customers in the U.S. and overseas through
    power generation and sales and distribution of energy and energy
    services. Collectively, and as individual companies, we support
    competition, clean energy, and sustainable development at home and
    around the world.
        The issue of how best to coordinate economic policy associated with
    restructuring of the electric power industry and environmental policy
    associated with the impact of power plant emissions on air quality is
    one that I believe offers this Congress and this Administration
    historic opportunities. I've said in the past that we are now
    confronted with the last, best chance to achieve clean air. The right
    public policy decisions in the context of electric industry
    restructuring will foster greater efficiency, produce lower energy
    costs, and spur development of new products and technologies while
    reducing this industry's impact on the environment through significant
    reductions in air pollution emissions.
        No opportunity comes without risk, however, and I believe there is
    also the strong possibility that wrong decisions will exacerbate long-
    standing air quality problems, compromise the nation's ability to
    achieve health-based environmental standards, unfairly shift the costs
    of environmental mitigation among regions of the country, and skew the
    emerging competitive market for electricity by establishing the ability
    to emit pollution as a competitive advantage.
        PSE&G is in a unique position to comment on the restructuring of
    the electric power industry and the potential impact--both positive and
    negative-on the environment. We have more than 10 years of experience
    in natural gas deregulation; we've been an active advocate in national
    industry forums for moving the electric industry to competition; we're
    in the process of preparing for competition in our home state of New
    Jersey; we've been a vocal, persistent advocate for improved
    environmental performance; and we've backed up a commitment to
    environmental quality through successful implementation of voluntary
    programs affecting our own impact on air and water quality and our
    management of wastes.
        New Jersey, with my company's active support, is instituting what I
    believe is the nation's most aggressive and comprehensive electric
    restructuring plan. As a result of legislation enacted in February and
    now being implemented by the state Board of Public Utilities, all
    electric customers, regardless of size, class, or location, will be
    able to choose their electric suppliers. Choice for all customers--
    residential, commercial, and industrial--starts on Aug. 1 of this year.
    The plan incorporates the largest across-the-board rate cuts in the
    nation (13.9% for PSE&G customers, plus 6% related to state energy tax
    reform) and the largest shopping credits in the nation (5.86 cents per
    kilowatthour) for residential customers. The 13.9% rate cut for PSE&G
    customers will return about $1.5 billion to the economy of New Jersey.
        A key element of making this plan work and workable is that
    policymakers in both the legislative and regulatory arena really tried
    to be fair to all stakeholders. In addition to the benefits for
    customers, it allows my company an opportunity to recover legitimate
    stranded costs through securitization and a market transition charge
    and it will give our employees an opportunity to compete in the
    marketplace. We believe this plan will create an active, robust, highly
    competitive market in our state. Success in this market will be a
    function of ingenuity, integrity, efficiency, and talent. I believe the
    men and women who comprise PSE&G are up to this challenge, and we're
    anxious to get started.
        One point that became very clear in the restructuring debate in New
    Jersey is that none of the stakeholders--legislators, regulators,
    customers--are willing to achieve lower-cost energy at the expense of
    dirtier air and a degraded environment. Our residents are aware of the
    relationship between the generation of electricity and emissions of air
    pollution, and they are acutely aware that they've been on the
    receiving end of nitrogen oxides (NOX), sulfur dioxide
    (SO2), and particulates--the source of which are exhaust
    stacks of coal-fired generating plants in the Midwest and South.
        It's no secret that my company, and I, share these concerns about
    the relationship between our industry, the restructuring of the
    industry, and the environment. It's an issue that I've brought to the
    restructuring debate at industry forums and at many public venues, and
    I'm pleased to have the opportunity to raise it today before this
    committee.
        We really have an important choice to make. We can seize what
    really is a unique opportunity to achieve the economic goals of a more
    efficient, lower-cost, more innovative energy market and position this
    change as a vehicle for improving environmental performance and at a
    reasonable and fairly allocated cost.
         Of course, we can make policy decisions that will reward the
    dirtiest energy producers, stifle development and introduction of new,
    cleaner technologies, and force consumers to choose between cleaner air
    or cheaper electricity.
        First, it's important to understand how significant power plant
    emissions are to air quality problems in the U.S. Electric generating
    facilities account for about two-thirds of all SO2
    emissions; almost a third of NOX, and more than a third of
    carbon dioxide emissions. In addition to these pollutants, the U.S.
    Environmental Protection Agency (EPA) in about a month, will release
    reports from electric industry members on their emissions of air
    toxics, the acid gases and metals that are also byproducts of fossil-
    fuel electric generation.
        Second, we now know that emissions travel hundreds of miles from
    their source and affect air quality on a regional basis. Emissions
    spewed into the air in the Midwest today becomes part of the airshed in
    the Northeast tomorrow.
        Third, the existing system of power plant emissions standards, some
    based on fuel-source, some of the age of the facility, some on
    geography, was never meant to function in conjunction with nationwide
    retail electric markets.
        Fourth, moving ahead with restructuring and the opening of markets
    on a nationwide basis without appropriate environmental safeguards will
    make existing air quality problems worse, make the cost of mitigation
    more onerous, unfairly shift these costs from the source of the
    pollution to where it ends up, and skew the emerging competitive
    market. This is because the dirtiest power will be the cheapest power.
         So, the question is, what is the best way to reconcile and
    rationalize the decisions on energy policy and environmental policy in
    a manner that achieves efficient, competitive markets while actually
    improving air quality.
        We believe this can be accomplished by incorporating national,
    uniform, more stringent emissions requirements applicable to all
    electric generating facilities into comprehensive national electric
    restructuring legislation. These standards should be output-based,
    fuel-neutral generation performance standards governing NOX
    and SO2. This approach will link implementation of the
    standards to the opening of markets; result in all generators of
    electricity internalizing the cost of appropriate environmental
    controls; and prevent the shifting of these costs to other regions and
    other competitors. And it will result in reduced emissions and cleaner
    air, at a cost well below the savings and without jeopardizing other
    economic benefits that will accrue from competition.
        PSE&G strongly supported legislation introduced in the last
    Congress by U.S. Rep. Frank Pallone (D-NJ), a member of this committee,
    that would have established output-based generation performance
    standards for nitrogen oxides and sulfur dioxide. This legislation
    attracted more co-sponsors than any other restructuring legislation
    introduced in the 105th Congress. It's my understanding that Rep.
    Pallone is currently revising this legislation and we look forward to
    its introduction in this session of Congress. It's also my
    understanding that Rep. Pallone is considering the addition of
    environmental disclosure provisions to the legislation. New Jersey
    included strong environmental disclosure rules in its state
    restructuring plan and we believe disclosure will be even more
    important as a component of federal legislation. Consumers have a right
    to know the environmental component of the energy products they
    purchase. They have a right to relate this information to price and
    make informed, intelligent purchase decisions. Disclosure rules also
    are needed to protect consumers from unfair, unscrupulous marketers,
    and will actually help the development of a market for legitimate
    ``green'' energy products.
        In addition to this legislative approach, PSE&G continues to
    support EPA's regulatory focus on implementing NOX
    reductions in the eastern half of the U.S. and SO2 controls
    required for compliance with Phase II of the acid rain program. And,
    yes, we do believe that both legislation and regulatory action are
    required to solve the problem. It's important to note that the EPA's
    NOX reduction rule commonly referred to as the ``SIP Call''
    would establish only a seasonal cap on NOX emissions during
    the five months of summer peak demand, and it only affects 22 states.
    It's an important and positive step, but it's a policy that's been
    under constant political attack since it was announced and its also the
    subject of litigation which raises the possibility--and uncertainty in
    terms of business planning--of delay.
        This point became even more important last week when the U.S. Court
    of Appeals for the District of Columbia struck down provisions of the
    EPA's new National Ambient Air Quality Standards for ozone and
    particulates. Let me be very clear: This was no victory for business or
    the utility industry. My view is that it was the worst possible
    development because it hampers our ability to take actions necessary to
    protect public health and incorporate these actions into very difficult
    business decisions we all will be making over the next five years.
        We all know that fossil-fuel electric generation produces emissions
    that affect public health. We had in place a reasonable schedule for
    control of these emissions and a reasonable course of action designed
    by EPA to protect the public. The court decision upsets this process.
    It creates confusion and additional risk for our industry. I don't
    believe that we will be held harmless if, at some point, in the future
    it's determined that we didn't act quickly or prudently enough to
    protect the public.
        Finally, I'd like to comment on concerns expressed by some of my
    colleagues from the Midwest that compliance with the EPA NOX
    reduction program will compromise electric system reliability during
    peak summer demand periods. This is just not the case. The Ozone
    Attainment Coalition of which PSE&G is a member, last week released a
    comprehensive study which clearly shows that power plants can comply
    with the EPA's requirements without compromising reliability. This
    analysis incorporates the latest data on power plant capacity, the
    number of plants that would require installation of NOX
    control technology such as selective catalytic reduction, the time
    required to install the controls, anticipated demands growth in
    affected regions, and an assessment of emissions trading and other
    flexible compliance mechanisms built into the EPA rule. It also
    includes evaluations of ``worst-case'' scenarios involving unplanned
    power plant outages and unavailability of generating capacity. The
    analysis of all of this data shows that necessary power plant retrofits
    could be accomplished during normally scheduled plant maintenance
    outages. Additional down time would affect only about 0.5% of
    generating capacity and only during non-peak periods.
        The bottom line is that affected utilities have a four-and-a-half
    year compliance window in which to plan and complete installation of
    control technology. Based on more than 30 years experience in this
    business, I believe this is enough time. We know how to plan and
    complete these kinds of projects. Let's start doing the work.
        This completes my testimony. I want to again thank the chairman and
    the members for honoring me with this opportunity. I'll be happy to
    answer any of your questions.

        Mr. Barton. The Chair would yield to the gentlewoman from
    Missouri to introduce our next witness.
        Ms. McCarthy. Mr. Casten was not yet in the room in the
    earlier introductions, but I am delighted he is here in this
    panel. He is CEO of Trigen Corporation.
        Mr. Barton. Let's suspend until the bells are done messing
    around.
        Ms. McCarthy. Mr. Chairman, as much as we have talked back
    and forth in these hearings about the economic opportunities
    present, Mr. Casten is living proof in his work as CEO of
    Trigen Corporation of that very policy, and as the legislation
    is passed which will allow consumers to choose their electric
    supplier, I think, as does Mr. Casten, that competitive
    advantage will go to those companies who harness the power of
    efficiency.
        Trigen has pushed the technology envelope to achieve
    economic and environmental goals. They are a company with the
    right idea, having grown from revenues of $1 million in 1987 to
    $247 million in 1997, and this is something that I believe is
    very critical to the future of any electric restructuring, that
    economic component.
        They serve quite a population, Mr. Chairman. Their
    customers get their energy from 41 plants in 27 locations and
    one of them in Kansas City, Missouri in my district where they
    do a fabulous job in an area where no other utility thought it
    was economical to do so.
        Mr. Casten is an advocate for market-based solutions to
    environmental problems. He is your cup of tea, Mr. Chairman,
    and I am delighted he is here.
        Mr. Barton. We are going to hear Mr. Casten's words of
    wisdom. Then, unfortunately, we have 3 votes on the floor and
    so we are going to have to recess to let the members votes, and
    it is probably going to be close to 2 before we get back, but
    we are going to hear you first and then we will take a recess.

                      STATEMENT OF THOMAS R. CASTEN

        Mr. Casten. Thank you, Mr. Chairman, and thank you for the
    kind remarks, Congresswoman McCarthy.
        I want to compliment you for pursuing improvements in the
    way the country regulates the electricity business. The
    original logic of monopoly regulation is long gone, erased by
    technological process. Thankfully, monopoly protection of
    electricity is starting to give way across the country.
    However, much of the outmoded regulatory apparatus is in
    Federal laws.
        I come before you today as an environmentalist who makes
    his living as a capitalist in the energy business. I am an
    environmentalist who has faith in the power of the market. At
    Trigen we have used one key tool to compete, and it is the same
    tool that I believe will be deployed by every energy company
    when outmoded regulatory roadblocks are removed. That tool is
    efficiency.
        Trigen has 45 plants and projects with a capacity of
    roughly 5,000 megawatts spread through 18 states, Canada and
    Mexico that produce heat and power. Our combined heat and power
    plants typically use half the fossil fuel and are twice as
    clean as the average U.S. electric generating plant. We burn a
    wide range of fuels and use many technologies to achieve these
    efficiencies, but each of these combined heat and power plants
    shares two features. It combines the generation of heat and
    power instead of wasting the heat, and it saves our consumers
    money.
        My company's environmental performance with consumer
    savings is a model of what America's energy business will
    become over the next decade. We are twice as efficient because
    it is the way to compete and gain market share. We burn less
    fuel so we can sell less expensive products: Heating, cooling
    and electricity.
        Fuel use efficiency is a product of market forces and
    technological advances. The present fuel use inefficiency is a
    product of State and Federal Government rules that have become
    outmoded. I firmly believe that this Congress and the
    administration can spur the economy and clean the environment
    by removing the present statutory and regulatory barriers to
    efficiency. I believe that the social purposes that the present
    regulatory laws were designed to address can be met with modern
    rules that don't act as barriers to efficiency.
        As was mentioned, I wrote a book last year that among other
    things listed the laws, regulations, policies and habits of
    mind that stand in the way of efficient generation. I will not
    take the subcommittee's time to go through that list now, but I
    do ask that a copy of my book Turning Off the Heat be included
    in the record of this hearing. The book touches on issues that
    you are addressing today, including PURPA and stranded costs.
        Mr. Barton. We can put in a summary of the book. I don't
    believe that we have enough money in the treasury to put the
    whole book in the record, but we will put a synopsis of the
    book and keep the book on file.
        Mr. Casten. Mr. Chairman, we attached a short bit that just
    lists the barriers to efficiency.
        Mr. Barton. That will be put into the record.
        Ms. McCarthy. Mr. Chairman, I believe if we followed the
    guiding premises of the book, we would save the treasury a lot
    of money.
        Mr. Barton. That is probably true, and we are not going to
    take that away from your time. Thank you.
        Mr. Casten. I am going to skip most of those issues because
    I would like to focus my remarks on the environmental aspects
    of restructuring as well.
        Congress and the administration need to address the fact
    that the Clean Air Act is a major roadblock to the installation
    of clean, modern electric generation. Unleashing competition by
    deregulating will have positive impacts on both the environment
    and the economy, but the U.S. will do considerably better on
    both counts if Congress also modernizes the Clean Air Act.
        What is wrong with the Clean Air Act? Simply put, the law
    has a blind spot. The law focus on the benefits of modern
    emissions control technology, things like scrubbers, but it is
    blind to the best possible environmental control. The best
    possible environmental control is to not burn the fuel.
    Efficiency. The law blocks the deployment of modern efficient
    energy generating technology. The Clean Air Act through its new
    source review requirements discourages both existing plant
    owners and new entrants from deploying efficient technologies
    that save money and reduce pollution. The act makes it
    practicably impossible to deploy efficiency improvements in
    existing power plants without triggering an environmental
    permitting process, and that process is likely to require the
    addition of costly emission controls, so the power plants are
    left the way that they are.
        The new source review combined with grandfathering
    encourages the life extension of obsolete, expensive, dirty
    power plants that use on average 35-year-old technology. New
    plants which are two times as efficient, up to 20 times
    cleaner, and produce cheaper power are forced by the Clean Air
    Act to install end of pipe add-ons and those add-ons often make
    it uneconomic to deploy the doubly efficient plant. A
    modernized environmental law can encourage replacement of the
    old dirty plants with new plants that save money and reduce
    emissions. This is what a competitive energy market will push
    people to do, but our environmental laws push the other way.
    The Clean Air Act makes perfection the enemy of the very good.
        The problem is not a reason for finger pointing, not yet at
    least. The Clean Air Act was written at a time when few people
    imagined the efficiencies that are now economically available,
    from 33 percent to 90 percent efficiency gains. We no longer
    have the excuse to leave the act alone. I appreciate that many
    will flinch at the notion of opening up the Clean Air Act. It
    is an understandable concern given the extremity of the debate
    on some environmental matters.
        However, I believe that the rewards to the economy and the
    environment will be very large. We should take full advantage
    of the best technologies our economy can provide. Correctly
    done, regulatory and statutory change will produce an
    environmental benefit and will save money. As an
    environmentalist, I think we should move forward in a way that
    takes full advantage of these efficiencies. Competition will do
    part of the job but the environmental laws have to change, too.
    Thank you for the opportunity to testify.
        [The prepared statement of Thomas R. Casten follows:]
    Prepared Statement of Thomas R. Casten, President & CEO, Trigen Energy
                                  Corporation
        Mr. Chairman and members of the Subcommittee, thank you for
    inviting me to appear today.
        To begin, I want to compliment you for pursuing improvements in the
    way this country regulates the electricity business. The old logic of
    monopoly regulation is clearly inadequate to today's needs and,
    thankfully, is starting to give way across the country. Even without
    passing legislation, Congress has helped raise the nation's awareness
    of the need for change and, in so doing, you are moving the country
    ahead in a good direction.
        I come before you today as an environmentalist who makes his living
    as a capitalist in the energy business. I am an environmentalist who
    has faith in the power of the market. I am a power company executive
    who knows beyond any doubt that our outmoded approach to energy and
    environmental regulation results in wasted money, wasted fuel, and
    needless pollution. As an independent power company without the benefit
    of any monopoly, we have used one key tool to compete, and it is the
    same tool that will dominate the energy business when monopoly
    restrictions and certain other barriers to competition are removed.
    That tool is efficiency.
        My company's success is a model for what America's energy business
    can become over the next decade. Trigen owns, operates, or is building
    45 plants spread through 18 states, two Canadian provinces, and Mexico.
    Our mission is to burn only half of the fossil fuel and produce only
    half of the pollution associated with conventional generation. In 1998,
    our plants emitted less than half of the pollutants that would have
    come from conventional generation of the same energy. Our combined heat
    and power plants converted 65% to 91% of the energy in the fuel to
    useful heat and electric power, compared to 33% average efficiency for
    the entire US electric power industry. We saved our customers money,
    and as a bonus, emitted only 54% of the greenhouse gasses that would
    have come from conventional generation of the same heat and power. If
    the US power generation industry had the same efficiency as Trigen, US
    consumers would save over $100 billion per year, and total US
    greenhouse gas emissions would be 16% below 1990 levels.
        As an environmentalist, I'm pleased by our performance, but we did
    this for business reasons. We're twice as efficient because it is the
    way to compete, the way to gain market share by extracting more value
    from every dollar spent on fuel, the way to give better value to our
    customers.
        Competition forces firms to increase efficiency or lose market
    share. The US electric industry, which has been shielded from market
    forces for 90 years, reached an efficiency of 33% in 1959, and has not
    improved in the ensuing 40 years.
        It is vital to understand why there has been no increase in the
    dismal efficiency of the entire US power generation industry for four
    decades, in the face of incredible improvements in technology. Our
    outmoded system of monopoly protection and power regulation has
    produced a power industry with plants that are 35 years old, on
    average, and that employ technology that is environmentally and
    economically obsolete. I firmly believe that it is the proper task of
    this Congress and the Administration to examine fully the statutory and
    regulatory barriers to generation efficiency--and eliminate them. If
    Trigen can do what we've achieved under the current rules, imagine what
    our remarkable economy could achieve with enlightened rules
        I have been trying to change the way the US makes power for 25
    years, and have repeatedly asked myself why we are stuck with such
    inefficient, dirty, and expensive power generation. As you may know, I
    wrote a book last year to explain why we must double the efficiency of
    our power generation. Among other things, I listed the laws,
    regulations, policies, and habits of mind that stand in the way of
    efficient generation. I called them ``Barriers to Efficiency,'' and
    they filled chapter eight of the book. I'll not take the Subcommittee's
    time to go through that list now, but ask that a copy of my book,
    Turning Off the Heat, be included in the record of this hearing.
        As this Subcommittee weighs the environmental benefits of
    electricity market competition, I urge you to take on an equally
    important and very delicate task. Congress and the Administration need
    to address the fact that, second only to monopoly regulation, the Clean
    Air Act is the major roadblock to installation of clean, modern
    electricity generation.
        To be clear, I am no enemy of the Clean Air Act or of tough
    environmental regulation. I know what this country would be like
    without those protections, and I wouldn't wish to live in that kind of
    place. But Congress can and should modernize the Clean Air Act so it no
    longer stands in the way of a much cleaner electricity industry.
        What's wrong with the Clean Air Act? Simply put, the law has a
    blind spot. While the law recognizes and, indeed, relies upon the
    benefits from modern emissions control technology (e.g., scrubbers), it
    is blind to the benefits of modern energy generating technology.
    Standards in the act are not related to the amount of useful energy
    produced from a given unit of fuel, and thus do not recognize or
    promote the single best environmental control strategy possible--
    burning less fuel.
        The Clean Air Act, largely through its New Source Review
    requirements, discourages both existing plant owners and new market
    entrants from taking reasonable actions which would reduce pollution.
    It is practically impossible to modify an existing plant to make
    efficiency improvements without triggering an environmental permitting
    process that is likely to require the addition of costly emission
    controls. Discouraging efficiency improvements encourages the continued
    use of old technologies.
        The average US power plant was built in 1964. Thirty-five year old
    technology is not only inefficient, but also emits about twenty times
    as much nitrous oxides per megawatt hour as a new plant without
    emissions controls. Yet, current environmental regulation holds up the
    construction of new and doubly efficient power plants for up to 18
    months of permitting. Regulatory agencies, by simply following the
    present law, often deny a permit unless the new plant adds end of pipe
    controls to reduce the emissions per megawatt hour to 1% of the average
    old plant. These added controls are expensive and consume energy, so
    they reduce efficiency. More importantly, they create strong economic
    incentives to keep repairing and extending the life of the old,
    inefficient and dirty plants. By enacting a new regulatory approach
    that allows every generator of heat and power the same pounds of
    pollutant per megawatt hour generated, Congress can trigger broad
    deployment of new, clean technology--a boom in efficient energy
    investments that will help every consumer and a broad slice of American
    industry and labor.
        A competitive energy market will push the power industry to invest
    to turn over capital stock. Since current technology is 20 times
    cleaner, the by-product of cheaper power will be reduced emissions. But
    our environmental laws push against this trend. The Clean Air Act makes
    perfection the enemy of the good. I have included with my testimony a
    recent paper we prepared on this matter.
        This problem is not a reason for fingerpointing. Not yet at least.
    The Clean Air Act was written at a time when few people foresaw the
    efficiencies achievable from energy generating technologies. We no
    longer have that excuse. We know that modern generating technology can
    be twice to three times as efficient as the national average. We can
    not afford to allow outdated environmental regulatory approaches to
    block the efficiency gains that will otherwise result from unleashing
    competition and deploying new technology.
        Many in the environmental community and regulatory agencies will
    flinch at the notion of changing implementation or the actual language
    of the Clean Air Act. It is an understandable concern, given the
    extremity of debate on some environmental matters. I believe the
    opportunity outweighs the concerns. Congress has an opportunity to
    induce modernization of the power industry, and save money and
    pollution. We believe that by eliminating the barriers to efficiency
    and unleashing market forces, Congress will cause over $200 billion of
    new power plant construction, creating many jobs. A modernized and
    competitive power industry will reduce the cost of heat and power by
    over $100 billion per year, after paying for the new investment. The
    environment will be greatly improved by the overdue retirement of
    obsolete and dirty generating plants. We will shift our environmental
    spending from end of pipe scrubbers to efficiency. In this way we will
    prevent pollution and save money. There will be an added bonus. US
    greenhouse gas emissions will fall dramatically as a result of the heat
    and power industry burning less fuel and charging less for their
    products.
        Thank you for this opportunity to testify. I will be happy to
    respond to questions.

        Mr. Barton. Thank you, Mr. Casten, and I want to thank our
    entire panel. I am going to ask that you remain near the
    hearing room. We are going to recess until 1:50, and that is
    eastern daylight savings time.
        [Brief recess.]
        Mr. Barton. The subcommittee will come to order. We had one
    additional vote, which is why it took us a little longer to get
    back. The Chair is going to reconvene the hearing and hopefully
    we will have members come back, but I am going to recognize
    myself for the first 5 minutes.
        Mr. Codey, I was actually here to hear your oral version of
    your testimony in which you supported a renewable requirement
    in the legislation, if we move to legislation. Ms. O'Neill, who
    represents an environmentally correct power marketing company,
    in her testimony indicated that a mandate was not necessary
    since Green Mountain is actually doing what many in the
    environmental community wish to be done. Why do you think that
    it is necessary to put something similar to the
    administration's bill in terms of renewables into the
    legislation?
        Mr. Codey. Well, Mr. Chairman, I think we have to recognize
    that initially I think there has to be incentives for people to
    move in this area. It is great for marketers to say that they
    are going to have a certain amount of renewables. We also want
    to encourage certain developers to have those kinds of
    renewable facilities available. And I think that requirement of
    knowing that there is a firm marketplace for developers to
    invest in that kind of technology will then have it available
    for marketers to go out and market it. So I do think that it is
    necessary.
        I think that we can talk about what is the reasonable
    level, what is the reasonable approach in terms of how quickly
    you get to that level. But I do think that it needs some sort
    of a requirement in order to stimulate the market.
        Mr. Barton. Ms. O'Neill, what has been the market reaction
    to the various mixes that Green Mountain presents to the
    public? My understanding is that one of your options is green-
    green, totally renewable.
        Ms. O'Neill. That is correct.
        Mr. Barton. So I think you give them two or three choices.
    Which choice is most popular, and in your opinion based on the
    actual data that your company has generated, what is the delta
    for purely green power? How many Americans will opt for that if
    they know that it is totally renewable?
        Ms. O'Neill. In general, the research is that about 20
    percent of American consumers will pay more for renewable
    energy and that is before there has been any significant amount
    of consumer education on the topic, and so we think that the
    potential is significantly larger than that.
        In terms of our experience, we find significant numbers of
    customers choosing all three of our power blends. In
    Pennsylvania, for instance, the low price is a cleaner blend,
    including just 1 percent of new renewable resources. The other
    two are both Green-E certified, one being 50 percent renewables
    and the third being 100 percent with 5 percent new. Again, I
    don't have the numbers specifically in front of me, but good
    numbers of consumers are choosing each of those blends.
        Mr. Barton. But if I read your marketing brochure
    correctly, I mean, I went to A&M so there is no guarantee that
    I am doing that, but if I am doing that, what is called the
    best green blend is 6.8 cents a kilowatt hour, which is about 2
    cents a kilowatt hour higher than the good blend, and you don't
    show a baseline for regular power, but I would assume that
    regular power is not going to be much less than the 4.83 cents
    a kilowatt hour. So for 2 cents more, you are getting the best
    that is available. Is that one interpretation of this marketing
    brochure?
        Ms. O'Neill. Yes. What that does indicate is that there is
    a 2-cent spread between our lowest price blend and our highest
    priced blend. Across the top it tells you what the prices are
    essentially if you stayed with your current utility and I think
    the one that you have in front of you is for one of the
    utilities in Pennsylvania that is one of the lower cost
    utilities. In Pennsylvania, in PECO, for instance, it is
    possible to buy our lowest cost blend for about the same amount
    that you would spend if you stayed with the current utility.
        Mr. Barton. Mr. Casten, I was intrigued by your testimony
    about efficiency and how that should be utilized in any
    legislation. Obviously combined cycle natural gas generated
    electricity is efficient today. What is the most efficient coal
    fired cycle? Is there such a thing as a combined cycle coal
    generator that would approach the efficiencies of the natural
    gas fuel?
        Mr. Casten. Mr. Chairman, when we combine the generation of
    heat and power, as we do at Coors in Colorado or Tuscola in
    Illinois, we approach 85 percent efficient with coal. By
    contrast the average for the Nation since 1959 is 33 percent
    efficient for all electric generation. The combined cycle gas
    turbine plants that you referred to will run 55, 57 percent
    efficient. In order to use the coal, we need to put the plant
    near where somebody is making chemicals, making beer, heating
    universities, whatever, and capture the heat that is left over
    instead of throwing it away and then we can go to 85 percent.
        Mr. Barton. Some of the concerns from our coal State
    members about coal not being competitive are misplaced then?
        Mr. Casten. I think they are somewhat misplaced. I want to
    be fair. It is a more difficult fuel to burn. It is difficult
    to get the permitting and the siting to put a new coal plant
    in. There are some very clean new technologies and there is a
    price advantage on the fuel. We are burning coal in several of
    our plants.
        Mr. Barton. For an older coal plant that has been given
    different environmental standards under the Clean Air Act that
    the environmentalists say are dirtier, it is very difficult to
    retrofit those to become efficient; is that a correct
    statement?
        Mr. Casten. It is, depending on where the plant is located.
    In my testimony in the President's panel I talked about a coal
    plant two miles south of National Airport and that whole plant
    could be heating this office with the right arrangements. So it
    is a location sensitive issue. If it is located at Four
    Corners, you are going to throw the heat away.
        Mr. Barton. My time has expired. The Chair would recognize
    the member from Michigan, Mr. Dingell, for 5 minutes.
        Mr. Dingell. Mr. Chairman, I thank you again for your
    courtesy.
        This question is to all of the panelists. Yes or no. Should
    restructuring legislation require electricity providers to
    disclose information relative to their generating sources and
    their impact on the environment, yes or no?
        Ms. O'Neill. Green Mountain is in favor of such a policy,
    yes.
        Mr. Niemiec. Yes.
        Mr. Cohen. Yes.
        Mr. Agathen. I would say yes as long as it is done
    properly.
        Mr. Codey. Yes, including marketers also.
        Mr. Casten. Yes.
        Mr. Dingell. Should there be a requirement for them to tell
    the truth on this matter?
        Mr. Agathen. Marketers?
        Mr. Dingell. Everybody.
        Mr. Codey. Yes.
        Mr. Casten. Yes.
        Ms. O'Neill. Sure.
        Mr. Dingell. All agree. Now, should the requirements of
    this bill apply to the publics, the munis, the marketing
    authorities, TVA, Bonneville and so forth, or should it apply
    only to the privates, and I am talking about all of the
    requirements in the bill? Yes or no.
        Mr. Codey. In my opinion, it should apply to all of them.
        Mr. Casten. I agree.
        Mr. Dingell. Or all or none or some.
        Mr. Cohen. You are referring to the disclosure
    requirements?
        Mr. Dingell. Should the bill apply to publics, munis, TVA,
    Bonneville, or should it apply only to the privates?
        Mr. Cohen. You are talking about the environmental
    provisions of the bill?
        Mr. Dingell. All of the provisions because the bill is
    going to impose many requirements on all of the producers and
    deliverers of electricity.
        Do you want to come down in the ``I don't know'' category?
        Mr. Agathen. My position would be if the States have
    allowed certain entities to opt out of the deregulatory
    process----
        Mr. Dingell. I am talking about the Federal package.
        Mr. Agathen. Or the State municipals or REA coops, I think
    you could make an argument it should not apply there. But if
    they have opted into the competitive situation, then yes.
        Mr. Dingell. My time is limited. Yes or no.
        Mr. Cohen. With respect to the environmental provisions,
    yes. I don't consider myself to be expert on other pieces.
        Mr. Dingell. How about antitrust, should they be exempt?
        Mr. Cohen. I don't have an opinion on that.
        Mr. Dingell. Should they continue being exempt from
    regulation altogether?
        Mr. Cohen. There are many different aspects of that
    question.
        Mr. Niemiec. I would say no just because I can't imagine
    one bill that would cover all of the various issues. It would
    seem to me that there would be some exceptions.
        Mr. Dingell. You don't think that this bill covers all
    aspects of deregulation?
        Mr. Niemiec. As I understood the question----
        Mr. Dingell. You would have it apply to the IOUs but not to
    the other components of the industry?
        Mr. Niemiec. I think the question was----
        Mr. Dingell. My question is should the bill cover everybody
    or only some, and you are saying that it should only cover
    some. I don't want a debate, yes or no.
        Mr. Niemiec. I would say no.
        Ms. O'Neill. I am going to duck that because I haven't
    thought through all of the ramifications. In general,
    environmental policy should apply generally to all
    organizations.
        Mr. Dingell. But as to the balance, I am putting you down
    you don't know?
        Ms. O'Neill. Correct.
        Mr. Dingell. Should we address in this bill only the
    question of regulation or deregulation or should we impose
    large environmental components on this bill? Yes or no.
        Mr. Agathen. Absolutely not on the environmental
    components.
        Mr. Codey. Congressman, I don't think that is a yes or no
    answer. I think an outbased standard is a very simple number,
    and it can be put in this bill. It should apply to everybody,
    and I think it is a very simple thing to do.
        Mr. Dingell. Sir.
        Mr. Casten. I think this bill must address the Clean Air
    Act and take the barriers to efficiency away.
        Mr. Dingell. So we should address the Clean Air Act?
        Mr. Casten. Yes, sir.
        Mr. Dingell. How about down at this end.
        Mr. Cohen. We should address emissions control in this
    bill.
        Mr. Niemiec. I say absolutely not.
        Ms. O'Neill. There should be some environmental policies
    provisions contained in restructuring.
        Mr. Dingell. Let's talk about RPS. Should RPS apply to
    everybody in the industry, and if not, who should be exempted?
        Ms. O'Neill. A renewables portfolio standard if enacted
    would apply to participants who are in the market and should
    apply to utilities and marketers.
        Mr. Dingell. How about publics and privates and munis and
    TVA and the coops and the marketing authorities like
    Bonneville, apply to them or not?
        Ms. O'Neill. I would think that that would apply to them as
    environmental.
        Mr. Niemiec. RPS should apply to no one, it is a bad idea.
        Mr. Cohen. It should apply across the board.
        Mr. Agathen. It should supply to no one, it is a bad idea.
        Mr. Codey. It should apply to anyone selling in the retail
    market.
        Mr. Casten. The bill should encourage renewables to find a
    better way than RPS to do it. Apply to everybody.
        Mr. Dingell. You don't think that RPS works very well?
        Mr. Casten. I think there are better ways.
        Mr. Dingell. Thank you, Mr. Chairman.
        Mr. Barton. If you wish a second round of questions, I am
    sure that the panelists will agree.
        Mr. Dingell. I would like to have the authority to put
    written questions to the panel members and have their
    responses.
        Mr. Barton. Without objection, that is a right that all
    members of the subcommittee obviously have.
        Mr. Dingell. Thank you.
        Mr. Barton. The gentleman from Illinois, Mr. Shimkus, is
    recognized for 5 minutes.
        Mr. Shimkus. I want to direct my first question to Mr.
    Agathen on some issues that people make the assumption that
    they are correct. Mr. Agathen, is there much coal fired
    capacity sitting around unused in the United States that will
    run once competition kicks in? In other words, there is the big
    fear that we have all of these coal fired plants sitting around
    not doing anything and if there is a competitive market, that
    we are just going to bill all of this stuff out.
        Mr. Agathen. The answer is no. It will have very little, if
    any, impact because coal is already competing on an economic
    basis against all of the other units. It is generating
    economically now. The wholesale market is competitive. If a
    neighboring utility is generating at 4 cents and we are
    generating at 2 cents, they are buying all they can from us
    already, so we are maxed out.
        Mr. Shimkus. Do you know of any coal fired plants being
    built in the United States right now?
        Mr. Agathen. I think there may have been one or two
    announced over the last 5 years, and I don't know whether they
    were completed.
        Mr. Shimkus. If in the dirty Midwest we had all of these
    extra coal fired plants sitting around, would there have been
    the price spikes we experienced last year?
        Mr. Agathen. No.
        Mr. Shimkus. If we accept the assumption that we are going
    to kick on all of these additional plants, which there are
    none, would those new plants not be under the current Clean Air
    Act?
        Mr. Agathen. Yes, they would.
        Mr. Shimkus. So there would be an argument that there is
    not additional, new excessive dirty air being created by these
    coal fired plants? It would be the same restrictions that we
    have now which have done a great job in cleaning up the
    environment?
        Mr. Agathen. I would agree with that.
        Mr. Shimkus. And I would also add that it destroyed the
    southern Illinois coal industry, which of course has taken a
    lot--thousands of United Mine Workers out of their jobs.
        Ms. O'Neill, I have a question on this advertisement. Those
    towers to me seem to be cooling towers. Is that true?
        Ms. O'Neill. No, they are coal towers.
        Mr. Shimkus. Because in Illinois those are the cooling
    towers from nuclear plants. And if they were, I would then make
    the assumption that might be false advertising because the
    shadows make it appear that they are dirty pollutants, whereas
    we know that nuclear power is pretty clean as far as emissions.
        A better argument if you want to bring in the nuclear
    equation is to have the temporary nuclear storage sites on the
    left side addressing the issue of temporary storage as
    nonenvironmentally friendly. That may help us on our other bill
    of getting a temporary storage site, which is also an
    additional cost which we had addressed to the other panel as
    far as the costs of doing business because of nuclear sites.
        So you may want to talk to our advertisers because I would
    say that those are--in my view those are nuclear cooling towers
    which are emitting clean--just steam into the air.
        The last question I have is for Mr.--and I am sorry if I
    butcher the name--Niemiec. If in the administration's bill they
    want 7.5 percent generation RPS by 2010, is that doable, and
    where will it come from?
        Mr. Niemiec. I think the answer to that is I don't think
    that it is doable. Out of all of the electric generation, 7.5
    percent in 2010 must come from renewables. Let me just say year
    2000 projections and 2010 of the incremental new capacity, over
    55 percent, 55 percent would have to be renewables. So when
    people say 7.5, they are really saying 55 percent of the
    incremental new capacity. It will create a tremendous boom, and
    I can't imagine where it would all come from in that 10-year
    span.
        Mr. Shimkus. Do any of you see a massive increase in coal
    fired plants being planned for the next 10-15 years?
        Ms. O'Neill. No.
        Mr. Niemiec. No.
        Mr. Cohen. No, but I submit that is not the issue. The
    concern is the existing level of----
        Mr. Shimkus. I will take the no.
        Mr. Agathen. No.
        Mr. Codey. I wouldn't say massive. I think there may be
    some. We had a coal fired plant built in South Jersey in the
    last 2-3 years, and so I do think that there are opportunities
    to do that.
        I would like to indicate one other point that was raised
    about closing coal plants. We have to remember that there is
    going to be a trading opportunity with any restructuring so
    that plants would not be forced to close.
        Mr. Shimkus. It is not the plants, it is the coal mines.
        Mr. Codey. But they would still use the coal, they would
    just buy credits.
        Mr. Shimkus. No, they will buy western coal and they will
    close the mines.
        Mr. Casten.
        Mr. Casten. Let me answer with facts. The latest tally of
    announced new plants is 62,000 megawatts, of which 1,000 is
    coal.
        Mr. Barton. Amazing, we have a witness that is answering
    with facts, and he is a Democrat and a friend of the President,
    which is doubly impressive.
        The Chair recognizes Mr. Pallone of New Jersey for 5
    minutes.
        Mr. Pallone. I will leave that the way that it is.
        Let me ask Mr. Codey about the generation performance
    standard. We have a generation performance standard in my bill,
    and I just wanted to ask you at what level you would set a
    generation performance standard and talk about that.
        Mr. Codey. I think the level that was included in the bill
    which you sponsored in the last session was the appropriate
    level, and right now I am forgetting the amount of tons that
    equated to. But clearly that would have the effect of cleaning
    up the air.
        I also want to point out that the generation performance
    standard doesn't shut down any plants. What it does is it says
    you have to be this clean. If you are not this clean, you can
    buy credits from other people who are cleaner and still operate
    your plants, but the environmental costs of putting pollution
    in the air is reflected then in the market price of energy, and
    that is really what we are trying to get to.
        Mr. Pallone. Thanks, Larry.
        I wanted to ask about mercury emissions, and this gets a
    lot of attention in my district and in New Jersey. Let me ask
    Mr. Cohen first about how you think utility mercury emission
    reductions should be achieved? In other words, do you believe,
    for example, that mercury should be included in an emissions
    trading program?
        Mr. Cohen. That is a real complicated question that I don't
    think anyone has the full answer to right now. It is pretty
    clear that if we impose stricter standards for sulfur and we
    are scrubbing some of the flue gas, we will take out a lot of
    mercury. There will be a lot of mercury co-benefits from
    scrubbing and so that you may get some of those results in
    tandem with imposing emission controls for the conventional
    pollutants. There are lots of technological issues there.
        I think the most likely way to go is to look at some kind
    of minimal performance standard for mercury. I think the
    question of trading is a vexed one because it does appear that
    there are local impacts of mercury emissions. The closer you
    get to the stack, the more dense the concentration of deposited
    mercury. So if you have fresh water lakes and other aquatic
    areas close to a plant, you may not want to shift all of the
    mercury emissions to one particular hot spot. That is my only
    reservation about the trading piece, but this probably needs a
    little more study before legislation is enacted.
        Mr. Pallone. Mr. Casten got into this before, and I would
    like to ask him, and maybe Ms. O'Neill as well, when you--we
    talked about the Renewable Portfolio Standard, and you sort of
    got into this--whether you can identify methods other than a
    Renewable Portfolio Standard to provide incentives for the
    greater use of renewables?
        Mr. Casten. First of all, let me set the record straight. I
    am a registered Republican who is very concerned about the
    environment, and I hope that is not an oxymoron.
        Mr. Pallone. Well, there is Teddy Roosevelt.
        Mr. Casten. Congressman, I think so that your generation
    performance standard is the start of the way to get at the
    renewables. I would like to see you replace the other rules.
    Allow an allowance of pollutant per megawatt hour generated of
    heat or power. Apply it to everybody regardless of fuel, the
    age of the plant, whether they are public, private or
    otherwise, and then let people trade if they don't meet it.
        What that does is eliminates the need for Renewable
    Portfolio Standard because it creates a property right that
    comes from generating power that doesn't have any pollutant. So
    any renewable that is not producing NOX or not
    producing SOX would have some pounds of spare on
    their level of the allowance, and they would sell it to other
    people who produced too much NOX. The beauty of that
    is that the market will decide what the level of the price
    difference is. It will flex as technology moves along, but it
    does provide the incentive for what we really want out of
    renewable. We have to ask why do we want renewable, and we want
    it because it is less polluting and because it does some other
    things.
        Mr. Barton. Would the gentleman yield. We will give the
    gentleman additional time.
        Based on what you just said, nuclear would qualify?
        Mr. Casten. It certainly would. One of the advantages of
    nuclear is it does not put out NOX. It may have some
    other disadvantages, but allow all of those to work into the
    pricing.
        Mr. Pallone. I just wanted to have Ms. O'Neill respond to
    the same question, and also about the Renewable Portfolio
    Standard, whether you distinguish between emerging and existing
    renewables, but also the same question that I asked Mr. Casten.
        Ms. O'Neill. I do want to clarify that my testimony doesn't
    say that there should not be a renewables portfolio standard.
    It lists it as one of several mechanisms that should be
    considered by Congress as part of a comprehensive restructuring
    bill. The challenge with a Renewable Portfolio Standard is to
    design it in such a way that it represents a floor for
    renewables development so that all consumers are getting some
    element of renewables and a competitive market could build on
    top of that and it doesn't represent a competition for the
    competitive market.
        And again, there are other mechanisms that my testimony
    referred to. Disclosure standards and a systems benefits charge
    are other mechanisms, good market based mechanisms for
    supporting the development of renewables, and in particular new
    renewables.
        Mr. Pallone. Okay. So that really answers the second part
    of that about emerging versus existing renewables.
        Ms. O'Neill. I think that is right. Yes.
        Mr. Barton. Thank you. The Chair recognizes the gentleman
    from Maryland, Mr. Ehrlich.
        Mr. Ehrlich. I am going to yield my time to Mr. Shimkus.
        Mr. Barton. You can't yield and leave.
        Mr. Shimkus. He will want to stay to hear my questions.
        Ms. O'Neill, on your portfolio do you consider hydros as
    renewables.
        Ms. O'Neill. Small hydro, and that is less than 30
    megawatts, has been considered by Green E as being a renewable
    resource. Large hydro has not been considered a renewable
    resource.
        Mr. Dingell. Why do you distinguish between small and
    large? They both impound water, they impede fish migration,
    they carry with them their own environmental problems. Why is
    small hydro environmentally benign while large hydro is not?
        Ms. O'Neill. That is rough, true justice, to say the least.
    And Green Mountain is working with American Rivers on a project
    that would help define what is low impact hydro versus real
    impact hydro as a better alternative to looking at water
    resources than large and small. But doing rough justice right
    now, that is what the Green E program, which represents a large
    group of environmentalists, has erected as the standard for
    renewable versus nonrenewable.
        Mr. Shimkus. Reclaiming my time, Mr. Dingell, but it was a
    very good question because the administration, as we learned
    last week, they are not including hydro as part of the
    renewable portfolio and that is why I have asked what is going
    on with that issue.
        Mr. Cohen, last fall voters rejected ballot initiatives in
    California and Massachusetts which would have overturned State
    restructuring laws. In both cases the environmental community,
    including your former employer, the Conservation Law
    Foundation, opposed the initiatives and supported retention of
    State restructuring laws. Neither law contains clean air new
    source performance standards which you have insisted are
    necessary today. If competition without this new emissions
    restriction is bad for the environment, why has the
    environmental community fought to retain the California and
    Massachusetts restructuring laws?
        Mr. Cohen. Actually, that is not a factually correct
    statement.
        Mr. Shimkus. Can you correct it for me?
        Mr. Cohen. The Conservation Law Foundation for which I
    formerly worked supported a series of agreements before the
    public utilities commission that would have put in place
    restructuring with environmental conditions, new source
    performance standards. And those were put in place for several
    of the utilities in the state. The legislation also that was
    finally passed and which my employer supported after I left
    also contains an environmental mandate for emissions control. I
    don't know the exact specifics, but it does push--it does
    require a cleanup of existing sources within the State.
        Mr. Shimkus. Thank you. And I am just going to close and
    yield back my time by saying that in a restructured environment
    the Clean Air Act will still apply and I think we have heard
    from our panel that there is going to be basically no--or very
    little new coal generating facilities in the country, and I
    think that is a premise which would help us carrying this
    debate forward.
        Thank you, Mr. Chairman. I yield back.
        Mr. Barton. Does the gentleman from Maryland yield back his
    time?
        Mr. Ehrlich. I yield back the balance of my time.
        Mr. Barton. The gentlelady from Missouri is recognized for
    5 minutes.
        Ms. McCarthy. Mr. Casten, I thank you for being here and
    sharing with this committee your book Turning Off the Heat, and
    I do recommend it to everyone. One of the things that I wanted
    you to address, in the book you suggested as a practical matter
    that utilities are going to need some kind of cost recovery as
    part of restructuring. I wonder if you would make any
    suggestions to the committee whether that should be at the
    Federal or State level.
        And another point you touched on repeatedly in your answers
    here today and in your testimony are the obstacles to
    improvement of existing plants and construction of new ones and
    particularly with regard to the Clean Air Act and other
    regulations that are barriers. I would like to give you an
    opportunity to elaborate on that if you have not brought up
    everything that you would like to share with the committee,
    because I do think the barrier issue is critical to us
    constructing a good bill.
        Mr. Casten. I like living in a society where it is the rule
    of law and when we change the laws, there is an attempt to make
    people whole. I think stranded cost is an issue that is part of
    the fabric of our society. The question is whether it is going
    to be fairly done or end up with people overstating very badly
    what their issues are.
        I haven't heard any utility come forward and testify as to
    what gains they are going to make from having this legislation
    passed. But I see power plants that clearly can't compete at
    all being sold for 1.6 times their book value. So the market is
    finding some other values out there. I guess if I had my way
    there would be an auction and we would determine it that way.
    Short of that, I agree with the panel earlier this morning,
    with Ross Ain, mandate the States to deal with it fairly
    because it is the States that have to deal with their local
    utility company and they also have to deal with the ratepayers
    who are going to pay the money in the stranded cost and they
    are better able to balance that than you here.
        If I can turn to your second question and give a couple of
    examples. We have a laboratory. Massachusetts was the first
    State to deregulate. Not only did they deregulate and deal with
    stranded costs, but they said very efficient plants are exempt
    from a transition charge. So you could build these combined
    heat and power plants as a way to encourage it. That should
    have triggered a boom of efficient technology in Massachusetts.
    Instead, the State DEP, in enforcing the Clean Air Act, has
    announced that all new power plants will have to use a
    technology that reduces the NOX down to 2 parts per
    million. On an output corrected basis, the average generating
    plant in Massachusetts puts out 500 parts per million of
    NOX. If I want to put in a plant that puts out 25
    parts per million, I can't do it without adding 15 to 20
    percent to my cost to take it down even lower. I don't think
    that is good public policy.
        In your State if we want to put in a generating plant that
    would supply General Motors, we were blocked from doing that
    because the State has an anti flip-flop law that was designed
    to protect the regulated utilities from being preyed on by the
    coops, and they said you couldn't change suppliers.
        I think Congress needs to override those laws everywhere.
    Fifteen States have laws which say that it is illegal for a
    nonutility to generate power, so nobody can generate the power.
    I think all of these things can be cleaned up in the Federal
    regulation. Thank you.
        Ms. McCarthy. Mr. Chairman, may I pursue since the light is
    still green?
        Mr. Barton. Sure.
        Ms. McCarthy. On the NOX issue, I wanted to ask
    Mr. Agathen, since he knows what it might mean to consumers in
    this area for complying with the NOX SIP call rule,
    what that real cost might be and what alternatives might help
    reduce emissions yet not impose such significant burdens on
    consumers? And, Mr. Casten, I appreciate your thoughts in
    raising that issue and pointing out the things that States have
    done that we might need to change at the Federal level if they
    fail to change them themselves. I would love to hear from Mr.
    Agathen.
        Mr. Agathen. It is very hard for us to estimate what the
    costs for our customers will be because the details are not
    sorted out yet. But I think we are talking in the hundreds of
    millions of dollar range is our best estimate, with a fairly
    wide range of uncertainty around those numbers.
        Ms. McCarthy. Thank you. Mr. Cohen, do you want to comment
    at all?
        Mr. Cohen. I have no reason to dispute the range that Mr.
    Agathen described. I would note that there are going to be
    considerable benefits in terms of reduced asthma treatment
    costs and treatment for other respiratory diseases in Missouri
    and downwind resulting from those emission controls. So one
    can't simply look at the cost side of the equation.
        Ms. McCarthy. One ought to look at where the wind goes when
    we are trying to resolve the issue. I thank you, Mr. Chairman.
        Mr. Barton. Thank you. Is Mr. Sawyer out in the annex?
    While we are waiting on Mr. Sawyer, are any of you aware of any
    State that has deregulated that has allowed stranded cost
    recovery where the stranded costs ended up being higher than
    they were estimated? My information is that they are turning
    out to be lower? Everybody is nodding their head.
        Mr. Codey. I believe they are lower.
        Mr. Agathen. Yes.
        Mr. Barton. So are you aware of any State where stranded
    costs have been higher than the estimate?
        Ms. O'Neill. Not in the estimate prepared by utilities.
        Mr. Barton. Even the environmental consumer groups would
    have estimates.
        Mr. Hall would you like to be recognized for 5 minutes.
        Mr. Hall. If I might, I will submit questions in writing.
        Mr. Barton. Former Chairman Dingell, if he were to return
    quickly, we will let him have a second round right now.
        Mr. Barton. I want to apologize to Mr. Casten. Sometimes I
    get carried away, but my Democrats will be even more surprised
    that there was a Republican who gave a fact-based answer, so it
    works both ways here.
        Ms. McCarthy. I just wondered if any of the panelists would
    like to add anything or share any other thoughts with us. Mr.
    Codey.
        Mr. Codey. Yes. If I could, previously a question was asked
    about increased output from coal plants and no more coal plants
    will be built.
        I think one has to look at the capacity factors of plants
    and forced outage rates. One of the things that we found as we
    entered competition, we find ways to make our plants more
    available than they used to be available. Our forced outage
    rates have gone from the 10 to 13 percent rate down to 5
    percent. So you will find ways to do outages quicker because of
    competition. You will have your plants available more. They
    will be available to run more coal plants in the Midwest and
    other places, and they will as a result, if they are not as
    clean as other plants, put more pollution in the air.
        Mr. Barton. Does Mr. Dingell wish to be recognized.
        Mr. Dingell. Yes, Mr. Chairman.
        First, I would like to refer quickly because of the limited
    time and I would ask you a yes or no question.
        The public benefits fund would be funded by essentially a
    tax on electrical utility users. Should that tax be returned to
    the utility in the amount that is paid by the ratepayers or
    should it be paid generally according to some other formula,
    yes or no?
        Mr. Codey. In New Jersey the societal benefits charge is a
    kilowatt hour charge that is paid by all customers to provide
    for conservation, low income assistance. It is paid by all
    customers who use a kilowatt hour.
        Mr. Dingell. Is the answer then from the silence of the
    panel that you don't know?
        Mr. Cohen. That would be my answer.
        Mr. Dingell. The public benefits fund, can you tell me how
    we would ensure that it would not be raided by the
    appropriators and the budgeteers who have been raiding every
    fund, the highway trust fund, the nuclear waste fund, the fund
    we set up to assure universal service to telephone users, how
    do we protect that--and the Social Security and Medicare trust
    fund, how do we protect that against the depredations of the
    appropriators?
        Ms. O'Neill. The devil is in the details on all of these
    programs. There are ways of making sure that the purposes are
    accomplished.
        Mr. Dingell. In other words, you trust the appropriators.
    Terrible mistake.
        Mr. Niemiec. I don't see a way to handle the issue that you
    are raising. Hence, you wouldn't have the systems benefit
    charge or other taxes.
        Mr. Cohen. I would be happy to respond in writing with
    folks who have thought a lot more about that than I have.
        Mr. Agathen. I have no suggestions on how to protect it.
        Mr. Codey. I know in New Jersey that you can have
    legislation which precludes the legislature from invading
    particular funds.
        Mr. Dingell. The last panelist?
        Mr. Casten. I don't think that it is a good way to
    accomplish its ends. We don't need it.
        Mr. Dingell. Mr. Casten and Mr. Codey, you have plants in
    what countries?
        Mr. Casten. We are primarily in the United States, with two
    in Canada and one in Mexico.
        Mr. Dingell. And you, sir?
        Mr. Codey. We have 15,000 megawatts of capacity, 10,000 in
    New Jersey and Pennsylvania, 5,000 in countries such as Chile,
    India, Argentina, China, et cetera.
        Mr. Dingell. Do your plants in other countries meet U.S.
    air quality standards?
        Mr. Casten. Our plants exceed U.S. air quality standards
    everywhere.
        Mr. Codey. I am not sure of the answer to that question.
        Mr. Dingell. Yes or no.
        Mr. Codey. I am not sure of the answer. I know that we meet
    existing standards in the countries where we are located, and
    some of them were existing plants that we purchased.
        Mr. Dingell. Now--well, Mr. Chairman, I think those are the
    questions. I would repeat my request to the Chair that I be
    permitted to submit written questions.
        Mr. Barton. Without objection. All members not present will
    have the requisite number of days to submit questions.
        Are there any other members present who wish to ask this
    panel questions? Seeing none, the Chair would recognize himself
    for just a few wrap up questions.
        Congressman Hall, did you want to ask a question?
        Mr. Hall. No. I will override my staff right now.
        Mr. Barton. Absent a renewable mandate or an environmental
    mandate, and keep in mind that we don't have a bill yet and
    there are a number of bills out there but the subcommittee has
    not yet put together a subcommittee print, but if we choose not
    to follow the administration's lead and we put some disclosure
    requirements in, what in your estimate is the natural level of
    renewable demand for energy in this country if you use the
    definition that is in the administration's bill, which is
    primarily, you know, wind, solar, biomass, perhaps small
    hydroelectric? The administration has a 7.5 percent mandate.
    Using their same definition if we don't have a mandate, what is
    kind of the market level for renewable?
        We will just go right down the table. If you don't have an
    estimate, that is fine, too. But you are a fairly informed
    group.
        Ms. O'Neill. As I mentioned before, I think there is
    significant potential for lots of customers wanting to choose
    cleaner and renewable resources. Exactly what that is in
    percentages is not clear, but certainly well above the amount
    of renewables that we currently have.
        Mr. Barton. So above 1 or 2 percent but probably less than
    the 20 percent that you alluded to?
        Ms. O'Neill. That is correct.
        Mr. Niemiec. Right now there is 2.3 percent in the United
    States, and I think the natural, based on the work that we did
    at the Texas Energy Coordination Council in asking people about
    another natural 3 percent, and that sounds low relative to the
    number that Ms. O'Neill mentioned, so I would say natural 5 to
    6 percent.
        Mr. Cohen. I don't have an estimate.
        Mr. Agathen. From what I understand, it is in those ranges,
    2 to 3 percent. The market will tell us what it is.
        Mr. Codey. We have a requirement in New Jersey going up to
    4 percent. I believe that that is aggressive in terms of a free
    market being able to produce those kinds of numbers, 4 to 5
    percent maximum.
        Mr. Barton. Mr. Casten?
        Mr. Casten. The renewable market is rapidly ramping up and
    I have trouble with the dynamics because they are getting
    cheaper virtually every month. With environmental credits, I
    think you will get to the 7 percent. Without environmental
    credits, you will probably be in the 3 percent range.
        Ms. O'Neill. Mr. Chairman, if I might, I think we have
    barely begun to explore the potential for the demand for
    renewable energy. Consumers are very unaware of where their
    energy comes from and what the environmental consequences are
    of electric generation, and that the potential goes way up when
    that kind of education effort is applied.
        Mr. Barton. The second part to that question, there is
    obviously a segment of the consumer market that will pay market
    or above market for renewable, however you define it. So that
    the second part of the question is let's reverse it. Let's
    assume that we put a mandate in somewhere in the neighborhood
    of the administration's 7.5 percent. What is the cost to meet
    that mandate? In other words, are there entrepreneurs out there
    that will put in the kind of power that is mandated, and if so,
    what will that cost to do?
        I am kind of reversing it, but it is the same way. Take an
    extreme case and we mandate it at 50 percent, what would it
    cost to get the 50 percent? Obviously we are not going to put
    that kind of a mandate. Let's start with Mr. Casten.
        Mr. Casten. Mr. Chairman, because the administration
    excluded hydro, which is a mistake, I don't believe 7.5 percent
    will come forward and the price will go to the cap which is I
    think 1.5 cents a kilowatt hour.
        Mr. Barton. So you think a price cap will preclude reaching
    the percentage mandate?
        Mr. Casten. I am not sure how to build 7.5 percent in 10
    years without hydro. And so I think the price will end up being
    at the price cap all of the time.
        Mr. Codey. I agree with that statement.
        Mr. Agathen. I hope that I am answering this. I think the
    underlying pinnings of restructuring is that we are trying to
    reduce price and give customers choice. The renewables
    portfolio goes totally opposite on both of those principles. So
    I think you have to wait and see what the market is going to do
    in reaction to that. If you mandate it, you are never going to
    know what the true market is going to do with it.
        Mr. Cohen. I don't have an answer.
        Mr. Niemiec. As I stated earlier, if you mandated 7.5
    percent, incrementally that is about 55 percent of the market
    during those 10 years and I don't think that can be achieved--
    --
        Mr. Barton. You mean 55 percent of the expected increase in
    demand?
        Mr. Niemiec. Yes. Would have to be built with renewables,
    and I don't think that we are capable of doing that. In terms
    of cost if you had a more gradual approach, I think you are
    looking at 3 to 4 cents a kilowatt hour above a base cost of
    incremental of around 3.5 cents on a combined cycle natural
    gas.
        Mr. Barton. Ms. O'Neill?
        Ms. O'Neill. I don't have an additional view to provide on
    that.
        Mr. Barton. I want to thank the panel for being here today.
    Our next hearing is next Wednesday. It is on consumer
    protection. Our next working group meeting is next Tuesday at
    4:30. The former distinguished chairman of the Subcommittee on
    Energy and Power, Mr. Phil Sharp, who was a member of the full
    committee and this subcommittee for a number of years, will be
    our guest at our working group. I thank the witnesses, and the
    hearing is adjourned.
        [Whereupon, at 2:50 p.m., the subcommittee was adjourned.]
        [Additional material submitted for the record follows:]
        Responses of Paul Agathen, Senior Vice President, Energy Supply
                 Services, to Questions of Hon. John D. Dingell
    General Questions
        Question 1. Do you support federal legislation to mandate retail
    competition by a date certain? (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 2. Should there be an explicit environmental component of
    restructuring legislation? (Please answer ``Yes'' or ``No.'')
        Response. No.
    Emissions
        Question 3. Do you believe that federal restructuring legislation
    is the best avenue for curing the problems recently raised by the
    courts with the Clean Air Act? (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 4. Do you support the inclusion of emissions control
    legislation as part of a restructuring bill? (Please answer ``Yes'' or
    ``No.'')
        Response. No.
        Question 5. Several parties have suggested that federal
    restructuring legislation contain language to cap utility emissions and
    trade emissions allowances. Under such a program, utilities would be
    assigned allowances based upon their emission rate per megawatt hour of
    electricity generated. This raises questions about the types of
    generation sources that should be allowed to earn credit in such a
    program. In order to clarify, please specify whether the following
    types of generation should be credited in such a cap and trade program:
        a) waste-to-energy facilities be included? (Please answer ``Yes''
    or ``No.'')
        Response. Yes.
        b) nuclear generating facilities be included? (Please answer
    ``Yes'' or ``No.'')
        Response. Yes.
        c) small hydroelectric generating facilities be included? (Please
    answer ``Yes'' or No.'')
        Response. Yes.
        Question 6. If emissions control language was included in
    restructuring legislation, should such language regulate emissions of:
        a) NOX? (Please answer ``Yes'' or ``No.'')
        Response. No.
        b) SOX? (Please answer ``Yes'' or ``No.'')
        Response. No.
        c) mercury? (Please answer ``Yes'' or ``No.'')
        Response. No.
        d) carbon? (Please answer ``Yes'' or ``No.'')
        Response. No.
    Renewable Resources
        Question 7. Should federal restructuring legislation contain a
    Renewable Portfolio Standard? (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 8. What percent of a providers' electricity supply should
    be required to come from renewable resources? (Please answer with a
    number between 0 and 100 percent.)
        Response. 0.
        Question 9. Should the required percentage increase over time?
    (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 10. Should a Renewable Portfolio Standard sunset after a
    number of years? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 11. If a Renewable Portfolio Standard is included in
    federal restructuring legislation, should it apply to the Tennessee
    Valley Authority, the federal Power Marketing Administrations,
    municipal utilities and rural cooperatives if it is required for other
    electricity suppliers? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 12. Should hydroelectric facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 13. Should waste-to-energy facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Green Labeling
        Question 14. Should restructuring legislation require an
    electricity provider to disclose information about its generation
    sources and their impact on the environment? (Please answer ``Yes'' or
    No.'')
        Response. No.
        Question 15. Should providers be required to disclose to customers
    the percentages of each fuel used in generating the electricity being
    offered for sale? (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 16. Should providers be required to disclose data about
    the emissions associated with the electricity being offered for sale?
    (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 17. Should providers be required to disclose information
    about other environmental impacts such as fish mortality? (Please
    answer ``Yes'' or ``No.'')
        Response. No.
        Question 18. Who should bear the burden of supplying information to
    retail customers: marketers, generators, or distributors? (Please
    choose one.)
        Response. No response.
        Question 19. Who should enforce environmental disclosure
    provisions: The Environmental Protection Agency, The Department of
    Energy, The Federal Energy Regulatory Commission, The Federal Trade
    Commission, or individual states? (Please choose one.)
        Response. DOE.
        Question 20. What types of penalties are appropriate for violations
    of any ``green labeling'' requirement?
        Response. Fines.
    Public Benefits Fund
        Question 21. While many states require utilities to undertake
    programs that promote energy efficiency, the fate of these programs is
    unclear in a competitive electricity market. One proposed solution is a
    charge that would be placed on all customers and used to fund energy
    efficiency and conservation programs. For example, the Administration's
    legislation proposes that the revenue from such a charge be placed into
    a ``public benefits fund'' that would be disbursed to states on a
    matched basis so that the states can pay for low income, energy
    efficiency and conservation programs. This prompts a number of
    questions:
        a) Should the agency administering the charge be authorized to
    adjust it? (Please answer ``Yes'' or ``No.'')
        Response. No.
        b) In your opinion, would some states benefit from a public
    benefits fund more than others? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        c) In your opinion, would some states pay more into a public
    benefits fund than others? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
                                     ______

    Responses of Donald W. Niemiec, Vice President, Union Pacific Resources
             Energy Marketing, to Questions of Hon. John D. Dingell
    General Questions
        Question 1. Do you support federal legislation to mandate retail
    competition by a date certain? (Please answer ``Yes'' or ``No.'')
        Response. Yes, but we do not feel that a date certain is an
    imperative part of a federal restructuring legislation.
        Question 2. Should there be an explicit environmental component of
    restructuring legislation? (Please answer ``Yes'' or ``No.'')
        Response. No, we feel that all environmental legislation should be
    separate and distinct from electric restructuring legislation.
    Emissions
        Question 3. Do you believe that federal restructuring legislation
    is the best avenue for curing the problems recently raised by the
    courts with the Clean Air Act? (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 4. Do you support the inclusion of emissions control
    legislation as part of a restructuring bill? (Please answer ``Yes'' or
    ``No.'')
        Response. No.
        Question 5. Several parties have suggested that federal
    restructuring legislation contain language to cap utility emissions and
    trade emissions allowances. Under such a program, utilities would be
    assigned allowances based upon their emission rate per megawatt hour of
    electricity generated. This raises questions about the types of
    generation sources that should be allowed to earn credit in such a
    program. In order to clarify, please specify whether the following
    types of generation should be credited in such a cap and trade program:
        a) waste-to-energy facilities be included? (Please answer ``Yes''
    or ``No.'')
        b) nuclear generating facilities be included? (Please answer
    ``Yes'' or ``No.'')
        c) small hydroelectric generating facilities be included? (Please
    answer ``Yes'' or No.'')
        Response. The Natural Gas Supply Association strongly supports fuel
    neutral, output-based standards. We also support market-based
    approaches (emissions trading) as a mechanism for implementing
    regulatory programs. We do not, however, feel that it is necessary to
    address air quality concerns in electric restructuring legislation.
        Question 6. If emissions control language was included in
    restructuring legislation, should such language regulate emissions of:
        a) NOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        b) SOX? (Please answer ``Yes'' or ``No.'')
        Response. No.
        c) mercury? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        d) carbon? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Renewable Resources
        Question 7. Should federal restructuring legislation contain a
    Renewable Portfolio Standard? (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 8. What percent of a providers' electricity supply should
    be required to come from renewable resources? (Please answer with a
    number between 0 and 100 percent.)
        Response. 0.
        Question 9. Should the required percentage increase over time?
    (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 10. Should a Renewable Portfolio Standard sunset after a
    number of years? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 11. If a Renewable Portfolio Standard is included in
    federal restructuring legislation, should it apply to the Tennessee
    Valley Authority, the federal Power Marketing Administrations,
    municipal utilities and rural cooperatives if it is required for other
    electricity suppliers? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 12. Should hydroelectric facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 13. Should waste-to-energy facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. No.
    Green Labeling
        Question 14. Should restructuring legislation require an
    electricity provider to disclose information about its generation
    sources and their impact on the environment? (Please answer ``Yes'' or
    No.'')
        Response. Yes.
        Question 15. Should providers be required to disclose to customers
    the percentages of each fuel used in generating the electricity being
    offered for sale? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 16. Should providers be required to disclose data about
    the emissions associated with the electricity being offered for sale?
    (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 17. Should providers be required to disclose information
    about other environmental impacts such as fish mortality? (Please
    answer ``Yes'' or ``No.'')
        Response. No.
        Question 18. Who should bear the burden of supplying information to
    retail customers: marketers, generators, or distributors? (Please
    choose one.)
        Response. With increased focus in the consuming public on
    environmental friendly solutions to air quality concerns, it would
    appear that an electricity marketer may wish to advertise its
    commitment to or purchases from generation sources such as renewables
    or gas-fired plants. However, requiring a marketer to report the source
    of generation may be difficult, especially if the marketer is
    purchasing electricity from a pool or if electricity is traded multiple
    times prior to being pooled and sourced to market. Note that many
    electricity marketers may not own generation plants, and the generators
    are the only ones that actually collect the data.
        Question 19. Who should enforce environmental disclosure
    provisions: The Environmental Protection Agency, The Department of
    Energy, The Federal Energy Regulatory Commission, The Federal Trade
    Commission, or individual states? (Please choose one.)
        Response. The disclosure provision should be integrated with
    existing reporting requirements. A review of state, FERC, and DOE
    reporting requirements should identify the appropriate entity to
    enforce disclosure provisions that minimizes additional administrative
    burden.
        Question 20. What types of penalties are appropriate for violations
    of any ``green labeling'' requirement?
        Response. Fines.
    Public Benefits Fund
        Question 21. While many states require utilities to undertake
    programs that promote energy efficiency, the fate of these programs is
    unclear in a competitive electricity market. One proposed solution is a
    charge that would be placed on all customers and used to fund energy
    efficiency and conservation programs. For example, the Administration's
    legislation proposes that the revenue from such a charge be placed into
    a ``public benefits fund'' that would be disbursed to states on a
    matched basis so that the states can pay for low income, energy
    efficiency and conservation programs. This prompts a number of
    questions:
        a) Should the agency administering the charge be authorized to
    adjust it? (Please answer ``Yes'' or ``No.'')
        b) In your opinion, would some states benefit from a public
    benefits fund more than others? (Please answer ``Yes'' or ``No.'')
        c) In your opinion, would some states pay more into a public
    benefits fund than others? (Please answer ``Yes'' or ``No.'')
        Response. We do not support a public benefits fund. To the extent
    that the government selects a public benefits fund as a desirable
    element in legislation, then that fund should be clearly labeled and
    used for a single purpose. For instance, many states are already
    considering a public benefits fund in rates which would provide some
    monies for serving low income users where need exists. That type of
    fund should be kept separate from conservation or energy efficiency
    programs.
                                     ______

    Responses of Lawrence R. Codey, President and Chief Operating Officer,
     Public Service Electric and Gas Company, to Questions of Hon. John D.
                                    Dingell
    General Questions
        Question 1. Do you support federal legislation to mandate retail
    competition by a date certain? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 2. Should there be an explicit environmental component of
    restructuring legislation? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Emissions
        Question 3. Do you believe that federal restructuring legislation
    is the best avenue for curing the problems recently raised by the
    courts with the Clean Air Act? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 4. Do you support the inclusion of emissions control
    legislation as part of a restructuring bill? (Please answer ``Yes'' or
    ``No.'')
        Response. Yes. Specifically, a nation-wide output-based, fuel
    neutral emissions cap-and-trade program covering nitrogen oxide, sulfur
    dioxide, and carbon dioxide.
        Question 5. Several parties have suggested that federal
    restructuring legislation contain language to cap utility emissions and
    trade emissions allowances. Under such a program, utilities would be
    assigned allowances based upon their emission rate per megawatt hour of
    electricity generated. This raises questions about the types of
    generation sources that should be allowed to earn credit in such a
    program. In order to clarify, please specify whether the following
    types of generation should be credited in such a cap and trade program:
        a) waste-to-energy facilities be included? (Please answer ``Yes''
    or ``No.'')
        Response. Yes.
        b) nuclear generating facilities be included? (Please answer
    ``Yes'' or ``No.'')
        Response. Yes.
        c) small hydroelectric generating facilities be included? (Please
    answer ``Yes'' or No.'')
        Response. Yes.
        Question 6. If emissions control language was included in
    restructuring legislation, should such language regulate emissions of:
        a) NOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        b) SOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        c) mercury? (Please answer ``Yes'' or ``No.'')
        Response. yes, pending outcome of EPA's study of utility mercury
    emissions.
        d) carbon? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Renewable Resources
        Question 7. Should federal restructuring legislation contain a
    Renewable Portfolio Standard? (Please answer ``Yes'' or ``No.'')
        Response. Yes. It should be noted, however, that a properly set
    cap-and-trade system for power plant emissions, as described above,
    will also promote the development of renewable energy resources, as
    zero-emission renewable resources can ``balance'' emissions from fossil
    plants.
        Question 8. What percent of a providers' electricity supply should
    be required to come from renewable resources? (Please answer with a
    number between 0 and 100 percent.)
        Response. The recently enacted New Jersey electric restructuring
    plan mandates what I believe is a reasonable and achievable renewables
    portfolio requirement. It starts at 2.5% and increases to 6.5% over 13
    years.
        Question 9. Should the required percentage increase over time?
    (Please answer ``Yes'' or ``No.'')
        Response. Not necessarily. Traded renewable credits could be used
    to the same effect, i.e., to phase in a portfolio standard.
        Question 10. Should a Renewable Portfolio Standard sunset after a
    number of years? (Please answer ``Yes'' or ``No.'')
        Response. Yes, but only if it's clear that a robust renewables
    marketplace has been established.
        Question 11. If a Renewable Portfolio Standard is included in
    federal restructuring legislation, should it apply to the Tennessee
    Valley Authority, the federal Power Marketing Administrations,
    municipal utilities and rural cooperatives if it is required for other
    electricity suppliers? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 12. Should hydroelectric facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 13. Should waste-to-energy facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Green Labeling
        Question 14. Should restructuring legislation require an
    electricity provider to disclose information about its generation
    sources and their impact on the environment? (Please answer ``Yes'' or
    No.'')
        Response. Yes.
        Question 15. Should providers be required to disclose to customers
    the percentages of each fuel used in generating the electricity being
    offered for sale? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 16. Should providers be required to disclose data about
    the emissions associated with the electricity being offered for sale?
    (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 17. Should providers be required to disclose information
    about other environmental impacts such as fish mortality? (Please
    answer ``Yes'' or ``No.'')
        Response. Yes, provided such information can be quantified on a
    scientifically sound basis and can be readily compared to an accepted
    benchmark. For example, raw data on fish mortality is meaningless
    absent the context of the natural mortality rate for any given species
    in the body of water under study.
        Question 18. Who should bear the burden of supplying information to
    retail customers: marketers, generators, or distributors? (Please
    choose one.)
        Response. The entity that makes the retail sale to end-use
    customers, which, in the formulation of this question, would be
    marketers. Note that tracking of fuel source and environmental
    characteristics along the distribution chain will enable marketers to
    report such information to customers.
        Question 19. Who should enforce environmental disclosure
    provisions: The Environmental Protection Agency, The Department of
    Energy, The Federal Energy Regulatory Commission, The Federal Trade
    Commission, or individual states? (Please choose one.)
        Response. The Federal Trade Commission, but not to the exclusion
    of, i.e., not to preempt, individual states with more stringent or
    comprehensive disclosure provisions.
        Question 20. What types of penalties are appropriate for violations
    of any ``green labeling'' requirement?
        Response. Monetary fines; suspension or revocation of a marketer's
    license.
    Public Benefits Fund
        Question 21. While many states require utilities to undertake
    programs that promote energy efficiency, the fate of these programs is
    unclear in a competitive electricity market. One proposed solution is a
    charge that would be placed on all customers and used to fund energy
    efficiency and conservation programs. For example, the Administration's
    legislation proposes that the revenue from such a charge be placed into
    a ``public benefits fund'' that would be disbursed to states on a
    matched basis so that the states can pay for low income, energy
    efficiency and conservation programs. This prompts a number of
    questions:
        a) Should the agency administering the charge be authorized to
    adjust it? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        b) In your opinion, would some states benefit from a public
    benefits fund more than others? (Please answer ``Yes'' or ``No.'')
        Response. Not on a per capita basis.
        c) In your opinion, would some states pay more into a public
    benefits fund than others? (Please answer ``Yes'' or ``No.'')
        Response. Yes, to the extent that higher population and more
    intense energy use prompt higher collection of a public benefits
    charge. Also some states are imposing their own public, or societal
    benefits charges for local purposes.
                                     ______

    Responses of Armond Cohen, Director, Clean Air Task Force, to Questions
                            of Hon. John D. Dingell
        Preliminary note: Despite best efforts, it is not possible for the
    respondent to provide a ``yes'' or ``no'' answer in many cases, as
    requested, either because our organization has not taken a position on
    the issue, the question is outside the domain of our expertise, or
    because the question makes assumptions that require elaboration.
    General Questions
        Question 1. Do you support federal legislation to mandate retail
    competition by a date certain? (Please answer ``Yes'' or ``No.'')
        Response. No position.
        Question 2. Should there be an explicit environmental component of
    restructuring legislation? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Emissions
        Question 3. Do you believe that federal restructuring legislation
    is the best avenue for curing the problems recently raised by the
    courts with the Clean Air Act? (Please answer ``Yes'' or ``No.'')
        Response. The answer depends what other avenues are practically
    available.
        Question 4. Do you support the inclusion of emissions control
    legislation as part of a restructuring bill? (Please answer ``Yes'' or
    ``No.'')
        Response. Yes.
        Question 5. Several parties have suggested that federal
    restructuring legislation contain language to cap utility emissions and
    trade emissions allowances. Under such a program, utilities would be
    assigned allowances based upon their emission rate per megawatt hour of
    electricity generated. This raises questions about the types of
    generation sources that should be allowed to earn credit in such a
    program. In order to clarify, please specify whether the following
    types of generation should be credited in such a cap and trade program:
        a) waste-to-energy facilities be included? (Please answer ``Yes''
    or ``No.'')
        Response. No.
        b) nuclear generating facilities be included? (Please answer
    ``Yes'' or ``No.'')
        Response. No.
        c) small hydroelectric generating facilities be included? (Please
    answer ``Yes'' or No.'')
        Response. Organization has taken no position.
        Question 6. If emissions control language was included in
    restructuring legislation, should such language regulate emissions of:
        a) NOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        b) SOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        c) mercury? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        d) carbon? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Renewable Resources
        Question 7. Should federal restructuring legislation contain a
    Renewable Portfolio Standard? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 8. What percent of a providers' electricity supply should
    be required to come from renewable resources? (Please answer with a
    number between 0 and 100 percent.)
        Response. No position.
        Question 9. Should the required percentage increase over time?
    (Please answer ``Yes'' or ``No.'')
        Response. No position.
        Question 10. Should a Renewable Portfolio Standard sunset after a
    number of years? (Please answer ``Yes'' or ``No.'')
        Response. No position.
        Question 11. If a Renewable Portfolio Standard is included in
    federal restructuring legislation, should it apply to the Tennessee
    Valley Authority, the federal Power Marketing Administrations,
    municipal utilities and rural cooperatives if it is required for other
    electricity suppliers? (Please answer ``Yes'' or ``No.'')
        Response. No position.
        Question 12. Should hydroelectric facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. No position.
        Question 13. Should waste-to-energy facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. No.
    Green Labeling
        Question 14. Should restructuring legislation require an
    electricity provider to disclose information about its generation
    sources and their impact on the environment? (Please answer ``Yes'' or
    No.'')
        Response. Yes.
        Question 15. Should providers be required to disclose to customers
    the percentages of each fuel used in generating the electricity being
    offered for sale? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 16. Should providers be required to disclose data about
    the emissions associated with the electricity being offered for sale?
    (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 17. Should providers be required to disclose information
    about other environmental impacts such as fish mortality? (Please
    answer ``Yes'' or ``No.'')
        Response. No position.
        Question 18. Who should bear the burden of supplying information to
    retail customers: marketers, generators, or distributors? (Please
    choose one.)
        Response. No position.
        Question 19. Who should enforce environmental disclosure
    provisions: The Environmental Protection Agency, The Department of
    Energy, The Federal Energy Regulatory Commission, The Federal Trade
    Commission, or individual states? (Please choose one.)
        Response. No position.
        Question 20. What types of penalties are appropriate for violations
    of any ``green labeling'' requirement?
        Response. No position.
    Public Benefits Fund
        Question 21. While many states require utilities to undertake
    programs that promote energy efficiency, the fate of these programs is
    unclear in a competitive electricity market. One proposed solution is a
    charge that would be placed on all customers and used to fund energy
    efficiency and conservation programs. For example, the Administration's
    legislation proposes that the revenue from such a charge be placed into
    a ``public benefits fund'' that would be disbursed to states on a
    matched basis so that the states can pay for low income, energy
    efficiency and conservation programs. This prompts a number of
    questions:
        a) Should the agency administering the charge be authorized to
    adjust it? (Please answer ``Yes'' or ``No.'')
        Response. No position.
        b) In your opinion, would some states benefit from a public
    benefits fund more than others? (Please answer ``Yes'' or ``No.'')
        Response. No expertise to answer.
        c) In your opinion, would some states pay more into a public
    benefits fund than others? (Please answer ``Yes'' or ``No.'')
        Response. No expertise to answer.
                                     ______

    Responses of Karen O'Neill, Vice President, New Markets, Green Mountain
                  Energy, to Questions of Hon. John D. Dingell
    General Questions
        Question 1. Do you support federal legislation to mandate retail
    competition by a date certain? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 2. Should there be an explicit environmental component of
    restructuring legislation? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Emissions
        Question 3. Do you believe that federal restructuring legislation
    is the best avenue for curing the problems recently raised by the
    courts with the Clean Air Act? (Please answer ``Yes'' or ``No.'')
        Response. No opinion.
        Question 4. Do you support the inclusion of emissions control
    legislation as part of a restructuring bill? (Please answer ``Yes'' or
    ``No.'')
        Response. Yes. It is a desirable, though not necessary, component
    of restructuring legislation.
        Question 5. Several parties have suggested that federal
    restructuring legislation contain language to cap utility emissions and
    trade emissions allowances. Under such a program, utilities would be
    assigned allowances based upon their emission rate per megawatt hour of
    electricity generated. This raises questions about the types of
    generation sources that should be allowed to earn credit in such a
    program. In order to clarify, please specify whether the following
    types of generation should be credited in such a cap and trade program:
        a) waste-to-energy facilities be included? (Please answer ``Yes''
    or ``No.'')
        Response. No.
        b) nuclear generating facilities be included? (Please answer
    ``Yes'' or ``No.'')
        Response. No.
        c) small hydroelectric generating facilities be included? (Please
    answer ``Yes'' or No.'')
        Response. Yes.
        Question 6. If emissions control language was included in
    restructuring legislation, should such language regulate emissions of:
        a) NOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        b) SOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        c) mercury? (Please answer ``Yes'' or ``No.'')
        Response. No.
        d) carbon? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Renewable Resources
        Question 7. Should federal restructuring legislation contain a
    Renewable Portfolio Standard? (Please answer ``Yes'' or ``No.'')
        Response. Yes, but with an important qualification: It should be
    carefully structured to be compatible with, and support, a competitive
    market for renewable resources. Guidelines for such an RPS should
    include the following:

     The RPS should be based on energy sold, not capacity
            available.
     The sources of generation that would qualify for an RPS should
            include: wind, biomass, sun, geothermal, wave and tidal.
     The RPS should be subject to an appropriate limit on costs and
            should incorporate the use of a credit system.
     If the RPS applies to suppliers rather than generators, the
            RPS standard should apply to all product offerings, not merely
            the overall mix of generation provided by the supplier.
        Question 8. What percent of a providers' electricity supply should
    be required to come from renewable resources? (Please answer with a
    number between 0 and 100 percent.)
        Response. There is no magic number; what percentage is reasonable
    will vary depending on the qualifying resources. It should start out
    low, based on an assessment of currently available resources, and ramp
    up over time, to perhaps 5-10 percent between 2010 and 2015.
        Question 9. Should the required percentage increase over time?
    (Please answer ``Yes'' or ``No.'')
        Response. Yes. See response to Question 8.
        Question 10. Should a Renewable Portfolio Standard sunset after a
    number of years? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 11. If a Renewable Portfolio Standard is included in
    federal restructuring legislation, should it apply to the Tennessee
    Valley Authority, the federal Power Marketing Administrations,
    municipal utilities and rural cooperatives if it is required for other
    electricity suppliers? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 12. Should hydroelectric facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. No for purposes of an RPS, since the promise of new hydro
    is not the same as that of other new renewable resources. Hydro should
    be considered a renewable resource for disclosure purposes, however.
        Question 13. Should waste-to-energy facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. Landfill gas facilities should qualify; municipal solid
    waste incineration facilities should not quality.
    Green Labeling
        Question 14. Should restructuring legislation require an
    electricity provider to disclose information about its generation
    sources and their impact on the environment? (Please answer ``Yes'' or
    No.'')
        Response. Yes.
        Question 15. Should providers be required to disclose to customers
    the percentages of each fuel used in generating the electricity being
    offered for sale? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 16. Should providers be required to disclose data about
    the emissions associated with the electricity being offered for sale?
    (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 17. Should providers be required to disclose information
    about other environmental impacts such as fish mortality? (Please
    answer ``Yes'' or ``No.'')
        Response. No.
        Question 18. Who should bear the burden of supplying information to
    retail customers: marketers, generators, or distributors? (Please
    choose one.)
        Response. Marketers, including utilities acting as default service
    providers.
        Question 19. Who should enforce environmental disclosure
    provisions: The Environmental Protection Agency, The Department of
    Energy, The Federal Energy Regulatory Commission, The Federal Trade
    Commission, or individual states? (Please choose one.)
        Response. The Federal Trade Commission is probably the appropriate
    agency to charge with enforcement.
        Question 20. What types of penalties are appropriate for violations
    of any ``green labeling'' requirement?
        Response. Fines and injunctive relief
    Public Benefits Fund
        Question 21. While many states require utilities to undertake
    programs that promote energy efficiency, the fate of these programs is
    unclear in a competitive electricity market. One proposed solution is a
    charge that would be placed on all customers and used to fund energy
    efficiency and conservation programs. For example, the Administration's
    legislation proposes that the revenue from such a charge be placed into
    a ``public benefits fund'' that would be disbursed to states on a
    matched basis so that the states can pay for low income, energy
    efficiency and conservation programs. This prompts a number of
    questions:
        a) Should the agency administering the charge be authorized to
    adjust it? (Please answer ``Yes'' or ``No.'')
        Response. Probably not.
        b) In your opinion, would some states benefit from a public
    benefits fund more than others? (Please answer ``Yes'' or ``No.'')
        Response. No opinion.
        c) In your opinion, would some states pay more into a public
    benefits fund than others? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
                                     ______

        Responses of Thomas R. Casten, President and CEO, Trigen Energy
               Corporation, to Questions of Hon. John D. Dingell
    General Questions
        Question 1. Do you support federal legislation to mandate retail
    competition by a date certain? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 2. Should there be an explicit environmental component of
    restructuring legislation? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Emissions
        Question 3. Do you believe that federal restructuring legislation
    is the best avenue for curing the problems recently raised by the
    courts with the Clean Air Act? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 4. Do you support the inclusion of emissions control
    legislation as part of a restructuring bill? (Please answer ``Yes'' or
    ``No.'')
        Response. Yes.
        Question 5. Several parties have suggested that federal
    restructuring legislation contain language to cap utility emissions and
    trade emissions allowances. Under such a program, utilities would be
    assigned allowances based upon their emission rate per megawatt hour of
    electricity generated. This raises questions about the types of
    generation sources that should be allowed to earn credit in such a
    program. In order to clarify, please specify whether the following
    types of generation should be credited in such a cap and trade program:
        a) waste-to-energy facilities be included? (Please answer ``Yes''
    or ``No.'')
        Response. Yes.
        b) nuclear generating facilities be included? (Please answer
    ``Yes'' or ``No.'')
        Response. Yes.
        c) small hydroelectric generating facilities be included? (Please
    answer ``Yes'' or No.'')
        Response. Yes.
        Question 6. If emissions control language was included in
    restructuring legislation, should such language regulate emissions of:
        a) NOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        b) SOX? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        c) mercury? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        d) carbon? (Please answer ``Yes'' or ``No.'')
        Response. No.
    Renewable Resources
        Question 7. Should federal restructuring legislation contain a
    Renewable Portfolio Standard? (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 8. What percent of a providers' electricity supply should
    be required to come from renewable resources? (Please answer with a
    number between 0 and 100 percent.)
        Response. Let pollution allowances be sold by renewables, leave
    market to decide.
        Question 9. Should the required percentage increase over time?
    (Please answer ``Yes'' or ``No.'')
        Response. No.
        Question 10. Should a Renewable Portfolio Standard sunset after a
    number of years? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 11. If a Renewable Portfolio Standard is included in
    federal restructuring legislation, should it apply to the Tennessee
    Valley Authority, the federal Power Marketing Administrations,
    municipal utilities and rural cooperatives if it is required for other
    electricity suppliers? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 12. Should hydroelectric facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 13. Should waste-to-energy facilities qualify as renewable
    sources of electricity? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
    Green Labeling
        Question 14. Should restructuring legislation require an
    electricity provider to disclose information about its generation
    sources and their impact on the environment? (Please answer ``Yes'' or
    No.'')
        Response. Yes.
        Question 15. Should providers be required to disclose to customers
    the percentages of each fuel used in generating the electricity being
    offered for sale? (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 16. Should providers be required to disclose data about
    the emissions associated with the electricity being offered for sale?
    (Please answer ``Yes'' or ``No.'')
        Response. Yes.
        Question 17. Should providers be required to disclose information
    about other environmental impacts such as fish mortality? (Please
    answer ``Yes'' or ``No.'')
        Response. No.
        Question 18. Who should bear the burden of supplying information to
    retail customers: marketers, generators, or distributors? (Please
    choose one.)
        Response. Generators.
        Question 19. Who should enforce environmental disclosure
    provisions: The Environmental Protection Agency, The Department of
    Energy, The Federal Energy Regulatory Commission, The Federal Trade
    Commission, or individual states? (Please choose one.)
        Response. DOE.
        Question 20. What types of penalties are appropriate for violations
    of any ``green labeling'' requirement?
        Response. Apply previous laws.
    Public Benefits Fund
        Question 21. While many states require utilities to undertake
    programs that promote energy efficiency, the fate of these programs is
    unclear in a competitive electricity market. One proposed solution is a
    charge that would be placed on all customers and used to fund energy
    efficiency and conservation programs. For example, the Administration's
    legislation proposes that the revenue from such a charge be placed into
    a ``public benefits fund'' that would be disbursed to states on a
    matched basis so that the states can pay for low income, energy
    efficiency and conservation programs. This prompts a number of
    questions:
        a) Should the agency administering the charge be authorized to
    adjust it? (Please answer ``Yes'' or ``No.'')
        Response. No.
        b) In your opinion, would some states benefit from a public
    benefits fund more than others? (Please answer ``Yes'' or ``No.'')
        Response. No.
        c) In your opinion, would some states pay more into a public
    benefits fund than others? (Please answer ``Yes'' or ``No.'')
        Response. No.

                           CONSUMER PROTECTION ISSUES

                                  ----------

                            WEDNESDAY, MAY 26, 1999

                      House of Representatives,
                                 Committee on Commerce,
                              Subcommittee on Energy and Power,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10:03 a.m., in
    room 2123, Rayburn House Office Building, Hon. Joe Barton
    (chairman) presiding.
        Members present: Representatives Barton, Stearns, Largent,
    Rogan, Shimkus, Shadegg, Pickering, Fossella, Bryant, Hall,
    McCarthy, Sawyer, Markey, Pallone, Gordon, and Dingell (ex
    officio).
        Staff present: Cathy Van Way, majority counsel; Joe
    Kelliher, majority counsel; Ramsen Betfarhad, majority counsel;
    Jeff Krilla, majority counsel; Miriam Erickson, majority
    counsel, Donn Salvosa, legislative clerk; Sue Sheridan,
    minority counsel; and Rick Kessler, professional staff member.
        Mr. Barton. We are ready to start. All of our witnesses are
    here, but we need at least one more member for a quorum. So as
    soon as we get another member we will start. But the record
    will show the witnesses were all here at 10 a.m.
        The subcommittee will come to order.
        Today the Subcommittee on Energy and Power will examine the
    issue of consumer protection in a competitive electric market.
    This is either the fourth or the fifth in a series of hearings
    on the issue of electricity restructuring and deregulation.
    Competitive markets offer tremendous benefits to consumers in
    the form of lower prices, improved services, and technological
    innovation. That is true for electricity markets just as it is
    true for other markets. There is a need to ensure that
    consumers will not be denied those benefits by fly by night
    electric suppliers, by false and misleading advertising, and by
    unfair or deceptive trade practices. This is something that
    every member of the subcommittee agrees with.
        I am pleased to see that the States that have so far opened
    their electricity retail markets have addressed consumer
    protection issues. These States have set licensing for criteria
    to keep out fly by night electric suppliers. They have
    established minimum consumer protection provisions and
    prohibited unfair trade practices. I want to commend in
    particular the State of California which has set tough
    licensing standards for electric suppliers. States have also
    taken vigorous enforcement action against electric suppliers
    that have acted unscrupulously. In one case, the State of
    California barred an electric supplier from selling electricity
    for unfair trade practices. The State of Pennsylvania ordered
    utilities to cease running advertisements that it found were
    false and misleading.
        The question before the subcommittee today is how to ensure
    consumer protection at the Federal level as we move toward a
    competitive electric market. I look forward to hearing from our
    witnesses about the adequacy of existing State and Federal
    consumer protection laws. States have consumer protection laws
    on the books that protect consumers from unfair or deceptive
    practices. Similarly, at the Federal level, the Federal Trade
    Commission regulates and oversees Federal unfair and deceptive
    trade practice regulations. We need to know whether these laws
    that are already on the books are adequate. If not, I hope that
    our witnesses will offer specific suggestions on how they can
    be strengthened.
        Another question that needs to be discussed today is
    exactly what the interaction between the Federal and State
    roles should be. It is my view that the bulk of consumer
    protection issues should be addressed at the State level since
    the States have demonstrated that they have both the
    willingness and the authority to address consumer protection
    issues. However, there may be a need to include some consumer
    protection issues in a Federal comprehensive bill. Two consumer
    protection provisions that have been proposed in a number of
    bills already introduced are uniform Federal information
    disclosure standards and anti-slamming provisions. I am
    inclined to believe that these provisions should be included in
    a Federal restructuring bill. Electricity markets are regional
    in scope and a uniform information disclosure standard would be
    easier for consumers to understand than 50 separate standards.
    For the same reason that uniform disclosures are used in food
    products, appliances and consumer credit, it makes sense that
    they could be used in electricity if we deregulate at the
    Federal level. Also, given the experience in our
    telecommunications legislation that this subcommittee, the full
    committee, helped pass several years ago, I believe that
    Congress should include some provisions to prohibit slamming in
    electricity.
        There is one other issue that we may need to address and
    that is the issue of consumer privacy. Utilities have a lot of
    information on consumers today, including the amount of
    electricity that we use, our billing history, our payment
    history. While I recognize that there is a need for some of
    that information to be disseminated so that consumers can
    receive competitive offers from alternative electricity
    suppliers, I believe that we must take every effort to protect
    legitimate consumer privacy. I don't think that the consumers'
    telephone numbers should be disclosed by utilities. If an
    electricity supplier in this new competitive environment in the
    State of Texas wants my business, they can send me a letter. I
    don't need any phone calls during supper time. I also think
    that consumer billing and payment history should not be
    disclosed or should only be disclosed under very unusual
    circumstances. If someone has had a problem paying their
    electricity bill, that is between themselves, their supplier,
    and possibly, the credit company. No one else has an automatic
    right to know, in my opinion.
        Let me emphasize that consumer protection issues are not
    new issues. Unscrupulous firms have always tried to take
    advantage of unwary consumers. For decades, the States and the
    Federal Government have enacted legislation to protect
    consumers and those laws have been and need to be continuously
    and vigorously enforced. These issues may be new to the
    electricity business, but they are not new to the State and
    Federal consumer or to the State and Federal agencies in charge
    of overseeing these issues. I look forward to hearing from our
    witnesses today on the issue of consumer protection.
        With that, I would like to recognize the distinguished
    ranking member, Congressman Hall, for an opening statement.
        Mr. Hall. Mr. Chairman, thank you for your statement that
    adequately covered the subject, so I can be brief. Today's
    hearing on consumer protection issues will give us a wide
    variety of views on what needs to be done at the Federal level
    to ensure that electric utility customers have accurate and
    current information. They are going to have to be able make
    some decisions about electricity purchases in a restructured
    electric marketplace, so this testimony, combined with the
    testimony that I hope we will hear from State witnesses, ought
    to give us some idea of how we can divide this issue between
    what should be primarily State and what should be primarily
    Federal responsibility.
        I always prefer that we be regulated and governed and
    examined and treated by people with 50 different uniforms
    rather than those with just one. So, my questions today are
    going to concentrate on that Federal/State interface; that is,
    the relative roles that each level of government should play in
    making certain that there is a cop on the beat and who watches
    the emerging marketplace and has the ability to protect
    customers from fraud and from abuse. I think that is the major
    purpose of this hearing today and I thank you, Mr. Chairman,
    and I yield back the balance of my time.
        Mr. Barton. Thank you, Congressman. Before we recognize Mr.
    Bryant, we have been working our little timing system, and I am
    told that there is an electrician standing by and we have got
    to see if this thing works. The red light works, but the green
    light doesn't work. Where is the electrician? This is high-tech
    Congress, isn't it? See if you can get the green light to work.
        Mr. Hall. I think you used 16 minutes, Mr. Chairman.
        Mr. Barton. That is probably true. Well, let's give him a
    second. Try it again. The red light works. All right. To be
    continued.
        The Chair will recognize Congressman Bryant from Tennessee
    for an opening statement.
        Mr. Bryant. I thank the chairman and I also thank the
    ranking member for their comments. I, too, believe that
    consumer protection is largely a State issue. I believe that
    the States that have already initiated retail competition have
    enacted consumer protections including consumer education,
    slamming protection, and universal service. Already, as the
    chairman has mentioned also, there are a wide variety of
    Federal protection statutes under the Federal Trade Commission
    including the Equal Credit Opportunity Act, the Fair Credit
    Reporting Act, the Truth-in-Lending Act, the Fair Debt
    Collection Practices Act, as well as the Telemarketing and
    Consumer Fraud and Abuse Prevention Act.
        There are some areas that, again, other members have
    already alluded to where there could be a Federal interest and
    Federal role. Certainly, standardized information disclosure
    that was present in one of last year's bills, the slamming
    provisions, consumer education, again, universal service,
    licensing of suppliers and certainly the very powerful issue of
    privacy. But, I look forward to this very distinguished panel
    testifying today and would yield back the balance of my time.
        Mr. Barton. Thank you, Congressman Bryant. We now recognize
    Mr. Sawyer of Ohio, who is now officially the co-chairman of
    the working crew on electricity restructuring.
        Mr. Sawyer. Thank you, Mr. Chairman. I think it is probably
    prudent that I finish reading my opening statement before I
    submit it or even read it to the rest of the panel. So I will
    do that and then hand it in. Thank you very much.
        Mr. Barton. All right, we will defer and recognize the
    gentleman from Illinois, Mr. Shimkus, who had a good day of
    baseball practice today. Hit one over the left fielder's head,
    I believe.
        Mr. Shimkus. No, centerfield.
        Mr. Barton. Centerfield.
        Mr. Shimkus. Thank you, Mr. Chairman. I am looking forward
    to this testimony. As many of you, and as the chairman duly
    notes many times, Illinois has a restructuring bill. Many of
    the consumer protection issues that we will be addressing today
    is included in an Illinois bill. Everywhere from energy
    assistance, to get the redlining, slamming, misleading
    marketing practices, consumer education programs. So, we are
    really proud of that provision and ensuring that everyone is
    going to be served.
        I guess the question that I will be looking for as we move
    on a Federal bill is to make sure that these important issues,
    that they are really warranted, and that to ensure that if
    States have moved aggressively in these areas that we protect
    what the States have done in their consumer approach. Also, I
    will be investigating how current Federal law may apply where
    there may not be a need for further restrictive language in our
    restructuring bill.
        With that, Mr. Chairman, I yield back my time.
        Mr. Barton. Thank you. The Chair would recognize Mr.
    Pallone of New Jersey for an opening statement.
        Mr. Pallone. Thank you, Mr. Chairman, and I wanted to say I
    appreciate your keeping this hearing to one panel and your
    decision to hold the hearing with the panel of State utility
    regulators on a separate date. My home State of New Jersey, as
    I mentioned before, recently enacted restructuring legislation
    that will enable all State residents to choose their
    electricity supplier by August 1. The New Jersey plan
    recognizes the nexus between the electric power industry and
    the need for consumer protection and to this end, New Jersey's
    legislation contains disclosure provisions including
    environmental disclosure.
        In the near future I plan to introduce an expanded version
    of my restructuring bill which will include meaningful and
    enforceable disclosure provisions, a kind of truth-in-labeling
    law for electric energy, among other provisions. Consumers, I
    believe, want and deserve to know the price, source and
    environmental content of the energy products and services they
    are purchasing. And, I will be interested to hear from today's
    panelists their opinion of what elements should be handled by
    the States versus those that the Federal Government should
    handle. I also hope our panelists will provide their opinions
    regarding the administration's opt-out provision, disclosure
    provisions, universal service, and public systems benefits
    funds.
        And again, Mr. Chairman, I want to thank you for holding
    this hearing and I look forward to the witnesses.
        Mr. Barton. Thank you. The Chair would recognize the
    gentleman from Oklahoma for an opening statement, who was also
    at baseball practice today and played very well at shortstop.
        Mr. Largent. Thank you, Mr. Chairman. It is easier to play
    good at shortstop when you don't have any balls hit to you.
        Thanks for having this hearing and I look forward to the
    testimony that we are going to hear from this distinguished
    panel. It is time. I think that there are some issues that we
    need to talk about with this panel and hopefully get answers to
    issues on reliability, transmission issues, what States are
    already doing, successful things that have taken place, and
    those that have not been so successful, to help shape where we
    go at the Federal level.
        And I look forward to the testimony. Thank you, Mr.
    Chairman. I yield back.
        Mr. Barton. Thank you, and I also understand that you and
    Congressman Markey are going to introduce your legislation
    today, and I am sure that would be of interest to this
    audience. So I look forward to that.
        Mr. Largent. We are selling tickets. It is at 1:30.
        Mr. Barton. Be there.
        The gentlelady from Missouri is recognized, Ms. McCarthy,
    for an opening statement.
        Ms. McCarthy. Thank you very much, Mr. Chairman, for
    holding this hearing. I believe this issue is, indeed, critical
    as we move forward. Many States like my own, Missouri, have
    taken a look through their public service commissions or other
    regulatory bodies into this question of consumer protection,
    and the task force that the Missouri Public Service Commission
    wrote includes issues like the development of rules containing
    a minimum, their affable, enforceable uniform standards of
    disclosure that will allow consumers to easily compare items of
    interest such as price, price variability, contract terms and
    conditions, and other relevant factors.
        I came to this committee and this Congress about the time
    we were deregulating telecommunications, and I am living
    through the frustrations of consumers who can't read their
    phone bills anymore without a great deal of frustration and
    confusion. So, the critical component I think that you will be
    addressing today is essential because this is like the last
    great deregulation that Congress is going to do. We have to do
    this one right and well or I don't believe the consumers will
    take kindly to us.
        So, I look forward very much to your testimony and wisdom
    on this point. And again, Mr. Chairman, thank you very much for
    your leadership in this area.
        Mr. Barton. Thank you. Thank you, Congresswoman. Does Mr.
    Sawyer want to make an opening statement? He was here and then
    he wanted to defer.
        Mr. Sawyer. No, Mr. Chairman.
        Mr. Barton. No? Okay. Does Congressman Shadegg wish to make
    an opening statement?
        Mr. Shadegg. Mr. Chairman, I simply want to thank you for
    holding this, yet another in a series of hearings. I think
    these issues are critically important. I began my service on
    this committee by expressing my view that it was important for
    Congress, on behalf of the American people, to deregulate
    energy; that, indeed, technology is forcing us into that
    position; that we can, in fact, deliver electricity to
    consumers at lower prices; that we can give them the option of
    buying electricity that fits their needs; that we can, for
    example, give them the opportunity to buy green power, if they
    choose to buy green power, and do things to protect the
    environment and use their own financial resources to push
    public policy in that direction, and that there are many
    opportunities to be achieved by deregulating the energy
    industry.
        I am somewhat dispirited by the fact that in the course of
    these hearings, and in my discussions with industry
    representatives on every side of this issue, I have discovered
    that there are very, very, very significant hurdles to be
    overcome before we are going to be able to pass legislation to
    deregulate the energy industry. It seems to me that one of the
    biggest problems is that, unlike the other areas where we have
    engaged in deregulation, the government itself is deeply
    involved in this marketplace. In airlines, you didn't have the
    government airline competing against some privately owned
    airlines, and therefore, deregulation was not as difficult as
    it is here. The same is true of trucking, for example.
        But, notwithstanding the fact that we have some great
    challenges, notwithstanding the fact that I think one of the
    biggest challenges is to figure out how to level the playing
    field between public power and private power, I believe we must
    rise to the occasion. I think that it is vitally important that
    we put in the energy and put in the effort and achieve
    legislation in this area. A part of that legislation has to be
    consumer protection. I certainly believe in a marketplace, but
    I do not believe that a marketplace functions if people cannot
    understand the products they are buying, can't make informed
    decisions one way or the other.
        Now, I am generally not in favor of complex government
    regulation and detailed mandates on any business, but when it
    comes to telling business you must tell the straight scoop to
    your customers, they must be able to read their bills; they
    must be able to figure out what they are buying and what they
    are paying for and what they may choose not to buy and not to
    pay for. I think those are appropriate instructions for the
    government to give to the private sector in terms of creating a
    truly competitive marketplace. So, I think this is a vitally
    important hearing, and I commend you, Mr. Chairman, for holding
    it.
        Mr. Barton. Thank you, Congressman. Seeing no other members
    present, the Chair would ask unanimous consent that all members
    not present have the requisite number of days to put a
    statement in the record at this point in time. Hearing no
    objection, so 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 Mr. Chairman. I would like to commend you for your
    dedication to electricity competition and the pragmatic approach taken
    to ensure that all aspects of deregulation are explored and debated.
        I would also like to take this opportunity to welcome a fellow
    Floridian, Mr. Blake Casper from Tampa. I look forward to his
    perspective as both a residential and business consumer.
        The hearing before us today focuses on one of the most important
    aspects of electric utility deregulation--Consumer Protection. In fact,
    consumers are the reason why we are working to assist the states in
    transforming a heavily regulated monopoly into a competitive,
    deregulated industry.
        Such a transition is not without risk--but the rewards of
    competition can easily outweigh the potential risks if we are prudent
    about adequate consumer safeguards. In addressing issues such as
    information disclosure, licensing requirements, consumer education, and
    protection against deceptive business practices; we must be mindful of
    the following questions:

     How far should consumer protection extend?
     Are current federal laws able to provide adequate protection?
            If not, what additional authority should we as legislators
            grant the federal government?
     Finally, should the states, who have the lead role in retail
            competition, also retain a lead role in consumer protection?
        Mr. Chairman, I look forward to exploring these and other questions
    and I welcome this panel of witnesses who undoubtedly will provide us
    with invaluable information.
        Thank you.
                                     ______

     Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
        Mr. Chairman, I commend you for holding this hearing on consumer
    protection issues in a competitive electricity power market. I have
    said it in the past, I shall say it again now, ALL consumers must be
    able to choose their electricity provider and enjoy ALL the benefits
    that competition holds for them. This is the greatest consumer
    protection of all.
        The Commerce Committee, as a custodian of consumers' rights, has
    pursued with vigor its duty to protect consumers' rights. The Committee
    has been vigilant in protecting electricity power consumers' rights in
    a fully regulated market. The Committee has no lesser resolve in
    protecting electricity power consumers in a fully competitive market,
    or during the transition. We must not let the benefits of a competitive
    electricity power market be highjacked by ``bad'' acts of a few
    unscrupulous folks.
        As consumers, we must have access to information that is free from
    falsehoods, misrepresentations, or other deceptions in order to make
    informed purchasing decisions. Since most consumers rely on advertising
    as the primary source from which they obtain information about products
    and services--electricity power services is no exception--ensuring the
    integrity of advertising should be a priority. In a competitive
    electricity power market, consumers will be bombarded with a wide range
    of price and service offers, contract terms, and service claims such as
    environmental friendliness from a variety of information sources. All
    that may prove to be confusing and difficult to evaluate. For example,
    consumers may have trouble understanding what is ``green'' about a
    ``green power'' offering. Other consumer protection issues such as
    information privacy, slamming, and cramming that enjoyed little
    relevance in a fully regulated electricity power market will become
    relevant in a competitive market.
        States that have opened their markets to competition have tackled
    many, if not most, of those consumer protection issues. They have
    empowered either their Public Utility Commissions or Attorney Generals'
    Offices with the necessary power to address those issues. Consumer
    protection issues that escape scrutiny at the State level, are
    addressed by a number of existing federal consumer protection laws,
    most ably enforced by the Federal Trade Commission. If current federal
    laws, in turn, do not accord consumers the required safeguards, then we
    must act.
        I thank you Mr. Chairman and again commend you for holding this
    hearing. I am very pleased that the Members participating in the
    Members Working Group heard from former Representative Phil Sharp
    yesterday. I believe the Member Working Group is a fine example of
    bipartisanship and I commend Mr. Pickering and Mr. Barton, Mr. Sawyer
    and the others for working so hard on an issue of such importance to
    the Committee.
        So, I yield back my time and I look forward to hearing the
    testimony of the witnesses.

        Mr. Barton. We want to welcome our panel today. We have got
    a distinguished group of individuals. We are going to start at
    my left, your right, with Ms. Elaine Kolish and then we will
    work right down the row. We are going to give each of you 5
    minutes, and since we don't have our timer back, we have a
    little clock up here that we will click. So you will just have
    to trust me on the click and, alternatively, if two-thirds of
    the members present hold up a sign that says we have heard
    enough, then you know that your time has expired.
        Congressman Hall says you don't have to take your full 5
    minutes if you don't want too.
        So we are going to start with Ms. Elaine Kolish, who is the
    Associate Director of the Bureau of Consumer Protection for the
    Federal Trade Commission. Ms. Kolish, we welcome you to the
    subcommittee. Your statement is in the record in its entirety,
    and you are recognized for 5 minutes.

     STATEMENTS OF ELAINE D. KOLISH, ASSOCIATE DIRECTOR, BUREAU OF
       CONSUMER PROTECTION, FEDERAL TRADE COMMISSION; MARY ELLEN
     BURNS, ASSISTANT ATTORNEY GENERAL IN CHARGE, BUREAU OF ENERGY
       AND TELECOMMUNICATIONS; HARVEY MICHAELS, CHIEF EXECUTIVE
    OFFICER, NEXUS ENERGY SOFTWARE; BLAKE CASPER, CASPERS COMPANY;
     JACK BRICE, MEMBER, BOARD OF DIRECTORS, AARP; MARK N. COOPER,
    DIRECTOR OF RESEARCH, CONSUMER FEDERATION OF AMERICA; AND BETTY
      JO TOCCOLI, CHAIR, SMALL BUSINESS ALLIANCE FOR FAIR UTILITY
                              DEREGULATION

        Ms. Kolish. Thank you, Mr. Chairman and members of the
    committee.
        Mr. Barton. You need to really pull that microphone close
    to you and speak clearly.
        Ms. Kolish. Thank you, Mr. Chairman and members of the
    committee. The FTC is pleased to appear before you today to
    present testimony concerning the important topic of consumer
    protection in a deregulated power market. The FTC has been
    preparing for its role in deregulation by educating ourselves
    about the power industry. For example, Commission staff have
    been attending meetings and conferences of the National
    Association of State Utility Commissioners, the National
    Association of State Utility Consumer Advocates and meetings
    sponsored by the National Association of Attorneys General.
        We have also been working with our colleagues at the
    Federal level such as DOE and EPA and we worked with them to
    produce this booklet called A Blueprint for Consumer Protection
    which has a compilation of State and Federal consumer
    protection laws and is designed to help State decisionmakers
    who have not yet done deregulation. We have also shared our
    knowledge of consumer protection issues with State officials by
    providing them comments on various consumer protection measures
    that they have been considering. To further educate ourselves,
    and to assist States in examining consumer protection issues
    and industry trends, on September 13 and 14 the Commission will
    hold a public workshop on market power and consumer protection
    considerations.
        I would like to briefly explain the FTC's jurisdiction and
    authority in this area. We are a law enforcement agency with a
    statutory mandate that covers a broad spectrum of the American
    market, including the power market. The keystone of the FTC's
    consumer protection law enforcement effort is section 5 of the
    FTC act which prohibits unfair or deceptive acts or practices
    in commerce. The scope of section 5 encompasses a wide range of
    business practices including advertising, marketing, billing,
    and collection. The Commission prosecutes deceptive activity
    either through administrative law enforcement actions or
    through Federal district court actions enjoining deceptive
    practices and seeking redress for injured consumers.
        Experience has taught us that competition among 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 deregulation gives way to
    competition. These benefits, however, will not be achieved
    without vigilant consumer protection.
        One of our first priorities has been to educate energy
    marketers about existing consumer protection laws which may be
    new to them. But, our actions will not be limited to education.
    The Commission anticipates that as electric power markets
    become competitive it will actively pursue consumer protection
    activities in two major areas. The first is the policing of
    advertising claims, particularly claims about the environmental
    attributes of the power being sold. The second is the
    prosecuting of deceptive or fraudulent business practices.
        I would like to first talk a bit about advertising in this
    market. We anticipate that advertising will become extremely
    important in this industry when widespread deregulation occurs
    because an estimated $200 billion dollars in annual revenues
    would be at stake. Currently, advertising by this market is a
    small fraction of that for other consumer commodities, but it
    is growing rapidly. For example, in 1997 advertising
    expenditures grew 65 percent, and in 1998, another 12 percent.
        In a competitive market, power marketers are likely to make
    a broad range of claims. We have already seen the use of
    environmental advertising in those States that have opened
    their markets to retail competition. Many consumers are
    interested in the environmental qualities of the power they
    buy, and some consumers have indicated that they are willing to
    pay a premium for so-called environmentally friendly power.
        There is, however, a potential for abuse of environmental
    claims because of the premium price and because consumers
    cannot verify for themselves any of those advertising claims.
    The types of environmental claims already appearing in
    electricity ads include claims about the level of emissions of
    a product, the sources it is produced from, such as nuclear
    free or all solar, the activities of the company selling it who
    support environmental organizations, or the overall affect on
    the environment; like helps prevent global warming. All of the
    FTC's general principles about advertising will apply to these
    kinds of claims. That is, advertising claims must be truthful,
    they must not be misleading, and they must be substantiated by
    appropriate evidence at the time that they are made.
        The FTC's existing Guides for the Use of Environmental
    Marketing Claims, which were developed for environmental claims
    about any type of product, will provide guidance to power
    marketers on acceptable advertising in this area. In addition,
    NAAG is developing similar green guidelines specifically for
    electricity. The intent of that project is to assist States in
    their efforts to encourage fair competition and to provide
    consistency among States in enforcing State truth-in-
    advertising laws. The FTC has been pleased to participate in
    NAAG's process.
        Mr. Barton. We have had the first click up here, so try to
    summarize in the next minute if you could please, ma'am.
        Ms. Kolish. Our other chief concern is, as you have
    mentioned, slamming, which we have seen in the
    telecommunications industry and possibly cramming as well,
    which is the fifth most common complaint we received last year;
    that is, placing unauthorized charges on consumer's telephone
    bills, and we are concerned about that in this industry too.
    But, we stand ready to meet our consumer protection and
    competition law enforcement responsibilities.
        [The prepared statement of Elain D. Kolish follows:]
      Prepared Statement of Elaine D. Kolish, Associate Director for the
     Division of Enforcement, Bureau of Consumer Protection, Federal Trade
                                   Commission
                                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 consumer protection in a deregulated
    electric power market. I will concentrate my remarks today on the
    Commission's likely consumer protection role as retail competition
    develops in the electric power industry.
        Three weeks ago, the Commission testified before this Committee
    regarding the impact of market power and the importance of competition
    on the future of the electric power industry. More specifically, the
    Commission stated that ``competition between market participants will
    ordinarily provide consumers with the benefits of low prices, good
    products, and greater innovation.'' 1 We believe that the
    antitrust and consumer protection parts of our mission are closely
    integrated because consumers will not benefit from competitive markets
    unless they are also able to make confident purchase choices based on
    complete and accurate information.
    ---------------------------------------------------------------------------
        \1\ Testimony of the Federal Trade Commission Before the Committee
    on Commerce, Subcommittee on Energy and Power at 2 (May 6, 1999).
    ---------------------------------------------------------------------------
        The Commission has been preparing for a deregulated electric power
    market over the past several years, beginning with our self-education
    by talking to industry members and to state regulators. For example,
    Commission staff have been actively participating in conferences and
    meetings of the National Association of Regulatory Utility
    Commissioners (NARUC), the National Association of State Utility
    Consumer Advocates (NASUCA), and in meetings sponsored by the National
    Association of Attorneys General (NAAG).2 As we have done
    with the state competition regulators, we in turn have shared our
    knowledge of consumer protection issues with state officials by, among
    other things, submitting written comments to various states about
    consumer protection issues they were considering.3 We are
    also participating in NAAG's process to develop environmental marketing
    guides for electricity. In addition, to further assist states in
    examining consumer protection issues and to identify industry trends as
    states deregulate their electricity markets, the Commission will hold a
    public workshop on September 13-14, 1999, on market power and consumer
    protection considerations in restructuring the electric power industry.
    ---------------------------------------------------------------------------
        \2\ For example, during 1997-1998, Wisconsin Attorney General James
    Doyle, then-President of NAAG, made the theme of his presidency
    consumer protection and competition issues in the deregulated utility
    markets. FTC staff attended NAAG hearings held around the country to
    examine these issues.
        \3\ These comments may be found on the Commission's website at
    . Other federal agencies also have been
    engaged in efforts to assist state decision makers about consumer
    protection issues that are relevant in a deregulated environment. The
    Department of Energy has released a report entitled ``Retail Electric
    Competition: A Blueprint for Consumer Protection,'' that
    comprehensively reviews the variety of consumer protection issues
    raised by retail electric competition, including the various state laws
    in effect in this area. FTC staff assisted DOE with this publication by
    reviewing those sections addressing FTC laws and regulations.
    ---------------------------------------------------------------------------
                           ii. the ftc's jurisdiction
        The FTC is a law enforcement agency whose statutory authority
    covers a broad spectrum of the American economy, including the electric
    power industry. The keystone of the FTC's consumer protection law
    enforcement effort is Section 5 of the FTC Act, which prohibits
    ``unfair or deceptive acts or practices in or affecting commerce.''
    4 The scope of Section 5 encompasses a wide range of
    business practices, including advertising, marketing, billing and
    collection. The Commission takes action against deceptive activity
    under Section 5 either through administrative law enforcement actions
    or through federal district court actions seeking temporary and
    permanent injunctive relief and, ultimately, restitution to injured
    consumers.
    ---------------------------------------------------------------------------
        \4\ 15 U.S.C. Sec. 45.
    ---------------------------------------------------------------------------
        Experience demonstrates that competition among 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. These benefits, however, will not be achieved
    without, among other things, vigilant consumer protection.
        One of our first priorities has been to conduct business
    education.5 Because a competitive market will rely on
    advertising and promotional activities, we are engaged in efforts to
    educate electric power providers about existing consumer protection
    laws that will apply to their business practices. For example, staff
    recently participated in a conference the Edison Electric Institute
    (EEI) sponsored to educate its member utilities about consumer
    protection principles.6
    ---------------------------------------------------------------------------
        \5\ The Commission devotes significant resources to such activities
    in order to assist business who desire to comply with the law. We
    routinely provide advice and guidance on consumer protection issues,
    based on our substantial expertise in consumer protection issues
    arising in many different industries.
        \6\ ``Advertising--Labeling and Disclosure: Are You Aware of the
    Rules of the Road?'' EEI, May 3-4, 1999.
    ---------------------------------------------------------------------------
        The Commission anticipates that, as electric power markets become
    competitive, the agency will focus closely on two areas of consumer
    protection. The first is the policing of electric service providers'
    advertising claims, particularly claims about the price and
    environmental attributes of the power being sold. The second is the
    policing of unfair or deceptive business practices such as slamming or
    cramming.
                            iii. advertising claims
        In a competitive retail electricity market, electricity service
    providers are likely to make a broad range of advertising claims,
    including claims about the nature of the service provided, the company
    selling the electricity, and the price for the service. The FTC, as
    well as state attorneys general and public utility commissions, will be
    active in policing against false and misleading advertising for
    electricity products, just as they do now for most other products. Huge
    resources are at stake in this industry, whose total annual revenues
    are estimated at $200 billion. Although advertising by electric power
    companies is a small fraction of that for many other consumer products,
    it is growing rapidly as deregulation advances. For example, ad
    spending by the electric power industry grew 65% in 1997 and 12% in
    1998.7
    ---------------------------------------------------------------------------
        \7\ EEI EnergyADSmart, ``Electric Power Ad Spending Rises Slightly
    in 1998'' (May 1999), .
    ---------------------------------------------------------------------------
        We have already seen the use of environmental advertising in those
    states that have opened their markets to retail competition. Many
    consumers are interested in the environmental qualities of the electric
    power they buy, and some consumers are willing to pay a premium for
    ``environmentally friendly'' electric power. There is, however, a
    potential for abuse of environmental claims because of the premium
    price, and because consumers cannot verify any of these advertising
    claims themselves.8
    ---------------------------------------------------------------------------
        \8\ It may be worth noting how environmental claims can be made for
    what would appear to be a homogeneous, undifferentiated product. In
    general, customers receive electricity from power lines that are
    attached to a ``grid'' into which numerous generators, using a wide
    variety of fuel sources and generation systems, transmit their
    electricity. Once on the grid, all electricity is mixed together and
    its origins become indistinguishable. When a customer has a demand
    (``load'') for electricity--for example, to turn on lights--the amount
    needed to meet the load is, in effect, drained off the grid. The
    electricity passing through the circuit nearest to that customer's line
    goes to the customer's meter and meets the load.
        In this situation, it is impossible to ensure that electricity used
    by a particular customer came directly and exclusively from that
    customer's supplier or to verify the precise sources of the electrons
    used by the customer. It is possible, however, to track the financial
    transactions that occur as power is supplied to the grid and then to
    the customer. A customer's usage is measured at the customer's meter.
    The customer is billed for that usage, and the proceeds go to the
    retail supplier. The supplier must in turn pay the middlemen who
    provided the power, and the middlemen must pay the generators whose
    power they bought to service the supplier. In this way, the customer's
    usage is linked, through the financial process, to identifiable
    generation plants and the characteristics (e.g., fuel type, emissions,
    etc.) associated with those plants. Thus, it can reasonably be said
    that the customer's power purchase did result in electricity,
    possessing the characteristics advertised by the supplier, being
    generated and placed on the grid. Accordingly, companies may claim to
    be selling electricity generated by particular power sources or having
    particular environmental characteristics, so long as such claims are
    substantiated, even though the source of the electricity that arrives
    at the customer's house or workplace is impossible to determine.
        An alternative system for tracking electricity, referred to as a
    tradeable tags system, also is under consideration. In this system,
    each characteristic would be assigned a tag, which could be traded
    separately from the electricity itself. The system would work similarly
    to the system of sulphur emissions certificates administered by the
    Environmental Protection Agency. Although no state has yet adopted a
    tradeable tags system, it could be considered by some states in the
    future. See ``Uniform Consumer Disclosure Standards for New England,''
    National Council on Competition and the Electricity Industry (Jan.
    1998) .
    ---------------------------------------------------------------------------
        The types of environmental claims already appearing in electricity
    ads include:

     claims about the level of emissions of a product (``20% lower
            than average'' or ``doesn't pollute the air or water'');
     the sources it is produced from (``nuclear free'' or ``all
            solar'');
     overall effect on the environment (``help prevent global
            warming'' or ``reduce acid rain'' or ``green power''); or
     the activities of the company selling it (``we support
            environmental organizations'' or ``10% of profits go to
            rainforest preservation'').
        All of the FTC's general principles about advertising will apply to
    these kinds of claims; that is, advertising claims must be truthful and
    they must be substantiated with appropriate evidence at the time they
    are made. Under FTC case law, deception occurs ``if, first, there is a
    representation, omission, or practice that, second, is likely to
    mislead consumers acting reasonably under the circumstances, and third,
    the representation, omission, or practice is material.'' 9
    It also is deceptive to omit ``material information, the disclosure of
    which is necessary to prevent [a] claim, practice, or sale from being
    misleading.'' 10 Express claims, or deliberately made
    implied claims, used to induce the purchase of or payment for a
    particular product or service, are presumed to be
    material.11 Substantiation of claims about electricity
    sources or characteristics presents many challenges because new
    tracking systems must be developed for competitive markets, and they
    must provide a means of independent verification.
    ---------------------------------------------------------------------------
        \9\ Federal Trade Commission Policy Statement on Deception,
    appended to Cliffdale Assocs., Inc., 103 F.T.C. 110, 165, appeal
    dismissed sub nom. Koven v. FTC, No. 84-5337 (11th Cir. 1984)
    (Deception Statement).
        \10\ Id. at 177.
        \11\ Thompson Medical Co., Inc., 104 F.T.C. 648, 816 (1984), aff'd,
    791 F.2d 189 (D.C. Cir. 1986), cert. denied, 479 U.S. 1086 (1987).
    Information concerning the cost of a product or service also has been
    found to be material. Deception Statement at 174.
    ---------------------------------------------------------------------------
        The FTC's Guides for the Use of Environmental Marketing
    Claims,12 which were developed for environmental claims
    about any type of product, also will provide guidance to electricity
    marketers on acceptable advertising practices. In addition, NAAG is
    developing similar green guidelines for electricity. The intent of that
    project is to assist states in their efforts to encourage fair
    competition and to provide some consistency in enforcing truth in
    advertising laws in the electric power industry. The FTC staff has been
    involved in the process by submitting comments to NAAG and
    participating in their workshop.
    ---------------------------------------------------------------------------
        \12\ 16 C.F.R. Part 260 (FTC Green Guides).
    ---------------------------------------------------------------------------
        The Administration's recently introduced ``Comprehensive
    Electricity Competition Act'' (CECA), would authorize the Department of
    Energy to promulgate information disclosure regulations for advertising
    and promotional materials, in consultation with the Federal Energy
    Regulatory Commission, the Environmental Protection Agency and the FTC,
    requiring electricity suppliers and marketers to disclose in a standard
    format certain information about the electricity they sell, including
    price and other charges, the type of energy resource used to generate
    the electricity, and environmental attributes of the electricity, such
    as emissions levels. The FTC, along with state authorities, would be
    responsible for enforcing the disclosure requirements.
                   iv. unfair or deceptive business practices
        The second major area where the FTC expects to be active in a
    deregulated electricity market is in the policing of various
    unscrupulous business practices.13 Based on the deregulation
    of the telecommunications industry, we may see practices like
    ``slamming'' (changing a customer's electricity supplier without
    authorization) and ``cramming'' (placing unauthorized charges on a
    customer's bill) by dishonest electricity service providers as markets
    are deregulated. Indeed, the CECA bill provides for the FTC to issue
    and enforce regulations to combat slamming and cramming in the sale of
    electric power.
    ---------------------------------------------------------------------------
        \13\ Enforcement of consumer protection laws also promotes
    competition by helping to ensure that honest competitors are not denied
    entry to the market due to the actions of unscrupulous competitors and
    that they do not lose market share to unscrupulous competitors. See
    generally Neil W. Averitt & Robert H. Lande, Consumer Sovereignty: A
    Unified Theory of Antitrust and Consumer Protection Law, 65 Antitrust
    L.J. 713 (Spring 1997).
    ---------------------------------------------------------------------------
        The FTC has significant experience combating cramming on telephone
    bills, where unauthorized charges appear on a customer's bill,
    sometimes completely unrelated to phone service. Cramming was our fifth
    most common consumer complaint last year. In addition, the Commission
    has been active in taking law enforcement actions targeting billing
    practices associated with cramming. In FTC v. International Telemedia
    Associates, Inc., the Commission sued a billing aggregator and a vendor
    regarding charges for audio entertainment services delivered through
    collect callbacks.14 The complaint alleged that the
    defendants failed to disclose the costs of the services to the
    consumers that they induced to call toll-free numbers to obtain the
    callback. In FTC v. Hold Billing Services, Ltd., 15 the FTC
    targeted a billing aggregator and a vendor for practices allegedly
    resulting in unauthorized telephone bill charges for a package of
    services. The defendants allegedly induced consumers to enter a
    purported sweepstakes without adequately disclosing that they construed
    each completed entry form as an authorization to bill charges to the
    telephone number filled in on the form.
    ---------------------------------------------------------------------------
        \14\ No. 1-98-CV-1935 (N.D. Ga., filed July 10, 1998).
        \15\ No. SA-98-CA-0629 (W.D. Texas, filed July 15, 1998).
    ---------------------------------------------------------------------------
        Several contributing factors lead us to believe that cramming also
    may become a problem in deregulated electricity markets. Billing
    formats used by electricity providers are often confusing, and there
    are many line item charges that consumers may have trouble identifying,
    making it more difficult for consumers to notice fraudulent charges. In
    competitive markets, the billing system will have to accommodate
    multiple vendors, some of whom may offer services unrelated to
    electricity. Moreover, billing may be handled by aggregators or service
    companies rather than the utility or service providers themselves.
        The FTC also will be watching for other unscrupulous practices like
    pyramid schemes, investment scams and telemarketing violations in this
    newly deregulated market. The FTC already enforces rules and laws
    against these practices in other industries, and we may see them in
    electricity markets as well. For example, the FTC late last year
    settled charges with FutureNet, which was an alleged pyramid scheme.
    FutureNet was purporting to sell electricity service, even though at
    the time, no state had deregulated the sale of electric power to
    consumers. The FTC's settlement barred the defendants from engaging in
    pyramid schemes in the future, and required that they post a $1 million
    bond before engaging in any multilevel marketing plans in the
    future.16
    ---------------------------------------------------------------------------
        \16\ FTC v. FutureNet, No. 98-1113GHK (AIJx) (C.D. Cal. 1998).
    ---------------------------------------------------------------------------
        The Commission enforces other consumer protection rules that will
    apply to the sale of electricity in a competitive market. The
    Telemarketing Sales Rule, 16 C.F.R. Part 310, protects consumers from
    deceptive and abusive telemarketing practices, for example, by
    requiring telemarketers promptly to tell consumers that the call is a
    sales call and to inform them of the nature of the product being
    offered; by prohibiting misrepresentations regarding the cost and other
    aspects of the offered goods or services; and by prohibiting calls
    before 8 a.m. and after 9 p.m.
        The Commission's Cooling Off Rule, 16 C.F.R. Part 429, applies to
    door-to-door sales and other sales made away from the seller's
    principal place of business. It requires that a seller in a door-to-
    door sale of consumer goods or services (with a purchase price of $25
    or more) furnish the buyer with certain oral and written disclosures of
    the right to cancel the contract with three business days from the date
    of the sales transaction. It requires that this notice be included on
    the sales contract or receipt and that sellers provide consumers with a
    copy to keep for themselves. The Rule also requires a seller, within 10
    business days after receipt of a valid cancellation notice from the
    buyer, to honor the buyer's cancellation by refunding all payments made
    under the contract.17
    ---------------------------------------------------------------------------
        \17\ Some sellers of deregulated utilities are already marketing
    their services door to door.
    ---------------------------------------------------------------------------
        Finally, the Commission enforces several statutes and implementing
    credit rules, such as the Truth in Lending Act (TILA),18 and
    the Equal Credit Opportunity Act (ECOA).19 Although
    utilities whose rates are set by state regulatory agencies are, under
    some circumstances, exempted from certain aspects of these
    requirements, once electric power rates are set by market forces rather
    than regulators, utilities and other sellers and advertisers of these
    services may be subject to these rules as well.20
    ---------------------------------------------------------------------------
        \18\ 15 U.S.C. Sec. 1601 et seq.
        \19\ 15 U.S.C. Sec. 1691 et seq.
        \20\ The TILA and ECOA are implemented by Regulation Z, 12 C.F.R.
    Sec. 226, and Regulation B, 12 C.F.R. Sec. 202, respectively. Although
    the Federal Reserve Board promulgates these regulations, the Commission
    enforces these requirements for most non-bank entities around the
    nation. See Section 108(c) of the TILA, 15 U.S.C. Sec. 1607(c) and
    Section 704(c) of the ECOA, 15 U.S.C. Sec. 1691c(c).
    ---------------------------------------------------------------------------
                                 v. conclusion
        Deregulation in a number of industries has proven to be beneficial
    to many consumers and the competitive process. The Commission stands
    ready to meet both its consumer protection and competition enforcement
    responsibilities to protect consumer gains that should follow the
    introduction of market forces to the electric power industry.

        Mr. Barton. To hear the State perspective, we now would
    like to hear from Ms. Mary Ellen Burns, who is the Assistant
    Attorney General in Charge of the Bureau of Energy and
    Telecommunications, the Office of the Attorney General of the
    State of New York. Your statement is in the record in its
    entirety, and we would hope that you could try to summarize it
    in 5 minutes.

                      STATEMENT OF MARY ELLEN BURNS

        Ms. Burns. Thank you very much, Mr. Chairman and members of
    the subcommittee. I want to thank you for giving the New York
    State Attorney General's Office the opportunity to address you
    all on this very important issue of how to protect consumers as
    they try to make choices about electric service for their homes
    and their small businesses in this new environment of
    deregulation.
        Competition in retail electric service offers the
    possibility of reducing the price consumers pay and improving
    the quality and efficiency of the services they receive. But a
    competitive retail market can only work if consumers are
    informed, if they can rely on the information they receive, and
    if they can trust the competitive providers to live up to their
    side of the bargain.
        Like other State Attorneys General, the New York Attorney
    General's Office is in the front line of protecting consumers
    and small businesses and we use State law to do so. In addition
    to particular statutes that address very particular kinds of
    consumer abuses, we rely heavily on two New York laws of
    longstanding. One prohibits deceptive acts and practices in the
    conduct of any business or the furnishing of any service, and
    the second outlaws false advertising in the conduct of the
    business or the provision of service. We have used these
    generic and general laws in many areas, including going against
    telecommunication services abuses and we intend to do so as
    well in this new area of deregulation of electrical service.
        I would note that the role of State attorneys general
    varies. In our own State of New York we do not represent the
    Public Service Commission, our utilities regulator. We actually
    appear as an advocate for consumers in small businesses before
    our Public Service Commission. In some States the attorneys
    general do represent their public utility commission. In some
    States they do not appear as advocates. In some States they
    represent the advocates who appear before the public utility
    commission. So, I would want to note that our views here today
    really reflect our particular position in New York and don't
    necessarily reflect the views or the perspectives of other
    State attorneys general.
        I would also note, as the committee has pointed out and as
    the FTC witness has pointed out, that there is a National
    Association of Attorneys General (NAAG) working group on
    utility deregulation, and we are very active with that working
    group--indeed, we are the co-chair--and that working group has
    had the occasion to address many of the consumer protection
    issues that the members have raised this morning. We have
    appended to our testimony several resolutions that were passed
    by NAAG that address some of the subjects mentioned.
        Just briefly, New York was one of the first States to start
    to deregulate its electricity markets starting in around 1996.
    Deregulation is being phased in in New York. It has been
    pursuant to order of the Public Service Commission and not
    pursuant to legislation, which is perhaps unique in terms of
    how other States are doing it. And as a result of it being
    phased in very gradually, I think it would be important for the
    committee to note that we don't have extensive hearings yet
    with consumer frauds or with consumer abuses.
        As NAAG actually noted in a December 1998 report,
    nationwide competition has entered the market to such a limited
    extent that there has not yet been an opportunity for consumer
    fraud to become a significant problem. Nonetheless, it is
    certainly appropriate for us to be proactive and farsighted in
    trying to head off consumer abuse and identifying areas of
    abuse. Those areas, as we see it, include the following, and it
    includes many of the things that have been mentioned so far:
    uniformity of definitions and the use of plain language in
    advertising as well as in billing. We think that is critical,
    and there are two NAAG resolutions which address that. It is
    important because this is a technical area consumers have
    little familiarity with making comparisons, and also because
    electricity is an essential service.
        Mr. Barton. I hate to nag somebody representing NAAG, but
    your click has just clicked, so if you could summarize in about
    1 minute?
        Ms. Burns. We also think there should be protection against
    termination of services. There is in New York for incumbent
    utility providers. We are concerned about slamming. We haven't
    seen it yet, but we think that is a real, certainly a
    possibility. We are concerned about privacy issues, and in
    terms of the bottom line question of Federal and State roles
    here, we certainly think this area has been one of traditional
    State concerns for additional State protection, both on the
    regulatory side and on the law enforcement side. However, we
    certainly do welcome Federal initiatives and I think there is
    probably more than enough for both the Federal and the State
    government to address in this area. We hope to work with you
    all on it.
        [The prepared statement of Eliot Spitzner follows:]
      Prepared Statement of Eliot Spitzer, Attorney General, State of New
                                      York
        Chairman Barton, Members of the Subcommittee on Energy and Power,
    thank you for this opportunity to address the Subcommittee on the
    important issue of protecting consumers as they shop for electric
    service for their homes and small businesses. Competition in retail
    electric service offers the possibility of reducing the price that
    consumers pay for electricity and improving the quality of that
    service. However, the competitive retail electric service market will
    work only if consumers can rely on the information they receive, can
    trust competitive electric service suppliers to live up to their side
    of a bargain, and can expect fair treatment in the delivery of this
    essential service.
    The Role Of The State Attorneys General
        Like other state Attorneys General, the New York State Attorney
    General's Office is in the front line protecting individual consumers
    and small businesses. In addition to using many specific statutes
    targeted at particular practices, we rely heavily on two New York laws
    of general application, one that prohibits ``deceptive acts or
    practices in the conduct of any business, trade or commerce, or in the
    furnishing of any service'' 1 and a second that outlaws
    ``[f]alse advertising in the conduct of any business, trade or
    commerce, or in the furnishing of any service.'' 2 We have
    applied these general consumer protection statutes to many kinds of
    consumer frauds and abusive business practices, including, for example,
    those which have arisen in the retail sale of telecommunications
    services. We expect to apply these same laws to protect consumers in
    the context of deregulated retail electric services.
    ---------------------------------------------------------------------------
        \1\ New York General Business Law Sec. 349.
        \2\ New York General Business Law Sec. 350.
    ---------------------------------------------------------------------------
        The Attorneys General in other states have general and specific
    consumer protection statutes similar to New York's. However, state
    consumer protection statutes do differ. Moreover, the role of state
    Attorneys General in matters involving electric service varies. In
    addition to enforcing the consumer protection laws, the New York
    Attorney General advocates on behalf of residential and small business
    consumers before our State Public Service Commission. We do not
    represent the Public Service Commission. Some Attorneys General in
    other states have similar advocacy roles with respect to utilities,
    while others represent the utility regulator and do not appear as a
    party in regulatory proceedings.
        The role of an Attorney General also differs from that of a state
    utility regulator, such as New York's Public Service Commission. Our
    office sometimes has opinions that may differ from those of utility
    regulators. Our testimony today relates the views of the Attorney
    General's Office only and should not be construed to represent or imply
    any position or opinion of any other New York State agency, or of any
    other state Attorney General..
        Despite their differing circumstances, state Attorneys General
    currently face or expect to face similar problems with the deregulation
    of utility services. For this reason, in 1996 the National Association
    of Attorneys General (``NAAG'') established a Utility Deregulation
    Working Group to study utility deregulation and advise the state
    Attorneys General about the anticipated effects of deregulation,
    including, among other issues, potential consumer abuses in the
    deregulated retail electric service marketplace. To date, NAAG has
    adopted three resolutions on electric utility service deregulation, two
    of which deal extensively with consumer protection, and which are
    attached to this testimony. New York is currently the co-chair of the
    Utility Deregulation Working Group, along with North Carolina.
    Electric Service Deregulation In New York
        New York is one of the first states to deregulate its electricity
    markets. We did so pursuant to Public Service Commission orders, rather
    than under statute. New York began phasing in deregulation of retail
    electric service in June, 1996 with a limited pilot program for the
    customers of a single utility. Today, there are deregulation orders for
    all of New York's six investor owned electric utilities.3 We
    are still phasing in retail electric service deregulation, but
    consumers of each of our incumbent electric utilities have at least
    limited access to deregulated sources of retail electric service.
    ---------------------------------------------------------------------------
        \3\ Until May, 1998, New York had seven investor owned electric
    utilities: the Central Hudson Gas & Electric Corporation; the
    Consolidated Edison Company of New York, Inc.; the long Island Lighting
    Company, the New York State Electric & Gas Corporation; the Niagara
    Mohawk Power Corporation, Orange And Rockland Utilities, Inc.; and the
    Rochester Gas And Electric Corporation. The Long Island Power Authority
    (``LIPA'') now serves former electric customers of the Long Island
    Lighting Company. LIPA, a self-regulated public authority, does not
    currently permit retail electric service competition in its franchise
    territory but is examining the possibility of permitting such
    competition.
    ---------------------------------------------------------------------------
        New York's experience with deregulated retail electric service is
    still minimal. Only a fraction of one percent of our retail electric
    service customers (75,000 out of 7.2 million (0.1%)) have chosen to
    obtain their electricity from a deregulated supplier. Perhaps for this
    reason, we have yet to see numerous abuses in the deregulated retail
    electric service marketplace. Nonetheless, as the market develops,
    ensuring consumer protection for this vital service is an absolute
    necessity.
    Consumer Protection Issues In The Retail Sale of Electricity
        The marketing and sale of retail electric service raise many of the
    same concerns as the marketing and sale of any other consumer service.
    These traditional consumer protection issues include the accuracy and
    completeness of advertising and the possibility of abusive trade
    practices such as hidden charges, nonperformance and refusal to address
    disputes in good faith.
        However, deregulated retail electric service differs from other
    consumer services because electric service is essential to health and
    safety, as well as to just about every aspect of normal living. Also,
    until recently consumers had no choice in electric service supplier and
    therefore have no experience in shopping for this service. Further,
    advertising of retail electric service may include terms unfamiliar to
    consumers.
        The peculiar features of the emerging retail electric service
    marketplace--potential unfamiliar technical terms, consumer
    inexperience, and an essential service--argue for plain language and
    standardized definitions of any technical terms used in advertising
    retail electric service. NAAG twice urged plain language and
    standardization of technical terms, along with other consumer
    protections, in resolutions adopted, respectively, in March, 1997 and
    in July, 1998.4
    ---------------------------------------------------------------------------
        \4\ Consumer Protections And Restructuring Within The Electric
    Industry, adopted at Spring Meeting, March 19-21, 1997, Washington,
    D.C.; and Standards For Advertising, Offers Of Service, And Bills In
    The Competitive Retail Electricity Marketplace, adopted at Summer
    Meeting, July 13-16, 1998, Durango, Colorado.
    ---------------------------------------------------------------------------
        In particular, electric service advertising that mentions price
    should employ a standardized means of disclosure so that consumers can
    make meaningful price comparisons. For example, such advertising should
    clearly disclose monthly service fees, minimum monthly charges and any
    other factors that would affect a consumer's bill. Such electric price
    disclosure standardization would benefit consumers in much the same way
    as the Truth-In-Lending Act enables consumers to make meaningful price
    comparisons between loan and credit card offers.
        Another peculiar feature of deregulated retail electric service is
    the expectation that consumers may have their electric service
    ``slammed,'' that is, the consumer's electric service supplier may be
    changed without the consumer's permission. This has proven to be a
    widespread abuse in the marketing of long distance telephone service.
    However, retail electric service slamming has not been a serious
    problem in New York so far. Our office is aware of only one allegation
    of retail electric service slamming in New York, and that incident
    appeared to involve a misunderstanding between a consumer who called to
    inquire about switching service and the supplier representative who
    took the call.
        The absence of a significant number of slamming complaints in New
    York may relate to the limited number of customers for deregulated
    retail electric service in our state. The absence of such complaints
    may also be related to the New York Public Service Commission's general
    requirement that deregulated retail electric service suppliers adopt
    practices to prevent slamming.5 In any event, simple
    prudence urges that we look at ways to prevent electric service
    slamming. We can start by looking at the experience gained in fighting
    telephone service slamming.
    ---------------------------------------------------------------------------
        \5\ Case 94-E-0952--In the Matter of Competitive Opportunities
    Regarding Electric Service, Opinion and Order 97-5, Appendix B, p. 2
    (issued and effective May 19, 1997).
    ---------------------------------------------------------------------------
        Another area of concern is that consumers may bring to the
    selection of a deregulated retail electric service supplier the
    expectation that the supplier will offer the same terms as a regulated
    utility. For example, in New York regulated utilities are not permitted
    to charge for disconnecting service and customers can discontinue
    service at any time. We have no such prohibition or requirement for
    deregulated electric service suppliers. Thus, a New York consumer
    shopping for an electric service supplier might assume that a potential
    supplier would allow termination of service without charge at any time,
    when, in fact, a supplier might impose a $100 disconnection fee and
    require a month's notice.
        The New York Public Service Commission requires deregulated
    electric service suppliers to provide prospective customers with a copy
    of a disclosure statement prior to the consumer's committing to that
    supplier's service.6 Whether this requirement will prove
    adequate to protect consumers, or whether certain terms, such as
    disconnection fees, need to be prohibited or capped, is still an open
    question.
    ---------------------------------------------------------------------------
        \6\ Ibid.
    ---------------------------------------------------------------------------
        A further consumer protection issue arises because of the essential
    nature of electric service, whose interruption can cause irreparable
    injury to health and safety. For this reason, New York has extended
    special protections to residential customers of regulated electric and
    gas utilities. These protections ensure that consumers receive
    sufficient notice to take precautions to enable them to continue to
    receive electrical service.
        The Home Energy Fair Practices Act 7 and regulations
    adopted under it 8 safeguard consumers in their homes by
    requiring adequate notice before a regulated utility may terminate
    service and by prohibiting or regulating certain utility practices.
    These requirements, prohibitions and regulations are quite extensive,
    including a written 15 day notice of termination of service,
    termination only between the hours of 8 a.m. and 4 p.m. and only on
    days followed by a full work day, continuation of service upon
    certification of a medical emergency or special need such as a lift
    support system in use, personal contact before termination if all
    adults in a household are elderly, blind or disabled, personal contact
    with any household before termination between November 1 and April 15,
    and notice to any third party a customer designates. These notice
    provisions are intended to prevent physical injury, provide sufficient
    time to pay a bill to avoid a shut off, allow immediate reconnection in
    the event of a mistaken shut off, and permit intervention by others to
    protect a customer who may not be able to take care of his or her
    affairs. In addition to the protections against residential customers'
    loss of electric service, New York restricts regulated utilities' use
    of estimated bills, security deposits, backbilling, and late payment
    charges on residential accounts.
    ---------------------------------------------------------------------------
        \7\ New York Public Service Law Sec. Sec. 30 et seq.
        \8\ Home Energy Fair Practices Act--Rules, 16 N.Y.C.R.R., Part 11.
    ---------------------------------------------------------------------------
        However, these New York laws apply only to regulated utilities and
    impose no duties on deregulated retail electric service suppliers.
        The New York Public Service Commission has examined the question of
    whether to protect consumers from residential service shut offs by
    deregulated retail electric service suppliers. The Commission imposed
    on such suppliers only requirements to provide 15 business days' notice
    before termination and to ensure the consumers a ``smooth transition''
    to another supplier.9 To provide consumers better protection
    against abuses by deregulated electric service suppliers, this office
    has proposed legislation that would extend the protection received by
    consumers of regulated utilities to consumers receiving service from
    deregulated suppliers.
    ---------------------------------------------------------------------------
        \9\ If a deregulated retail electric service supplier terminates a
    consumer's contract and that consumer cannot find another such
    supplier, the New York Public Service Commission requires the regulated
    utility servicing the consumer's area to supply the consumer
    electricity as a ``provider of last resort''. Case 94-E-0952--In the
    Matter of Competitive Opportunities Regarding Electric Service, Opinion
    and Order 97-5, Appendix B, p. 2 (issued and effective May 19, 1997).
    However, it remains to be seen whether consumers defaulting back to a
    regulated utility will make the transition without inconvenience or
    injury.
    ---------------------------------------------------------------------------
        Because electric generation has varying impacts on the environment
    depending on the energy source, many consumers may wish to be informed
    about the source of electrical generation when they choose a supplier.
    The New York Public Service Commission is taking steps to give
    consumers some of that information. Starting next year, our Public
    Service Commission will require both incumbent utilities and competing
    retail suppliers to make environmental disclosures to customers and to
    potential customers, setting forth the electricity provider's fuel
    resource mix and selected air emissions data, as compared to a
    statewide average to be compiled by the Commission's staff based on
    historic data.
    State Law Enforcement Activities
        In New York, there has only been one case of fraud related to
    deregulated retail electric service and one instance that bordered on
    fraud. In September 1998, we obtained a conviction under our criminal
    scheme to defraud statute of an individual who held himself out as a
    supplier of electric service and collected downpayments for such
    service even though the New York Public Service Commission had rejected
    his application to become a supplier and he had no ability to supply
    electricity.
        In another instance in 1998 an individual was soliciting
    ``customers'' on behalf an illegal pyramid scheme based in
    Pennsylvania. The individual in question was rather naive and appeared
    not to be aware of the legal requirements for being a deregulated
    retail electric service supplier. There was no evidence that this
    individual signed up any customers or collected any funds through his
    efforts.
        Pennsylvania appears to have the most experience with consumer
    abuses in deregulated retail electric service, perhaps because it has
    the largest number of consumers (approximately 415,000, over five times
    as many as New York) who have switched to deregulated suppliers. The
    Pennsylvania Attorney General's Office reports having terminated five
    frauds involving retail electric service, and the Pennsylvania Public
    Utility Commission has also been active against abuses in the retail
    electric marketplace.
    Maintaining State Authority
        Consumer protections for access to retail energy services, such as
    the New York provisions described here, have traditionally been an area
    of state concern. In part this is due to the fact that retail energy
    services are usually provided in a geographic area within the
    boundaries of a single state.10 There are also practical
    reasons for states to provide such protections. Climate and economic
    circumstances are different in each state. New York can provide
    consumer protection adapted to our circumstances. Another state with
    different circumstances may not need all of the features New York
    provides and may choose to create others.
    ---------------------------------------------------------------------------
        \10\ A few customers receive retail energy services across State
    boundaries where geographic peculiarities such as a large river or a
    mountain make it impractical to supply service from the nearest utility
    in a customer's home State.
    ---------------------------------------------------------------------------
        State Attorneys General have been in the forefront in the
    enforcement of consumer protection laws, and we have the ability to act
    forcefully, flexibly, and effectively in the new era of electricity
    deregulation. In this arena, the New York Attorney General will
    continue to use our traditional enforcement statutes and powers and
    will seek other laws where appropriate or necessary. We welcome the
    interest of the Congress and the federal government in consumer
    protection in the still largely uncharted territory of electricity
    deregulation. At the same time, we recognize and support the historic
    role of the states in this area, both as regulators of electric
    utilities and as protectors against consumer abuse. We urge that, if
    federal consumer protection enforcement legislation is deemed
    necessary, any such laws serve as a complement to and not as a
    substitute for state consumer protection efforts.
        Thank you for the opportunity to address you on these matters of
    concern. We look forward to working with this subcommittee and with
    other interested parties in ensuring that consumers, who are supposed
    to be key beneficiaries of electricity restructuring, indeed see the
    benefits of deregulation and are protected from abuse.

        Mr. Barton. Thank you, ma'am.
        I want to welcome my next witness, which is Mr. Harvey
    Michaels, who is the Chief Executive Officer for Nexus Energy
    Software in Newton, Massachusetts. I am told you are going to
    give a presentation of some sort.

                      STATEMENT OF HARVEY MICHAELS

        Mr. Michaels. I am.
        Mr. Barton. Okay. Now, since we have so many members
    disguised as empty chairs over here, let's turn this monitor
    around so the audience can see it. Tom, if you will scoot down
    this way, we'll look at this one, and we are going to let the
    audience look at that one. Okay. Isn't that nice? That way
    everybody can participate.
        I am announcing for President at 2 today.
        Okay. I am told your presentation takes about 8 minutes.
        Mr. Michaels. Take as short or as long as you want.
        Mr. Barton. We don't want to give you unfair time, but are
    you going to talk as we go through the slide presentation or
    are you just going to show us something?
        Mr. Michaels. I am going to present what we have here
    quickly, and if there is any area of more interest we----
        Mr. Barton. Okay. We are going to recognize you for 5
    minutes, and if it takes a little bit longer because of the
    video, we will go beyond that. Welcome to the committee.
        Mr. Michaels. I very much appreciate the opportunity. My
    name is Harvey Michaels and I am the CEO of Nexus Software. I
    have been working with consumers on energy choices, energy
    efficiency, throughout my career. Starting Nexus Energy
    Software 2 years ago, we were trying to use the Internet to
    help consumers with choices in the future, both in choosing a
    retail energy supplier, which I will describe today with these
    slides, as well as managing energy use in their homes,
    including energy efficiency options that they have.
        The materials that I am going to show you on the screen are
    exhibits which are in the testimony. I will present them
    briefly. I will also show a few subsidiary pictures of it.
        The energy guide website is designed to attract consumers
    and have them understand what their opportunities are. Using
    the zip code, when a consumer comes to our site and enters the
    zip code, they will be able to see all the choices that are
    available to them in their area. I hope this is informative to
    the committee to understand what the Internet can do, and what
    private Internet companies are doing to bring retail choice to
    consumers in the States that have them.
        On the energy guide site there are three components: the
    energy gear section, which shows some energy-saving equipment
    that they can purchase for their homes; energy finder, which I
    will show today, which is their retail choice options, and
    general energy information, including understanding what this
    is all about.
        If someone goes to the energy finder side of the site they
    will see a map of the States that currently have some form of
    electric deregulation retail choice. We are adding gas retail
    choice shortly. And, in the States that have it, if they are in
    one, such as Pennsylvania, which I have noted here, they have
    the chance to put in their zip code, and if they choose a
    typical winter or summer bill, what we will do at that point is
    show them all the choices.
        Mr. Barton. What if they are like me and they don't know
    the zip code? Can they find the zip code just by putting in the
    city that they live in?
        Mr. Michaels. They can put in the city. They can put it on
    the State. But, we do drive from zip codes. So, hopefully, they
    know that, in terms of getting the most accurate information.
        When they put that in, we will screen all the suppliers,
    and we try to list every supplier that is available that they
    can choose from. And using that typical bill, if they enter it,
    we will show them what their annual savings will be by choosing
    any one of these suppliers.
        In Pennsylvania right now, the way restructuring has
    occurred in Pennsylvania, there are many options available to
    consumers that will save from 5 percent to 10 percent of their
    bill. There also are options that don't necessarily save them
    money, but are the green options. And if they look at one of
    those, such as the Green Mountain option, they will actually
    pay a little more, but they will be able to see what this
    option does in terms of providing environmental benefit. In
    fact, we found where consumers coming to this site that many of
    them come initially looking to reduce their bill, but they are
    attracted to the green offers, and they do find them valuable
    to look at.
        There is ancillary information that you probably can't see
    very clearly on these screens that deals with everything from
    deregulation status in the individual States, when they click
    on their State, to understanding frequently asked questions,
    such as, there are sales credits in Pennsylvania that vary by
    utility service territory, and a number of other rather
    complicating issues, and these are described, and we keep this
    up for each of the States that do in fact have deregulation.
        I am just going to mention briefly the other side of the
    site and why it is there, which is energy efficiency. When a
    consumer goes to manage energy use in their home, they are
    interested in getting their bill down, and getting that bill
    down means a combination for many of them of choosing a
    supplier that costs less and using one. And, the opportunity of
    energy efficiency dovetails completely in home energy
    management. For the green energy interested consumer, they also
    go together. Clean energy helps the environment. Efficiency
    reduces their use and also helps the environment. So, these
    things should work together, and we found it very important in
    our approach to working with consumers to put them together.
        We have tried some fun things, like our bulb-lite offer.
    This is a six-pack of compact fluorescent bulbs, and with this
    six-pack, which we have arranged a low-cost deal with suppliers
    of compact fluorescents, we compute on the site how much this
    box will save them. And, what is very typical is this $58.95
    box of compact fluorescents will save $350 a year.
        The last element of the site that I will mention is that
    consumers have the option of doing an energy audit of their
    homes and seeing how much they can save by adjusting the
    thermostat settings or putting in clock thermostats or lights
    or equipment like that. They understand how much they spend on
    each of their appliances in their home, if they do that, and
    they have this description of their house, which is generated,
    which will show what each of the appliances cost, which they
    can come back to from time to time and look at in more detail.
        We are working with utilities who have sponsored the audit
    side of the website. In many utilities around the country they
    are providing an energy audit service to the consumers along
    with us.
        Mr. Barton. Your click has clicked also. I enjoy this
    presentation. Congressman Hall says he can't listen and look at
    the same time, though.
        Mr. Michaels. I am sorry. This is my conclusion, if there
    is time for that. From working with consumers over my career,
    and our experience at Nexus over the last 2 years, I think that
    we can conclude and describe to the committee that consumers
    really do care about their bill. More than half are interested
    in energy efficiency and saving money, and about 10 percent are
    actively interested in spending some more to improve the
    environment. We get a very strong message that consumers want
    energy supplier choice, but they find choosing difficult.
        Finally, we found the Internet as a solution that will
    bring these options to mass market consumers. Thank you very
    much.
        [The prepared statement of Harvey Michaels follows:]
     Prepared Statement of Harvey Michaels, Chairman and CEO, Nexus Energy
                          Software and ENERGYguide.com
                                  introduction
        Thank you Mr. Chairman for the opportunity to appear before your
    committee this morning and contribute input to your deliberation on the
    issue of electricity restructuring and competition.
        My name is Harvey Michaels and I am Chairman and CEO of Nexus
    Energy Software. Our Headquarters are located at 233 Needham St,
    Newton, MA 02464. Our corporate web site can be found at
    www.nexusenergy.com; our e-commerce site, on which my testimony will
    focus today can be found at www.energyguide.com.
        Nexus is a new company. I and others founded it in 1997 with a goal
    of creating PC and Web products for consumers that will help them use
    their home PC to take advantage of e-commerce opportunities in energy
    deregulation and energy efficiency. Nexus is comprised of personnel
    with a variety of expertise, including educational software, energy
    efficiency, energy engineering and the internet industry. This
    combination allows us to be able to design products that are of the
    quality and degree of user-friendliness that consumers expect today.
        In my testimony today, I will focus on ENERGYguide.com, our e-
    commerce site, as an example of how the internet can be a powerful tool
    for consumers in deregulation. I will show how they can use it to both
    educate themselves about deregulation, and to identify, understand and
    compare the offers being made to them by competing suppliers in a
    deregulated state. I will talk about how Internet electronic markets
    may be even more applicable to energy than to some of the more
    conventional uses seen today. I will also provide a simulation of a
    visit to ENERGYguide.com to provide an example of what the Internet can
    provide to a consumer relative to deregulation.
    Background
        The energy industry is the latest in a series of industries--
    including airlines, trucking, banking, and telecommunications--that
    have undergone deregulation. In each case, deregulation has been
    accompanied by some degree of uncertainty and confusion on the part of
    consumers. Partly as a result of this, it has taken some period of time
    for new marketplaces in these industries to evolve. As energy
    deregulation unfolds today, there is a new development present that
    offers an opportunity for a smoother, more effective and more consumer-
    friendly implementation of deregulation. That development is the
    Internet--whose ability to bring information to consumers gives it the
    potential to become one of the most significant consumer tools ever
    available in the marketplace.
    Electronic Markets and the Internet
        For the first time, more and more consumers are faced with the
    opportunity and eventually the need to select an electricity and/or gas
    supplier from among competing entities. As states move to deregulate,
    lawmakers and regulators there are expending significant effort to put
    in place consumer education programs and consumer protection provisions
    and programs. Yet there are indications that despite considerable
    expenditures in some states, consumers may not yet understand their new
    choices and indeed may be confused. They may not understand the process
    nor really know how to evaluate and compare offers from competing
    suppliers. Consumers seek, and deserve to have, the information they
    need to feel comfortable with energy deregulation and the ability to
    efficiently and safely participate in this new marketplace. Such
    information can be provided by the creation of electronic marketplaces
    on the Internet.
        Whereas in the previous decades electronic markets such as the real
    estate industry's MLS and Sabre's computerized reservation system (CRS)
    were important advances, these early electronic markets were designed
    for the professional--the broker in the case of those examples--to help
    their customers. Starting in the mid-1990's, the Internet has taken the
    concept of an electronic marketplace to a new level. With the Internet,
    it now has become possible for the consumer to get more and higher
    quality information and greater access to the marketplace such that
    they can make and execute informed purchasing decisions.
        There are several factors that drive the emergence of electronic
    markets on the Internet:

     Consumer Search Time and Product Evaluation--Electronic
            market-makers aggregate relevant market information, enabling
            consumers to find their options in one place, rather than
            having to seek information from each of many potential sellers.
            Moreover, consumers in the past rarely have had perfect
            information about the products in which they are interested,
            especially products that have complex attributes or that may be
            difficult to understand. The Internet makes this information
            readily available, thereby simplifying the process of matching
            consumers with the right products for them.
     Risk Management--Consumers often view new markets or products
            they may not understand as risky. The Internet allows the
            creation of neutral information intermediaries that can provide
            all product information in one place, as well as tools with
            which to analyze such, and thereby allow consumers to compare
            products along dimensions that are important to them. The
            possibility exists for the creation of what some consumers
            might consider to be the ideal market--one in which consumers
            are given complete, objective information about available
            products.
    Internet-Based Electronic Markets In Energy
        Electronic markets will begin to play an important role in
    electricity and gas, just as they have in other markets. Consumers will
    find it convenient to go to one place to find the information they need
    and be able to make purchasing decisions based on needs and product
    attributes that are important and understandable to them.
        What sets the retail energy marketplace apart somewhat is the very
    newness of the market. Thus far, the penetration of customer choice in
    states that have deregulated has moved slower than many anticipated. An
    important factor may be the lack of understanding by many consumers of
    what is happening and what their options are. An electronic marketplace
    combined with information and analytical tools (e.g. ability to compare
    offers) may provide an important ingredient to the timely development
    of deregulated energy markets from the standpoint of consumer
    acceptability.
        Electronic markets all electronically link buyers and sellers but
    may vary significantly in a variety of ways. Some of the
    characteristics that appear to be applicable to energy are:

     Objectivity--With energy, it is best that electronic markets
            are created and owned by independent entities, not one
            controlled by one or more energy companies.
     Education--With energy deregulation being new in concept,
            there is considerable confusion as to what it really means to a
            consumer, e.g. What is happening to my local utility? Will they
            still restore my service? Who can I buy from and when? The
            Internet, and neutral information intermediary sites focused on
            deregulation, can provide not only extensive basic information
            but update it instantly as new information becomes available.
     Analysis--It is natural that consumers may at first focus only
            on the lowest rate available to them. Internet-based analytical
            tools allow consumers to look at overall costs of energy offers
            and how different price levels and contract structures affect
            them. These tools can offer technically sophisticated
            capabilities cloaked by user-friendly operation on a web page.
     Consumer Convenience and Control--As with other items and
            commodities purchased on the Internet, a consumer can be in
            control of when and how they shop and make purchases. They can
            access it when they want and on their terms. At any time they
            have available to them all the information they need in one
            place. The information is up to date. If a consumer wants to
            use the Internet to be apprised of new offers when they become
            available, they have the option to have such sent to them as
            they become available.
     Comprehensiveness and Product Variation--Energy deregulation
            and the Internet should offer consumers not only the ability to
            compare offers on the basis of many factors but to compare and
            understand offers that are not just price variations but
            product variations as well. ``Green power'' offers may not be
            the lowest price option for a consumer in a given instance but
            yet offer other attributes that the consumer desires to
            acquire. Seeing all offers available to them and having the
            ability to compare them is what many would say the Internet is
            perfectly designed for and there may be no better application
            of such than to energy.
        Usability testing conducted at Nexus in the process of building
    ENERGY
    guide.com clearly demonstrated this point. When consumers were faced
    with the task of selecting from an electronic ``list'' of suppliers
    that were part of the Massachusetts Electric Retail Choice Pilot, their
    immediate reaction was to select the cheapest rate. However, when the
    system helped them compare the likely costs of the different options
    and they realized the relatively small differences, every one of these
    consumers began to look for other factors to differentiate the supplier
    offers. Issues such as energy sources, minimum contract term, and size
    and location of supplier were reacted to differently by consumers; in
    the end, none of them made their selection on price.
        In the early stages of deregulation in Massachusetts, California,
    Pennsylvania and elsewhere, residential and small commercial consumers
    have had the opportunity to save some money by choosing a supplier, or
    to select a green energy supplier at a higher price. But this is
    clearly just the beginning. The market is beginning to create options
    that have greater benefit for consumers, whether they seek to reduce
    costs, or benefit the environment, or both.
        One such opportunity is to purchase market-priced electricity. Many
    consumers have energy use patterns that naturally benefit from
    purchasing at market, since their high use periods are not on the
    market peak. This is particularly true of consumers in urban areas who
    do not air condition their homes during the day, while commercial
    facilities are driving up demand. Restructuring and the Internet, with
    tools such as what we are developing, can help consumers predict what
    their bills will be with market rates.
        Another such opportunity is to purchase energy bundled with
    efficient appliances. Restructuring of the energy industry will create
    a period of revolutionary change in how consumers look at energy.
    Energy is a commodity raw material--an analogy is wheat. Consumers
    don't really want to purchase wheat, but rather the many products made
    with wheat: breads, pizza, pasta, etc. Only a regulated utility
    industry has kept consumers buying energy, something they also don't
    really want. Advances in deregulation, software, and Internet commerce
    will mean that consumers will eventually buy light, hot water and
    comfort rather than energy. Buying end uses rather than energy,
    products, and maintenance separately will naturally result in more
    energy efficiency. Light with standard bulbs, heat with inefficient
    heating systems, food storage with inefficient refrigerators will just
    cost too much.
        Our products, including the ENERGYsmart audit and the
    ENERGYguide.com website, provide energy suppliers with the opportunity
    to create these bundled offers. For example, providing time-based
    energy with home automation equipment provides a way for some
    homeowners to create a very large reduction in energy costs.
    Additionally, providing efficient light bulbs or appliances as part of
    a green energy offer provides the consumer with a lower monthly bill
    due to the reduced kwh, as well as greater environmental benefit when
    compared with green energy alone. Several suppliers have contacted us
    about our ability to present such offers on our website, and these
    options for consumers should arrive shortly.
    ENERGYguide.com, Consumers and Deregulation
        Recognizing the confluence of the emergence of the Internet and the
    contemporaneous deregulation of electricity and gas, Nexus Energy
    Software was founded in 1997 to address what was seen as a natural
    convergence of these two developments. Our goal was to focus on using
    modern technology to create PC and Internet applications that can
    create an energy ``channel'' on the Internet that would allow ongoing
    communications and commerce between energy companies and consumers.
        The changes happening in the energy industry have created a range
    of new opportunities for consumers. But, without assistance, most
    consumers find it difficult to research, compare, and choose among the
    alternative options. Nexus' products are intended to help consumers
    make smart energy decisions, ranging from energy efficiency in the home
    and business to choosing an energy supplier.
        An example of one of these applications is our PC and Web software
    known as ENERGYsmart. ENERGYsmart is software that allows a consumer to
    conduct a user friendly and entertaining home energy analysis that
    identifies ways that they can make their home more energy efficient and
    environmentally friendly. Unlike many energy analysis tools previously
    available, ENERGYsmart has been designed by educational software and
    internet experts as well as energy specialists to create a tool for
    consumers that meets that standards they expect in software and on the
    web today.
        ENERGYguide.com is the web site that we have created for consumers
    to allow them to have one place on the Internet to obtain all of the
    energy and energy-related information tools and online purchasing
    capabilities they need to manage and reduce their home energy bills and
    make smart, informed purchases of deregulated energy and other energy-
    related items. It has been designed with the consumer in mind and,
    specifically, with an eye towards what the needs and wants of that
    consumer are with respect to deregulation. The remainder of this
    testimony will focus on demonstrating how a consumer would interact
    with ENERGYguide.com.
        Exhibit A is the home page of ENERGYguide.com, accessible at
    www.energy
    guide.com. There you will see a number of different options for the
    consumer that demonstrate how we are seeking to provide a household
    with both energy efficiency and energy deregulation information and
    opportunities. At this particular time, you can see that we are
    offering a ``Father's Day'' contest focusing on the benefits of energy
    efficient and environmentally friendly lawn mowing. You will also see
    our energy efficiency product of the month--``BULBlite, a sampler of
    energy efficient compact flourescent light bulbs that can be purchased
    online. You will further see at the right an option called Quickfind.
    This is an ``express'' way for a consumer to search for offers in
    states that are deregulated. Also on our home page, while not visible
    on Exhibit A is a link directly to the web site of the Alliance to Save
    Energy, an organization that offers consumers information and
    assistance on energy efficiency.
        In the center of the home page are links to the main three areas of
    ENERGYguide.com. Energy Info is the area where consumers can find a
    wealth of information and several analytical tools as well as links to
    other web sites that provide similar resources. Energy Gear provides e-
    commerce for energy efficient appliances and equipment. It is designed
    with several features that allow it to not be simply an online
    catalogue but to provide a consumer with personalized shopping
    assistance. Energy Finder is the area of deregulation. Clicking on
    Energy Finder will bring the consumer to the web page shown here as
    Exhibit B.
        This web page shown as Exhibit B provides a map that quickly shows
    the general status of electricity deregulation across the country.
    (ENERGYguide.com at present offers electricity deregulation information
    and offers. The same capability for natural gas is due to be added in
    June.) By clicking on a consumer's state or on the state's name from
    the ``drop-down'' table, a Pennsylvania consumer is taken to a web page
    where they are presented with an opportunity to get more detail on the
    status of deregulation in their state and an opportunity to get a basic
    ``education'' on deregulation. Specifically, they are able to go to web
    pages that address the following:

     Current deregulation information for PA
     What is Restructuring?
     What's in it for me?
     Who can I buy electricity from?
     What else should I look out for?
     Other frequently asked questions for PA
        This web page also allows a consumer to click to get a list of all
    of the officially registered suppliers in PA and to go to an ``offers''
    page shown here as Exhibit C.
        Exhibit C is the first ``offers'' web page encountered by a
    Pennsylvania consumer. On this page, consumers enter their zip code and
    their preferred level of detail on their electricity bills. (Simple
    estimates for seasonal usage will suffice but more billing data will
    increase the precision of savings estimates made later.)
        By entering a zip code on Exhibit C's web page, ENERGYguide.com
    will provide all of the offers that are being made by competitive
    suppliers in that particular zip code, i.e. those offers that pertain
    to that specific consumer.
        Exhibit D is the web page that a consumer in Philadelphia would
    see. It contains all of the offers being made, the estimated monthly
    cost of the offer, the minimum term of the offer and whether or not it
    is a green power offer. By clicking on the link at the bottom of this
    web page (not visible in Exhibit D) a consumer can see another web page
    where these offers are compared in greater detail. This is depicted in
    Exhibit E.
        On the web page shown as Exhibit E, all of the offers are compared
    on the following aspects:

     Monthly Generation/Supplier Charge
     Monthly Total Electricity Bill
     Estimated Monthly savings
     1st Year Generation/Supplier Charge
     1st Year Total Electric Bill, and
     1st Year Savings
        With a different or additional click, a consumer can see more
    detail on any of the individual offers. Exhibit F is the web page that
    shows more detail on the offer of Green Mountain Energy Resources
    called ``Nature's Choice''.
        There is no cost to a consumer to use ENERGYguide.com's
    deregulation components. There is no obligation on the part of the
    consumer who visits ENE
    RGYguide.com to make any purchase anywhere on the site. There is no
    requirement to become a registered member of ENERGYguide.com.
    ENERGYguide.com's privacy statement is available to any visitor to the
    site. ENERGYguide.com is a member of the newly formed Trust-e network.
        ENERGYguide.com lists the basic information on all supplier offers
    at no cost to the supplier. Suppliers have the option to contract with
    ENERGYguide.com for advertising or other featuring on the web site.
    Suppliers also have the option of contracting to provide consumers with
    online signup capability for their offers.
        ENERGYguide.com works to stay in constant touch with developments
    in the states on deregulation and to provide the information
    accordingly on the site. We communicate on a regular basis with Public
    Utility Commissions and other state organizations as well as with the
    suppliers themselves to ensure that the information is up date.
    Summary
        The Internet allows a consumer's desktop PC to serve as a portal
    for their entry into energy deregulation. Consumers can use it to put
    the power of information and analysis to work as they now shop for
    power for the first time. Lawmakers and regulators can count on it as
    being available as such a tool for consumers and as a development which
    will make the implementation of deregulation for consumers easier and
    more beneficial.
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        Mr. Barton. Thank you, Mr. Michaels, for your presentation.
        We are going to yield to Mr. Stearns to introduce our next
    witness to the subcommittee.
        Mr. Stearns. Thanks for the courtesy, Mr. Chairman. I just
    want to welcome a fellow Floridian to the panel. I understand
    that he is an owner of a McDonald's franchise in Tampa,
    Florida, and also has his company, a family owned business, and
    it is nice to see a taxpayer as a witness here. And, so I
    appreciate your testimony and I want to welcome you as a fellow
    Floridian. Thank you, Mr. Chairman.
        Mr. Barton. Mr. Casper, your statement is in the record and
    we will recognize you for 5 minutes.

                        STATEMENT OF BLAKE CASPER

        Mr. Casper. Thank you, Mr. Chairman.
        Mr. Barton. Pull that microphone up to you, if it will come
    any further. I don't know if it will. There you go.
        Mr. Casper. Thank you, Mr. Chairman, members of the
    committee. My name is Blake Casper, and as Mr. Stearns
    mentioned, I am a McDonald's franchisee in Tampa, Florida. We
    are selling beanie baby number 6 today. Our company, Caspers
    Company, is a family owned business, and I pay electric bills
    for both my home and my business, and I speak to you today as
    both a residential and small business consumer.
        I have been asked to come here today to discuss the need
    for consumer protection mechanisms in a competitive retail
    electric market and I can respond succinctly. The ability to
    choose my electric supplier is my protection. In Florida we
    have piles of statutes, rules, and hundreds of government
    employees to regulate the electric utility industry and
    allegedly protect me and other consumers, yet I lack the one
    tool that I need: the ability to choose my electric supplier.
        Our company buys thousands of items every day, ranging from
    hamburger buns, soft drinks, napkins, to insurance policies and
    legal services, and it all works fine without the help of
    special government protections or commissions. It works because
    our suppliers must compete for our business in a fully
    competitive market, and if you wanted to protect electric
    consumers, you only have to do one thing: Clear away the
    regulations and allow the creation of a fully competitive
    retail electric market where all electric suppliers can compete
    on a level playing field.
        To ensure a level playing field, I have just three
    suggestions. One is to require the separate ownership of
    generation of transmission and distribution systems. This is
    the only way to ensure that incumbent utilities do not have an
    unfair advantage over new suppliers wanting to compete for our
    business. Our french fry supplier does not own our only
    distribution route into our stores, and neither should our
    electricity supplier.
        No. 2, protecting the restrictions on customers' ability to
    purchase through aggregation. In our business, a major source
    of savings which allows us to keep menu prices low is the
    ability to combine our buying power with other McDonald's
    franchisees.
        No. 3, don't stick us with huge stranded cost bills. In
    order to have full and fair competition, you can't mandate a
    monthly subsidy to incumbent utilities to compensate them for
    inefficient and costly plants.
        I may not understand all the technicalities of what
    constitutes so-called stranded costs and how to calculate them,
    but I do understand this: In our business nobody guarantees us
    anything. Business conditions and regulations change all the
    time, and we adapt. If we make a bad investment, we pay for it,
    not our customers.
        I understand the electric utilities' arguments about their
    duty to serve and stranded investments, but, frankly, I am not
    sympathetic. They have enjoyed a government-protected monopoly
    for decades, and they have been given years to prepare for
    retail competition. It sounds like a pretty good deal to me. If
    you want to give me a hamburger monopoly for all of Tampa Bay,
    I will take it. In fact, I would even pay for it, and I will
    sign on the dotted line today that, if you decide later to
    allow competitors, I won't come asking you for yet another
    handout.
        We do need your help. The electric utilities in Florida are
    using my money to fight against consumer choice and other
    consumer-friendly initiatives at every step of the way. They
    are filing lawsuits to prevent the introduction of new, low-
    cost clean power plants. They are fighting attempts to reign-in
    the rates when they earn record profits, and they use their
    considerable political weight to fight against the mere study
    of customer choice in Florida.
        Our business simply cannot afford to hire a platoon of
    attorneys to fight them both in the Florida legislature and at
    the Florida Public Service Commission. Small electric consumers
    desperately need a date certain for customer choice in the
    States and a fully competitive market. Mr. Chairman, customer
    choice will provide the best protection for small consumers.
        [The prepared statement of Blake Casper follows:]
              Prepared Statement of Blake Casper, Caspers Company
        Mr. Chairman and members of the committee, my name is Blake Casper.
    I am an owner of a McDonald's franchise in Tampa, Florida. Our company,
    Caspers Company, is a family-owned business. I pay electric bills for
    both my home and my business, and I speak to you today as both a
    residential and a small business consumer.
        I have been asked to come here today to discuss the need for
    consumer protection mechanisms in a competitive retail electric market.
    I can respond succinctly--the ability to choose my electric supplier is
    my protection. In Florida we have piles of statutes and rules and
    hundreds of government employees to regulate the electric utility
    industry and, allegedly, protect me and other consumers. Yet I lack the
    one tool I need--the ability to choose my electric supplier.
        Our company buys thousands of items everyday, ranging from
    hamburger buns, soft drinks and napkins, to insurance policies and
    legal services, and it all works fine without the help of special
    governmental protections or commissions. It works because our suppliers
    must compete for our business in a fully competitive market. If you
    want to protect electric consumers, you only have to do one thing:
    clear away the regulations and allow the creation of a fully
    competitive retail electric market where all electric suppliers can
    compete on a level playing field. To ensure a level playing field, I
    have just three suggestions. These suggestions are based on the
    attributes of the markets where our other vendors compete for our
    business:

    1. Require separate ownership of generation and transmission and
            distribution systems--This is the only way to ensure that the
            incumbent utilities do not have an unfair advantage over new
            suppliers wanting to compete for our business. Our french fry
            supplier does not own the only distribution route into our
            stores and neither should our electricity supplier.
    2. Prohibit any restrictions on customers' ability to purchase through
            aggregation--In our business, a major source of savings which
            allows us to keep menu prices low is the ability to combine our
            buying power with other McDonald's franchisees. This allows us
            to command the lowest possible price and the best quality.
            Electricity is the one purchase we can't aggregate. I keep
            hearing that under competition, only the so-called ``big dogs''
            will win, and that residents and small businesses like ours
            will see their rates go up. The fact is, under the present
            regulated system which supposedly protects us, we already pay
            more than big industrial companies. In Florida, residents and
            small businesses consume three times more electricity than big
            industry. With that immense buying power, both residents and
            small businesses can pool their purchases to command a better
            prices and service.
    3. Don't stick us with a huge stranded cost bill--In order to have full
            and fair competition, you can't mandate a monthly subsidy to
            incumbent utilities to compensate them for their inefficient
            and costly plants. I may not understand all the technicalities
            of what constitutes so-called ``stranded costs'' and how to
            calculate them, but I do understand this--in our business,
            nobody guarantees us anything. Business conditions and
            regulations change all the time, and we adapt. If we make a bad
            investment, we pay for it, not our customers. I understand the
            electric utilities' arguments about their duty to serve and
            stranded investments, but frankly, I am not sympathetic. They
            have enjoyed a government-protected monopoly for decades, and
            they have been given years to prepare for retail competition.
            Sounds like a pretty good deal to me. If you want to give me a
            hamburger monopoly for all of Tampa Bay, hey, I will gladly
            take it. In fact I would even pay for it. And I will sign on
            the dotted line today, that if you decide later to allow
            competitors, I won't come asking for yet another handout.
        Certainly, more can be done to ensure a level playing field for the
    electric market which will protect consumers, but these are the major
    considerations to which I would give the most weight.
        We do need your help. The electric utilities in Florida are using
    my money to fight against consumer choice and other consumer-friendly
    initiatives at every step of the way. They are filing lawsuits to
    prevent the introduction of new low-cost, clean power plants in Florida
    which would not go into any utility's rate base. They are fighting
    attempts to reign in their rates when they earn record profits which
    exceed their regulated rate of return. And they use their considerable
    political weight to fight against the mere study of customer choice in
    Florida.
        The electric utilities have rafts of lawyers and lobbyists and a
    whole lot more money than we do. Our business simply cannot afford to
    hire a platoon of attorneys to fight them both in the Florida
    Legislature and at our Florida Public Service Commission. Small
    electric consumers desperately need a date certain for customer choice
    in the states and a fully competitive market along the lines I have
    suggested to you today. Customer choice will provide better protection
    for small consumers than new regulations and more bureaucracies.

        Mr. Barton. Thank you, Mr. Casper, for that warm and
    friendly Ronald McDonald statement.
        I think you are related to Mr. Stearns. That is what I told
    him.
        No, we appreciate your forthrightness.
        We would now like to welcome Mr. Jack Brice, who is a
    member of the board of the American Association of Retired
    Persons, for which organization I will be eligible in about 6
    months.

                         STATEMENT OF JACK BRICE

        Mr. Brice. We will welcome you to the club.
        Mr. Barton. Your statement in its entirety is in the
    record, and we recognize you for 5 minutes.
        I do want to compliment Mr. Casper; he finished his in
    about 4\1/2\ minutes. We appreciate that.
        Mr. Brice. Mr. Chairman and members of the committee, AARP
    thanks you for this opportunity to present our views. AARP
    believes that the fate of residential consumers in a
    restructured electric industry will depend upon whether the new
    market structure gives them a fair chance to receive the
    benefits of competition, ensure that their interests are
    represented in the market, and will provide fundamental
    protection against abuse.
        Given the vulnerability of older residential ratepayers,
    AARP believes that any Federal legislation to restructure the
    electric utility industry must ensure that residential
    customers share in the benefit of competition, include strong
    consumer protection provisions, and establish a universal
    service policy to assist low-income and high-cost area
    consumers.
        AARP understands the reluctance of many Members of Congress
    to institute new programs. Historically, new programs in the
    utility area either increase taxes on the class of consumer who
    can least afford it or force a reallocation of resources that
    may seriously jeopardize other valuable programs. Therefore,
    much of what we are proposing today can be accomplished within
    the jurisdictional authority of existing governmental entities.
        AARP believes strongly that residential customers have
    benefited, or should benefit, from restructuring. An important
    way in which residential consumers can reap lower rates from
    the outset is through aggregation. AARP supports a Federal role
    in facilitating aggregation, and on the State level we have
    been promoting municipal aggregation with a volunteer opt-out
    procedure. However, we also favor allowing nongovernmental
    entities to become aggregators as well, as is provided for in
    the administration's bill and, as we understand it, in
    legislation being drafted by members of this subcommittee.
        While we do not envision aggregation being a panacea for
    all residential consumers, it can provide an alternative for
    those who are interested. Facilitating aggregation is not
    enough within itself. Additionally, consumers must be educated.
    These efforts will likely come from aggregators, but should
    also come from DOE, FTC, and groups like AARP.
        For competition in the electric industry to work, strong
    consumer protections to prevent abuse in the competitive market
    are necessary. For the benefit of older consumers, and indeed
    all ratepayers, Congress should take a proactive approach to
    addressing the specific problems of slamming, cramming, and
    consumer confusion regarding billing statements. We feel
    strongly that a failure to provide solid consumer protection
    provisions will only lead itself to abuses down the road.
        AARP recognizes that many members of this committee are
    well aware of the problems that have occurred as a result of
    slamming and cramming practices in the telecommunications
    arena. We applaud the full Commerce Committee for doing its
    part to address these problems by approving anti-slamming
    legislation in the last Congress. Unfortunately, we have no
    doubt that similar practices will develop as the market for
    retail electricity evolves.
        Now, at this juncture, Congress has a unique opportunity to
    nip fraudulent activity in the bud before it has a chance to
    fully flower. Anti-slamming and anti-cramming provisions will
    go a long way toward addressing these abuses.
        A truth-in-billing requirement is of paramount importance
    to consumers and would serve the best interests of electric
    utility service providers as well, similar to the recently
    approved FCC order, the development of which AARP played an
    active role. The truth-in-billing provision addressing electric
    utility bills will provide consumers with a wealth of valuable
    information. It is undeniable that, as various industries
    continue to converge, and the utility billing statement becomes
    a more attractive means to bill for services, consumers are
    likely to become more and more confused by what they are being
    asked to pay for.
        Mr. Barton. You have also had your first click, Mr. Brice.
    So if you could try to summarize it----
        Mr. Brice. I shall.
        Mr. Barton. Please, sir.
        Mr. Brice. AARP strongly believes that providing such
    information to consumers will alleviate confusion, making them
    more likely to become participants in the competitive
    marketplace.
        Mr. Chair, we thank you for this opportunity to present our
    views, and we will be looking forward to the opportunity to
    working with you.
        [The prepared statement of Jack Brice follows:]
       Prepared Statement of Jack Brice, Member, Board of Directors, AARP
        Mr. Chairman and Members of the Committee: My name is Jack Brice
    and I am a member of AARP's Board of Directors. We thank Chairman
    Barton and the other members of the Committee for inviting us to
    present our views on what we feel are the necessary consumer protection
    components to any federal legislation dealing with the restructuring of
    the electric utility industry.
        AARP's membership has a vested interest in the move towards
    competition now underway in the electric utility industry. For
    everyone, electricity is a basic necessity of modern life. The cost of
    this necessity, however, can comprise a significant portion of an
    average consumer's personal expenditures. In fact, energy costs can
    take up to as much as 5 percent of the median-income household's
    monthly budget. Older Americans are particularly vulnerable to rapid
    increases in energy prices. Although older persons consume
    approximately the same amount of residential energy as non-elderly
    Americans do, they devote a higher percentage of total spending to
    residential energy. Among low-income older families, an average of 17.5
    percent of their income is spent on residential energy. Too often, low-
    income older persons are faced with the choice of risking their health
    and comfort by cutting back on energy expenditures or reducing spending
    for other basic necessities.
        Proponents claim that retail competition will bring about
    substantial rate reductions for all ratepayers, including the elderly.
    A corollary to this theory is that consumers will receive other
    benefits of retail competition as well, including the ability to shop
    among competitive providers, and to take advantage of a new array of
    products and pricing options.
        However, as states are making decisions to open their respective
    markets to competition, it is unclear whether the ability to choose a
    power provider is leading to rate reductions for all consumers. In
    fact, while the move to competition almost always benefits larger
    businesses, its impact on individual, household consumers is less
    certain.
        The fate of residential consumers in a restructured electric
    industry will depend on whether the new market structure gives them a
    fair chance to receive the benefits of competition, ensures that their
    interests are represented in the market, and provides fundamental
    protections against abuse.
        Residential ratepayers, and particularly older Americans, thus face
    very significant risks--and few, if any, assured benefits--in the move
    to retail competition in the electric power industry. These risks go
    beyond the ability to benefit from choice. They also include risks
    associated with confusion, deception and fraud.
        AARP's concerns have led us to question the need for federal
    legislation in the past. However, as restructuring activity in the
    individual states continues--as we have testified that it should--some
    issues have crystallized that we believe require Congressional action.
        Given the vulnerability of residential ratepayers, AARP believes
    that any federal legislation to restructure the electric utility
    industry must:

     Ensure that residential customers are among the first to
            benefit from competition;
     Include strong consumer protection provisions; and
     Establish a comprehensive universal service policy, including
            a guarantee of affordability.
        Before offering more specificity to these three general areas of
    concern, let me state that AARP understands the reluctance of many
    Members of Congress to institute new programs. Historically, new
    programs in the utility area threaten either to increase taxes on the
    class of consumers who can least afford it, or force a reallocation of
    resources that might seriously jeopardize other valuable programs.
    Therefore, much of what we will be proposing today is designed to be
    accomplished within the authority of existing government entities.
    Residential Customers First
        AARP believes strongly that residential customers should benefit
    from restructuring. We are pleased that legislation announced earlier
    this spring by the Administration begins to address the issue of
    residential customers sharing in the benefits of competition from the
    start. Likewise, we are encouraged to hear that legislation being
    drafted by Members of this Subcommittee may also provide relief for
    residential consumers.
        The fact of the matter is that residential consumers are simply not
    as attractive to utilities as industrial customers are. If residential
    consumers are not among the first allowed to benefit from competition,
    it is hard to imagine a scenario where they would benefit in the long
    run.
        One very important way in which residential consumers can reap
    lower rates from the outset is through aggregation. Aggregation in its
    simplest form will allow residential consumers from like communities or
    associations to pool their respective electricity needs, enabling them
    to negotiate lower rates from a power provider.
        AARP supports a federal role in facilitating aggregation. On the
    state level, we have been promoting municipal aggregation with a
    voluntary opt-out procedure. However, we also favor allowing non-
    governmental entities to become aggregators as well, as provided for in
    the Administration's bill. While we do not envision aggregation being a
    panacea for all residential consumers, it can provide an alternative
    for those who are interested.
        Facilitating aggregation is not enough in and of itself.
    Additionally, consumers must be educated. These efforts will likely
    come from the aggregators but should also come from the Department of
    Energy, the Federal Trade Commission and groups like AARP. Licensing
    requirements and consumer protection safeguards must also be put in
    place. As large aggregators are likely to operate on an interstate
    basis, it is incumbent upon the Congress to ensure that they meet
    certain threshold operational requirements and that deceptive,
    fraudulent or other illegal behavior not be tolerated.
    Consumer Protection Laws
        For competition in the electricity industry to work, strong
    consumer protection laws must be applied to the sale of electricity in
    a restructured industry. Low-income, non-English speaking and elderly
    consumers, in particular, will need very strong consumer protections to
    prevent abuse in the competitive market. For the benefit of older
    consumers and indeed all ratepayers, Congress should take a proactive
    approach to addressing the specific problems of slamming, cramming and
    consumer confusion regarding billing statements. We feel strongly that
    a failure to provide solid consumer protection provisions will only
    lend itself to abuses down the road.
        AARP recognizes that many Members of this Committee are well aware
    of the problems that have occurred as a result of slamming and cramming
    practices in the telecommunications arena. We applaud the full Commerce
    Committee for doing its part to address these problems by approving
    anti-slamming legislation in the last Congress. Unfortunately, we have
    no doubt that similar practices will develop as the market for retail
    electricity evolves.
        Now Congress has the unique opportunity to nip fraudulent activity
    in the bud, before it has a chance to fully spread. Anti-slamming and
    anti-cramming provisions like the ones included in the Administration's
    legislative offering will go a long way towards addressing these
    abuses. We also support providing the Federal Trade Commission (FTC)
    with the authority to enforce the law.
        In addition to providing the FTC with the tools to counter slamming
    and cramming, there is another measure that will reduce incidents of
    fraud while providing the consumer with valuable and necessary
    information. A ``Truth-in-Billing'' requirement is of paramount
    importance to consumers and would serve the best interests of electric
    utility service providers as well. Not unlike the recently approved
    Federal Communications Commission (FCC) Order, in the development of
    which AARP played an active role, a truth-in-billing provision
    addressing electric utility bills would provide consumers with a wealth
    of information, in a form that is ``user friendly.''
        It is undeniable that as various industries continue to converge,
    and the utility billing statement becomes a more attractive means to
    bill for services, consumers are likely to become more and more
    confused by what they are being asked to pay for. By providing a
    comprehensive, easy-to-read billing statement each month, a consumer
    can better track what services are being provided; who is providing
    them; at cost they are being provided; what additional taxes or charges
    are being imposed and who they can call if they have a dispute. Other
    items that should be displayed on the billing statement include
    information about interruptibility of service and information regarding
    the mix of resources used to generate the power. We also support the
    use of standardized language in describing fees or charges that are
    being imposed on consumers. AARP strongly believes that providing such
    information to consumers will help alleviate confusion, making them
    more likely to become participants in the competitive marketplace.
        AARP also supports the creation of a consumer database to assist
    residential customers in obtaining information about retail electric
    utility providers. We would support this database being housed at the
    FTC, an agency with a tradition of excellent consumer protection.
        Finally, we would ask that this Committee look closely at public
    policy developments in the area of privacy and ensure that consumers in
    a restructured electric utility environment are afforded protections
    similar to those being implemented in Pennsylvania.
    Universal Service
        As we have said previously, electric utility service is essential.
    It is arguably more important to the residential consumer than is
    telephony. Therefore, one of the cornerstones in any restructuring
    effort is the requirement that electric utility service be universal
    and affordable. A universal service policy must ensure basic electric
    service at a level of consumption that would meet the needs of
    residential ratepayers for lighting, heating, cooling, cooking, and
    recreation. Such service must be affordable for all consumers, which
    means that it must be discounted for low-income and high cost area
    consumers. In our view, affordability means that electricity rates do
    not strain the household budget.
        AARP is concerned that in a competitive environment, less
    attractive customers will be adversely affected. While we recognize
    that there have been problems with the universal service program in
    telecommunications, we believe these problems need not carry over into
    the electric utility area. The Administration has made an attempt to
    address universal service through a proposed Public Benefits Fund. Our
    concern with this fund is that it renders low-income energy assistance
    an option, not a requirement. Further, we are concerned that the cost
    of the program may ultimately be borne by all consumers as a new tax.
    We recommend that the costs of implementing a universal service system
    be placed on all generators of electricity based on a standard formula
    and not on consumers via a line-item charge.
    Conclusion
        In conclusion, let me stress what AARP believes to be the Federal
    government's essential role in a restructured electric industry. First,
    facilitate aggregation so that residential consumers can benefit from
    the start. Second, enact strong consumer protection provisions, and
    third, develop a mechanism to ensure universal service.
        Mr. Chairman, AARP continues to be concerned that restructuring
    could unravel the protections of regulation, while offering only
    uncertain improvements on the current structure. The work that you have
    done to highlight many of the inherent problems in the move to a
    deregulated environment over the last two months is to be commended. We
    are hopeful that the introduction of comprehensive bipartisan
    legislation will address many of our concerns and further advance the
    debate. On behalf of AARP, I thank you again for providing us with this
    forum to discuss the critical area of consumer protection. We look
    forward to continuing our active participation in this debate on both
    the federal and state level and to working with you in crafting
    solutions that will ultimately benefit not only our members, but also
    the nation as a whole.

        Mr. Barton. Thank you, Mr. Brice.
        Before we recognize Mr. Cooper, I notice that a group of
    very intelligent and good-looking people just came in the room,
    and it turns out they are my constituents there at the back
    from Waxahachie, Texas. So go home and tell them that your
    Congressman is working very hard.
        Congressman Hall has already laid claim on you, though. He
    wants you to move north to Rockwall. He says he likes you.
        We recognize Mr. Mark Cooper, who is the director of
    research for the Consumer Federation of America.

                       STATEMENT OF MARK N. COOPER

        Mr. Cooper. Thank you, Mr. Chairman. In addition to
    representing CFA here in Congress and before Federal agencies,
    I have actually testified at public utility commissions in 10
    cases and at four State legislatures on behalf of CFA's
    members, such as AARP. So we have seen the problem from both
    sides, and I want to stress what I think this Congress must do
    in order to make this work.
        We start from the purpose of restructuring. In the electric
    utility industry, we see it as the need to promote universal
    service in a more efficient manner. This industry is not broke,
    but it could work better. Service to the public is the ultimate
    goal; competition is only a means to that end.
        At the same time, it is true in this market, as all other
    markets: Competition is the best form of consumer protection.
    Therefore, the most important thing that you can do is to
    ensure that we have a vigorously competitive market. No amount
    of consumer protection or targeted assistance will compensate
    for a fundamentally flawed market structure. We believe that
    competition is what this committee and the Federal agencies it
    authorizes can and should promote.
        Nevertheless, consumer protection is important. Electricity
    is a vital commodity. It may never simply be just a plain, old
    commodity; it is too important to daily life. There are no
    close substitutes. We may need extra consumer protection
    forever. We certainly need it in the transition.
        We think that the essential thing that the Congress can and
    should do is to promote competition in interstate markets.
    Transmission is an interstate function. No individual State can
    reach across its borders to regulate transmission.
        The Congressman mentioned the airline industry and the
    trucking industry, and suggested that deregulation went better.
    Let me remind you that airports are essentially bottleneck
    facilities owned and operated by government entities. Highways
    are essential bottleneck facilities owned and operated by the
    government. The transmission system is a private highway, but
    it must be owned--operated, if not owned--in an open fashion to
    promote competition and ensure reliability. And that is why you
    are having so much trouble, because the essential bottleneck
    facility is not open. That is your first job; that is a Federal
    job, and you must do it well.
        Second of all, the ultimate responsibility for national and
    regional markets, industrial organizations, resides at the
    Federal level. The interstate market will be interstate. No
    State can reach across and ensure a competitive structure.
    States cannot regulate those markets. You must ensure that the
    electricity market in the interstate and regional jurisdiction
    is competitive, has enough people so that we actually have
    choices. That is a Federal function, anti-trust function, but
    more, because in creating a market, Federal authorities must be
    concerned where new markets are thin and subject to abuse. We
    had a create hue and cry about that last year.
        Those are the two essential functions that reside at the
    Federal level. That is where you should devote your efforts and
    attention. If you fail at the Federal level, we cannot succeed
    at the State to have a competitive market, because States are
    not big enough--with the exception perhaps of Texas, maybe
    California--but they will rely on interstate transportation and
    movement of energy. That is your job.
        Now there are shared responsibilities between the Federal
    and the State jurisdictions. We think licensing and standards
    are important. And insofar as there is interstate commerce, you
    must take a role there. Privacy is important. The Public
    Utility Holding Company Act prevents the abuse of interstate
    entities. Individual States cannot reach into neighboring
    States to regulate entities. So before you repeal PUHCA, you
    must have an alternative in its place. We prefer effective
    competition. We will consider State regulation. But you must
    have an effective alternative in its place because that is an
    interstate abuse.
        Finally, with respect to privacy, slamming, and cramming,
    there is no doubt that there will be Federal issues. When we
    say that States and Federal jurisdictions should share
    responsibility, what we have in mind is a Federal minimum
    standard that States can improve upon, but we need a floor, a
    minimum level of protections that everyone gets, and then
    perhaps the States can do better.
        Thank you, Mr. Chairman. We look forward to working with
    you.
        [The prepared statement of Mark N. Cooper follows:]
     Prepared Statement of Mark N. Cooper, Director of Research, Consumer
                             Federation of America
        Mr. Chairman and Members of the Committee, my name is Dr. Mark N.
    Cooper. I am director of Research at the Consumer Federation of America
    (CFA). Founded in 1968, CFA is the nation's largest consumer advocacy
    group. Composed of over 240 state and local affiliates representing
    consumer, senior citizen, low-income, labor, farm, public power and
    cooperative organizations, the Consumer Federation of America's purpose
    is to represent consumer interests before congress and the federal
    agencies.
        CFA has an ongoing interest and involvement in national electricity
    and energy policy formation. Focusing on electric utility issues in the
    past decade, CFA has testified before Congress, filed comments in
    regulatory proceedings at the Federal Energy Regulatory Commission
    (FERC) and before several state commissions, served on advisory boards
    of the Office of Technology Assessment, filed amicus before the U.S.
    Supreme Court, taken part in informal dialogues with industry
    representatives, sponsored an annual electric utility conference and
    published several major research reports.
                 i. overall goals of electricity restructuring
        The purpose of restructuring in the electric utility industry is to
    promote universal service in a more efficient manner than at present.
    Service to the public is the ultimate goal; competition is the means to
    that end. At the same time, the most effective form of consumer
    protection is vigorous competition. Therefore, the most important step
    in restructuring is to establish market structures and conditions that
    create the greatest chance for vigorous competition in generation for
    all market segments. No amount of ``consumer protection'' or ``targeted
    assistance'' can make up for a market that suffers from fundamental
    competitive flaws.
        Nevertheless, consumer protection remains an especially important
    concern as this industry is opened to greater competition. Experience
    with electricity as a commodity is lacking both on the supply-side and
    the demand side, particularly as it affects direct sales to small
    customers. In the long term electricity will never simply be a
    ``commodity.'' It is too vital to daily life and economic activity to
    shed all aspects of utility treatment. Heightened consumer protection
    may always be necessary.
                  ii. principles for market structural reform
        A competitive market for electricity will be dependent upon an
    effective supply-side because as a necessity, the demand for
    electricity is relatively inflexible (the price elasticity is low).
    There are no substitutes for electricity in most applications. A
    competitive market requires many producers who are seeking to win
    customers with quality services at prices that are driven by their
    costs. By this definition, it will be difficult to make the transition
    from the current structure and there will be a number of electricity
    market segments that will not be subject to effective competition.
    Public policy should promote competition wherever it can be effective
    and continue regulatory protections where it cannot.
    A. Promoting Competition
        Minimize potential impacts of market power: Vertical divestiture--
    separating ownership of generation from ownership of transmission and
    distributions facilities--is the best method of preventing abuse of
    affiliate relationships. If vertical divestiture is not required,
    extensive authority to prevent abuse of affiliate transactions must be
    available including imposition of affiliate transaction rules and an
    affiliate code of conduct.
        Regulators must have the authority to ensure non-discriminatory
    access to the transmission and distribution system. Non discriminatory
    access must include the imposition of ``just and reasonable'' rates for
    access.
        Regulators must have the authority to monitor and investigate
    market conditions. The regulatory authority must include the ability to
    gather evidence, hold hearings and order corrective action, including
    penalties and restitution where abuse of market power is found.
        Regulators must have the option of imposing price ceilings,
    conditions or limitations on sales. Regulators must have the authority
    to apply conditions or limitations on mergers or acquisitions within
    their jurisdiction, to the extent that the regulator finds it necessary
    to protect ratepayers, promote competition, or prevent anti-competitive
    actions.
        Promote Competitive Opportunities for Small Customers.
    Restructuring must actively promote competition for residential
    ratepayers. There must be institutions and mechanisms in place to
    ensure that residential ratepayers can purchase low cost power.
    Facilitating the aggregation of small customers will reduce overhead
    costs.
    B. Ensure Fairness In Remaining Monopoly Areas
        Protect Ratepayers from Cost Shifting: Restructuring should allow
    the integration and coordination functions now performed by utilities
    to be performed by the system operator with benefits credited to the
    customers who do not to elect suppliers. Ensure that costs associated
    with transactions, including additional facility and management costs
    are borne by the parties engaging in the transactions. Ensure that
    residential customers bear no more than a reasonable share of network
    facilities and other joint and common costs incurred to serve all
    customers. Retain regulatory oversight over the metering and billing
    process
        Minimize or reduce price discrimination: prohibit shifting costs
    from high volume to low volume customers. Prohibit cherry picking by
    requiring service providers to serve all customers in their chosen
    service territory.
        Residential customers should not subsidize utility entry into new,
    competitive businesses and sufficient mechanisms to detect, prevent and
    correct such subsidization shall be established.
        To ensure that all classes of customers benefit from restructuring,
    discriminatory policies must be prevented including non-discrimination
    within customer classes so that similarly situated customers must be
    treated similarly; and a user pays principle to ensure that entities or
    customer classes who cause costs to be incurred (who use facilities)
    and obtain the associated benefits should bear the corresponding cost
    burden.
        Rates should not be deaveraged or rebalanced, to prevent shifting
    of costs onto those customers without competitive alternatives.
        Minimize the impact of recovery of uneconomic costs: Require
    shareholders to bear their fair share of stranded costs. Ensure that
    any stranded costs that are recovered are paid for equitably by all
    customer classes, allocated by usage of stranded assets. Allocate
    uneconomic costs based on electricity usage (kilowatt-hours consumed),
    not other formulae that shift excess costs onto residential customers.
    Prohibit the transfer of costs from generation assets to transmission
    and distribution assets as a way to collect stranded costs because such
    transfers allow large industrial customers to further avoid stranded
    costs, since they do not use the distribution system. Prohibit
    securitization of stranded costs because it locks in recovery of costs
    without an opportunity to ``true-up'' for over recovery.
    C. Provide Effective Protection Against Holding Company Abuses Before
            Repeal of the Public Utility Holding Company Act
        PUHCA provides essential consumer protections: PUHCA provides
    essential protection for competition and consumers in the electric
    utility industry in a number of ways. It bars utility acquisitions that
    could monopolize new territories or new power sources or which create
    risks to consumers or investors. It demands that utility acquisitions
    ``serve the public interest by tending toward the economical and
    efficient development of an integrated public-utility system.'' It
    limits utility speculation in unrelated ventures, where that
    speculation imposes risks on electric customers. It guards against
    corporate structures that make state regulation more difficult. It
    prohibits interaffiliate transactions within registered holding company
    systems, except at cost. It requires advance review of certain bond
    issuances of registered holding company systems.
        Premature repeal of PUHCA would expose consumers to abusive
    transactions: The fundamental consumer protections provided by PUHCA
    prevent a wide range of abusive transactions from taking place.
    Regulation of transactions under PUHCA is sufficiently rigorous to
    dissuade most utilities from engaging in multi-state, non-contiguous
    and diversified activities. As a result, PUHCA prevents the development
    of complex corporate holding companies that span many state and
    international borders and evade regulation. By imposing rigorous
    regulation, PUHCA effects a structural solution. Most utilities have
    not done certain things to avoid coming under PUHCA. If the commitment
    to consumer protection embodied in PUHCA is maintained, they will not
    engage in these activities.
        Regulation cannot replace PUHCA's structural protections because we
    do not have a comprehensive state-federal scheme of regulation in place
    in this country by any stretch of the imagination. Before PUHCA is
    repealed we must be certain that state authorities have adequate power
    to provide the consumer protection function and markets should be open
    to competition.
                   iii. utility assurances for all consumers
    A. Reliability of Supply
        The introduction of competition into utility industries invariably
    raises quality concerns. Two sets of policies to ensure quality should
    be pursued.
        Licensing and certification: Licensing and certification should
    cover several broad areas. All companies should be required to
    demonstrate their technical, financial and managerial capabilities to
    provide the services for which they seek certification. Histories of
    prior complaints and problems should be made available. Bonding should
    be required to cover penalties for failure to meet reliability and
    marketing standards. Penalties should be known in advance.
        Standards: Standards should be set and rigorously enforced. There
    are at least two crucial aspects to implement this policy. First,
    minimum standards should be established and imposed on the marketplace.
    Second, penalties for failing to meet quality standards should be
    severe.
    B. Certainty of Service
        Utility Protections: Because electricity is a necessity all
    consumers must continue to receive utility protections. Terms and
    conditions must be regulated at the point of sale. Specific policies in
    this area include application, credit, deposit, disconnection, restoral
    of service, bill collection, dispute resolution, and partial payment
    policy.
        Obligation to serve: The obligation to serve has been a cornerstone
    of utility service and should remain so. Every consumer should have a
    provider who has the ultimate obligation to provide the basic necessity
    service. This would include the responsibility to maintain the
    facilities necessary to deliver electricity, as well as the actual
    purchase and delivery of electric service. The basic service package
    should be available to all consumers at a reasonable cost.
                            iv. consumer protection
    A. Customer Choice
        The cornerstone of consumer protection is consumer sovereignty. The
    ability of consumers to exercise informed choices in the marketplace is
    considered essential to the efficient functioning of a market.
        Fair Marketing: Consumers must be assured that as they are forced
    to make purchase decisions about electricity, they are provided at
    least the same level of protection from fraud and abuse as they have
    today. Marketing fairness involves protection against abuse of
    consumers and provision of reasonable opportunities to benefit from the
    introduction of competition into the industry. If the marketplace
    becomes fully competitive, these protections may no longer be
    necessary. Balloting should be considered as a vehicle for executing
    choice.
        Sales Practices: Customers must be protected against abusive
    marketing practices. Regulations should explicitly outlaw slamming/
    cramming (changing service providers or adding services without the
    written permission of the customer) and other fraudulent or abusive
    marketing practices (pressure tactics, bait and switch tactics,
    negative options, etc.) Electric service providers should be prohibited
    from coercing or inducing their customers toward the purchase of
    nonregulated goods or services from affiliated companies. Rules should
    be enacted on notification and language requirements. Standards for
    information included in marketing should be set. A cooling off period
    should be specified.
        Consumer Education: Vigorous consumer education campaigns should be
    conducted including the development of materials to enable consumers to
    make effective choices. Initially, consumers should be alerted to the
    fact that competition is coming. They must be made aware that new
    decisions are coming. Consumers must be provided information on price,
    quality and features that facilitate comparisons across providers.
    Third party information should be developed.
        Outreach efforts should be conducted. Each provider should be
    required to prepare a plan for consumer education. The plan should
    cover materials, outreach and monitoring. The Commissions should
    monitor the effects of education efforts
    B. Transaction Safeguards
        Privacy Protection: Information about billing, payment history and
    consumption patterns must be under the control of the customer. To the
    extent that exchange of such information is necessary for efficient
    billing, it should be made available to the parties with whom the
    customer has contracted for service.
        Billing Practices: Delivery of bills and billing information should
    be stipulated. This should include frequency of billing and notice,
    information and billing detail, format and language requirements.
    Customers must receive fair and clear billing statements with uniform
    labels that disclose price, price risk, length of contract, supply mix
    and environmental pollutants and must have access to fair dispute
    resolution procedures; suppliers must comply with fair marketing
    practices.
    C. Post Purchase Remedies
        Resolution of Disputes: Without effective dispute registering
    procedures, abusive practices are likely to persist because of the
    difficulty of pursuing post-purchase remedies. Therefore, it is
    important to provide support for the registering of complaints. There
    are four steps in the complaint process--intake, investigation,
    resolution, and redress.
        Companies should be required to provide 800 number services and
    notification of dispute procedures. The lead state consumer protection
    agency should also have a centralized dispute handling service.
    Policies to protect consumers from unfair or rapid loss of service or
    pressure tactics during the adjudication process must be in place.
        In the transition to competition, it is important to require all
    sellers to be certified and licensed. This will ensure that they are
    subject to the consumer protection policies. It is a central step in
    ensuring that they adhere to reliability policies and consumer
    protection policies.
    D. Enforcement
        General Authority: Each of the policy areas outlined is intended to
    prevent or discipline abusive practices without enforcement. This has
    not proven adequate in other industries. Therefore, vigorous
    enforcement is necessary. Penalties must be sufficient to discourage
    abuse. Exemptions of electricity services from consumer protection
    statutes should be lifted and electricity should be subject to the full
    force of consumer law. Customers must have a private right-of-action,
    including class actions, for enforcement and damages.
        Jurisdictional responsibilities: The transformation of an industry
    as fundamental to modern society as electricity requires coordinated
    and active involvement of all levels of policy making.
        It is clear that federal authorities have primary responsibility to
    ensure that the interstate jurisdiction supports competition and
    protects consumers. Transmission is an interstate function. Markets
    simply cannot perform reasonably if the interstate movement of power is
    impeded. Open access cannot be a voluntary activity. Ensuring that the
    highways of commerce are open is a fundamental governmental activity.
        Federal authorities also clearly have ultimate authority for the
    competitiveness of markets. These are interstate markets and no state
    can reach across its borders to determine industry structure. Federal
    agencies have that responsibility. In the transformation of the
    industry, federal authorities cannot just rely on antitrust laws,
    although it is clear that concentration in the industry must be
    prevented. Federal authorities must be active in monitoring markets and
    establish circuit breakers as markets are formed.
        To the extent that interstate activity creates problems for state
    authorities, as addressed in PUHCA, federal authorities must take
    action.

        Mr. Stearns [presiding]. Thank you, Mr. Cooper.
        Next is Betty Jo Toccoli, Chair of the Small Business
    Alliance for Fair Utility Deregulation. Welcome, Betty.

                      STATEMENT OF BETTY JO TOCCOLI

        Ms. Toccoli. Good morning.
        Mr. Barton. I met with Mrs. Toccoli in California. So we
    are very appreciative that you would make this trip here today.
        Ms. Toccoli. Thank you.
        Mr. Hall. And, Mr. Chairman, she's able to cross State
    lines. She came to my home town in Texas and held hearings, and
    gave us the benefit of her knowledge. I thank you for having
    her.
        Mr. Stearns. Yes, sure.
        Ms. Toccoli, please present your opening statement.
        Ms. Toccoli. Thank you very much. We very much appreciate
    the opportunity to be a participant in these hearings. We want
    to thank the chairman and the committee members for your
    efforts to include all stakeholders.
        I not only cross States lines; I was an early participant
    from day one at the table in the negotiations in the California
    rate structuring, which is where I live. I have had the
    opportunity, through the Small Business Alliance, to help
    educate and advocate across many States throughout our country.
        Small business supports electric restructuring. We feel
    strongly that all customers have a right to choose their
    electric provider without mandated switching or mandated
    aggregation. We think aggregation is a good possibility for us
    to lower our costs.
        We have, as small business people, a tremendous stake in
    this process. I am a small business owner, and it can work out
    to lower my costs or it can work out to increase my frustration
    as a small business owner. As you have already heard, we really
    do not have the opportunity to have multiple attorneys and
    advisors to advise us on how to make these decisions. We
    believe rules should protect consumers, including small
    business consumers, not competitors.
        We are particularly concerned about the rural small
    businesses, and even some suburban businesses, because we think
    they are particularly vulnerable. Certainly consumer protection
    and the right to choice is important for these businesses.
        We do believe that the lead will be taken by the States,
    and should be, and particularly in the area of consumer
    protection. But we think there is an appropriate role for the
    Federal Government, particularly in the area of FERC, on the
    reliability grid, and on the FTC in consumer protection.
        Some of the things that are extremely important to us in
    consumer protection are strict minimum standards for safety,
    reliability, financial responsibility, and technical
    competence. I think our original fears of reliability and
    safety, at least in California, have kind of gone away. We
    think those are being very well-handled.
        What we have discovered, next to our first issue of choice,
    is the issue of consumer protection. I have had the opportunity
    to work with NARUC on some of the Consumer Services Division's
    area, and I am very pleased to tell you that commissioners are
    really reaching out to work with us on small business consumer
    protection as well as residential.
        We also think that there should be strict rules prohibiting
    unfair and deceptive practices and respecting consumer choice.
    I might tell you that in the small business world we don't call
    it slamming; we call it shocking.
        We do want to protect the right for consumers to have
    redress, and this needs to be timely, inefficient, and very
    easy. In this area we have promoted small business ombudsmen in
    the utility commissions. We protect the right to be informed.
        And last, but not least, probably the most important area
    for the small business community is the proper education. Small
    business owners do not receive education in the same manner as
    other consumers, and you need to work with small business
    organizations, the Small Business Administration--to achieve
    these goals.
        Again, I want to say thank you. You have a big job ahead of
    you. We would like the opportunity to continue to work with the
    committee, Members of Congress, and all the stakeholders to
    make electric deregulation work for all. Thank you.
        [The prepared statement of Betty Jo Toccoli follows:]
    Prepared Statement of Betty Jo Toccoli, Chair, Small Business Alliance
                          4 Fair Utility Deregulation
        Good Morning, I'm Betty Jo Toccoli, a small business owner of a
    financial services firm and as President of the 180,000 member
    California Small Business Association was involved in the California
    deregulation from the beginning. I am also Chair of the Small Business
    Alliance 4 Fair Utility Deregulation (SB4). The SB4 was formed by
    delegates from across the USA to implement one of the issues from the
    1995 White House Conference on Small Business--utility deregulation. We
    are a grassroots, volunteer non-partisan and non-political organization
    with the purpose of educating and advocating for small business on this
    important issue.
        We appreciate the opportunity to present the consumer protection
    views of small business before this committee. No doubt, you know this
    is the celebration of Small Business week here in our Nation's Capital.
    Thank you Chairman Barton and committee members for your efforts to
    include all stakeholders in these important hearings.
        Small business supports the efforts of restructuring the electric
    industry. We believe all customers (small and large) (business and
    residential) should have the right to directly choose their electric
    service provider.
        The purpose of restructuring the electric utility industry is to
    allow free market forces to operate in order to benefit all customers.
    In the past, when regulators attempted to divide the natural gas market
    between ``core'' (industrial) and ``non-core'' (small business and
    residential) customers, prices dropped for core customers who were
    given direct access to competitive gas supplies but remained high for
    non-core customers who were not given access to competitive choices. In
    a truly competitive market, every customer must have the right to
    choose.
        Small businesses have a tremendous stake in the electric
    restructuring process. On the one hand, because of competition, they
    could reap substantial benefits through lower electric bills. On the
    other hand, they could be victimized by abusive marketing practices,
    receive poorer service and encounter other problems in a changed and
    confusing electric marketplace. We believe rules should be put in place
    to protect consumers, not competitors. While large users may be the
    first to see immediate benefits, it is the small users that stand the
    risk of having the most to lose if restructuring is not done correctly.
        We are particularly concerned about the many rural and sometimes
    suburban small businesses and their right to choice and a competitive
    market. Small business is known as the job creators and driver of the
    economy and these rural small businesses are particularly vulnerable as
    we move through restructuring.
        SB4 strongly believes that states should take the lead in
    restructuring their electric utility industries. We believe that our
    voice will be better heard at state commissions and they will be in the
    best position to respond in a flexible and timely manner to the needs
    of consumers in their particular community.
        We do recognize and support a role for the federal government
    particularly reliability of the grid through FERC and consumer
    protection under the FTC.
    Strict Minimum Standards for Safety, Reliability, Financial
            Responsibility and Technical Competence.
        Small business owners need clear and consistent rules to ensure
    that all providers meet minimum standards for safety, reliability,
    financial responsibility and technical competence. The right to choose
    a provider who may be unsafe, unreliable, insolvent, or incompetent for
    electric service is not a meaningful choice for small business owners.
        To protect consumers and avoid confusion, we also need consistent
    rules. A customer's right to safety, reliability, fair marketing
    practices, price and service information, fair and accurate billing and
    a speedy dispute resolution should be the same whether the customer is
    dealing with a utility or a non-utility provider. At a minimum, all
    providers should be licensed and bonded to reduce the opportunities for
    fly-by-night operators.
    Strict Rules Prohibiting Unfair and Deceptive Practices and Respecting
            Consumer Choice.
        The marketplace must also ensure that all providers market their
    services in a fair and honest manner. Small business customers must
    also have the right to choose. This includes the right to be served by
    the existing utility if that is what they want. Once customers make
    their choices, those choices must be respected and there should be no
    unauthorized switching of their electric service or a forced
    aggregation scheme.
    Protecting the Right to Consumer Redress.
        Small business customers also require a fast and fair means of
    resolving disputes with providers. Every provider (utility or non-
    utility) should have a method of receiving and resolving customer
    complaints. Customers should have the right to speak to a live customer
    service representative. Ideally, most disputes should be resolved with
    one telephone call and within 10 business days. To be meaningful, the
    complaint process must be fast.
        For small business owners, having reliable, ongoing electric
    service means the difference between being open and closed for
    business. Small businesses should not have to spend weeks, months or
    years to resolve disputes with providers.
        Also, choosing an electric service provider, keeping track of their
    performance, and correcting service problems and billing errors should
    not be a full-time job. We need a hassle-free process that will not add
    to the overhead costs of small businesses.
    Protecting the Right to Be Informed.
        Small businesses will benefit from electric restructuring only if
    they are genuinely informed about the changes in the electric utility
    industry, their rights as consumers and how to make wise purchasing
    decisions in the competitive marketplace.
        Many small businesses are simply too small to afford consultants,
    engineers, attorneys and other experts to independently advise them
    regarding competitive offerings. While a small business owner may know
    their subject matter; many are not sophisticated in utility related
    issues.
        At the same time, these small businesses have narrow margins,
    limited capital and can ill afford a costly mistake. For these reasons,
    small businesses would benefit tremendously from relevant, reliable
    consumer information and require such information to reduce their
    vulnerability to marketplace abuse.
        A critical component of small business consumer protection is the
    correct form of education. Statistical information has shown that small
    business owners make decisions in a different manner from other
    consumers. They count on respected peers and small business
    organizations to provide them with accurate information, so they can
    make informed decisions.
        The U.S. Small Business Administration has conducted extensive
    research and possesses a wealth of information regarding how to reach
    small business owners. Congress and States should draw on this resource
    and on small business organizations throughout the U.S. to educate
    small business owners about electric restructuring.
        Small business owners should also have the right to be left alone.
    In California, the electric restructuring legislation provided for a
    Ado not call@ list that consumers could place themselves on if they
    were not interested in receiving telemarketing calls or other appeals
    from energy service providers.
        We think that securing all of these rights is important if small
    business owners are to benefit from competition. Getting the details
    right will not be easy. It will require careful attention to local
    concerns, local developments and diverse communities.
        On behalf of SB4 and the small business community, we again thank
    the Chairman and the subcommittee for taking the time to hear from us
    on this important matter. We are eager to work with the Chairman,
    members and your staff as you look at this important public policy
    issue.

        Mr. Stearns. Thank you very much.
        You know, we are here to talk about consumer protection,
    and I understand that. However, Mr. Cooper, I think your point
    is well-taken. At least from the market power standpoint, the
    controlling of the transmission lines is the key because then
    that means there is competition if everybody has access. Then
    that means the consumer will have a lower price.
        Let me ask the first question, Ms. Kolish: Can you identify
    consumer protection issues that cannot be addressed by the FTC
    under its existing authority?
        Ms. Kolish. Thank you, Congressman.
        Mr. Stearns. Can you pull the microphone a little closer to
    you. Thank you.
        Ms. Kolish. As we mentioned in our testimony, we think that
    the problems of slamming or cramming are not ones that our
    current authority might be adequate to address. As you know,
    slamming is the unauthorized transfer of a service provider.
        In that respect, our regulatory authority, our rulemaking
    authority, is designed to be retroactive. We look to see if
    there are prevalent problems in the marketplace going on. We do
    not have the authority to proactively regulate. So we would not
    be able to do a rulemaking in that area to issue rules until we
    could show that there was a widespread problem already
    occurring in the industry. I think that is one of the reasons
    why the administration's recently introduced bill would give
    the FTC the authority to issue a rule on slamming, as a number
    of States have already done.
        The second area we are concerned about is cramming, which
    we have seen in the telecommunications area. As I mentioned, it
    was our fifth most common complaint last year. We have been
    bringing lots of cases in Federal district court. We could
    proceed against that on a case-by-case basis, as we are in the
    telecom area, but rules that might help--those bills, I think
    as Ms. McCarthy said, are confusing to consumers, might be
    useful in preventing this. That is, if consumers can understand
    all the charges on their electric utility bill, they might
    notice unauthorized charges more readily, especially small ones
    that might go unnoticed when people just sort of routinely and
    automatically pay their bills.
        Mr. Stearns. On a State level--for example, California--
    slamming and cramming, is that occurring?
        Ms. Kolish. I am not certain that any----
        Mr. Stearns. On the electricity deregulation?
        Ms. Kolish. I am not certain anyone has seen cramming
    anywhere yet. We are anticipating this, unfortunately.
        Mr. Stearns. Okay, but you have seen slamming?
        Ms. Kolish. I think some States are worried about slamming.
    I am not certain they have seen it yet, but almost every State
    I am aware of has issued regulations on that.
        Mr. Stearns. All right. Then the next question would be,
    are there provisions within the State itself to prevent this?
        Ms. Kolish. It is entirely possible the State attorneys
    general or the PUCs, under their existing mini-FTC act or other
    regulations, could either proceed on a case-by-case basis or
    use their own rulemaking authority.
        Mr. Stearns. Your testimony discussed how the FTC experts
    expect electric suppliers will claim to be selling
    environmentally friendly electricity. Is environmental
    advertising a new issue for the FTC? Have you seen ads in other
    industries that make a similar environmental claim? How do you
    ensure that these claims are not false and misleading?
        Ms. Kolish. Environmental advertising, in fact, is very
    popular for many industries and services, and we, in fact, have
    been active in this area. In 1992, in cooperation with NAAG,
    the Commission issued Guidelines for the Use of Environmental
    Marketing Claims. We revised those guides again in 1996 to
    update them to account for market changes. We have also brought
    more than 30 law enforcement actions against marketers who
    abused their privileges and made misleading claims for
    environmental products.
        Mr. Stearns. Ms. Burns, a lot of people have expressed
    concern that, when we deregulate, that, for example, States
    will open their retail markets, will abandon the universal
    service obligations to low-income assistance folks. What that
    your experience in New York? Or did it continue its commitment
    to universal service and low-income assistance?
        Ms. Burns. Well, New York is committed to universal
    service, and we do have certain programs for low-income
    assistance. I think one of the key ways New York has protected
    low-income, as well as elderly, customers is through very
    strong requirements, due process requirements, notice
    requirements, before service can be terminated. They are quite
    extensive, and they are a matter of State law.
        Mr. Stearns. So you are saying low-assistance income folks
    have not suffered? And New York is making a particular effort
    to help them? Yes or no?
        Ms. Burns. What I am saying is that, with respect to
    incumbent utilities, New York has fairly strong protections
    against cutoffs, et cetera. Our experience, as I indicated, is
    too new with deregulation--it is just being phased-in--to know
    whether or not there will be problems with respect to
    competitive suppliers. Indeed, in New York the same kind of
    protections that we extend to customers of incumbent utilities
    in terms of service cutoffs, et cetera, there are fewer such
    protections currently extended to customers of competing
    providers. That is a concern of my office, for instance.
        Mr. Stearns. All right, my time has expired. Next is Mr.
    Hall, the ranking member from Texas. Mr. Hall.
        Mr. Hall. Mr. Chairman, thank you.
        Mr. Casper, I have listened to your testimony, and it was
    interesting. You say, ``I may not understand all the
    technicalities of what constitutes so-called stranded costs and
    how to calculate.'' That is your position, isn't it, that you
    don't understand all the technicalities of stranded costs? Is
    that your testimony?
        Mr. Casper. Yes.
        Mr. Hall. And you say, ``If you want to give me a hamburger
    monopoly for all of Tampa Bay, hey, I will gladly take it. In
    fact, I would even pay for it, and I will sign the dotted line
    today that, if you decide later to allow competitors, I won't
    come asking you for another handout.'' If you were given an
    area and you were going to decide where to put another
    hamburger stand, you would do some kind of feasibility study,
    wouldn't you? Traffic and location and proximity to other
    hamburger stands, and things like that?
        Mr. Casper. Correct.
        Mr. Hall. That would be the sensible way to do it?
        Mr. Casper. Sure.
        Mr. Hall. You would have the right to do that, wouldn't
    you? It would be your obligation. If you had shareholders, you
    would owe them the obligation of being pretty choosey as to
    where you build this. You would need some information from
    someone that knew more about traffic and things than you did?
        Mr. Casper. We would run the risk, yes, sir.
        Mr. Hall. Yes. So you also say, ``I understand the electric
    utilities' arguments about their duty to serve stranded costs,
    but, frankly, I am not sympathetic.'' They don't always get to
    say where they build that extra stand, do they, because they
    are government-regulated? A little difference in your situation
    and theirs, is it not?
        Mr. Casper. The decisionmaking----
        Mr. Hall. Yes.
        Mr. Casper. [continuing] for that investment is different.
        Mr. Hall. Because they are regulated. Let me get a little
    more simple with you. You seem not to believe in the concept of
    stranded cost. What if I told you that you could have a
    McDonald's hamburgers monopoly, but you also had to feed
    everybody, the rich and the poor, with all the hamburgers they
    could eat at a price that was set by the government? You
    wouldn't like that, would you?
        Mr. Casper. If I was guaranteed the return that the
    utilities are guaranteed----
        Mr. Hall. The return is the basis of working with the
    government, and the government working with you, and them
    setting a figure for your return, guarantee you a return.
        Mr. Casper. We would take the return that Florida Power and
    Light makes.
        Mr. Hall. Okay.
        And if they bought the hamburgers one at a time, and at a
    higher price, bought all the hamburgers they could eat at
    prices set by the government, if they bought them by the bag,
    or if they got them by the bag they got them at a lower price,
    so set up as a monopolist, you could go out and build enough
    hamburger stands to feed everybody in your monopoly area, and
    you would probably do that, would you not? If you are going to
    keep your monopoly, then you have to feed these folks as they
    move in and out.
        Mr. Casper. Congressman, in all due respect, I think the
    difficulty of the question, and my understanding of it,
    probably goes to prove that the system is broke, and that may
    be----
        Mr. Hall. And you need to fix it, but when you fix it, you
    need to be fair about fixing it, and you would want whoever
    gave you that monopoly to be fair with you in fixing it?
        Mr. Casper. Yes, sir.
        Mr. Hall. And you would be reasonable in that expectation.
    But, finally, you are required to put a store on every other
    block because the government wants convenience and they want to
    serve these folks. And you would know you could do it more
    efficiently with fewer, larger stores. So you would go out and
    borrow the money. But Tampa Bay is a pretty big place, and you
    have to keep building bigger and better stands just to keep up
    with the increase in population. And then when the summer is
    over and people aren't on the beaches, and your business drops,
    you still have to pay the carrying cost of these stores. So you
    have a peak-and-valley business for several years, but each
    year the peak gets a little bit higher, but you can only charge
    what the government allows you to charge. To get that monopoly,
    you have to do that. And your rate of return is not as high as
    if you had an unregulated stand, but then you have no
    competition.
        But, wait a minute. Then 1 day the government decides it
    wants to deregulate the hamburger business. They are going to
    allow, of all things, Burger King, to come into the market.
        Could I have some music in the background here?
        And Burger King has promised that it can sell hamburgers
    for less with fewer stores, the kind of idea you had when they
    made you build a store on every corner.
        Under these conditions, seriously--I don't mean to be
    playing with you--don't you really believe you would be looking
    for stranded cost recovery if you had contracted with the
    government to serve these areas, and all of a sudden the
    government pulled it out from under you, and somebody else was
    going to come in and cherrypick, or could come in and
    cherrypick? Wouldn't it be fair to be fair with them on
    stranded cost?
        Mr. Stearns. The time has expired.
        Mr. Casper. I think there are probably reasonable
    exceptions.
        Mr. Hall. Okay. I thank you.
        Mr. Casper. Okay.
        Mr. Stearns. And I thank the gentleman. The chairman of the
    committee is recognized, Mr. Barton from Texas.
        Mr. Barton. Thank you. Well, I was told that Mr. Casper was
    going to make an announcement; because Congressman Hall was
    such a great guy, they were going to rename the Big Mac, the
    ``Hall Hunger Buster.''
        But after those questions, they postponed that
    announcement. There is some talk of pulling McDonald's out of
    Rockwall, but I'll go to bat to make sure----
        Mr. Hall. I like McDonald's, but I don't think they are
    going to force them to build any nuclear plants just to feed
    everybody in Tampa Bay.
        Mr. Barton. Anyway, Ms. Kolish, is it the FTC's position
    that the existing consumer protection laws at the Federal level
    are adequate with the exception of some specific provisions on
    slamming and cramming, and perhaps disclosure? Is that correct?
        Ms. Kolish. Yes, that is a fair statement, Congressman.
        Mr. Barton. Okay. And, Mrs. Burns, I know you said that you
    represent New York, and don't necessarily represent the
    National Attorneys General Association, but is the FTC's
    position similar to your national association's position?
        Ms. Burns. I would say that, as far as NAAG is concerned,
    we do see the need for more particularized protections,
    especially in some of the areas I mentioned, such as uniformity
    of certain kinds of disclosures and privacy protections, et
    cetera. Whether those need to be Federal or State, I think is
    something----
        Mr. Barton. Well, is it safe to assume that, with some
    specific provisions like have just been outlined, that the
    National Association of Attorneys General would prefer that
    most additional consumer protection that is electricity-
    specific will be done at the State level?
        Ms. Burns. I think certainly the concern that attorneys
    general always have is twofold. One is we do not see the need--
    no one is suggesting it here, but concerns about preemption of
    State authority are always at issue. I think the concern that
    Mr. Cooper raised in terms of whether Federal protections cover
    the field or whether, as we prefer, they would complementary
    to, and supportive of, State enforcement possibilities.
        Mr. Barton. Thank you.
        Mr. Michaels, are there other competitors in the segment of
    the marketing industry that you are in, or are you pretty much
    it in terms of electricity price shopping on a national level?
        Mr. Michaels. There are other websites that list suppliers.
    There are other websites that have efficiency equipment. The
    aspects that we have of putting them together, and doing the
    evaluation for the consumer of their bottom-line bill are
    unique to our site.
        Mr. Barton. What would your answer be to Mr. Brice or Mr.
    Cooper if they were to say, well, it is great if you have got a
    home computer and you are computer literate, but what about the
    people that can't afford home computers or perhaps have them,
    but are afraid to turn them on because they don't know what to
    do with them? How would they take advantage of the information
    that you are making available?
        Mr. Michaels. That is absolutely correct and a reasonable
    concern. The propagation of computers among all groups is
    increasing, and access to computers, if you don't have them at
    home, in public places is increasing as well. But a solution
    for other consumers that deals with a mail-back approach has
    been discussed in a few States, and perhaps there are other
    things you can do.
        Mr. Barton. Mr. Casper, I know that Mr. Hall was pretty
    explicit with you in some of his questions, but, as I
    understand your testimony, you are for competition, and you
    want as much information as possible to make the decisions
    about where to get your electricity supplies. Is that a fair
    summary of your testimony?
        Mr. Casper. Yes.
        Mr. Barton. Mr. Brice, on behalf of the AARP, I would
    summarize what you have said in your written statement is,
    again, you all are for competition, but you want to make sure
    that there is adequate consumer protection, so that senior
    citizens are not taken advantage of? Is that a fair summary?
        Mr. Brice. That is correct.
        Mr. Barton. Okay. Mr. Cooper, I wasn't here when you were
    speaking. I was out in the annex talking to some of my
    constituents. But Congressman Largent said that you stated that
    the best consumer protection is competition and informed
    consent. Is that fair?
        Mr. Cooper. Absolutely, and the Federal job is to make
    those interstate markets work in a competitive fashion.
        Mr. Barton. And I have talked to you personally, Ms.
    Toccoli, but, again, small businesses are afraid that they may
    not have the same opportunities to price-shop as some of their
    larger competitors. So the Small Business Alliance that you
    represent wants to make sure that it is a level playing field.
        Ms. Toccoli. That is correct. We want choice, and we want
    protection for the choices we make.
        Mr. Barton. Okay, I yield back, Mr. Chairman.
        Mr. Stearns. I thank the gentleman. The gentleman from
    Ohio, Mr. Sawyer, is recognized for 5 minutes.
        Mr. Sawyer. Thank you, Mr. Chairman.
        The topic I would really like to explore as much as
    anything today is the notion of confidentiality and privacy.
    When we were working on healthcare legislation, it occurred to
    me that the two arenas where people are most concerned about
    protecting those two things are in terms of their financial
    information and their condition of health. They were operating
    under the assumption that, because medical professionals had
    taken an oath to preserve both of those highly valued
    commodities, that in fact that they were protected. But the
    truth of the matter may be something closer to an image that I
    used yesterday in this room, and that was of a bottle whose
    neck is tightly sealed, so tightly sealed that nothing can get
    in and out. That is that oath. But the bottom of the bottle is
    missing, and it is just leaking like mad. Healthcare
    information is bought and sold all the time.
        Our banks seem to work pretty well. People walk up to a
    bank and they take cash out of their pocket and hand it over to
    somebody whose identity they don't know, with the confidence
    that they will get their money back, and perhaps even with
    interest, and that all they have to do is identify themselves,
    and that contract will be sustained.
        I really am interested in hearing each of you talk about
    that component which, it seems to me, is very much at risk in
    terms of the information-sharing that may take place in a
    competitive environment where the information that is gathered
    as a result--I mean information about your hamburger business,
    for example, that would be of immense usefulness to your
    competitors, and the competition and the need to generate
    income may well put the information that is important in your
    competitive industry very much at risk in this environment.
        Could you comment, those of you who care to, on the ways in
    which we might go about guarding that enormously precious
    commodity that I suspect will be very much at risk as you turn
    over information that may have commercial value to competitive
    electric suppliers? Yes, sir?
        Mr. Cooper. One of the problems that we have encountered in
    telecommunications is that the incumbent utilities think they
    own that information. They thought that, as part of the
    franchise, to go back to Mr. Hall's suggestion--and I would be
    glad to answer some questions on stranded costs, since I am an
    expert and have testified about a dozen times on stranded
    costs----
        Mr. Sawyer. I would be eager to hear about that, but not in
    this question.
        Mr. Cooper. With respect to privacy, they think they own
    that information, and whatever the legal basis was that, as the
    franchise monopoly might have had for that claim, in a
    competitive market they can't have it anymore, and that is the
    fundamental point.
        So with banks, banks may never have thought they owned that
    information to do with that as they please; utilities did, and
    it will vary from State to State and utility to utility. But
    the fundamental point is that, as you transition from that
    franchise to a competitive situation, you have to make it clear
    that the customer owns the information. As the customer owns
    the information, the customer controls it, and it only gets
    revealed with the customer's permission. That is the
    fundamental change that has to happen.
        Now the second thing, of course, is that, in order to run
    an electronic system such as this, you have to transfer certain
    information. The answer is that you should only transfer what
    is necessary for purposes of tendering a bill, and that
    information should only be used for the purpose of tendering
    the bill to collect for the specific services transacted.
        Mr. Sawyer. What kind of custodial standards should apply
    in a circumstance like that, and should there be sanctions for
    violating them?
        Mr. Cooper. Oh, absolutely. If you don't police it, the
    information is much to valuable; it will get abused. So you
    have to have vigorous, but you have to establish the legal
    principles that I own my information. The only information that
    gets transferred is with my permission, with the exception of
    what is necessary for billing. Having said that, you then have
    to police that and make sure that, when you get caught
    violating it, you pay the price. And, ultimately, the price
    should be you are out of business if you become a bad actor.
        Mr. Stearns. The gentleman's time has expired.
        Mr. Sawyer. Could I ask one more question?
        Would you make it a violation to have blanket sign-over,
    blanket release of information as a condition of being a
    customer of a company?
        Mr. Cooper. Absolutely not. I mean, go back to your medical
    question; we have got a problem. But the answer is that
    informed consent, a great deal of thinking about that, it has
    to be informed. Yes, it can't be the bottom of a check that
    says, ``Switch to me. I have $50,'' and there is a little
    language there that says, ``Besides, I can give away and use
    all your information.'' Obviously, that is not informed
    consent. So you need good informed consent for the release of
    your information.
        Mr. Sawyer. Mr. Chairman, thank you for your flexibility.
        Mr. Stearns. Yes, I thank the gentleman. The gentleman from
    Oklahoma, Mr. Largent, is recognized for 5 minutes.
        Mr. Largent. Thank you, Mr. Chairman.
        Mr. Casper, I would tell you that you had Mr. Hall right up
    to the boat, and then you let him get off the hook. Right up to
    the boat you let him get off.
        Mr. Michaels, I am intrigued by your testimony that I have
    before me. I wanted to talk to you a little bit about--well,
    first of all, I want to ask you this question: You are in the
    software business. You sell software. Do you sell software to
    electric suppliers or do you sell the software to the end-user,
    the consumer?
        Mr. Michaels. We have the Internet site, which is our own
    site, and part of the Internet site is the sale of energy-
    efficient products such as high-efficiency lights, and we make
    a margin on the lights that are sold on the site.
        As retail choice proceeds, and there are many more retail
    suppliers, we do have a signup capability for the suppliers
    actually to be signed up as part of their evaluation on the
    site. And that is a potential component for us.
        We also have offered utilities around the country the
    opportunity to sponsor the energy audit portion of the site,
    which is useful. One of the things we are talking about is the
    exchange of data on energy billing information between the
    utility and the energy audit portion. And that is currently----
        Mr. Largent. So it is sort of multifaceted?
        Mr. Michaels. It is multifaceted.
        Mr. Largent. Someone told me about--in fact, one of the
    staff was talking about--a CD-ROM package that you give to
    consumers. Can you tell us a little about that? This is kind of
    a consumer option or something?
        Mr. Michaels. Well, when a utility sponsors the energy
    audit portion, one of the options utilities have is actually to
    send the CD-ROM you were talking about in the mail to
    consumers. The typical situation is that a third of consumers
    who have computers will use it. Waiting for people to get to a
    website takes a lot longer, and that is the reason that they
    try it that way.
        Mr. Largent. I see, and then what does the CD-ROM do?
        Mr. Michaels. Evaluates all the energy options in their
    home, shows them how they can reduce their bill by installing
    energy-efficient equipment. It lets them track their bill over
    time to see what performance they are getting and the things
    they are trying to do, as well as view the energy guide site
    and see the supplier options in their area.
        Mr. Largent. Now when you say, ``tracks all their energy
    outputs, options,'' what did you say?
        Mr. Michaels. Tracks their energy bills and sees if they
    are reducing their energy use normalized for----
        Mr. Largent. Does it actually analyze, like how much
    electricity their washing machine uses or dishwasher?
        Mr. Michaels. Yes, it conveys that to the user.
        Mr. Largent. And is this the technology that will
    eventually lead to smart appliances and options that consumers
    have to run their dishwasher or the washing machine at certain
    times of the day where the electricity prices would be lowest?
        Mr. Michaels. Absolutely, the combination of having this
    capability on consumer's PCs, and the options available on the
    Internet, including retail options and connection to home-
    automation, like you are describing, should produce the most
    value for consumers eventually; it will take some time.
        Mr. Largent. One of the other things in your testimony that
    I wanted you to kind of highlight was this idea that you had
    been tracking the selections that consumers were making on
    their suppliers. And that initially, it showed that consumers
    were choosing on price only, but as they got more familiar with
    the options that they had before them, that it says here, it
    says the size and location--it says, ``In the end, none of them
    made their selection on price''; that issues such as energy-
    sources, minimum-contract terms, size and location of supplier
    were reacted to differently by consumers.
        My question is, the idea is that the market really can
    drive this whole renewable energy idea, in and of itself. Is
    that true?
        Mr. Michaels. There is a lot the market can do. When
    consumers have the information digested in a way that they can
    get their arms around it easily, they look to minimize the
    cost, the use of electricity and gas, and they also look to
    minimize their environmental impact in many cases.
        And what we found in the focus groups that you are
    referring to is that consumers often started saying, ``I am all
    driven by cost,'' but once they actually got into it, they
    said, ``Well, maybe I can live with a few bucks a month more
    and do my part.''
        Mr. Largent. Yes. Thank you.
        Ms. Burns, one of the issues that I hear from constituents
    in the State of Oklahoma, as we are moving toward restructuring
    in a low-cost State, is cross subsidization. And I am sure that
    maybe has been an issue in New York as well. And the issue,
    again, is allowing a PSO or OGB, or whoever the company, the
    IOUs are, that have developed this brand image, getting into
    the heating and air-conditioning or electrical contracting work
    as a subsidiary of their business. How has the State of New
    York dealt with that issue?
        Ms. Burns. I think there are really two issues. One is the
    competitive concern in terms of anti-trust law, which is, are
    they, indeed, cross-subsidizing? And obviously, one does not
    want that to occur. And I think our public service commissions,
    as well as our anti-trust law, would look to that.
        I think the other issue, in terms of a more consumer
    protection concern, is where you have the unregulated
    subsidiary with a similar name to the regulated utility. We do
    have that situation in New York, and the concern there is that
    it may lead to confusion on the part of the consumer. I think,
    according to the FTC, actually FTC economists, who gave a
    little talk to the NAAG working group recently, I think in
    Nevada there was a study that their public utility commission
    did, which showed that consumers were confused if the
    unregulated subsidiary had a similar name, and that made them
    really prefer to go to that provider, as opposed to other
    competing providers who did not have the name; and that even
    putting a notice in saying, ``We have the same name, but we are
    an unregulated subsidiary,'' did not really effectively change
    that preference. So, currently, in New York, there aren't any
    rules to deal with this, that I am aware of, but it may be----
        Mr. Stearns. The gentleman's time has expired.
        Ms. Burns. [continuing] that we would have to have some.
        Mr. Stearns. The gentleman from Michigan, the ranking
    member of the full committee, Mr. Dingell, is recognized for 5
    minutes.
        Mr. Dingell. First, this question, I think to the
    representative of the Consumer Federation, and also--I am
    having trouble seeing names--the gentleman immediately to your
    right. Gentlemen, we now, according to all accounts, have a
    situation where the householder is receiving, essentially, a
    subsidy under State regulation. If this bill passes, that
    subsidy will be repealed. Do you favor that?
        Mr. Cooper. Well, the question of the pricing is
    essentially a State question.
        Mr. Dingell. Just a simple yes or no. Pardon?
        Mr. Cooper. Pricing of electricity is almost entirely a
    State matter.
        Mr. Dingell. That is right.
        Mr. Cooper. And the way that I would see Federal
    legislation, as I emphasized in my opening remarks, is that the
    Federal legislation should promote and support competition in
    the interstate jurisdiction, which will, in fact, we hope and
    believe, lower the cost of electricity to the purchasing entity
    in the State.
        Mr. Dingell. So the answer, then, is that you favor
    enactment of legislation which would repeal that subsidy to the
    householder?
        Mr. Cooper. Well, I don't think Federal legislation can, in
    fact, repeal that subsidy.
        Mr. Dingell. You don't think so?
        Mr. Cooper. Nor do I think it should. What I think it
    should do is promote competition, and the States will continue
    to deal with it. I would question whether there is a subsidy--
    we battle over that question at the State level on a continuous
    basis. So that if Federal legislation, is enacted, it should
    not tell the States what they can or can't do with the pricing.
    It should make the job of introducing effective competition
    easier. But the States will continue to deal with the question
    of how they allocate the costs----
        Mr. Dingell. In other words, you advocate deregulation only
    on interstate sales. Is that correct?
        Mr. Cooper. The Federal jurisdiction should not tell the
    States that they have to deregulate in their markets.
        Mr. Dingell. All right now, Mr. Brice, what do you have to
    say?
        Mr. Brice. I would agree that the option should be the
    State's. We have been working with municipalities on some
    issues----
        Mr. Dingell. So you don't think that this is something that
    should be mandated by the Federal Government?
        Mr. Brice. That is true.
        Mr. Dingell. Now the lady on the end in the blue, ma'am,
    you said that this is something--and I can't see your name
    plate, for which I apologize.
        Ms. Toccoli. Just call me ``B.J.''
        Mr. Dingell. Thank you. I apologize to all three of you.
        Your comments were that this is a matter which should be
    dealt with at the State level?
        Ms. Toccoli. Yes, we think the State should take the lead,
    at least for small business, certainly is where it is easier
    for us to communicate. We don't think it is a ``cookie cutter''
    deal, and certainly consumer protection starts at the State
    level and can be supplemented by the Federal level.
        Mr. Cooper. Mr. Chairman, may I add a point? If you include
    Texas, which I think is about to go in terms of restructuring,
    by my count, 55 percent of the electricity sold in this country
    is sold in States that have already restructured, more than
    half. So we are past the question of whether the Feds can move
    this. The Feds have been behind. The question now is, what can
    the Feds do to help the States that want to proceed to have an
    effectively competitive market and consumer protection? It is
    not the question of, can the Feds make restructuring happen?
    The States have done what they are going to do. We are past the
    tipping point. It is time to focus on the question of how this
    body can help that market work competitively to provide a
    little additional----
        Mr. Dingell. Is there any State that is not now working on
    deregulation or on restructuring of its utility market?
        Mr. Cooper. I doubt you could find one that hasn't been
    grappling with it and deciding what to do.
        Mr. Dingell. I think that is a fair statement.
        Yes, sir, what did you have to say?
        Mr. Casper. Mr. Dingell, excuse me. Florida recently--well,
    I shouldn't say recently--last year they voted down a bill for
    deregulation, and the year before that they voted down even the
    idea of studying deregulation in the State of Florida.
        Mr. Dingell. Who did that?
        Mr. Casper. The Florida legislature.
        Mr. Dingell. The Florida legislature?
        Mr. Casper. Yes, sir.
        Mr. Dingell. So, then the U.S. Government is being asked to
    go in and tell the Florida legislature what they ought to do,
    is that right, under this legislation?
        Mr. Casper. I don't know if we will see deregulation in the
    State of Florida unless that happens.
        Mr. Dingell. In other words, are you advocating that the
    Federal Government ought to come in like Big Brother and tell
    the Florida legislature what they ought to do?
        Mr. Casper. I think there should be, hopefully, in a
    Federal bill, a large----
        Mr. Dingell. I find myself curious. You appear to be
    espousing the position that the Florida legislature ought to be
    told by the Federal Government what the Florida legislature
    ought to do with regard to protection of consumers on electric
    utility prices. Traditionally, the State of Florida has
    regulated retail utility sales within its borders. I am curious
    why you are here advocating now that we should have the Feds
    come in and totally revamp the situation and tell the Florida
    legislature what to do. Obviously, you have a strong reason for
    this. What is it?
        Mr. Casper. Mr. Dingell, just like I said previously, it is
    that we in the State of Florida, unless there is a Federal
    mandate, may never see electrical deregulation.
        Mr. Dingell. Well, why is it that we should not trust the
    Florida legislature? You elect them down there; I don't. Is
    there something wrong with your legislature that you wish to
    announce today that would give us a basis for assuming we ought
    to step in and do away with the Florida legislature's control
    over electric utility rates within the State of Florida?
        Mr. Casper. I think it has a lot to do with the utilities
    in our State and their ability to facilitate legislation.
        Mr. Dingell. I am curious. Well, I guess I have used up
    about the amount of time I need.
        Texas has already deregulated its utility prices, have they
    not?
        Mr. Cooper. I believe there is a piece of legislation that
    has passed both houses and is likely to be signed.
        Mr. Dingell. Very good. Well, Mr. Chairman, you have been
    very gracious. Thank you.
        Mr. Stearns. I thank you the gentlemen.
        Mr. Barton. Would the chairman yield just for a second?
        Mr. Stearns. The chairman yields to the chairman.
        Mr. Barton. I just want to inform my distinguished ranking
    member--and I know that he knows this--there is no bill yet.
    There are a number of bills that have been introduced, and we
    hope to introduce a bill, but right now we are holding hearings
    to see if there is consensus on getting such a bill. So there
    is no pending bill before the subcommittee. And I know the
    gentleman knows that.
        Mr. Stearns. Next the Chair recognizes the gentleman from
    Arizona, Mr. Shadegg, for 5 minutes.
        Mr. Shadegg. Thank you, Mr. Chairman. I appreciate the
    testimony of all the witnesses and I would like to explore
    several particular details.
        Mr. Michaels, I will start with you because I am fascinated
    by what you do. Let me see if I fully understand it. One of the
    things that I don't understand is how you are going to make a
    living at it because I haven't figured out--I mean, your
    website sounds fascinating to me, and if Arizona fully
    implements its deregulation efforts, which they are trying to
    do at the moment, I would love to log on and figure out, okay,
    where is the best deal for me and what are the options?
        First of all, do you make some money off of the website
    itself? Can you make earnings off of the website or is that a
    kind of a lost leader for you?
        Mr. Michaels. I would describe it as a loss leader at this
    point. The business of websites is attracting a lot of traffic,
    and having leadership in your area, the traffic by itself
    ultimately creates value in that you can have advertising on
    the site.
        We do have two mechanisms in place that we expect will
    eventually be important: the purchase of energy-efficient
    products and services by consumers directly, and second, the
    ability for retail suppliers to have the actual signup service
    through the site itself. These things, when retail choice
    really takes hold and really comes into play, will be important
    for us. Right now, we do have this utility sponsorship of the
    energy audit portion. It is a really important part of running
    the company right now.
        Mr. Shadegg. I appreciate that clarification. I will tell
    you a part of it must already be working. When you mentioned--I
    had actually read, ahead of time, your little bulb package, and
    I thought, ``Sounds like a gimmick; it is not going to get me
    very far.'' But when you said that that package of bulbs, which
    I can buy for $58, could save me $350 a year, Mr. Shimkus and I
    both said, ``Wow.'' I think he and I are ready to buy the
    product. So, I am certain that it does have a value.
        I would also say that you, through the website, are
    obviously going to become, if you are not already, a leader in
    the area.
        Let me understand another aspect of the business. Another
    aspect of the business is that you go to utilities who are in
    the market in the area, work an arrangement with them, where
    they sponsor the CD; is that right?
        Mr. Michaels. The CD and the energy audit portion of the
    website. So that consumers, when they are doing an evaluation
    of their homes for energy efficiency, are doing something that
    is brought to them by us and the local utility.
        Mr. Shadegg. Well, I have a load controller in my home
    because energy used to be, when we built our home or bought our
    home, a huge component of the overall cost. Quite frankly,
    thanks to the industry, energy costs I think relative to other
    costs in our family's budget have gone down a little bit, and
    we aren't, I don't think, as good at using that load controller
    as we once were. I am sure if we get into another crisis, we
    will be paying more attention to it. But, any way we can save
    money is important to the Shadegg family budget.
        I would like to understand-I think you have a unique
    perspective; you must have to deal with utilities in--how many
    different States?
        Mr. Michaels. We are working with 26 utilities; I'm not
    sure exactly how many States, probably about 15 States.
        Mr. Shadegg. And the value of your service is dependent
    upon the reliability of the information you get from them?
        Mr. Michaels. The value of our service to consumers?
        Mr. Shadegg. Yes.
        Mr. Michaels. It is something they work with directly, so
    they eventually get a rate. They will go back and forth until
    they are very comfortable with it, which is one of the
    advantages of working interactively, which you can, on-line.
        Mr. Shadegg. Given that you work with lots of different
    utilities in a number of different States, do you have a
    perspective on what types of consumer protections--and since
    that is what this hearing is about--are, in fact, necessary?
    That is, what types of consumer protection, if any at all,
    should the government mandate? And if you care to break it
    down, are there things that you think the Federal Government
    has to mandate, in terms of consumer protection as
    distinguished from the States, in that area?
        Mr. Michaels. Well, the area that we are most involved with
    is information privacy. We have an application for a new site,
    a voluntary program called ``Trustee,'' sets a set of standards
    for websites and the use of consumer information, and not
    selling it, not releasing it without permission. And those
    things are extremely important, I think, from the standpoint of
    the credibility of the Internet and information in the
    industry. Having something that required proper privacy would
    not only serve the public, but would serve companies like us
    who are doing it voluntarily.
        Mr. Shadegg. Are your customers, or the people that you can
    serve through the Internet site, or through the CD-ROM--are
    those only residential or do you have the same kind of service
    that you provide to business customers?
        Mr. Michaels. Well, we have gotten residential started; we
    are focusing on developing a business side, which we hope to
    have up by the end of the year.
        Mr. Shadegg. Ms. Kolish, I would like to ask you, you have
    a unique responsibility----
        Mr. Stearns. The gentleman's time has expired.
        Mr. Shadegg. I thank the gentlemen.
        Mr. Stearns. The gentleman from New Jersey, Mr. Pallone, is
    recognized for 5 minutes.
        Mr. Pallone. Thank you, Mr. Chairman. I wanted to ask Ms.
    Kolish a couple of questions.
        Ms. Kolish, if Federal legislation was enacted that
    repealed PUHCA, but did not guarantee retail competition and
    protection against the exercise of market power, would such
    legislation benefit or harm consumers, in your opinion?
        Ms. Kolish. Oh, goodness, you are asking me a competition
    anti-trust question rather than a consumer-protection one, and
    I am not certain I can answer it without knowing a little bit
    more about what you have in mind.
        Mr. Pallone. Okay.
        Ms. Kolish. I mean----
        Mr. Pallone. Go ahead.
        Ms. Kolish. The Commission, obviously, believes that market
    power is an important issue that the Federal Government and the
    State governments need to take into account, and that you are
    not starting from a level playing field here.
        Mr. Pallone. Right.
        Ms. Kolish. And so that mergers and everything will need to
    be very carefully scrutinized.
        Mr. Pallone. But I mean, the question is, would you want,
    you know, whatever we do in terms of a PUHCA repeal to include
    some kind of guaranteed retail competition or protection
    against the exercise of market power? I mean, in other words,
    do you feel that that should be part of comprehensive
    legislation that repealed PUHCA, and, you know, what are the
    good or bad parts of that, if it is not in there?
        Ms. Kolish. I am not certain what the answer to that is.
        Mr. Pallone. Okay.
        Ms. Kolish. We can tell you more. What we do know is that
    the anti-trust laws that exist provide a great deal of
    protection already to competition and for consumers. Both the
    existing competition laws as well as the FTC act, which
    prohibits unfair methods of competition, provide the FTC and
    DOJ itself lots of authority in this area.
        Mr. Pallone. Okay. Well, let me ask you this: I have a
    second thing. Would deregulation of the electric utility
    industry, in and of itself, provide consumers with a greater
    level of protection, or would it result in greater challenges
    to the consumer in terms of guarding against unscrupulous
    practices or ensuring access to a reliable source of
    electricity?
        Ms. Kolish. Well, in this market, because consumers haven't
    had to choose, it probably will present greater challenges for
    them. But I think those are challenges that consumers with
    education can handle, and with the existing law-enforcement
    efforts, both Federal and State combined, that consumers will
    receive ample protections.
        Mr. Pallone. Okay. I wanted to ask one more thing of you,
    if I could. You mention in your testimony--it references the
    concept of green tags as an alternative to more traditional
    disclosure methods. Two questions: If you could give us some
    more detail about that, including how it would operate, and who
    would operate it? And then, you know, what are the advantages
    and disadvantages of green tag systems?
        Ms. Kolish. I think your question relates to how would
    marketers substantiate the claims they make about energy
    sources and pollution sources, and that it poses very difficult
    substantiation issues--having tracking systems in place so that
    a marketer will know, if they are claiming they have hydro-
    power, that they have actually provided hydro-power. An
    alternative that has been considered to the settlement process
    for figuring that out has been a tradable tag system, where
    energy would be tagged as being hydro-power, and you could sell
    that tag the way you do other commodities.
        Mr. Pallone. Okay. Ms. Burns, the issue of billing
    information is sensitive, and on the one hand, many argue that
    a customer has a right to expect that their current billing
    information be kept confidential. On the other hand, some argue
    that all providers should have access to an incumbent utility's
    information about its customers; otherwise, the utility retains
    a significant comparative advantage over other potential
    providers. And I just wanted your opinion on that.
        Ms. Burns. Well, I think the privacy concerns that have
    been expressed by some of the members of this subcommittee are
    ones that we share. I will say in New York our office hasn't
    really had the opportunity to look at this in-depth. But I
    think they are issues that really do need to be looked at. I
    think privacy of billing information is important. The NAAG
    resolutions that we have mentioned support privacy protection
    for billing information. And I think the question is sort of,
    how do you go about ensuring that? And what do you look to? Do
    you look to other kinds of confidential requirements for other
    kinds of bills--telecommunication bills, for instance. And I
    think in New York, that is still kind of an open question, but
    I think privacy protections are very important.
        Mr. Pallone. Ms. Toccoli, did you want to comment on that,
    too?
        Ms. Toccoli. Well, we have a little----
        Mr. Stearns. The gentleman's time has expired. Why don't
    you go ahead?
        Ms. Toccoli. Small business has a little different issue,
    that we also need access to information on our businesses. It
    is so often held by the leasing or property management. So, we
    have mixed emotions because we also need access to some of that
    information. We are, though, for privacy.
        Mr. Pallone. Okay, thank you. Thank you, Mr. Chairman.
        Mr. Stearns. Thank you. The gentleman from Illinois, Mr.
    Shimkus, is recognized for 5 minutes.
        Mr. Shimkus. And I've got my clock running; I know if
    Stearns is in the Chair.
        Mr. Michaels, first a quick question for you: When you
    showed us your presentation and you talked about green power,
    how did you define green power?
        Mr. Michaels. There is a voluntary ``green E''
    certification that a number of the companies have applied for
    and gotten, and specifically that is what I was referring to.
        Mr. Shimkus. Was nuclear power considered ``green?'' Mr.
    Michaels. I believe not. I don't really remember the specifics
    of the----
        Mr. Shimkus. The only reason I ask is that it is probably
    an issue that we have to address somehow and for our
    legislation to have a--define: What is that? I always will
    argue that nuclear power, as far as emissions, is as safe as
    you are going to get.
        There are questions about hydro-power. The administration's
    bill doesn't have hydro-power as ``green.'' So, that is
    something that is a Federal issue that we are going to have to
    look at.
        The question is going to be for Mr. Casper. Mr. Brice
    mentioned aggregation. Mr. Casper, in your testimony, you
    stated that Congress must prohibit any restrictions on the
    customer's ability to purchase power through aggregation. That
    makes, obviously, sense to me. I am a proponent of that. But,
    can you explain to me what type of restrictions we might put on
    that would prohibit aggregation?
        Mr. Casper. None other than the ones that are existing
    today, and the fact that we can't aggregate today.
        Mr. Shimkus. Okay. Mr. Brice, as far as AARP, do you have
    any concerns that we are going to restrict the ability to
    aggregate?
        Mr. Brice. No, we just want to be sure that considers the
    consumer.
        Mr. Shimkus. And, Mr. Brice, you also----
        Mr. Barton. Use the microphone, Mr. Brice, please, sir.
        Mr. Brice. Sorry.
        Mr. Shimkus. You also talked about billing. And, of course,
    I wasn't here for the passage of the Telecom Act, but I'm on
    the Telecom Subcommittee, too, and I think we have to also be
    very careful about our Federal regulators. We have a universal
    service fund on bills, which is designed to provide subsidies
    for rural telephone, so that we can have full coverage. But
    that is also where the infamous ``e-rate'' fund is charged and
    that the proposal to increase the e-rate is charged there, all
    of which is an additional tax on the consumer which is not
    voted on by Congress.
        So, I think your organization is right to be concerned
    about billing and to make sure that-I see billing as one of the
    biggest problems that came out of the Telecommunications Act
    that we haven't really cleared up. Have you got any comments on
    that?
        Mr. Brice. I agree. Well, first of all, it is confusing
    usually, and what we want to be assured of is that there is
    clear indication of what the segments and the components of the
    bill represent--if it is a tax, if it is a free charge, or
    whatever. We want to be sure that the consumer is aware of what
    they are being charged and asked to pay for.
        Mr. Shimkus. Great. Thank you.
        Mr. Cooper, which States did you testify in on their State
    dereg bills?
        Mr. Cooper. I have testified in Tennessee, Indiana, and New
    York at the legislature. I have testified in restructuring
    hearings. Actually, I testified in Arizona, Pennsylvania,
    Virginia, and New York.
        Mr. Shimkus. Pennsylvania and Virginia are the only two of
    those States that have passed restructuring?
        Mr. Cooper. Well, New York has done restructuring
    administratively----
        Mr. Shimkus. I mean by law.
        Mr. Cooper. Arizona is almost done administratively.
        Mr. Shimkus. Right.
        Mr. Cooper. Legislatively, Pennsylvania certainly has, yes,
    and Virginia just passed it.
        Mr. Shimkus. I was wondering if Illinois was in that group,
    but it is not.
        Mr. Chairman, that is all I have for right now. I yield
    back. Thank you.
        Mr. Stearns. I thank the gentleman for yielding back. The
    gentleman from Mississippi, Mr. Pickering, is recognized for 5
    minutes.
        Mr. Barton. Would the gentleman yield before that?
        Mr. Stearns. Absolutely.
        Mr. Barton. I just want to inform the audience, Mr.
    Pickering had a terrible day at baseball practice today.
        He muffed several ground balls and complained about the
    calls when he was batting. So he has had a ``bad hair day,'' so
    I want the witnesses to be nice to him.
        Mr. Pickering. Thank you, Mr. Chairman. I hope I got all
    the errors out of my system before the game time-the game day.
        But I also want to thank the chairman for these hearings,
    and join with you in thanking Tom Sawyer for joining us, the
    co-chair for the working group; Mr. Dingell for appointing him.
    I think it one other indication of the momentum and the effort
    from the committee's work to move forward on this issue, and to
    find the agreement necessary to do so.
        I have a couple of questions concerning jurisdiction and
    privacy. Mr. Michaels, I hope I can do it quickly enough that
    you would have time to demonstrate an audit, your audit
    capability. I believe you had one presentation on your web
    page. I don't think you got to your audit to show us your
    technology on that front.
        But, first, let me ask Ms. Burns, on consumer protection,
    as we go forward in Federal legislation, is there anything that
    you see we need to do from a consumer protection point of view
    that the States are not doing? Is there any direction,
    guidance, on issues? If so, what should we focus on in consumer
    protection?
        Ms. Burns. Well, first off, I think, as a representative of
    the State, we do like to think that our State powers with
    respect to consumer protection are pretty wide, pretty varied,
    and that we are pretty knowledgeable about what our consumers
    need. So that is sort of where we start from. Having said that,
    I do think that there is a Federal role. We don't say that
    there is no such role. We welcome a Federal role.
        Mr. Pickering. Would you give us specific examples of what
    you think would be helpful----
        Ms. Burns. Well, I think many----
        Mr. Pickering. If at all?
        Ms. Burns. [continuing] of the issues that have been
    touched on today are areas in which there may well be a role
    for a Federal protections as well as State protections, whether
    those be slamming, which, you know, has proven to be a big
    issue in telecom, whether it is the question of uniformity of
    disclosures.
        I think as we move into a more national set of markets,
    which we don't have now, but as you have competing providers
    who are nationwide and not just intrastate, that Federal
    concern might be more pointed. But, again, I will say again my
    mantra which is, ``We like to think whatever role the Federal
    Government plays in this area of consumer protection, it is one
    that''----
        Mr. Pickering. Would be in partnership with the States?
        Ms. Burns. Exactly.
        Mr. Pickering. Mr. Michaels, do you have anything to add as
    far as privacy or disclosure from a Federal level?
        Mr. Michaels. I think as long as information on the web is
    regulated in a way that consumers won't avoid using the web,
    that is the primary concern I have.
        Mr. Pickering. Mr. Casper, I would like to follow up on a
    question that Mr. Dingell started. As you know, as we have a
    whole range of proposals before the committee--from a date
    certain mandate, to competition, to removal of barrier
    incentive approach, to the administration's proposal of an opt-
    out from competition. In your view, if you had a bill that
    would remove barriers, establish reliability standards,
    transmission standards, clarify the total power act on the
    States' authority to move to the retail wheeling if they so
    choose, would that not bring market pressure to those States,
    such as Florida, that to date have not chosen to go to
    competition? But as Texas moves, as Arkansas moves, as Oklahoma
    moves, as Virginia moves, as other States move, would there not
    be also market incentives without a mandate for the States to
    begin responding to competition in other regions and within
    their own region, without a mandate? What is your view of that?
        Mr. Casper. No doubt that, as other States move, the
    pressure mounts on Florida. It is just, as of today, there has
    been nothing done, and the barriers that are put up by the
    utilities in Florida are significant.
        Mr. Pickering. Would you support Federal legislation that
    established those things and gave incentives and removed
    barriers to competition, but did not have a mandate? As
    preferable to no Federal legislation?
        Mr. Casper. I would support a bill that is as strong as
    possible and----
        Mr. Barton. The gentleman's time has expired.
        Mr. Pickering. Yes, thank you. Mr. Michaels, I didn't get
    around to your audit. I apologize.
        Mr. Barton. He actually showed part of the audit
    capability.
        Mr. Pickering. Did he? Okay, another error on my part
    today, Mr. Chairman.
        Mr. Barton. No, no.
        You are just getting them out of your system.
        We will have additional questions for the witnesses for the
    record, and we would hope that you would try to reply in a
    timely fashion.
        We will not be in session next week, so we won't have a
    hearing next week. But the following week we will have a
    hearing on competition and innovation. And then the following
    week we hope to have a hearing on the administration bill. And
    then the following week after that, I am sure that there may be
    another hearing where we bring together a number of issues,
    including what has happened in the States in the last several
    months. If Texas does pass the bill--and we think they will
    this week or next week--we may have some witnesses on that
    piece of legislation.
        I want to thank the witnesses, and this hearing is
    adjourned.
        [Whereupon, at 12:05 p.m., the subcommittee was adjourned.]

                             STATE AND LOCAL ISSUES

                                  ----------

                             THURSDAY, JULY 1, 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 2247, Rayburn House Office Building, Hon. Joe Barton
    (chairman) presiding.
        Members present: Representatives Barton, Stearns, Largent,
    Burr, Whitfield, Norwood, Rogan, Shimkus, Shadegg, Pickering,
    Bryant, Bliley (ex officio), Hall, Sawyer, Pallone, Rush, and
    Wynn.
        Staff present: Cathy Van Way, majority counsel; Joe
    Kelliher, majority counsel; and Sue Sheridan, minority counsel.
        Mr. Barton. The subcommittee will come to order. We want to
    welcome everyone to our continuing series of hearings on the
    state of electricity industry in the United States. Today our
    hearing is going to be on electricity competition and how the
    States and local governments are handling that particular
    issue.
        And it is a really special privilege for me later in the
    hearing, to introduce two great State legislators from the
    State of Texas who worked together in a bipartisan fashion to
    pass a very comprehensive State deregulation bill in Ralph
    Hall's home State; which also happens to be my home State.
        This should be our next-to-the-last hearing on this subject
    because I hope very soon to be working with Congressman Hall
    and Congressman Bliley and all other members of the
    subcommittee to fashion a bipartisan, comprehensive Federal
    restructuring bill.
        It is appropriate that our hearing today is on what the
    State and local governments have done. I think everyone
    understands that earlier this week Chairman Bliley made an
    important statement regarding the irreversible trend of retail
    competition at the State and local level. And he said that the
    need for a cattle prod such as a federally mandated, date
    certain for States to act is no longer necessary.
        I am pleased to join him in that assessment and in setting
    the schedule to move a comprehensive bill out of the
    subcommittee. We plan to move forward together in a bipartisan
    fashion. We want to finish the job that we started back in 1992
    in this subcommittee where we did wholesale competition at the
    Federal level.
        I am hopeful that our action will encourage the States that
    have not acted to begin to act very soon. While our methods may
    be changing in the light of the fact that 23 States have moved
    to competition, our goal of lowering electricity prices,
    improving customer service and spurring innovation by ensuring
    vigorous retail and wholesale competition in the electricity
    markets is the same as it always has been.
        It is especially important to note that even though
    Chairman Bliley stated earlier this week that we are not going
    to insist upon a cattle prod of a date certain Federal mandate,
    we still are going to push for consumers, including residential
    ratepayers, to have real choice at the retail level.
        And as we move closer to enacting a comprehensive
    restructuring bill there still are some important questions to
    be answered. What should the role of Federal Government be in
    fostering reliable and competitive, retail and wholesale
    electricity markets? How do we assure that the competition that
    we hope will result is vigorous and also fair?
        With our second panel of municipal and cooperatively owned
    utilities, we are going to be asking what their role should be
    in a competitive electricity market. In that vein, I am going
    to be very interested to hear specifics from today's witnesses.
        I would like, as I said at the beginning, to particularly
    welcome State Senator David Sibley, a Republican, a good friend
    of mine from Waco, Texas, my home town where my mother is his
    constituent. And our good friend, State Representative Steve
    Wolens from Dallas, Texas. He is a Democrat and he passed his
    version of the bill, 144 to 4.
        I have seen resolutions honoring Davy Crockett not pass the
    Texas legislature 144 to 4. That is a tremendous
    accomplishment. Both of these gentlemen are to be commended for
    their dedication to this issue and their willingness to listen
    to all sides. I am told that all of the interest groups and
    stakeholders in Texas supported the bill on final passage, and
    that is a tremendous accomplishment.
        I hope that they will tell this subcommittee about how they
    worked that political magic and how they can help us to garner
    such overwhelming bipartisan support when we move to mark-up.
        Now is the time to take this issue from the positions that
    many have held for a number of years and move into the real
    world of what is going on today in the marketplace. We hope
    that this hearing will shed some light on those issues.
        We hope that we can begin to move forward in a bipartisan
    fashion. And I want to echo the words of Chairman Bliley who
    said that he wants our friends on both sides to work with us on
    this effort.
        I would now like to welcome the ranking Democrat, the great
    friend from Rockwall, Texas, Ralph Hall, for an opening
    statement.
        Mr. Hall. Mr. Chairman, I thank you very much and I
    subscribe to everything you have said. And I again want to
    repeat my perennial expression of gratitude to you for the way
    you handle this issue and for the cooperation you have reached
    across to us over here and we are grateful for it. It is the
    way to do it.
        And we do have two fine gentlemen from Texas here, and my
    friend from New Jersey over here just a moment ago was
    interested in your use of the term ``cattle prod''. I don't
    know. I am sure they have a similar tool in New Jersey.
        But there is another bit of western lore that we might pull
    into this and after the two that passed the bill in Texas the
    way they did and the hard work this group has done, we might
    give this Congress some advice that is given on the range
    almost every day in Texas: Don't ever try to rope a yearling
    when he is running downhill.
        And this bill is running downhill. Now, we have got some
    momentum on it. We are working together, something good is
    going to happen unless somebody tries to rope him. If they do,
    I think they are probably going to get hurt.
        Mr. Chairman, I thank you for holding this hearing and I am
    looking forward--Jim Sullivan also. I want to express my
    appreciation to Jim because you know, we don't just talk to
    people from Texas. We prefer to. We very rarely ever go north
    of the line but we go east.
        And Jim is a fine member. A former chairman of NAERC;
    outstanding and knowledgeable, and has more than one time given
    his services to this committee, to this Congress. And we thank
    him for that.
        I extend a special welcome to these two Texas legislators.
    As you said, they steered restructuring legislation through
    their respective bodies. And they weren't really together to
    start with. I gathered some difference, a great deal of
    difference in their approach to it.
        And I kept getting reports that it was a 50/50 chance as to
    whether or not we were going to get a bill. I am referring of
    course, to Senator Sibley of Waco who is just north and east of
    me, and Steve Wolens of Dallas who is almost in my district--
    the job they did.
        They think alike, I guess basically in being successful and
    skilled and caring legislators, but they had their own ideas
    about this. They worked them out and they worked hard at it and
    they worked day and night. And despite the fact that we kept
    getting reports it is a 50/50 chance of getting a bill, you can
    imagine how the chairman who is running this committee and the
    ranking Democrat who opens gates for him, would have felt if we
    hadn't gotten a bill.
        We would have been in terrible shape to try and lead the
    rest of this committee into writing a bill that Jeremy Bentham
    called the greatest good for the greatest number. And that is
    what we have to do.
        So I just hope my colleagues will listen carefully to
    Senator Sibley and Representative Wolens and to these other men
    who are giving their time. And I know it takes time to travel
    here, it takes time to prepare for being here, it will take
    time to leave here. So you all are givers and not takers, and
    we are very grateful for that.
        I expect we can learn an awful lot from their experiences
    and Mr. Chairman, I yield back the balance of my time, and
    again I thank you.
        Mr. Barton. I thank the gentleman from Rockwall and I know
    Senator Sibley is surprised to know that last night the ghost
    of Sam Rayburn moved Waco north of Rockwall. I guess things do
    happen in the dead of night. It used to be south of Rockwall.
        The chairman would now like to recognize the full committee
    chairman, the Honorable Tom Bliley, for an opening statement.
        Chairman Bliley. Thank you, Mr. Chairman, and I certainly
    want to commend you for holding this hearing on State and local
    issues in your efforts to bring about a fully open and
    competitive electricity power market.
        I began championing a competitive electricity market over
    10 years ago. In 1992 as the chairman of the subcommittee
    pointed out, with great effort on his part and the part of
    many, we took the first step in bringing competition to the
    wholesale market. Since 1994 I have work to spur the movement
    to retail competition and today I am pleased to report that
    some 163 million Americans in 23 States will soon be seeing the
    power of choice.
        This is a tremendous victory considering that 6 months ago
    to this day, only 13 States had opened their electricity power
    markets to competition. I commend the States that have taken
    this important step. However, the work is not yet complete. I
    encourage the remaining States to open their electricity power
    markets to competition and accord their citizens the power of
    choice.
        Meanwhile, we here in Congress need to finish our job.
    There are Federal issues that must be addressed if we are to
    bring about a fully open, and competitive electricity power
    market that benefits all Americans. In order to do our part we
    must pass a comprehensive, electric power bill that is good for
    all consumers, improves reliability, and ensures open and
    robust competition.
        Let me reiterate what I said Tuesday. We have a duty to
    give consumers access to more choices and lower prices. To deny
    them this would be wrong. So I urge all members to honestly
    join in this effort. It is important to consumers and it is
    important to our economy as we move toward the new millennium.
    I am hopeful that we can accomplish this great challenge
    together.
        Now is the time for everyone to come to the table prepared
    to work. I have instructed my staff to work very closely with
    Chairman Barton's staff to develop legislation that will finish
    the job. I extend an open invitation to all members,
    Republicans and Democrats, to participate in enacting a
    comprehensive electricity restructuring bill.
        As we develop that bill we must never lose sight that the
    consumer is front and center. Thank you, Mr. Chairman. I look
    forward to hearing the testimony of our distinguished witnesses
    today, and yield back the balance of my time.
        Mr. Barton. Thank you, Chairman Bliley. Before we recognize
    Mr. Pallone, Congressman Hall and I were talking privately that
    many of you probably don't know what the phrase ``yearling
    running downhill`` means. Once a calf grows up it becomes a
    yearling and it leaves its mother and the spring after that
    happens you have the roundup.
        And basically what that means is, if the yearling, the
    young cow is running downhill back to the pasture or the
    corral, you don't want to do any work to keep him from doing
    him what you want him to do anyway. So for those of you that
    didn't grow up on a ranch Congressman Hall wanted you to know
    what that phrase meant.
        Mr. Hall. I had always wondered what it was. I had used it
    a lot of times.
        Mr. Barton. We now recognize the gentleman from New Jersey
    for an opening statement. Mr. Pallone.
        Mr. Pallone. I know what a yearling is. There was a novel
    or something about a yearling. Thank you, Mr. Chairman.
        I wanted to say that I am particularly interested in
    hearing the testimony from today's witnesses since my home
    State of New Jersey recently enacted legislation that would
    deregulate the electric market on a very aggressive schedule.
        All New Jersey residents will be able to chose their
    electricity suppliers by August 1 of this year, and individual
    States clearly have the right and responsibility to establish
    their own game plans for introducing energy competition as we
    continue the restructuring debate here in Congress. We must of
    course make sure that we do not undo the progress that States
    like my own State have made.
        I would like to hear from States that believe they need our
    help as to what kind of assistance they would need from the
    Federal Government, and I would also hope our witnesses would
    provide their perspective on the effectiveness of mandating
    price cuts and whether the anticipated benefits outweigh
    associated costs.
        Further, hopefully the witnesses will inform us as to
    whether they believe Congress could remove or eliminate what
    some claim to be significant, Federal statutory barriers to a
    more competitive electric industry without pre-empting State
    authority over those areas traditionally falling within the
    State's jurisdiction.
        And since I might not be able to stay for the question
    period I would also like to ask up-front whether States have
    the authority to ensure the continued reliability of the
    intrastate electrical system and protect the interests and
    priorities of native or local load customers.
        Again, Mr. Chairman, I want to thank you for having the
    hearing on this issue today because I think that this issue
    with regard to the States is particularly important. Thank you.
        Mr. Barton. Thank you, Congressman Pallone. We would
    recognize the gentlemen from Kentucky, Mr. Whitfield, for an
    opening statement.
        Mr. Whitfield. Mr. Chairman, I am delighted we are having
    this hearing today and particularly focusing on State and local
    issues and the way that groups in Texas and Michigan and other
    parts of the country have dealt with this issue.
        We have had a number of hearings on this subject. I think I
    have said about all I need to say, so I will waive the balance
    of my time.
        Mr. Barton. Thank you. We would like to recognize the
    gentleman from Ohio, Mr. Sawyer, for an opening statement.
        Mr. Sawyer. Thank you, Mr. Chairman. All this discussion of
    colloquialisms in Texas reminds me that in Ohio one of the
    great linguistic dividing lines is the Old Lincoln Highway. And
    above it there is one collection of colloquialisms and below it
    there is another.
        I discovered that when you live north of that line,
    particularly in an urban setting, that the word ``service`` has
    a very different meaning from when you live below that line and
    in an agricultural setting. And I was talking with one of my
    colleagues in the Ohio legislature. He said, what did you do
    over the weekend? I said, I have been at home doing constituent
    service. He said, son, I have been looking at your voting
    record and I do believe you may be right.
        Language is important and the work of the States has been
    critical. Texas I think, can be particularly instructive
    because it does represent such a very large market; virtually a
    region in its own right. But because of that it also creates
    some unique circumstances.
        Distinguishing among those and understanding the importance
    of flexibility it seems to me, is particularly important. As
    you know, I have paid a lot of attention to transmission issues
    in all of this, and Texas I think, because it is so large, has
    a great deal to teach us but it may not represent all of the
    solutions.
        I have four basic questions I hope we can explore today.
    The question of whether or not there is sufficient transmission
    capacity across the country to create a genuinely competitive
    environment and whether the legislation that we are
    contemplating will provide for sufficient capacity to invest
    and grow, and the flexibility to do that as the transmission
    needs of much larger markets begin to evolve.
        That question of flexibility of framework I think is
    extremely important, not only for the changing nature of
    interstate regional markets, but particularly for the hard-to-
    reach within particularly isolated pockets in the country in
    electrical terms. As we look at this the third question is,
    what role the FERC should have, both with regard to
    transmission and siting problems in particular.
        And finally, the valuation of both existing and new
    transmission facilities I think, plays into all of this as we
    make sure that there is sufficient attractiveness to provide
    for investment in new transmission entities.
        I hope that we can touch on all of those today, and I thank
    you, Mr. Chairman, and our ranking member for calling this
    particular hearing. I think in conclusion once again, we have a
    great deal to learn from it. Thank you.
        Mr. Barton. Thank you, Congressman. I am going to look up
    colloquial whatever it is, and see what that means when I have
    a chance.
        We have got a journal vote on. We are going to try to
    continue so that we don't have to have an interruption. And so
    I have sent a runner and hopefully we can continue the hearing.
    We would now like to recognize the Congressman from Tennessee,
    Mr. Bryant, for an opening statement.
        Mr. Bryant. Thank you, Mr. Chairman. I do want to thank you
    also for calling this particular meeting and the series of
    meetings that we have had.
        I certainly think with the first panel including, I think,
    40 percent Texans, it has to be a very valuable panel and I
    look forward to hearing from Texas, as well as others in the
    second panel from Paragould, Arkansas, all the way to New York
    City. So we have a wide variety I think today, of
    presentations.
        As I said before, I think we can all learn much from this
    valuable experience that some of these States have had. And
    with that in mind, I simply yield back my time and commend the
    process.
        Mr. Barton. Thank the gentleman from Tennessee, and we
    recognize the gentleman from Oklahoma, Mr. Largent, who was the
    winning baseball pitcher from last week. I think gave up one
    run and what, five hits, in seven innings? And for the third
    year in a row or fourth year in a row, was the winning pitcher?
        Mr. Largent. Third.
        Mr. Barton. Third year in a row. And he used to be a
    football player for the Seattle Seahawks but we don't worry
    about that anymore. So we recognize the gentleman who has done
    outstanding work on this issue, for an opening statement.
        Mr. Largent. Thank you, Mr. Chairman. I don't have an
    opening statement. I just wanted to hear your introduction.
    Seriously, this should be a fascinating hearing. This is
    probably one of the most confusing issues I think, in
    electricity deregulation for most members.
        And so to hear from the public power folks about issues on
    private use and new bond issuance and different issues like
    that, will be very important; open transmission. And so I look
    forward to the testimony of our panels.
        Mr. Barton. Thank the gentleman. We now recognize the
    gentleman from Arizona, Mr. Shadegg, for an opening statement.
        Mr. Shadegg. I thank the chairman and I commend him for
    scheduling this hearing. Given that the composition of the
    first consists of, as has been noted, almost all Texans, I find
    it rather interesting that instead of sending the normal
    invitation to this hearing you and Mr. Hall sent me a subpoena.
        Mr. Barton. You are lucky to get that, Mr. Shadegg.
        Mr. Shadegg. Other than to note that Arizona is facing many
    of the problems that we will hear about today, and that Arizona
    has moved forward with its own legislation, and that the
    Arizona legislation I think, differs from some degree from the
    Texas approach in that the legislation in Arizona forced all
    utilities, including public power, to open their territory to
    retail competition, creating some unique circumstances in
    Arizona, I am very much looking forward to this hearing.
        And in the spirit of the July 4 holiday and our Nation's
    birthday, I am going to spare you the balance of my opening
    statement and simply ask permission to insert it in the record.
        Mr. Barton. Point out for the record that March 2 is Texas'
    Independence Day, which Senator Sibley and Representative
    Wolens know.
        Does Mr. Burr wish to give an opening statement?
        Mr. Burr. Only to say Mr. Chairman, we have been challenged
    to try figure out the high concentration of Texans who have
    testified on electricity.
        We have come to the conclusion that this is an effort by
    the Chair and the ranking member to have a way to gauge whether
    the census count in the year 2002 in fact is accurate, by
    making sure that we have had every Texan through the committee
    to in fact, testify.
        Mr. Barton. The statement is supposed to be relevant to the
    subject at hand, Mr. Burr.
        Mr. Burr. Let me take this opportunity today to thank you
    for allowing North Carolina to participate at last, in the
    debate on electricity, and to welcome the Honorable Preston
    Bass who is here to testify, and others of his colleagues from
    towns in North Carolina who are here to share their firsthand
    experiences.
        I think that it has always been the intent of this chairman
    and this ranking member to make sure that this process includes
    the voices of all, not just Texas; even though we do take the
    opportunity to highlight the heavy-weighted nature of the
    Chair's choice of witnesses, and we welcome those Texans.
        But to also say in all honesty, that this is a process that
    up till this point has included everybody. This is a process
    that I am convinced as we go through to final legislation, will
    continue to include everybody, and hopefully will meet the test
    of the best policy the Congress can produce relative to
    electricity deregulation.
        I thank the Chair and I thank the ranking member for their
    leadership and their guidance through this. I yield back.
        Mr. Barton. I see no other members present that wish to
    give opening statements. All members not present who wish to
    have an opening statement put in the record will do so without
    objection at this point in the hearing record.
        Normally, we would go ahead and bring the first panel but
    because there is nobody here but me we are going to have a very
    short recess to go vote and we should reconvene within the next
    10 minutes. So all our witnesses, we would encourage you to
    stay in the room, in our audience. I am going to run, vote and
    we should reconvene I would say, at about a 10:45.
        So we are in recess for approximately 12 minutes.
        [Brief recess.]
        Mr. Barton. The subcommittee will come back to order. We
    appreciate the indulgence when we had to do the short recess.
        We want to call our first panel forward. We have the
    Honorable David Sibley from the Texas State Senate, from Waco,
    Texas; we have the Honorable Steve Wolens from the Texas House
    of Representatives in Dallas, Texas; we have the Honorable Jim
    Sullivan who is President of the Alabama Public Service
    Commission, Montgomery, Alabama; we have the Honorable David
    Svanda?
        Mr. Svanda. Perfect.
        Mr. Barton. Svanda, who is the Commissioner for the
    Michigan Public Service Commission. And last, but certainly not
    least, the Honorable William Nugent who is Commissioner for the
    Maine Public Utility Commission, Augusta, Maine.
        Gentlemen, I want to welcome each of you to the
    subcommittee. We have your statements, which I might say were
    on time. We ought to send a notice of that to the Department of
    Energy that it is possible to get testimony on time to the
    committee, and we will put them into the record in their
    entirety.
        We are going to go right down from my left, your right. We
    are going to give each of you 7 minutes. There is a little
    light that will turn on and when it turns red you are supposed
    to stop, but we will give you a little extra time to complete
    your sentence and your train of thought.
        So we will start with Senator Sibley. And again Senator,
    the subcommittee can't tell you how pleased we are that you and
    Representative Wolens were able to put together the bipartisan
    bill in the Texas legislature. And it is my understanding the
    Governor has signed it.
        That is a tremendous accomplishment for our State and gives
    us tremendous momentum for the country. So we welcome you to
    subcommittee and will recognize you for 7 minutes to elaborate
    on your written testimony.

       STATEMENTS OF HON. DAVID SIBLEY, TEXAS STATE SENATE; HON.
     STEPHEN D. WOLENS, HOUSE OF REPRESENTATIVES, STATE OF TEXAS;
         HON. JIM SULLIVAN, PRESIDENT, ALABAMA PUBLIC SERVICE
    COMMISSION; HON. DAVID A. SVANDA, COMMISSIONER, MICHIGAN PUBLIC
        HEALTH SERVICE COMMISSION; AND HON. WILLIAM M. NUGENT,
            COMMISSIONER, MAINE PUBLIC UTILITIES COMMISSION

        Mr. Sibley. Thank you, Chairman Barton, Mr. Hall, and
    members. It is an honor for me to be here with you.
        Mr. Barton. Dave, you need to really put that microphone up
    close to you.
        Mr. Sibley. Thank you. It is especially an honor to be here
    with Chairman Steve Wolens. We did enjoy a good working
    relationship and that is what I would wish for you and
    everybody as you try to put this together.
        One of the things I think that we did right was, we set
    goals. I guess the expression, not to get too Texan about this,
    but if you don't know where you want to go, how will you know
    when you get there?
        And so we came up with several goals, and some of the goals
    that we had were lower prices for residential consumers. And I
    would commend that to you. If the only choice a residential
    consumer has is higher price you are going to lose. That will
    not be something you want to do.
        The second was to set up a long-term, competitive market.
    We didn't take the short view; I think we took the long view. I
    think we were less concerned with what happens in the next 2
    years or 3 years as opposed to what we will look like in 5 or 6
    years down the way.
        And the third thing was to be fair to the stakeholders. I
    assured all of the stakeholders early on in this I didn't want
    to see anybody get hurt or killed. We didn't want people going
    broke, we didn't want to see people who are in the market now
    unable to be in the market after we set this up. So we tried to
    come up with something along those lines.
        The other colloquialism I will use, and this will be the
    last one, 2 years ago in the Texas legislature when I was
    Chairman of the committee that was overseeing this, I was not
    in favor of the idea. My question at that time was, what is
    broke? You know, if it ain't broke don't fix it.
        And so we had a system that had served the people of Texas
    relatively well for a long period of time. We are a low-cost
    State. We don't have extraordinarily high electric costs. But
    what I found out after looking at this for 18 months is that
    the system is broke. And what is broken is that consumers bear
    the risk of loss.
        In Texas, under rate of return regulation what we found was
    that no matter how the investment that the utility made was,
    they were still guaranteed a rate of return on that capital no
    matter how poorly it was spent, and that rate of return would
    be 10 or 11 or 12 percent.
        And I think that is not a good system. That is not, in
    economics, an efficient market. And so what we tried to do with
    our bill, and I would say this is a fourth goal, was to shift
    the burden of risk over to the companies so the risk of loss
    would now be borne by companies who made bad investments rather
    than rate payers who guarantee companies a rate of return.
        I would like to talk just briefly about the Texas
    legislation, and that is the joke in the Texas legislature is,
    the biggest lie in the Senate is, I will be brief. But in this
    case because of that light, I really will be brief.
        The Texas legislation had broad support. The first time it
    passed through the Senate, 91 percent of the Senators were in
    favor of it. As it passed through the House I believe it was 97
    or 98 percent. When it came back to the Senate for concurrence
    it was 100 percent. So we had a bill that I believe had a broad
    base of support.
        Utilities, the co-ops, the municipal systems,
    environmentalists, large industrial users, and even consumers
    ended up supporting the bill. So I think it was something that
    we are very proud of.
        I would like to talk about one of the simple features of
    the bill. Through the courtesy of Representative Wolens you
    have a chart in front of you that I will refer to. One of the
    central features was what we call the ``Price to Beat''
    mechanism, and this would be a representation of that.
        Starting, in fact right now, we freeze utility rates until
    the advent of competition which happens January 1, 2002. We
    could be lowering prices, because we are in a diminishing cost
    business right now, but we linked the lowering of prices to the
    stranded costs, and so we are paying off stranded costs.
        If you will see that green differential there, you have a
    gold-colored line. That would be what we project would be the
    diminishing costs. And we freeze that up there at that higher
    level; the purple line. And the whole differential goes to pay
    off stranded costs.
        When we start competition in 2002 in the State of Texas, we
    think we will have less than $3 billion of stranded costs,
    which I think is a very manageable thing.
        On day one of competition we mandate a cost reduction of 6
    percent and then we freeze companies at that rate. The ``price
    to beat'' mechanism is the lower, or the 6 percent reduction,
    and we hold them steady until certain conditions are met.
        Now, the ``price to beat'' mechanism applies to an
    incumbent utility. So in their service area the incumbent
    utility is frozen at a minus 6 percent of what they are today.
    They are not allowed to deviate from that. This is not a
    particularly popular thing with them. They would like to
    compete and try to hold onto all their customers.
        Taking the long-term view we felt that this gave enough
    headroom for competitors to come in and be able to compete and
    take customers away from the incumbent utility. The incumbent
    utility though, can go outside their service area and can
    compete at any price they wish. And so this gets them out of
    their service area and it allows others to come into their
    service area.
        We require utilities to break themselves up into three
    entities: a generation company, a wires company, and then a
    retail electric provider. The wires company remains regulated
    under what we call performance-based regulation, where the
    better the service is the more they recover. So that remains
    regulated.
        We have market power tests. We basically have two I would
    like to call to your attention. One is the generation market
    power test wherein our electric grid, which is ERCOT, Electric
    Reliability Council of Texas, no entity is allowed to have more
    than 20 percent of the generating capacity within that area.
        The second market power test is more in the retail market
    and that is the 40 percent number. We require the utilities,
    the incumbent utility, to lose 40 percent of its market in a
    certain segment of the market, before they are allowed to get
    out from under the ``price to beat'' mechanism. So they are
    frozen until they lost 40 percent of the market.
        Stranded costs is a tough issue. I think intellectually for
    me it was easy to deal with. I believe there is a regulatory
    compact. I believe that utilities gave up their right to charge
    whatever the market could bear in exchange for being able to
    have a monopoly.
        And they also said that whatever prices we are going to be
    charged would be approved by the PUC. And then to change all
    the rules I do think, puts them at a disadvantage. So the
    threshold question I think for you, is should they recover
    stranded costs? If the answer is yes then you are talking about
    allocation; who should pay. And that was an issue that
    Representative Wolens dealt with I think, in a very good way.
        If you do allow them to recover stranded costs, I implore
    you to have a true-up after the advent of competition. We chose
    2 years, so 2 years after competition we will look back and see
    how our allocations and how the stranded costs came out, and
    then we will either pay them more or they will pay us.
        Governor Bush insisted on linking environmental clean-up to
    payment of stranded costs and I think that worked very well for
    us, and I will be glad to answer any other questions.
        Let me conclude by saying I do think there is a role for
    the Federal Government in this, and that is the role of the
    referee. I think you ought to be able to help us set individual
    system operators to help us make sure all the reliability of
    the grids are there.
        PURPA needs to be brought into the 21st Century. You could
    help us in Texas if you would allow public power corporations
    in their taxes and bond status. That is a big issue in Texas. I
    was going to answer some of the questions Mr. Sawyer raised but
    the red light is on, but I will be glad to answer those as they
    come up. And I won't refer to any jokes about servicing.
        [The prepared statement of Hon. David Sibley follows:]
       Prepared Statement of Hon. David Sibley, District 22, Texas Senate
    Introduction
        Good Morning. My name is David Sibley, and as a Texas state
    senator, I authored the recently passed electric restructuring
    legislation in our state. Mr. Chairman and members of the subcommittee,
    I thank you for giving me the opportunity to testify today on the
    importance of state and local issues in electric restructuring.
        I would like to start by giving a brief overview of the Texas bill,
    and finish by discussing federal restructuring efforts.
        The Texas bill, which was signed into law by Governor Bush just two
    weeks ago, was the result of years of comprehensive study by key Texas
    leaders. A delegation comprised of Texas House and Senate members,
    representatives of the offices of Governor, Lieutenant Governor and
    Speaker of the House, and members of the Texas Public Utility
    Commission visited California, Pennsylvania and England to learn about
    their restructuring efforts. I can honestly say our bill used some of
    their good ideas, threw out bad ones and took some bold new steps in
    our effort to create a long-lasting competitive market in Texas.
        When we started this process, I was skeptical about the benefits of
    restructuring for residential customers. My question to the advocates
    was: What's broke? Texas has, by most measures, some of the lowest
    rates in the country, and the competitive wholesale market we
    implemented in 1995 has been bringing them down even further. I knew
    that through regulation and the status quo our residential customers
    would continue to be well served. What was broken was the customer
    bearing the risk of loss, not the companies. Under rate of return
    regulation, companies are guaranteed a ten percent return on investment
    no matter how unwise. The costs are passed through to the ratepayers. A
    free market would reward good investments and punish bad ones.
        After intensive study I came to the conclusion that residential
    customers can get lower rates and better service from a truly
    competitive electric market. The rub is: how do you structure a market
    lucrative enough to attract new entrants for the long term, while at
    the same time paying off stranded costs, letting existing utilities
    compete fairly without being punitive to them, and all the while
    ensuring lower rates and continued reliability for customers?
        I believe the Texas legislation does all of these things. It was
    supported by the utilities, electric cooperatives, public power
    agencies, power marketers, environmental groups, and industrial and
    commercial customers. While most consumer groups would not endorse the
    bill, they readily admit it is the best bill in the country for
    residential customers.
    Texas Legislation
        The Texas bill recognizes the unique circumstances of electric
    cooperatives and municipal utilities by allowing them to opt into
    competition at their own pace. They are not required to opt in by a
    date certain, but we believe that the new market structure will
    encourage most public utilities to voluntarily open their markets.
        After we made the decision to allow the coops and munis to compete
    at their own pace, the most difficult challenge we faced was designing
    a market structure that is conducive to competition without being
    punitive to existing utilities. Our market structure carefully balanced
    the unbundling of existing utilities, a rate design to foster
    competition while providing rate cuts, payment of stranded costs,
    market power restrictions to protect new competitors and customers,
    strenuous customer protections, environmental protections and the
    enhanced reliability of our grid.
        Unbundling: The Texas bill requires separation of existing
    utilities into three companies: a transmission/distribution company
    that will continue to be regulated (wires company or Wireco), a power
    generation company that can only sell to the wholesale generation
    market (Genco), and a retail electric company that markets to retail
    customers but cannot own or operate generation facilities (retail
    electric provider or REP). These formerly integrated companies will
    operate as affiliates under a strong code of conduct included in the
    bill to ensure independence. Our legislation requires open access to
    the transmission and distribution systems and nondiscriminatory rates
    for those services.
        Rate Design: Beginning on the market opening date, January 1, 2002,
    all existing customers are automatically transferred to the existing
    utilities' retail electric provider affiliate. We did this because we
    found that a lottery system of assignment would be perceived as state-
    mandated slamming. However, if we let existing companies keep their
    customers we had to make sure they couldn't force their prices down to
    keep competitors out of the market. We also had to make sure they
    didn't receive windfall profits from keeping those customers. At the
    same time, we wanted to provide an immediate benefit to customers
    through a rate reduction.
        We came up with what we call the ``Price To Beat.'' On Day One,
    January 1, 2002, residential and small commercial customers will
    automatically receive a 6 percent rate reduction from the new utility
    affiliate. This new rate is the ``price to beat'', which includes
    transmission/distribution service and energy charges (distribution/
    transmission is billed through whichever REP is providing the energy
    service so that a customer receives only one bill). A customer can shop
    around and get a lower price from a competitor. The incumbent utility
    REP cannot charge a price lower or higher than the ``price to beat''
    within the residential and small commercial markets for a period of
    three years or until it has lost 40 percent of its load within each
    respective market. And, once the incumbent utility REP has met one of
    those thresholds, it cannot charge a price higher than the ''price to
    beat'' through the fifth year after competition starts. While the
    incumbent utility REP cannot lower prices in their former service area,
    they may compete at any price outside of their former service area.
        The purpose of the ``price to beat'' mechanism is to provide enough
    headroom for profit so that new entrants will have an incentive to
    market to residential and small commercial customers. The 40 percent
    threshold ensures that incumbent utility REP's are not subject to this
    price freeze once the market is competitive. And, the price cap for
    years 3 through 5 ensures that customers will not see a price increase
    once the utilities begin to compete on price.
        A lot of thought went into the ``Price To Beat'' concept. We had to
    ensure that the rate reduction was not so large that a competitor
    wouldn't want to serve customers. In fact, we were under constant
    pressure throughout our legislative session to make much deeper rate
    cuts, which we could have done since we were working off of 1999 rates
    in a declining-cost business. However, doing so would have compromised
    our ability to create a competitive market. We don't want to deregulate
    monopolies. Also, the utilities lobbied hard to allow their utility
    affiliates to compete on price. Our bill allows a utility REP affiliate
    to freely compete outside of its affiliated distribution company's
    service territory, but places the ``price to beat'' restrictions on the
    affiliated REP within the existing service area. We felt like it would
    be extremely difficult for new players to compete without these
    restrictions, though, for example, we wanted the TXU Electric REP
    competing in the Reliant Energy (formerly HL&P) service area without
    restrictions, and vice versa.
        Stranded Costs: The fight in Texas wasn't about whether we should
    pay for stranded costs. There was consensus early on that the utilities
    should receive some compensation for their potential losses. I do
    believe there is a regulatory compact, i.e. utilities gave up their
    right to charge whatever the market will bear and agreed to charge only
    what a state agency said they could in exchange for the exclusive right
    to serve an area with electricity. Government at all levels then
    dictated what energy sources would be permitted for the generation of
    electricity and where the plants would be sited. For example, in the
    '70s Washington decided that we were running out of natural gas and
    pushed utilities into nuclear. In retrospect, this was not a good
    decision. I believe utilities are entitled to some compensation as we
    transition into a competitive market. The difficult issue is
    determining how much should be paid, how utilities would be paid and
    who would pay them.
        Our two biggest concerns were that customers would pay too much,
    and that real competition would be delayed or stunted due to large
    nonbypassable charges (the California problem). Beginning this
    September, we are freezing existing rates for the transition period to
    competition so that any over earnings can go towards stranded cost
    recovery. This will minimize the amount we have to pay under
    competition. To make sure customers and utilities are treated fairly,
    our legislation requires market valuation methods in all cases except
    for nuclear assets. It allows utilities to securitize stranded costs
    early based on an administrative model established by our PUC. A final
    true-up in 2004, two years after competition, would consider how much,
    if any, utilities had over earned during the transition period and
    during the first two years of competition under the ``Price To Beat.''
        Stranded costs are recovered through nonbypassable charges on
    distribution and transmission services, which are included in the
    delivery portion of the REP bill. The PUC has the authority to adjust
    these charges to ensure that they are not too high. Since the ``price
    to beat'' is based on the full price of electricity, including
    delivery, production and fuel, a large nonbypassable charge would have
    the effect of reducing the ``headroom'' or profit margin in the
    generation-related part of the price. This would make it more difficult
    for competitors to make a profit, and therefore discourage their entry
    into the market. The consideration of stranded cost recovery and its
    effect on rate design is a crucial component of restructuring that
    cannot be overlooked.
        Market Power: Texas broke new ground in addressing market power. As
    you may know, the Electric Reliability Council of Texas (ERCOT) is a
    wholly contained interconnection grid within Texas. There are no
    interstate interconnections within this grid. This has its advantages
    and disadvantages for us in considering legislation. A disadvantage is
    that the existing market concentrations within our state are relatively
    high, without the option of bringing in power from other grids. We
    addressed this issue head-on by prohibiting the ownership of more than
    20 percent of the installed generation capacity within a power region
    (Texas is also in the SPP, SERC & WSCC). We do not require divestiture
    but instead allow the auctioning of rights to capacity. The utilities
    were initially opposed to the capacity limitations within the bill, but
    have come to embrace it as part of a larger package that is fair to the
    industry.
        Another market power provision we included is a requirement that
    utilities sell 15 percent of their Texas jurisdictional capacity
    through auctions to ensure there is enough available capacity for
    competitors to resell. This is required for five years or until 40
    percent of the residential and small commercial market is served by
    competitors. Other market protections include a strong affiliate code
    of conduct to prevent cross-subsidization and the preferential
    treatment of generation and retail affiliates by the transmission/
    distribution company (Wireco).
        Customer Provisions: Our customer protections are very strong due
    to our experiences in the deregulated telecommunications market and
    England's experiences in the restructuring of their gas markets. A
    stand-alone customer protection bill was passed to address the
    telecommunications and electric industries, especially since we believe
    these industries will begin to merge and package services together. In
    addition to slamming and cramming protections, our law prohibits
    disconnections for nonpayment during extreme weather and gives the PUC
    the authority to promulgate marketing rules and guidelines. A system
    benefit charge on wire charges funds a customer education program to
    facilitate shopping, a low-income program for families at or below 125
    percent of the poverty level and a school-property tax replacement
    program to protect our school finance system.
        Environmental Protections: Governor Bush provided strong leadership
    in the area of environmental reforms. The legislation establishes an
    emissions cap for grand fathered units and requires statewide 50
    percent NOX emission reductions and 25 percent
    SO2 reductions by May 1, 2003. The costs of retrofitting
    certain older generation assets are allowed to be recouped as stranded
    costs to incentivize companies to retrofit to the highest technology
    available, and a renewable energy trading credit program was
    established to help the industry meet renewable energy goals. The bill
    also includes some energy efficiency requirements.
        Reliability: Finally, the anchor of our legislation lies in the
    improvement of our existing independent system operator (ISO) and the
    implementation of strong reliability standards. The ISO will be
    responsible for the physical and financial transactions within ERCOT.
    In addition, our PUC has been given the authority to revoke the
    certification or registration of any market participants that do not
    abide by the ISO rules. The ISO is governed by an 18-member board
    comprised of representatives from all of the market sectors, including
    residential, commercial and industrial customers.
    State and Local issues in Electric Utility Restructuring
        I believe the Texas legislation is a far-reaching comprehensive
    bill that will create a robust competitive environment. However, what
    works in Texas may not work in California or in Kentucky. And, retail
    competition may not benefit every state. I encourage this subcommittee
    to defer to each state in their decision of whether to allow retail
    competition. I believe most states will choose competition because it
    is more efficient and beneficial for all consumers.
        I do encourage you to pass a federal restructuring bill that
    recognizes the differences among states and market sectors. The grand
    fathering of existing plans will preserve the delicate compromises made
    by many parties, and will ensure a smoother implementation of our
    restructuring plans. Preemption will only create a legal quagmire that
    will slow down the establishment of competitive markets.
        There is clearly room for federal intervention and assistance.
    Outdated federal regulations, such as the mandated purchase
    requirements within PURPA, should be abolished. FERC should be given
    the necessary tools to ensure that strict reliability standards are
    implemented and to assist states and regional councils in assuring
    nondiscriminatory access to transmission systems. FERC should play the
    role of referee in the oversight and formation of regional transmission
    systems. Frankly, we can't implement our restructuring legislation in
    the non-ERCOT parts of Texas without FERC's help.
        Another extremely important role for Congress is to ease private
    use restrictions on outstanding tax-exempt bonds so the customers of
    public utilities are able to participate in retail competition.
    Competition in the service areas of public utilities cannot occur
    without open transmission access, which is discouraged by the
    possibility of retroactively taxable bonds if the private use issue is
    not clarified. Texas has many great municipal utilities that are eager
    to compete and will do well.
        Another concern I have is the possibility of federal system benefit
    charges. Deregulation of the telecommunications market at both the
    state and federal level has brought with it a laundry list of new
    charges to implement government programs. While these programs are
    often necessary, we should avoid duplicating programs at the state and
    federal levels. I'm also concerned that because Texas is a high energy
    use state, federal system benefit charges may tax Texans more heavily
    while the benefits may accrue in other areas. I urge you to defer to
    the states for all of these programs.
        Finally, I understand that Texas is different from other states
    because of its unique grid. I urge you to recognize that our
    Legislature and PUC have done an excellent job in regulating.

        Mr. Barton. Well, thank you Senator, and again, we will
    have sufficient time for questions that you can elaborate on
    some of those points.
        We would now like to recognize Representative Wolens.
    Congressman Hall was going to brag on you but he got some very
    favorable, personal news just now and he has gone to call his
    family. So if he were here he would expound on what a great job
    you did and how you brought the Texas House together which he
    didn't think was possible. And he just would have gone on and
    on about you in a much better way than I could. But we are
    delighted that you are here and we will give your statement in
    its entirety in the record and let you elaborate for 7 minutes
    plus a little extra, if you need to. Representative Wolens.

                   STATEMENT OF HON. STEPHEN D. WOLENS

        Mr. Wolens. Chairman Barton, thank you, members. It is a
    pleasure for me to be here for a couple of reasons. More than
    30 years ago I was a Page in Congress and I used to run
    errands, and I ran a lot of errands in this room for a lot of
    folks that told me when to get paper and when to get chewing
    tobacco and when to do all those kinds of things. So it is nice
    to be here sitting at a table instead of running back and
    forth.
        Chairman Barton just testified before the committee that I
    serve on, so Joe Barton, I like the symmetry of what is going
    on here, and it was maybe 35 years ago I met, what to me, was
    the biggest politician and the most important politician of my
    life, who was then State Senator Ralph Hall. And what I would
    say to Ralph Hall is that some things, at least from my
    perspective, never really change.
        I am really tickled about the vote that David Sibley and I
    were able to do in the House and in the Senate. It was a
    whopping vote. We were wondering if we could ever get to 100
    much less 142 or 144 votes, and it was miraculous.
        And what I also want to tell you is the people who signed
    off on the bill, and if you look at my handout in around page 5
    or 6 or 2 or 3, it will show you that joining hands in this
    bill were the National Federation of Independent Businesses of
    Texas and the Texas AFL-CIO.
        You had the investor-owned utilities signing off with all
    of their competitors, which includes PG&E and Enron. So you had
    the competition on both sides signing off on the bill. You had
    the investor-owned utilities with all their dirty plants; which
    they say is not the right word. They call them environmentally
    challenged plants.
        But in any event, you had the IOU's signing off with the
    Environmental Defense Fund also signing off on the bill. And if
    you look at the page there are a lot more names of various
    members of opposing financial interests signing off on the
    bill. The part of the magic was putting everybody with an
    antagonistic financial interest in the room to work on the
    bill.
        And you will notice that of the 200 pages that David and I
    were able to move, it is detail, it is meat. It is not a
    skeleton bill where we give it to the PUC and as the PUC you
    guys go figure it out. We didn't do that on the Code of
    Conduct. We put in the specific Code of Conduct and it is
    detailed and it is full of meat and full of flesh for the
    buzzards to go pick on.
        Now, everything in the bill is counter-intuitive; it runs
    against the grain. What David discussed with the ``price to
    beat'' is counter-intuitive. I mean, why in the world would you
    tell the incumbent utilities, you can't lower prices?
        And can you imagine the notion that we go in and say we are
    going to mandatorily limit and lower the rates by 6 percent,
    then we turn around say, you are going to freeze your rates
    there and come back and say no, we want to lower it? I mean,
    the incumbent utilities were before the legislature begging us
    to permit them to lower their rates and we said no.
        And the reason we said no is because what we have learned
    in trucking and what you have learned in trucking and what you
    have learned in airlines which is, if you let the big dog come
    underneath, lower the price, they are going to run the
    competition out of business and raise the price.
        Now, let me tell you the three reasons that we had no
    business changing the law in Texas. Reason No. 1 is, we have
    got some of the lowest rates in the country. Reason No. 2 is
    because we have got reliable service. And reason No. 3 is, no
    one asked us to do it.
        I have got 125,000 people in my district; he has got a
    half-a-million people in his district. I don't know about
    David. I got not a single letter saying, please change the
    structure. No one did it. So the question is, why did you guys
    change it? And there are a variety of reasons.
        No. 1, even though our rates are low we have got some of
    the highest bills in the country. The national average is about
    $800 a year: California is about $700 a year; Texas is about
    $1000 a year. So our bills are high.
        And reason No. 2 is a big deal to us, but it is going to be
    a big deal to you all and it is, dealing with capacity reserve.
    We learned in July 1978 that we were going to have a capacity
    reserve margin at 10 percent or lower in Texas. As you know,
    the margin of safety is 10 to 15 percent reserve capacity
    margin.
        Well, that was Texas now. There was a report that came out
    by the North American Electrical Reliability Council;
    Donaldson, Luvkin, and Generett reported it in their 1999
    Financial Report. But it is staggering what they say.
        They say by the North American Electrical Reliability
    Council that 8 of the 11 regions in the country are going to
    have a shortage of electricity; that it will be less than 10
    percent in 1999 in 8 of the 11 regions, of which Texas is one;
    but they also said for the entire United States by the year
    2003 it will be at 7.6 percent, which is of course, less than
    the 10 percent.
        And that is you all's to deal with. I mean, you asked what
    you should be fretting over? And you should be fretting over
    that issue because it is coming upon us.
        Now, the second reason that there is an adequacy of
    generation issue, No. 1 is that the increase and rate of demand
    has not exceeded the growth as we know here. And the second one
    is that the market is reluctant to invest. And if you look at
    the less than 10 percent in 1999, DOJ says it is going to cost
    $30 billion for capacity for the markets to spend to get us
    back up to 10 percent.
        It is $30 billion. And I would suggest that you are not
    going to find businesses willing to invest in the market unless
    they know what the rules are. And if you don't know what the
    rules are, they ain't going to be spending $30 million.
        So the first reason is that we have got high bills; the
    second adequacy of generation, which I believe is an issue for
    every State and for you all; and the third major reason, and I
    have got five of them, the third one is a parochial interest
    which is, mergers and acquisitions.
        It is everywhere. They are gobbling each other up, and they
    are not only doing it nationally but they are doing it
    internationally. You look to see in Texas, Central and
    Southwest was bought out by an Ohio company, American Electric
    Power of Columbus, which is fine. As a Texan I wasn't happy
    about it, but it is fine.
        But I don't know that I want Texas utilities to become
    necessarily Canada utilities. And it is not a far-off venture.
    Now look, February 1, 1999 Texas Utilities spends $1 billion in
    Australia. A day later New England Electric of Massachusetts
    buys Eastern Utilities for $750 million. It is no big deal.
    Those are two neighbors, side-by-side.
        The big deal is that New England Electric 2 months before,
    had been purchased by an English company; by National Grid of
    Coventry England for $3.2 billion. That is a big deal. But if
    you talk to the chairman of the Board of the English industry,
    of the English corporation, and his explaining why he bought a
    New England company he will say, to give him a platform for
    future acquisition in the United States.
        I see the red light, but let me mention just two other
    things briefly. I can tell you, and you know, from March,
    April, May and June if you look at today's New York Times there
    is another big acquisition going on in this business. Fourth
    reason, there is nothing inherently monopolistic about
    electricity; not at the generation side, not at the retail
    side.
        T&D, yes, but not at the other two. And if we deregulate
    something that is not inherently monopolistic, everybody will
    win. And finally, and this is also terribly important from your
    point of view, you will and we will unleash an enormous amount
    of technology and innovation.
        In the early 1980's you could get any phone you wanted to
    as long as it came in black. And look what we do with pagers
    and look what we do with cell phones. And you are going to see
    this exactly same thing. Texas Utilities was my electric
    company. Dallas Power & Light became my gas company 3 years
    ago; Lone Star Gas.
        They just bought a telephone company 2 years ago. Did you
    know that? If you looked at Forbes in April of this year,
    Forbes talked about 11 electric companies that are getting into
    the telephone business.
        And you are going to be seeing what you already see with
    Texas Utilities, which it is going to be electric, it is going
    to be gas. It is going to be telephones, local and long
    distance; cellular is going to be bundled in it and when they
    get through with that they are going to do a joint venture with
    someone and it is going to be internet, it is going to be local
    phone, it is going to be cable.
        And attached to that they are going to throw in your fire
    alarm system and they are going to throw in your smoke alarm
    system. And it is only be deregulating it.
        And thank you for letting me visit with you.
        Mr. Barton. I would like to keep letting you talk but there
    are some non-Texans here and they have had about all of Texas
    they want to hear for a while, I think.
        It is obvious that you and Senator Sibley made a great team
    and it is also obvious, or will be once the questions are
    through, that the bill that you helped pass is, as you put it,
    full of meat and we appreciate that.
        We now want to hear from the Public Utility Service
    Commissioner from the great State of Alabama. And I know that
    is a relief to everybody else on the panel that you are not
    from Texas. And I believe Alabama may have a little bit
    different perspective about some of these issues than we have
    just heard. So you are recognized for 7 minutes, Commissioner,
    and if you need a little extra time you will be given that
    privilege also.

                     STATEMENT OF HON. JIM SULLIVAN

        Mr. Sullivan. Thank you, Mr. Chairman, and I thank the
    members of the subcommittee. I am Jim Sullivan. I am not from
    Texas, I am from Alabama, and I am President of the Alabama
    Public Service Commission. But I can tell you, I have been
    vitally interested in what my friends to the right of me have
    been saying about the bill that they recently passed.
        I understand that my written statement will be included in
    the record today, and I appreciate that as well as I appreciate
    the opportunity to come here and make an appearance as you
    study State and local issues that are involved in electricity
    competition.
        Coloring any discussion of electric industry restructuring
    is the fact that Alabama is one of the so-called, low cost
    States. And my first charge as a Public Utility Commissioner is
    to ensure that Alabama keeps those rates down while keeping the
    quality of service and reliability up.
        Based on recent published information, Alabama has
    electricity rates that are 17 to 19 percent below the national
    average. With our basic low cost advantage Alabama does not
    find itself in a position to need to rush to judgment.
        I believe it is in Alabama's best interest to tell Congress
    that one size does not fit all. We should be allowed to manage
    electric industry restructuring in Alabama in a way that is
    consistent with our individual needs, our individual resources
    and our particular economy.
        The issues involved in restructuring the industry are not
    just complex, they are excruciatingly complex. Moreover, we
    simply cannot afford to get it wrong. This debate embraces not
    only questions of quality of life but indeed, our national
    security.
        The risk we accept in reshaping our national electric power
    industry must be prudent to a fault and essentially failsafe.
    Not surprisingly, these certainties are available to
    policymakers as they strive to bring competition to the retail
    electric business.
        I am convinced however, that the following observations
    will hold true as restructuring goes forward. First,
    deregulation is a misnomer. As trends go, probably different
    regulation, but not an absence of regulation. And this could
    result in some form of hybrid or quasi or market-based
    competition not sufficiently answerable either to regulators or
    to the market.
        Second, there will be winners and losers among utilities
    and customers: acquisitions, liquidations and disfranchised
    customers. We are already seeing major mergers of the companies
    involved with the new ``fuel of choice'', natural gas.
        Third, with no obligation to serve, reliability will be
    jeopardized. Fourth, restructuring will ultimately lead to a
    few global oligopolies due to mergers and acquisitions and the
    lack of full accountability to market our regulator. Market-
    based competition is better than regulation, however regulation
    is better than unbridled or freelance oligopoly.
        Fifth, nuclear power will be especially vulnerable to
    competition. Sixth, restructuring industries in the name of
    competition does not guarantee lower prices. In fact, supply
    and demand and balances will likely drive prices higher in many
    States, and I refer you specifically to recent reports by the
    U.S. Department of Agriculture and by the American Gas
    Association.
        The point is that not all of these factors may combine to
    create some sort of freelance oligopoly that is not truly
    answerable to the market or to the regulator. I feel that
    accountability and protections are more effective the closer
    they are to the customers.
        The States are our source and the accountability provided
    by a State-crafted solution to a State-specific situation has
    to be preferable to a Federal, one-size-fits-all mandate. In
    Alabama, the Public Service Commission has opened a docket to
    investigate the feasibility of electric restructuring in
    Alabama.
        We have received over 1200 pages of comment and our staff
    is studying that information in preparation for hearings that
    we will hold surrounding each of the several issue areas. Even
    at this preliminary stage of our investigation these comments
    at the State level make it more than evident that consensus is
    going to be hard to reach.
        It is equally evident that these decisions that can be made
    at the State level should remain at the State level. It is
    clear that most legislation introduced at the Federal level is
    patterned after legislation and regulatory action from the
    high-cost States. The proper course of action for these high
    cost States is not the proper course of action for a low-cost
    State like Alabama.
        And while not wanting to impede the progress of any State
    that has decided to implement a competitive retail market, I
    simply ask that Congress give equal consideration to the issues
    facing low-cost States as outlined in the Low-Cost States
    Initiative submitted earlier this year to each Member of
    Congress. And you will recall that the Low-Cost States
    Initiative carried the signatures of 23 of our States.
        In summary, I believe that the best help Congress can give
    Alabama is to clarify jurisdiction to allow Alabama to craft
    the solutions best for our States, deal with purely Federal
    issues such as PUHCA and PERFA and Federal power agencies, and
    let the State commissions and legislatures, who are the
    decision-makers closest to the conditions, continue to
    restructure as best suits our individual circumstances. Thank
    you.
        [The prepared statement of Jim Sullivan follows:]
      Prepared Statement of Commissioner Jim Sullivan, President, Alabama
                           Public Service Commission
        Mr. Chairman and Members of the Subcommittee: Good morning. My name
    is Jim Sullivan. I am the President of the Alabama Public Service
    Commission. I respectfully request that the written statement of the
    Alabama Public Service Commission be included in today's hearing
    record.
        I greatly appreciate the opportunity to appear on behalf of the
    Alabama Public Service Commission before the Subcommittee on Energy and
    Power of the U.S. House of Representatives' Committee on Commerce as
    you study state and local issues involved with electricity competition.
        Coloring any discussion of electric industry restructuring is the
    fact that Alabama is one of the so called low-cost states, and my first
    charge as a Public Service Commissioner is to ensure that the Alabama
    Public Service Commission keeps those rates down while keeping quality
    of service and reliability up. Based on recent published information,
    Alabama has electricity rates that are 17% to 19% below the national
    average. With our basic low-cost advantage, Alabama does not find
    itself in a rush to judgment.
        I believe it is in Alabama's best interest to tell Congress that
    one size does not fit all. We should be allowed to manage electric
    industry restructuring in Alabama in a way that is consistent with our
    individual needs, resources and economy. The issues involved in
    restructuring the industry are not just complex--they are
    excruciatingly complex. Moreover, we simply cannot afford to get it
    wrong. This debate embraces not only questions of quality of life, but
    indeed our national security. The risks we accept in reshaping our
    national electric power industry must be prudent to a fault and
    essentially fail-safe.
        Not surprisingly, few certainties are available to policymakers as
    they strive to bring competition to the retail electricity business. I
    am convinced, however, that the following observations will hold true
    as restructuring goes forward:

     First, ``deregulation'' is a misnomer--we are likely to see
            different means of regulation as industry restructuring goes
            forward, but not an absence of regulation. The result may well
            be some form of hybrid or quasi market based competition which
            is not sufficiently answerable to the market or the regulator;
     Second, there will be winners and losers among utilities and
            customers--acquisitions, liquidations, and disenfranchised
            customers. We are already seeing major mergers involving the
            companies involved with the new ``fuel of choice'', major gas
            companies;
     Third, reliability will be jeopardized with no obligation to
            serve;
     Fourth, restructuring will ultimately lead to a few global
            oligopolies due to mergers and acquisitions and the lack of
            answerability to market or regulator;
     Fifth, nuclear power will be especially vulnerable to
            competition;
     Sixth, restructuring industries in the name of competition
            does not guarantee lower prices. In fact, supply and demand
            imbalances will likely drive prices higher in many areas.
        The point is that all of these factors will combine to create some
    ``freelance oligopoly'' that is not truly answerable to the market or
    the regulator. I feel that accountability and protections are more
    effective the closer they are to consumers. The states are at the
    source, and the accountability provided by a state crafted solution to
    a state specific situation has to be preferable to a federal, one-size-
    fits-all mandate.
        In Alabama, the Public Service Commission has opened a docket to
    investigate the feasibility of electric industry restructuring. We have
    received more than 1,200 pages of comments and our staff is studying
    that information in preparation for hearings that we will hold
    surrounding each of several issue areas. Even at this preliminary stage
    of our investigation, these comments, made at the state level,
    illustrate how difficult it will be to reach consensus. It is equally
    evident that those decisions that can be made at the state level should
    be made at the state level. In our restructuring docket, we have
    received credible economic studies and ancedotal evidence that claim to
    ``prove'' conclusively that retail competition in Alabama will either

     Save each ratepayer in excess of $200 per year while producing
            major benefits for the Alabama economy as a whole, OR
     Cause all ratepayers to see a dramatic rate increase while
            significantly undermining the economy of Alabama.
        Can Congress examine this dichotomy in Alabama and make a decision
    that is correct for Alabama? I submit that it cannot.
        If there are such differing opinions of the proper path to follow
    in our state from those parties specifically concerned with Alabama and
    its economic well-being, how can a national one-size-fits-all mandate
    from Congress be better suited to the interests of Alabama and its
    citizens than solutions crafted by Alabamians? I don't believe it can.
        It is clear that most legislation introduced at the federal level
    is patterned after legislation and regulatory action from the high-cost
    states. The proper course of action for these high-cost states is not
    the proper course of action for a low-cost state like Alabama. The
    Alabama Public Service Commission certainly does not want to impede the
    progress of any state that has decided to implement a competitive
    retail market. But we do ask this Congress to give equal consideration
    to the issues facing the low-cost states.
        The comments received in the Alabama Public Service Commission
    investigation also point to certain areas that are not within our
    jurisdiction but require attention and resolution if restructuring is
    to proceed in Alabama.
        One prime example is the current tax structure of our investor-
    owned jurisdictional utility versus the tax situation of the Alabama
    municipals, cooperatives, federal power agencies and new competitive
    suppliers. The tax changes that would occur through federal- or state-
    mandated retail competition are critical issues. Any loss of revenues
    caused by an ill-conceived plan could be disastrous for the state and
    local governments that rely on those taxes. The reform of utility taxes
    in Alabama will have to be crafted by the State Department of Revenue,
    the Governor's Budget Office and the Legislature. I can assure you that
    in Alabama, as in many other states, this will not be a quick or an
    easy project. The questions surrounding the tax status of public power
    entities will need resolution at the federal level, and the treatment
    accorded these agencies will have to be incorporated into the changes
    developed at the state level.
        This is one example of federal/state conflict that needs to be
    addressed at the federal and state level. Other areas will need federal
    attention in order to allow the states to continue to lead the charge
    to restructure electricity markets as local conditions dictate:

     Affirming state authority to implement customer choice, if a
            state so chooses, without running afoul of the Commerce Clause
            or the Federal Power Act;
     Affirming state authority to deal with stranded costs--a
            problem created in the states and a problem that can best be
            addressed by the states in accordance with the amount and kinds
            of costs considered stranded and the impact and amount of
            recovery considered prudent in a given jurisdiction;
     Affirming state authority over delivery services, including
            transmission;
     PUHCA reform;
     PURPA repeal;
     Public power issues;
     Reliability and management of the grid.
        Other areas of restructuring, besides taxes, lend themselves to
    resolution at the state level. These areas include public purpose
    programs and customer protection issues.
        In summary, I believe that the best help Congress can give Alabama
    is to define jurisdictional issues so as to allow Alabama to craft the
    solutions best for Alabamians; deal with purely federal issues such as
    PUHCA, PURPA, and federal power agencies and let the state commissions
    and legislatures, who are the decision makers closest to the
    conditions, continue to restructure as best suits their circumstances.

        Mr. Barton. Are you going to give back time?
        Mr. Sullivan. I will give back time.
        Mr. Barton. I tell you, that is unusual, especially as slow
    as we listen in Texas to you folks talking in Alabama. That is
    good. We appreciate that.
        We would now like to hear the Honorable David Svanda who is
    the Commissioner for the Michigan Public Service Commission.
    And former Chairman Dingell is not here now but if he were here
    he would brag on you and tell you what a great job you are
    doing and how pleased he is at the efforts that Michigan is
    making. So we have welcomed you. Your statement is in the
    record in its entirely and we will recognize you for 7 minutes
    also.

                    STATEMENT OF HON. DAVID A. SVANDA

        Mr. Svanda. Thank you very much, Mr. Chairman and members
    of the committee. It is a true pleasure and honor to be here.
    Let me legitimize my testimony from the outset by indicating
    that Michigan's First Lady, Michelle Engler, grew up in Texas.
        I am pleased to be here before you today to discuss the
    importance of competition in the electric industry and to
    explain the status of industry restructuring in Michigan, and
    finally to encourage you and your colleagues to create a
    national vision for the electricity markets of the future.
        Michigan likes competition. When the Detroit Red Wings won
    the national championship 2 years in a row in 1997 and 1998, we
    were proud. We were proud, not because it was the Wings' turn
    to win those championships, but because they fought hard. They
    fought against tough competition, they continually improved,
    and ultimately delivered the superior product.
        Mr. Barton. Who won?
        Mr. Svanda. Last national hockey championship. Just out of
    curiosity. It escapes me.
        Mr. Barton. Yes. I don't normally interrupt the witness,
    but some team in Dallas, I think, beat some team in New York.
        Mr. Svanda. That could be.
        Mr. Barton. Go ahead.
        Mr. Svanda. When our auto companies in the 1970's and the
    1980's were really on the ropes, we were extremely proud of the
    way that they met their stiff competition from foreign
    competition. We are proud of the fact that labor, management,
    and government came together, not to create barriers to those
    new entities that wanted to sell their products into the
    American market, but instead, our companies responded by
    beating the quality, price, and performance of that
    competition.
        They competed and we all won. The same philosophy underlies
    Michigan's initiatives in the trucking, telecommunications,
    natural gas, and now in the electric industries. During the
    past several years the Michigan Commission has focused
    attention on bringing competition to the electricity industry;
    a move which parallels the changes we have made in those other
    industries which were formerly insulated from market forces.
        The first step occurred 5 years ago when the Commission
    issued an order that initiated retail wheeling on an
    experimental basis. We did that experiment for Consumers Power
    and for Detroit Edison. Together they serve about 90 percent of
    the retail market in Michigan.
        At the time, competition in retail generation was a
    relatively new concept. Since then we have held meeting after
    meeting, hearing after hearing, listened to, responded to
    literally hundreds of stakeholders. Based on those comments we
    have continued to issue a sequence of orders that culminated
    this past March.
        Those orders phased in customer choice and allowed the
    customers of Consumers Energy and Detroit Edison to select the
    generation, suppliers, and services that best met their own
    needs. The chosen electrons have in fact, begun flowing and the
    participating customers have in fact, begun to realize
    significant savings.
        I have to tell you though, that since my written testimony
    was prepared last week, there have been significant changes to
    the competition map that I know that all of you pay attention
    to.
        Just this Tuesday, day before yesterday, in response to an
    appeal by our two largest utilities, the Michigan Supreme Court
    vacated the Commission's orders that established our retail
    access program.
        While Michigan is continuing to consider the ramifications
    of this action, it certainly indicates the need for further
    legislation, both at the State and at the national level, and
    for that national vision that I encouraged you to create in my
    opening statement.
        If we are to overcome these types of developments, and if
    we are to create an environment in which competition can
    flourish, we must have a national vision unconstrained by
    artificial, State boundary, market barriers. Several factors
    have led me to this conclusion.
        First of all, the electricity industry is no longer focused
    on serving only those customers within a limited geographic
    industry. As has already been noted, the industry now has a
    national, even international scope. The market, like the
    electrons that it is based on, do not know State boundaries.
        Second, regulated prices are inconsistent from utility to
    utility, and in many cases, well above those found in the
    market. Economic regulation and government protection have not
    been successful in keeping electricity prices low.
        Some States with lower prices have achieved them in part
    due to the availability of inexpensive public power sources.
    That is an economic boost for them and a disadvantage to those
    of us unable to access it.
        Third, electric generation companies, whether utility or
    non-utility generators across the country, are functioning in
    limbo. They are reluctant to build new generation resources
    until they have a clear understanding as to how the industry
    will develop. As a result, reserve margins are shrinking and
    system reliability may be in jeopardy.
        While there is agreement from a cross-section of
    stakeholders that free markets are far superior to government
    protection and regulation, some are still not convinced. I can
    understand the concerns and I think we can respect those
    concerns and still achieve three important objectives.
        First, if a State chooses not to offer its citizens choice,
    it should not limit the development of the market for those
    States seeking competition. Utilities and other generators
    located in States without a competitive initiative should not
    be prohibited by those States from participating in the market
    that is created by other States.
        Second, multi-state companies stand to achieve the greatest
    gains from competition if they can include all of their
    facilities in their purchase agreements, whether or not those
    facilities are located in States offering choice. Without this
    opportunity, these companies will be weakened in their
    competitive efforts.
        Third, an effective market depends on a transmission system
    capable of transporting power between the customer and the
    seller. I mentioned earlier that Michigan has recently
    encountered bumps on our pathway to an open market. Actions
    taken by individual States alone will not result in the optimal
    development of a market in this country.
        I am not alone in my believe that there is a need for
    strong, national leadership and strong national direction if we
    are to move the electric industry forward. I believe that
    Congress must use its authority to establish the paths for
    States to follow, and Congress must create an environment in
    which electricity can be traded and transported just like any
    other interstate commodity.
        Perhaps the most important point that I want to leave with
    you today is that whenever you come to a fork in your
    legislative-making road, take the path that is marked
    ``competition``. I urge you not to introduce or expand
    regulation when there is an opportunity for the market to
    achieve a stated goal.
        Resist the impulse to protect special interests; for
    example, the use of renewable resources is worthy objective.
    However, this objective can be achieved through the
    marketplace. Universal service and other public benefit
    programs likewise, will be better served by allowing the market
    to work as opposed to building funding requirements into
    legislation.
        Fuel cells and micro turbines are excellent examples of new
    technologies that hold promise for electricity users to gain
    independence, and they should be allowed to fulfill their niche
    accordingly.
        Thank you very much.
        [The prepared statement of David A. Svanda follows:]
     Prepared Statement of David A. Svanda, Commissioner, Michigan Public
                               Service Commission
        My name is David A. Svanda and I am a member of the Michigan Public
    Service Commission. I am pleased to appear before you today to discuss
    the importance of competition in the electricity industry, explain the
    status of industry restructuring in Michigan, and seek your support for
    the adoption of comprehensive legislation to develop and expand the
    wholesale and retail electricity markets throughout the country.
        Michigan likes competition. When the Detroit Red Wings won the
    Stanley Cup in 1997 and 1998, we were proud. Not because it was the
    Wings turn to win the Cup, but because they fought hard against tough
    competition, continually improved, and ultimately delivered a superior
    product--a National Hockey League championship. When our auto companies
    were ``up against the wall'' in the 1970's and early 1980's, facing
    stiff foreign competition, we were extremely proud of how labor,
    management, and government responded--not by erecting barriers to
    imports but by beating the quality, price, and performance of the
    competition. They competed and we all won. The same philosophy
    underlies Michigan's initiatives in the trucking, telecommunications,
    natural gas, and, now, electricity industries.Why are changes
    necessary?
        I do not need to explain to you the transition occurring in the
    electricity industry. You have heard testimony and read the
    documentation on the changes consuming the industry, the reasons for
    these changes, and the perceived impacts of the changes, positive and
    otherwise. You have also heard that the savings resulting from
    competition will be an estimated $20 billion per year or more. States
    also have heard these messages. In over 20 states, legislatures have
    enacted, or state commissions have issued, comprehensive restructuring
    plans. Customers in many of these states are already experiencing
    savings from their participation in the market. Many other states are
    in the midst of investigating the potential for competition and may be
    joining us in offering their citizens choice.
        During the past several years, the Michigan Commission has focused
    attention on bringing competition to the electricity industry, a move
    which parallels the changes we have made in the trucking,
    telecommunications, natural gas, and other industries that were
    formally insulated from market forces. The first step occurred five
    years ago when the Commission issued an order initiating a retail
    wheeling experiment for large industrial customers of Consumers Energy
    and Detroit Edison. Together, these companies serve approximately 90%
    of the retail electric customers in the state. At that time,
    competition in retail generation was a new concept. Since then, we have
    held public meetings and comment periods, hearing from hundreds of
    stakeholders. Based on these comments, we have issued a series of
    orders culminating with an order on March 8, 1999. In this issuance,
    the Commission took the final steps necessary to phase-in customer
    choice and allow customers of Consumers Energy and Detroit Edison to
    select the generation suppliers and services that best meet their
    needs. The chosen electrons have begun flowing and the participating
    customers have begun to realize savings. While we are working with the
    utilities, alternate suppliers, and customers to smooth out the rough
    spots, we are also working with smaller investor-owned utilities and
    cooperatives to determine how they can most efficiently offer their
    customers similar opportunities.
        In taking the action we have in Michigan, we have recognized that
    government regulation, as well-intended as it has been, cannot bring
    about the same degree of economic efficiency and innovation which is
    spurred by the competitive market. I believe that unrestrained
    competition can produce the best results. I also believe that, to
    create an environment in which competition can flourish, we must have a
    national vision unconstrained by artificial state boundary market
    barriers. Several factors have led me to this conclusion.
        First of all, the electric industry is no longer focused on serving
    only those customers within a limited geographic area. The industry now
    has a national, even international scope. The market, like the
    electrons it is based on, do not know state boundaries. Cost effective
    transactions occur at the regional or multi-regional level. Small
    scale, jurisdictionally jealous regulation and government protection
    act as a drag on the development of a competitive market and should be
    dealt with by a sensitive visionary national policy.
        Second, regulated prices are inconsistent from utility to utility,
    and in many cases, well above those found in the market. Economic
    regulation and government protection have not been successful in
    keeping electricity prices low. Some states with lower prices have
    achieved them in part due to the availability of inexpensive public
    power sources; an economic boost for them and a disadvantage to those
    unable to access it. In Michigan, we have recognized that our
    relatively high prices are a serious problem. High electricity prices
    are one reason Governor John Engler encouraged the Michigan Public
    Service Commission to investigate the introduction of competition into
    the electric industry by offering customers choices in the provision of
    their electric services. This direction is consistent with a move to
    the marketplace seen throughout the country and globally.
        You see, in Michigan, we are competing for more than hockey
    trophies. We are competing for businesses that stay in, or move to,
    Michigan `` competing to have our residents served economically and
    fairly. We are achieving economic strength through competition. As I am
    sure you realize, this competition is more hard fought than any
    sporting event, and the results are far more important to Michigan and
    its citizens. We are employing every tool available to us to win. One
    of the tools that we feel is critical to our success is the opportunity
    for these customers to choose the electricity supplier that best meets
    their needs--and budgets. Michigan has been consistent in its vision
    that competition can bring significant benefits to Michigan's
    businesses and citizens.
        Third, electric generation companies, whether utilities or non-
    utility generators, across the country are functioning in limbo. They
    are reluctant to build new generation resources until they have a
    clearer understanding as to how the industry will develop. As a result,
    reserve margins are shrinking and system reliability may be threatened.
    Comprehensive federal legislation establishing a framework for a North
    American competitive market will provide generators with enough
    certainty to invest in new generation.
        While there is agreement from a cross-section of stakeholders that
    free markets are far superior to government economic regulation, some
    remain unconvinced. I can understand their concerns. Yet, in a
    December, 1998 letter to Congress, 23 lower-cost states joined in
    saying they ``do not want to impede the progress of any state that has
    decided to implement a competitive retail market in order to bring
    choice and lower electric rates to their consumers.'' I appreciate
    their sincerity and would like to offer three practical suggestions to
    help all of us achieve this end:
        1. If a state chooses not to offer its citizens choice, it should
    not limit the development of the market for those states seeking
    competition. Utilities and other generators located in states without a
    competitive initiative should not be prohibited by those states from
    participating in the market in states permitting competition. No
    market, including Michigan's, will fully develop unless there are a
    large number of suppliers offering a number of services and products to
    customers. Market entry and expansion should not be limited
    artificially.
        2. Multi-state companies stand to achieve the greatest gains from
    competition if they can include all of their facilities in their
    purchase agreements, whether or not those facilities are located in
    states offering choice. Without this opportunity, these companies will
    be weakened in their competitive efforts. A multi-state company should
    be permitted to structure its transactions to make the best use of all
    of its competitive assets, whether or not all of its facilities are
    located in a choice state.
        3. An effective market depends on a transmission system capable of
    transporting power between the customer and the seller. Transmission
    constraints within a state may jeopardize competition in neighboring
    states. Michigan is transmission constrained. Without additional
    investment in transmission facilities, it will be difficult to take
    full advantage of generation sources outside our borders. Through Order
    888, initiating open access, and its recent Notice of Proposed
    Rulemaking on Regional Transmission Organizations, the Federal Energy
    Regulatory Commission is pursuing resolution of problems in the
    transmission system. These initiatives merit Congressional acceleration
    and strengthening. Michigan supports these efforts and I have heard
    this support echoed by other Midwest States.
    What should Congress do?
        In Michigan we are pleased with our accomplishments. It is
    important to point out, however, that the task is not complete. We are
    actively seeking ways to expand the electricity market, attract new
    suppliers, and enable them to get their products to their customers,
    all while maintaining the reliability of the transmission grid.
    However, actions taken by individual states alone will not result in
    the optimal development of the market. I am not alone in my belief that
    there is a need for strong, national leadership if we are to move the
    electricity industry forward. I believe that Congress must use its
    authority to establish the path for states to follow and Congress must
    create an environment in which electricity can be traded and
    transported just like any other interstate commodity. If you determine
    that it is necessary to offer states the opportunity to ``opt out'' of
    competition, I urge you to condition this opportunity on their
    agreement not to limit the development of competition in neighboring
    states. Issues clearly within the state's purview which will not
    interfere with the development of competition elsewhere, such as
    customer education standards and levels of stranded cost recovery,
    should remain with the states.
        Perhaps the most important point I want to make to you today is
    this: whenever you come to a fork in the road, take the path marked
    ``competition.'' I urge you not to introduce or expand regulation when
    there is the opportunity for the market to achieve a stated goal.
    Resist the impulse to protect special interests. For example, the use
    of renewable resources may be a worthy objective. However, this
    objective can best be reached in the market place rather than through
    government mandates. Universal service and other public benefit
    programs likewise will be better served by allowing the market to work,
    as opposed to building funding requirements into legislation. Fuel
    cells and micro turbines are technologies that hold promise for
    electricity users to gain independence from the electric grid, and
    should be allowed to find their niche in the electricity marketplace
    without restrictive regulations or surcharges. Throughout history, free
    markets have been shown time and time again to work more effectively
    than any regulatory structure. If markets are to work, competition must
    supersede protection of special interests. I ask you to set forth the
    framework in which markets are allowed to do their work.
        Thank you for the opportunity to share these thoughts with you
    today. I will be happy to answer any of your questions now or at any
    time in the future.

        Mr. Stearns [presiding]. I thank the gentleman. Our last
    panelist, witness, is Honorable William Nugent who is
    Commissioner, Maine Public Utilities Commission. The Chairman
    Barton is coming back. We are going to continue to do this. I
    am going to stay here until he comes back so I advise members
    to use their own discretion in going to vote.
        Go ahead. You have 7 minutes.

                   STATEMENT OF HON. WILLIAM M. NUGENT

        Mr. Nugent. Thank you, Mr. Chairman, members of the
    committee. Thanks for the opportunity to join you in discussing
    this important public policy matter. And I have been asked
    specifically, as you might expect, to address Maine's specific
    approach to restructuring.
        In Maine, something was broke. While Maine has on average,
    the lowest electricity rates in New England, New England has
    the highest rates in the country. Our residents paid in 1997,
    an average 12\3/4\ cents per kilowatt hour; at the margin, 15
    cents per kilowatt hour in the larger service territory.
        Our industrial rates, by far the lowest in New England at
    6.4 cents, were nearly 2 cents per kilowatt hour above the
    national average rate that year. The Maine legislature
    established a collaborative to develop a plan to restructure
    the electric industry. It was unable to come to an agreement.
        They then turned to the Commission. The Commission gave the
    legislature a plan. The legislature reviewed, revised and
    passed the plan unanimously in both Houses in 1997, and we have
    been writing, implementing rules ever since. The best program
    description is in the law. I have given you a copy of that in
    electronic format.
        Key to the success of Maine's search for lower electricity
    prices is getting as many sellers as possible to sell in the
    Maine market. That is why we believe we have created the most
    competitor-friendly rules of any retail electricity market in
    the country.
        Starting next March, Maine's entire electricity market will
    be open to retail competition. Any electricity customer--
    residential, commercial, or industrial--will be able to buy
    power from whichever licensed seller of electric generation the
    customer chooses.
        Now, real markets are created by putting as many willing
    buyers in contact with as many willing sellers as is possible.
    To do that, Maine is opening its entire, as I have said, retail
    electricity market, 12 billion kilowatt hours a year, 1800
    megawatts of demand, to competition.
        There is no price cap, no mandatory percentage reduction in
    retail prices. For better or worse, as true markets do, the
    market will set the price for generation in Maine starting in
    March 1, 2000.
        To ensure fair competition, Maine law requires Maine's
    investor-owned utilities to divest their generation assets to
    become transmission and distribution utilities, T&D companies
    only. Further, if the T&D companies choose to sell in their T&D
    service territories, power generated by others, the law
    restricts the amount they can sell and imposes rigorous codes
    of conduct to govern the relationship between their power
    marketing and T&D divisions.
        The object is to ensure as level a playing field as
    possible for all competitors. Our largest utility is said that
    it will not sell generation. The second largest to-date has not
    set up a marketing arm. These two companies, representing more
    than 88 percent of Maine's total sales apparently will remain,
    as far as the electricity industry is concerned, only wires
    companies.
        State regulated, transmission and distribution utilities;
    the deliverers of competing generator's products. They have
    left the marketing of energy to whomever wants to compete in
    America's most open, retail, electricity market. That means the
    competitors will find in most of Maine next March no incumbent
    utility selling generation.
        The T&D companies must, by law, provide information
    impartially to all market participants and they will provide
    billing services. No one has got to feel sorry for these
    investor-owned utilities. That same law which restructured the
    industry gave them the right to recover all of their
    legitimate, verifiable, and unmitigatable costs stranded as the
    result of Maine's change from a fully regulated to a
    competitive retail industry.
        A competitive generator can win customers in Maine market
    in two ways. It can find the prospect, convince them of the
    quality and value of this product, and sign him up. Or the
    competitor can win all or part of the Maine's standard offer
    bit. This is Maine's so-called default service. The right to be
    the provider of last resort.
        It is likely that a substantial number of Maine's retail
    electricity customers, totally free to choose as of next March
    1, simply will not choose: either intentionally or because they
    are unaware that they can. That likely will include a
    substantial majority of residential customers, perhaps a
    majority of commercial customers, and even some attractive
    industrial customers.
        We offer no projections of how many such customers there
    may be. Market research is the competitor's job and they do it
    better than government bureaucrats do. On August 1 we will
    provide all bidders who have registered with us a copy of our
    Request for Bids on the right to serve for 1 year, Mainers who
    don't choose.
        They can bid to serve all or a portion of any or all of
    three categories: essentially residential, commercial, and
    industrial. Bid are due back in October 1. Billing determinants
    for deciding the winner are specified in our rule. Winners will
    be announced no later than December 1.
        Competitors who do not bid or bid on but do not win this
    standard offer will know on December 1 what the bogey is; what
    the standard offer price is against which customers will
    measure their prices. Competitors must be licensed by us to
    sell generation in Maine. To be licensed, a competitor need
    only prove its technical and financial capability and give us
    $100; then it gets its license. We have already issues several
    licenses.
        Maine law requires that each electricity product include
    not less than 30 percent renewables and efficient energy; the
    Nation's largest such requirement. It is a standard we believe
    will be easy to meet. In 1997, 46 percent of Maine's power came
    from renewable or efficient sources.
        Maine has already begun a $1.5 million consumer education
    program. Bills have been unbundled for 6 months allowing
    consumers to see energy and delivery as separate components of
    their electric consumption.
        We are also trying to demonstrate the value of open,
    competitive markets in a previously regulated portion of a
    vital industry and thereby make Maine's economy more
    competitive.
        We hope that however you proceed, Federal legislation will
    not interfere with States that have already acted to revamp
    their retail electricity markets, so long as we are generally
    not inconsistent with Federal policies. Each State may have
    legitimate reasons for differing from another with respect to,
    for example, the precise treatment of stranded costs, timing of
    competition for various groups of customers, consumer
    protection rules, and so on.
        And I thank the Chair for the opportunity to speak and look
    forward to questions.
        [The prepared statement of William M. Nugent follows:]
      Prepared Statement of William M. Nugent, Commissioner, Maine Public
                              Utilities Commission
        Mr. Chairman and Members of the Subcommittee, I am William M.
    Nugent, now in my eighth year as a Commissioner on the Maine Public
    Utilities Commission. I am a former President of the New England
    Conference of Public Utility Commissioners, Chair of the Regulatory
    Strategies Subcommittee of the National Association of Regulatory
    Utility Commissioners, and a member of that Association's Executive
    Committee.
        I have been asked to testify on Maine's unique approach to utility
    restructuring, and to offer comments on PURPA and PUHCA reform.
        Maine has had a recent, unhappy experience with electricity rates.
        Over a 5-year stretch from the mid-1980s through the early 1990s
    Maine's electricity rates rose more than 50 percent. Consumers total
    bills continued to rise markedly despite aggressive conservation
    programs.
        While Maine's electricity rates, on average, continue to be the
    lowest in New England, Maine's once substantial advantage over the
    balance of New England has narrowed considerably. And New England's
    average prices are well above national averages and far above prices in
    the lowest-price states. And the all-consumers average price masks
    substantial burdens.
        Comparing 1997 average prices, Maine at 9.5 cents per kwh was a
    full cent below the New England average, but Maine's average
    residential price per kilowatt hour--the average price for Maine's
    electorate--was 12.75 cents per kilowatt hour, second highest in New
    England. The U. S. average in 1997 was 8.43 cents per kilowatt hour.
        Maine's industrial users--operators of large, efficient, well-
    managed loads--enjoyed by a wide margin, the lowest average price in
    New England: 6.36 cents per kilowatt hour, compared to 8.4 cents, the
    average industrial price for the other five New England states. The
    national average industrial price in 1997 was 4.53 cents per kilowatt
    hour. While Maine industry enjoyed an advantage relative to industry
    elsewhere in New England, it was substantially disadvantaged relative
    to elsewhere in the U. S.
        These prices soon started to become unsustainable. Business's
    threats to move to lower-priced states, to install major energy
    conservation devices, to install self-generation, and to change fuel
    sources, combined with a vigorous political protest from residential
    users prompted a fundamental review of the way in which Maine acquires
    its electricity resource. In 1995 the Maine Legislature directed us to
    comprehensively review the problem and to recommend a Plan to
    Restructure the State's Electric Utility Industry.
        We did so, recommending in broad outline in December 1996 that

     As of January, 2000, all Maine consumers would have the option
            to choose an electric power supplier.
     As of January, 2000, Maine would not regulate as public
            utilities companies producing or selling electric power.
     Regulated public utilities would continue to provide electric
            transmission and distribution services.
     As of January, 2000, Maine's largest electric utilities would
            be required to structurally separate generation assets and
            functions from transmission and distribution functions (T&D).
            By 2006, the large utilities would be required to divest
            generation assets. Municipal utilities and electric
            cooperatives would be required neither to separate nor to
            divest generation.
     Existing contractual obligations with qualifying facilities
            (QFs) would remain with the T&D companies. T&D companies would
            periodically sell to the highest bidders the rights to market
            the power associated with QF contracts. The lawful obligations
            of the QF contracts would not be modified.
     Standard offer service, at a price no higher on average than
            available in 1999, would be available to customers who elect
            not to choose an alternative generation provider, and for
            customers who cannot obtain service on reasonable terms from
            the market.
     The Legislature fund low-income assistance programs through
            the general fund or by an equitable tax or surcharge on all
            energy sources. In the alternative, low-income programs could
            be funded through the rates of the T&D companies.
     All retail providers of generation would be subject to a
            minimum renewable supply requirement, which could be achieved
            with tradeable credits.
     Conservation and load management programs would be funded
            through the rates of the T&D companies.
     Utilities would have a reasonable opportunity to recover
            generation-related costs stranded as a result of retail access.
     The Commission would work to ensure that the regional bulk
            power market is structured to maintain reliability and to
            advance fair and efficient competition.
        In an extraordinary effort of self-education, Maine's citizen
    legislators read deeply on this subject and conducted weekly seminars
    on electric restructuring. In May of 1997, the Maine Legislature
    passed--unanimously in both houses--a landmark bill restructuring the
    State's electricity industry. The bill as passed chose March 1, 2000,
    as the start date and gave the Maine Public Utilities Commission the
    intervening 33 months to consult with interested parties and to write
    implementing rules.
        The following fundamental principles guided the Legislature's path
    to retail access:

     Where viable markets exist, market mechanisms should be
            preferred over regulation and the risk of business decisions
            should fall primarily on investors rather than consumers.
     Consumers' needs and preferences should be met with the lowest
            societal costs.
     All consumers should have a reasonable opportunity to benefit
            from a restructured industry.
     Industry restructuring should not diminish environmental
            quality, compromise energy efficiency, nor jeopardize energy
            security.
     All consumers should have access to reliable, safe, and
            reasonably priced electric service.
     Industry restructuring should not diminish low-income
            assistance or other protection to less fortunate customers.
     The industry structure should be understandable to the public,
            fair and perceived to be fair, and lawful.
     Industry restructuring should improve or maintain Maine's
            business climate.
        Maine's legislation comports with these fundamental principles and
    approaches industry restructuring in a manner that is viable, efficient
    and in the public interest.
        The best description of the program is in the legislation itself.
    And it is quite readable. I will leave the Committee a copy of the law,
    Chapter 316, P. L. 1997, in electronic format.
        Key to the success of Maine's search for lower electricity prices,
    prices more in line with national averages than regional outliers, is
    getting as many sellers as possible to sell in the Maine market. That's
    why the Maine Legislature and the Maine Commission created the most
    competitor friendly rules of any retail electricity market in the
    country.
        Starting March 1, 2000, Maine's entire electricity market will be
    open to retail competition. Any electricity customer, any electricity
    customer--residential, commercial or industrial--will be able to buy
    power from whichever licensed seller of electric generation the
    customer chooses.
        Maine believes that real markets are created by putting as many
    willing buyers in contact with as many willing sellers as is possible.
    To do that, Maine is opening to competition its entire retail
    electricity market--12 billion kilowatt hours a year, 1800 megawatts of
    peak demand. There is no price cap, no mandatory percentage reduction
    in retail prices. For better or worse, as true markets do, the market
    will set the price for generation in Maine starting March 1st, 2000.
        To ensure fair and open competition, Maine law requires Maine's
    investor-owned utilities to divest their generation assets, to become
    transmission and distribution utilities, T&D companies only.
        Further, if the T&D companies choose to sell in their T&D service
    territories power generated by others, the law restricts the amount
    they can sell and imposes rigorous codes of conduct to govern the
    relationship between their power-marketing and T&D divisions. The
    object is to ensure as level a playing field as possible for all
    competitors.
        Central Maine Power Company, whose sales represent more than 75
    percent of statewide totals, has said that it finds the restrictions so
    slanted in favor of new market entrants that it will not--I repeat,
    will NOT--sell electric generation. Bangor Hydro, Maine's second-
    largest IOU, to date has not set up a marketing arm.
        These two companies, representing more than 88 percent of Maine's
    total sales, are, and apparently will remain as far as the electricity
    industry is concerned, only wires companies, state-regulated
    transmission and distribution utilities, the deliverers of competing
    generators' products. Maine's two largest T&D utilities have left the
    marketing of energy to whomever wants to compete in America's most open
    retail electricity market.
        By law, Maine's T&D companies

     may not own generation,
     must provide information impartially to all market
            participants, and
     must provide billing services--that is, the wires company will
            collect and remit fees.
        No one need feel sorry for these companies. The same law that
    restructured Maine's electricity industry gave them the right to
    recover all of their legitimate, verifiable, unmitigatable costs
    stranded as a result of Maine's change from a fully regulated to a
    competitive retail electricity industry.
        A competitive provider can win customers in the Maine market in two
    ways. It can find a prospect, convince him of the quality and value of
    the competitors product, and sign him up.
        Or the competitor can win all or part of the Maine Standard Offer
    bid. This is Maine's so-called ``default'' service, the right to be the
    provider of last resort. We call it the Standard Offer provider.
        I believe it likely that a substantial number of Maine's retail
    electricity customers, totally free to choose as of next March 1st,
    simply will not choose--either intentionally or because they are
    unaware they can. That may include a substantial majority of
    residential customers, perhaps a majority of commercial customers, and
    even some attractive industrial customers.
        We offer no projections of how many of such customers there may be.
    Market research is the competitor's job, and they are far better at it
    than utility regulators are.
        On August 1, 1999, we will provide all bidders who have registered
    with us a copy of our request for bids on the right to serve for one
    year Mainers who don't choose. You can bid to serve 20-40-60-80 or 100
    percent of any or all of three categories:

     residential and small commercial,
     medium commercial and industrial, and
     large commercial and industrial.
        Bids will be due October 1. Prices for the residential and small
    commercial portion of the competition must be stated in cents per
    kilowatt hour. For the two larger categories, bidders may present their
    bids as they wish: demand and energy charges, as they see fit. Billing
    determinants for deciding the winner are specified in our rule. Winners
    will be announced no later than December 1.
        Competitors who do not bid on--or bid on but do not win--the
    Standard Offer, will then know on December 1, what the ``bogey'' is,
    what the Standard Offer price is against which customers may measure
    your price.
        Competitors must be licensed by the Maine Public Utilities
    Commission to sell generation in Maine. They can be licensed as a
    competitive energy provider, as a broker, or as an aggregator. We have
    already issued several licenses.
        How onerous is Maine's licensing requirement? A competitor need
    only prove its technical and financial capability and give us $100, and
    it gets its license.
        Maine law requires that each electricity product includes not less
    than 30 percent renewables, the Nation's largest such requirement. But
    the Legislature also defined renewables very broadly. It includes the
    usual--wind, solar, geothermal, hydro (from units of not more than 100
    megawatts) but also trash-to-energy and cogeneration plants which are
    at least 65 percent efficient.
        It is a standard that's easy to meet. In fact, there is a lot of
    renewable power in Maine; in 1997 46% of Maine's power came from
    renewable or efficient sources.
        Compliance is measured annually. Over a year (not any particular
    hour, day, week, or month) 30 percent of each product's generation must
    come from the renewables. The rule even gives time to make good any
    shortfalls.
        Maine's investor-owned T&D companies will put out to bid the rights
    to the electricity acquired through their NUG contracts on a schedule
    that will parallel the Standard Offer bidding schedule--Requests for
    Bids out on August 1, back on October 1, awarded by December 1, except
    that the bidding will be held at 2-year intervals.
        Maine has already begun a $1.5 million consumer education program.
    Bills have been unbundled for 6 months, trying to get consumers to see
    energy and delivery as separate components of their electricity
    consumption.
        Maine very much hopes competitive electricity providers will
    participate in both parts of the Maine market--competition for retail
    customers and for the Standard Offer. We have tried to create a fair
    opportunity to compete, win, and profit. We also seek to demonstrate
    the value of open, competitive markets in a previously regulated
    portion of a vital industry.
        To sum up this portion of my testimony, we have wholeheartedly
    moved to a market model for generation.

     Maine has required divestiture of generating assets (and sales
            of the QF output), and placed close restraints on (in-
            territory) marketing by utility affiliates. These measures
            prevent vertical market power and are intended to encourage
            entry by competing sellers of generation.
     Maine allows the market (not regulators) to set the price for
            default service (i.e. our bid-priced standard offer service).
            There are risks to pricing too high (customers pay too much)
            and to pricing too low (competitors stay away), and using bids
            is the best way to avoid both problems to the extent possible.
     All classes of customers are able to purchase at retail; no
            mandatory (e.g. municipally-mandated) aggregation, but
            voluntary aggregation is encouraged.
     All previously existing consumer protections have been
            maintained.
     Maine is paying appropriate attention to customer education;
            we require uniform disclosure labels (permitting apples to
            apples comparisons on price, generation source, and emissions
            characteristics).
        Equally important to the success of our effort to win more economic
    prices are good rules for access to and the pricing of transmission.
    Maine and the other New England commissions have played a major role in
    forming and supporting the Independent System Operator. The ISO employs
    operating procedures which ensure system reliability and supports a
    region-wide competitive wholesale electricity market which is critical
    to the restructuring efforts across New England.
        However you proceed, Federal legislation should not interfere with
    states that have already acted to revamp their retail electricity
    markets (so long as there is general consistency with the federal
    policies). Each state may have legitimate reasons for differing from
    another with respect to, for example, the precise treatment of stranded
    costs, timing of competition for various groups of customers, consumer
    protection rules, etc.
    PUHCA
        While Maine has little experience with holding companies, I believe
    reform or repeal of PUHCA should be considered in light of discussions
    on comprehensive legislation to revise the Federal Power Act and
    restructure the electric utility industry through appropriate State
    processes.

     Legislation should maintain effective State and Federal
            regulation against abusive practices that could place undue
            market power with multistate holding companies and harm
            development of competition.
     Any legislation should recognize that regulation should be
            reduced only as competition becomes effective at preventing
            monopoly abuses and allowing pro-competitive change and
            availability of customer choice.
     Any comprehensive legislation should provide for:
        --State consent for sale, encumbrance, or disposition of existing
                state jurisdictional rate-based facilities.
        --Reporting obligations concerning investments and activities of
                multistate public utility holding company systems.
        --Restrictions against assumption of liabilities of non-regulated
                activities through securities issuances, guarantees,
                endorsements, or sureties and the pledging or mortgaging of
                assets.
        --Protection against abusive affiliate transactions.
        --Prohibitions against reciprocal arrangements entered into in
                order to avoid the provisions of that legislation.
        --Federal and State commission access to books and records.
        --Independent audit authority for State commissions.
        --Non-preemption of State rate authority.
     Nothing in that legislation should affect the authority of
            State commissions under State laws concerning the provision of
            utility services, to regulate the activities of a public
            utility which is an affiliate, subsidiary or associate of a
            multistate public utility holding company, and to impose other
            relevant consumer protections.
        Any comprehensive legislation should provide the States with the
    flexibility to respond to changes in the utility industry arising from
    market forces, technology, or financial conditions.
    PURPA
        PURPA's mandatory purchase requirement should not apply in any
    state which has made a finding that the acquisition of generating
    capacity is subject to competition or other acquisition procedures such
    that the public interest is protected with respect to price, service,
    reliability and diversity of resources.
        Legislation that would repeal a utility's obligation to purchase
    wholesale power from QFs at avoided cost rates should be prospective in
    nature. And relief from this statute should be contingent upon the
    development of competitive markets as determined through a State
    commission supervised restructuring program.
        Thank you, Mr. Chairman and Members, for the opportunity to present
    my views.

        Mr. Barton. We thank you, Mr. Nugent. We appreciate your
    testimony. I want to apologize to the panel. We have had two
    votes in the last 30 minutes and normally we don't vote very
    often in the morning, so it has taken our members away.
        We need to continue our hearing though, so I am going to
    start the question period. I am going to turn the clock to 5
    minutes and I will recognize myself for the first 5 minutes of
    questions.
        The first question is to my two State legislators. This is
    more for the record so that other members might hear and read
    the record, or a summary of it, later.
        Could each of you explain how Texas handles the market
    power issue? Since you did it somewhat innovatively compared to
    some other States.
        Mr. Wolens. Mr. Chairman and members, there are two ways of
    addressing market power, or market power of use. One is a very
    technical method, which is the HHH method, which is highly
    technical, and the other is the Goldilocks method. We chose to
    use the Goldilocks method. We were looking for something that
    was not too hot or not too cold.
        And what we did is, we looked at the major incumbents in
    Texas and we looked at what amount of power that they had in
    Texas, and we came to 20 percent. And what we came down to in
    our legislation was that no company could have greater than 20
    percent in a power region.
        It is a complicated political issue what region that
    becomes, because if you narrow the region, for example, North
    Texas, you might see that Texas Utility might have 80 percent
    in North Texas but in ERCOT they would be quite a bit less than
    that.
        So the political issue for the Senate and for the House
    was, what is that region? It was pretty much David's call to
    put it in a power region and that is what we did.
        But I would like to mention that there is an issue that we
    couldn't overcome which is, how do you address market power
    outside of ERCOT? There are three other power regions that
    touch Texas: in the North, and the East, and the West.
        Mr. Barton. And for the audience, ERCOT is the Electricity
    Reliability Council of Texas.
        Mr. Wolens. Yes sir.
        Mr. Barton. It is the independent system operator or the
    TRANSCO.
        Mr. Wolens. It is. But Texas also has the Western Systems
    Coordinating Council, Southwest Power Pool, the Southeastern
    Reliability Council. And we cannot dictate what the market
    power, potential abuses, and how to control those potential
    abuses, are going to be in those power regions that have
    authority over multiple States, part of which touch on Texas.
        So if the Federal Government is going to address the issue,
    one area that must be addressed is in part, market power in
    these overlapping areas.
        Mr. Barton. It is my understanding that you have a cap, a
    20 percent cap, but you don't require divestiture of the
    generating capacity. The owner of the generating capacity, if
    they're over 20 percent, can lease that capacity, is that
    correct?
        Mr. Wolens. That is absolutely true. We're not into
    mandatory divestiture in Texas. So we invited alternatives to
    that and one was selling it into a market place.
        Were there any others that we left? Alternatives?
        Mr. Sibley. Well, they can sell it, they can have roll-ups,
    they can combine generation resources or assets and spin them
    off, sell stock in them.
        Mr. Barton. But after 2007 when the ``price to beat'' and
    all that goes away, there doesn't remain a market cap
    provision, is that correct? Once we get through the transition
    period?
        Mr. Sibley. No, there is still the 20 percent that remains
    there but we----
        Mr. Barton. There is a power----
        Mr. Sibley. We have another market power test and that is a
    40 percent market power test on the retail side. So we don't--
    --
        Mr. Barton. Right. To lose they have to lose 40 percent of
    their base----
        Mr. Sibley. In their common service area they have to lose
    40 percent before they----
        Mr. Barton. Before they can compete.
        Mr. Sibley. That goes away after 3 years.
        Mr. Barton. Senator Sibley--and I am going to ask some
    questions of the other witnesses, too--but the way that Texas
    did stranded costs is fairly innovative. Can you explain--and I
    am not sure I even understand what you did--but you come up
    with a bond, some sort of a stranded cost bond?
        Mr. Sibley. To allow them to securitize; securitization of
    what is verifiable as far as stranded costs go. Now, also I
    would refer you to Representative Wolens' chart because our
    price freeze is linked to the payment of stranded costs also.
        And we freeze them at what I would say is an artificially
    high rate right now. But we recover all of those costs over
    where the utility would have been otherwise, and that goes to
    mitigate stranded costs.
        Mr. Barton. But the securitization means that if they can
    verify to the PUC that there is in fact, a cost that has been
    incurred, they can issue a bond based on the value of that cost
    that they then pay off over time, which means the rate they
    have to charge the existing customer is lower. Is that correct?
        Mr. Sibley. That is correct. Whatever the verifiable amount
    is for stranded cost, we allow the utility to securitize that
    right now which means that they sell bonds for that amount,
    they pledge against that future cash-flow I guess, but you get
    a lower rate. The only way we let them do that is if it would
    save the consumer money.
        Mr. Barton. The reason you get a lower rate is that the
    cost to borrow may be 7 or 8 percent, yet the rate of return
    that they are allowed on the transmission of their total assets
    is going to be higher than that.
        Mr. Sibley. That is correct.
        Mr. Barton. So that that difference is the savings.
        Mr. Wolens. It is 14.51 percent. It is a guaranteed 10
    percent and then we put it at an amount to cover taxes. So it
    comes to 14.51 percent. If you securitize, we will securitize
    at about 7 percent and it has the effect like mortgaging your
    home.
        Mr. Barton. Right. So that that gap, that delta, is the
    savings to the existing customer.
        Mr. Wolens. It is an enormous savings--between 14-plus
    percent and 7 percent. It is half.
        Mr. Barton. I am not aware of any other State that has done
    that, and that is very innovative.
        Mr. Wolens. California did it but they loused it up a great
    deal.
        Mr. Barton. We have five Californians on the committee, so
    we have got to be careful. We learn from California, is the way
    we would look at it.
        Mr. Wolens. And they invited us to learn from them. They
    considered themselves to be the experiment for the rest of us.
    And when we visited California we talked to State Senator
    Steven Pease who was the Senate sponsor. He said, this is what
    we did, we are first out of the gate, you all see what we did
    wrong and make it better. And that is what we tried to do.
        Mr. Barton. My time is expired. I want to ask one question
    to the gentleman from Michigan and then I will recognize the
    gentleman from Illinois.
        Could you explain why the Court in Michigan earlier this
    week ruled against the challenge of the Michigan Utilities that
    the retail choice plan that the PUC had put in place was
    correct? What was the reasoning for the Court ruling? Or did I
    get that exactly wrong, the way I asked the question?
        Mr. Svanda. No, you got it fine. It was a very narrow issue
    that the Court responded to, and that issue was whether or not
    we had specific statutory authority to order our utilities to
    carry the power produced by a third party. And on that basis
    our orders and the phasing-in process is now in question.
        Mr. Barton. So the Court ruled you do have the authority?
        Mr. Svanda. We do not have the authority.
        Mr. Barton. Oh, you do not have the authority. So the
    retail choice plan does not go into effect? So what the Court
    ruled is, that you have to go to the Michigan legislature, is
    that correct?
        Mr. Svanda. For that authority piece, yes.
        Mr. Barton. Okay. The gentleman from----
        Mr. Svanda. If I could follow on. That's my answer today.
        Mr. Barton. The record is open for a couple of weeks.
        Mr. Svanda. The Court ruled on Tuesday and we are still
    understanding the implications along with the other actors in
    Michigan. Certainly, our utilities and all of the other parties
    that have played an important role so far are looking at the
    implications.
        Mr. Barton. But what that means, unless your answer
    changes, is that unless the Michigan legislature decides to
    either give your Commission the authority or to do it
    themselves legislatively, there cannot be a retail choice put
    in place in Michigan. If we don't mandate at the Federal level
    that Michigan has to do it; which we are not going to do.
        Mr. Svanda. That would be my understanding, again today,
    unless there were a voluntary effort for example. And were that
    to be the case then I guess I would have to wonder how vibrant
    that marketplace might become with a voluntary effort
    controlled still by the incumbent utility.
        Mr. Barton. Okay. The gentleman from Illinois is recognized
    for a long 5 minutes.
        Mr. Shimkus. Thank you, Mr. Chairman. It is good to be
    quick, otherwise I was way down on the list.
        First of all I want to say, God Bless the Republic of
    Texas. Your efforts have helped those States who have moved. I
    am from Illinois. And it has helped push the issue of the
    States working it out and doing the job and we ought to let
    them resolve most of the conflicts. And with your efforts that
    brings on another large State that helps us here, making sure
    that we do no harm. So thank you for your work.
        I want to ask a question to Mr. Svanda. Is that pronounced
    right? First of all, are you appointed or elected?
        Mr. Svanda. Appointed.
        Mr. Shimkus. By the Governor?
        Mr. Svanda. Correct.
        Mr. Shimkus. With the advice and consent of the Senate.
    That is right, because you were saying, I don't know next week
    what I might say. I was just wondering--it sounded very
    political.
        But you bring up a point in your testimony that is one--I
    am a second-term member. I have been involved in this issue I
    think, very focused for about 30 months. And you bring up an
    issue that is really--has not been a contentious point but you
    take it--on issue one on page 6 you talk about reciprocity and
    you State that, it is okay if a State doesn't open up its
    markets, and it is good for competition to allow, i.e., a
    Detroit Edison to go into other States that are open.
        I will argue against that as not being good or fair to
    those industries in the States or those States that have moved
    to aggressively open the market to allow a State who has not,
    protecting the current, monopolistic practices, to allow them
    to go cherry-pick throughout the country.
        I would like to have your comment and then I would like to
    ask for my friends from the great Republic of Texas to respond
    how they would feel if they opened up the market but then
    allowed States who have not opened up their markets, to come in
    and aggressively compete?
        Mr. Svanda. I understand the real difficult issue that you
    do raise with that question. And I attempted in my comments to
    put that in the context of moving to a competitive marketplace.
    That a State that chooses not to open its marketplaces should
    not restrict its companies, its utilities, from somehow
    competing otherwise in other open markets.
        And so my comments were aimed at encouraging allowing as
    many competitors in the country to compete in those open
    marketplaces. And I think that would teach valuable lessons
    across----
        Mr. Shimkus. But you also understand that it stops the
    legislative process because legislation will not get passed by
    allowing protected markets to compete in competitive markets?
        Mr. Svanda. I understand that difficulty, and we----
        Mr. Shimkus. And you are speaking as an appointed person,
    not an elected person now?
        Mr. Svanda. Yes.
        Mr. Shimkus. Because it just can't be done. My friends from
    Texas?
        Mr. Sibley. I would agree with you. I would look very
    strongly at a reciprocity-type provision in the next session of
    the legislature. If it turns out to be unfair advantages or
    competitive disadvantages through utilities from States that
    have opened up to the favor of those who have kept a
    monopolistic system, I don't think that would be fair.
        Mr. Barton. Would the gentleman yield on that?
        Mr. Shimkus. I will.
        Mr. Barton. So as a State that has acted, you wouldn't
    oppose if we put some sort of a reciprocity provision in the
    Federal law? We will give the great State of Alabama the right
    to do everything they want to do except sell outside their
    State lines if they don't allow the great utilities in Texas
    and other States to sell within the great State of Alabama.
        Mr. Sibley. I would favor that strongly. When Mr. Sullivan
    was talking earlier. I think one of his first statements was,
    one size doesn't fit all. I totally agree with that. After that
    I disagreed with just about everything he said.
        Mr. Barton. Well, but he has got the right to say it, and
    he says it so well.
        Mr. Sibley. No, and I do agree with him. If they want to do
    that, I will tell you as Chairman of the Economic Development
    Committee in the Senate of the State of Texas, I would
    wholeheartedly support his keeping Alabama closed.
        And because I believe as people look to make economic
    development decisions about where they put their plants, I
    think they are going to look at those who give people choices.
    And so I would be willing to take my chances with that and I
    would defend his wanting to let the State of Alabama make those
    decisions. I totally support that.
        Mr. Barton. I agree with you.
        Mr. Wolens. I might quibble with that. It is starting to
    look and smell like import fees or quotas, and it benefits us
    in Texas to have more people come and compete. The more
    competition that we have in the State the more it is going to
    be to drive down prices.
        The more that come in it will drive down prices in Texas
    and I want to benefit consumers in Texas; be they on rooftops,
    be they commercial, be they industrial. Let those people come
    in and do generation or let them come in and do electric
    retailing.
        But again, we still have a Federal issue--not only of the
    market power that we discussed, but there is still an issue of
    tariffs in those States that don't have tariffs--how it impacts
    us in those power regions that overlap us in Texas. And the
    other one is on the ISO--the Independent Systems Operator,
    which you folks call the RTO--the Regional Transmission
    Organization and in those power regions where they are not
    developed it creates a problem.
        Pardon me for interrupting.
        Mr. Shimkus. No, the question was directed to both of you
    all and I appreciate your answers. The final point that I want
    to address is, we have been moving and are just excited this
    year of our working group and the chairman's leadership, and
    there are issues that we need to be involved with.
        And one that we have heard over and over again and really
    addresses this issue of competition within States also, is the
    siting of new transmission lines. I will throw that out and
    maybe go down the table and address that real quickly.
        Mr. Barton. This will have to be the last question and then
    we will let Mr. Whitfield have his time. Answer the gentleman's
    question.
        Mr. Sibley. I don't see transmission as a competitive
    endeavor. I see that as--I want to say inherently
    monopolistic--but I would prefer to let the RTO make a decision
    about where the transmission lines ought to be sited to do that
    more efficiently.
        I think leaving that to engineers and people who makes
    those types of decisions is probably better than just having a
    free-for-all as far as the siting for it. Because you are going
    to get into condemnation issues and other things that I think
    would probably be done by a quasi government entity.
        Mr. Wolens. And I totally agree except again, it is a ``you
    folks`` issue to deal with the soda straw problems, going from
    one State to another State within a power region. But other
    than that, I have nothing further to add to what Senator Sibley
    did.
        Mr. Sullivan. I think transmission has to yield equal
    access, and I think at this point in time we are moving in that
    direction. I think FERC is taking the proper steps to assure
    that. And I think that we ought to allow that process to
    continue as it is.
        Mr. Svanda. I think FERC is probably taking the correct
    steps but they are doing it way too slowly. We need to assure
    open access real soon or a lot of competitive activities will
    fall by the wayside.
        Mr. Nugent. We have a fairly open transmission system
    around New England; have had it for about 30 years. But I see
    problems cropping up in the area you have identified and I
    don't yet have the answer. We have a situation of an integrated
    electricity grid covering six States.
        Siting will become a problem when it becomes a question of
    say, somebody building a plant in Connecticut to serve Maine
    and there is inadequate transmission across that routing.
        I think much of the transmission decisions should be left
    to the States but there may become a time when we have got to
    rely on some Federal authority to make sure that the
    transmission system is robust enough to support a fully
    competitive market. And we are working to answer those
    questions.
        Mr. Barton. Gentlemen, Mr. Sawyer is back. I said I would
    recognize Mr. Whitfield. Mr. Whitfield, I will recognize you
    and then we will go to Mr. Sawyer.
        Mr. Whitfield. Thank you very much. I think all of us are
    impressed with the legislation in Texas. It seems almost
    unbelievable that you could get all of those varied groups to
    come together to pass this legislation.
        In your legislation do you address the issue at all of
    renewable energy or are there some mandates relating to
    renewables? Could you tell me what those are?
        Mr. Barton. The recording secretary can't recognize a nod,
    Senator, so you have to verbally acknowledge.
        Mr. Sibley. I will shake my head ``yes`` real hard and you
    can hear the rattle. Yes, we did. We got into that. What we
    tried to do was have some incentives, and I have got a copy of
    the bill. I can share that with you. But we did try to set
    aside a moving goal that is racheted up over a period of time,
    and we tried to help incentivize the renewables.
        We think it is the direction we want to go because of
    environmental concerns. But I believe it is doable. Some people
    came in with some unrealistic goals that in my opinion, would
    have been impossible or would have been so, I guess
    economically inviable, that we rejected those.
        So each person or each entity that is going to do business
    in the State of Texas has to meet those goals as far as
    generation using renewables. And they are able to trade credit.
    So I will yield to Representative Wolens who is on the beam
    here.
        Mr. Wolens. We did 1.65 percent of its capacity has to come
    from renewable sources, which is hydro, wind, and biomass. It
    is surprising that in West Texas we have got enough capacity
    from wind to supply twice the amount of energy in Texas and in
    the Texas legislature we have the capacity to provide a lot of
    wind, too. That goes from 1.65 percent up to 3 percent by the
    year 2009. I think this is compatible with what some other
    States have been doing, too.
        Mr. Whitfield. But you do include hydro?
        Mr. Wolens. Yes, we do.
        Mr. Whitfield. Okay.
        Mr. Wolens. Hydro, wind, biomass, and I think two others
    that I don't remember.
        Mr. Whitfield. Okay. Now, I noticed that on the electric
    co-ops and the municipalities you allow them to opt in rather
    than giving them an option of opting out. Did you have to do
    that in order to get them to agree to this legislation, or was
    there some other reason?
        Mr. Sibley. Yes. Politics at its rawest.
        Mr. Whitfield. Now it is my understanding that there was
    some tie between environmental standards and stranded costs.
    Was there a tie between those two?
        Mr. Sibley. Yes. In order to recover stranded costs they
    had to agree to do certain things with some, I would say,
    lignite-fired coal plants that were causing us some problems.
    And we have a number of sites in the Dallas/Fort Worth area,
    the Houston area, that are going to have problems with clean
    air, or the clean air abatement issues coming out of the EPA.
        And so we thought, after talking with Governor Bush early
    one morning we decided that linking those two would be a way
    for those with environmental concerns to get part of what they
    wanted and for utilities to get part of what they wanted. So
    there's an incentive there for these utilities to clean up
    their act in regard to those plants. Representative Wolens took
    that idea, and I think perfected it actually; did a good job.
        Mr. Wolens. And then we did one other thing which is, we
    had a peculiar situation in Texas where some of our plants were
    grandfathered from being cleaned up. And I want to backtrack a
    little bit on the market power issue where I said that we said
    that you can't have any more than 20 percent.
        One company, Texas Utilities, was going to exceed the 20
    percent, and so we said, clean up the dirty power plants by
    1903 or 1905 and we will include that in the 20 percent. That
    is the only one where we wiggled a little bit from the 20
    percent. So it affected the stranded cost issue which is, clean
    up the dirty power plants and we will pay for it. I mean, this
    ain't for free for anybody.
        Clean up the dirty power plants, get rid of the filth
    before the Feds do something, the EPA does something, to close
    down industry in our urban areas. Clean them up and we will pay
    for it as part of the stranded costs which in turn get
    securitized.
        And second, if you are going to get into the 20 percent on
    the market power so you don't exercise undue market power,
    clean up these dirty plants and won't include it in the 20
    percent.
        Mr. Whitfield. I see my time is up, Mr. Chairman, but I am
    assuming we do have a copy of their legislation, right?
        Mr. Barton. We can get you a copy. I don't think we have
    handed it out but we have access to it.
        Mr. Whitfield. Okay. Thank you very much.
        Mr. Barton. Okay. We will let the record show that there
    are no dirty power plants in Texas. There are some that are
    less clean than others, and there is some incentive for the
    less-clean plants to become cleaner.
        We recognize the gentleman from Ohio, Mr. Sawyer.
        Mr. Sawyer. Thank you, Mr. Chairman. Ohio just went through
    the exercise that Texas completed. We went in a profoundly
    different direction than you did and I just want to compliment
    you on the tenacity and the attention to detail that it took to
    achieve a piece of legislation. Whether I agree with everything
    in it or not it addresses in substance, an awful lot of
    authority questions that are a part of that.
        Let me however, turn a little bit down to this end of the
    table. We have talked a great deal about what the current
    transmission system was put in place to do and the way in some
    parts of the country it has actually evolved slowly into a
    changing function.
        But would you say in general, first of all, that the
    transmission system is largely designed to get from specific
    capacity to specific load, and that it has only incidently
    served in a broader, interactive function in wholesale markets
    in the current setting?
        If that is in fact the case, as you nod your heads, my
    first question, the one I asked in my opening statement was, is
    there sufficient capacity in the transmission system to
    accommodate the kinds of concerns that I heard articulated in
    terms of the expenditure to get into sufficient generating
    capacity by 2010? Do we have the transmission capacity to meet
    those needs?
        Mr. Nugent. I think additions will have to be made to
    transmission and the standards for that are changing somewhat.
    It used to be that you determined the need for an additional
    unit of generation. You decided where that was and then you
    plugged that into the system and made amendments to the system
    to make sure it operated in a robust enough way.
        Now you're in a situation where you're creating a number of
    competitors all of whom want to compete in the system, and you
    have got to add additions or strengthen those transmission
    systems to accommodate that.
        Mr. Sawyer. Others?
        Mr. Svanda. Michigan has a terribly constrained capacity
    for transmission. If you declared tomorrow that there was an
    open access, free marketplace in electricity around the
    country, Michigan can only import about 20 percent of the
    capacity required to serve our customers' needs. And we have
    factored that in for example, in a way that we would propose to
    deal with stranded costs.
        Mr. Sullivan. And in the Southeast where we have a fairly
    large, integrated grid, it still holds true that the
    transmission systems were built to accommodate the individual
    companies as they were built and there are definitely
    constraints where the two systems would join.
        Mr. Sawyer. Are today's pricing policies sufficient to
    evolve that grid efficiently to retain reliability and to
    attract the capital necessary to make that happen?
        Mr. Sullivan. I think not. I think that there needs to be
    incentives placed on additional construction so that you'll get
    the investors to build the transmission systems that we are
    going to need to rid ourselves of those constraints.
        Mr. Sawyer. Others?
        Mr. Nugent. I think it is an open question right now. We
    are still trying to figure out what is the appropriate way to
    deal with that. At least in New England.
        Mr. Barton. Will the gentleman yield on that?
        Mr. Sawyer. Sure.
        Mr. Barton. For our Public Service Commissioners, is it
    possible in your opinion, to have a regulated transmission
    grid? We still use the standard regulatory model and have a
    deregulated transmission grid where there are no price
    controls? Kind of a dual transmission system if we are going to
    so to this market? Is that theoretically possible?
        Mr. Svanda. I believe that it is theoretically possible and
    I believe that we have even better than theory to prove it in
    the way that the physical highway system in this country
    currently exists.
        We have in fact, the State highways that we travel on,
    municipal, our city streets that we travel on, we have
    interstate highway systems, and we have toll roads. And as long
    as there is equal and open access it doesn't matter just so
    long that as each of us entering or accessing that system are
    treated in the same way.
        Mr. Barton. Mr. Sullivan?
        Mr. Sullivan. I think the answer to that is yes, if you
    will provide enough incentive for the investment to be made in
    those transmission systems.
        Mr. Barton. Okay. Mr. Nugent?
        Mr. Nugent. I don't see how you are going to get to a
    competitive transmission grid. I think what you are doing is,
    you may be able to find some segments connecting a particular
    generator to a node within the system that you may be able to
    leave in a deregulated fashion.
        But the idea of establishing an extensive grid which it
    seems to me, is likely to need eminent domain in order to be
    able to complete all its links, would mean that it is probably
    not likely to happen. I think you are likely to have a single,
    integrated, and fully regulated transmission grid.
        Mr. Sibley. If I could, I would like to agree with the
    gentleman from Maine. What you have is a toll road and that is
    the only way you can get wherever you want to get and then you
    are going to let them charge whatever they want to charge. So I
    would favor a regulated transmission system with somebody
    looking at it. Kind of a rate of return type regulation if you
    will.
        Mr. Sawyer. It is exactly what--forgive me, but that is
    where I was trying to head to. I had a couple of other stops
    along the highway.
        Mr. Barton. Well, continue on. I took some of your time,
    sir.
        Mr. Sibley. If I could also say, we had a 3-pronged test in
    Texas before we declared an area to be open, and one of them
    was, no transmission constraints. And it kind of feeds into the
    market power question as well.
        Also on our transmission, we had a postage stamp rate which
    means, to enhance competition however much electricity they
    want to move down that transmission system, it's the same, you
    know, whether you moved it 100 miles or 20 miles.
        Mr. Sawyer. Are you familiar with the FERC pricing policies
    today on transmission?
        Mr. Sibley. I am not.
        Mr. Sawyer. Could you comment on those for the purpose of
    where we are headed with conceivably, a flexible framework for
    a national transmission system, or regional transmission
    system?
        Mr. Svanda. Sure. And I think FERC has attempted to
    demonstrated that one size fits no one, in fact, because they
    have been confronted with a number of different proposals from
    different regions of the country in order to be responsive to
    how the industry has developed in different corners of the
    country to anticipate the cultural differences and economic
    differences and things like that; that they have tried to
    consider flexibility.
        And so I think most of their work so far as been good but
    as I mentioned earlier, way too slow, and there are parts of
    the country that specifically asked for some leadership. And I
    think they are preferring right now to take a one-size-fits-
    all, let us develop something nationally type approach. And
    that doesn't work so well for us in the Midwest.
        Mr. Sawyer. I am not entirely convinced that that is what
    they are doing, but I would agree with your conclusion, yes.
        Mr. Sullivan. Mr. Sawyer, I think what we are seeing here
    is, the answer depends on which part of the country you are
    getting your answer from. And I think that is indicative of the
    point that we are all sort of trying to make. And that is that
    the States individually, can determine what is best for us as
    we go toward a new environment in electricity competition.
        Mr. Sawyer. I generally agree with that. Transmission
    however, seems to pose a set of concerns that transcend
    individual jurisdictions and that may require that kind of
    flexible framework within which a Federal policy would need to
    be put in place.
        Mr. Nugent. We are trying to work that stuff out in New
    England. We are working on proper pricing patterns: should it
    be nodal, should it be zonal, should it be a combination of
    these? The six New England Commissions meet regularly to try
    and determine what is the best public policy interest and to
    advance that idea to the FERC. We haven't finally resolved that
    question. The FERC has generally been supportive of the
    initiatives that we have proposed, however.
        Mr. Barton. We will have to let you come back to this
    question.
        Mr. Sawyer. I will come back. Thank you, Mr.Chairman.
        Mr. Barton. The gentleman from North Carolina, Mr. Burr, is
    recognized for 5 minutes.
        Mr. Burr. Thank you, Mr. Chairman. Mr. Wolens, let me ask
    you, Texas did have a stranded cost; they addressed stranded
    costs, am I correct?
        Mr. Wolens. Yes sir.
        Mr. Burr. Tell me, was one of the considerations to the
    stranded cost plan, nuclear decommission?
        Mr. Wolens. Yes sir.
        Mr. Burr. Tell me what part of that played a factor.
        Mr. Wolens. We had two different ways of evaluating how you
    get to stranded costs. And one issue, the larger issue as
    Senator Sibley said, is do you pay it and how much do you pay?
    And generally we said, we are going to pay it. It still remains
    to be quibbled what that means, and every State is going to
    quibble. Even if you say we are going to pay 100 percent of it,
    it is not clear what 100 percent means to any one particular
    State. And there is an enormous amount of devil in the detail.
        Mr. Burr. Well, let me ask you one specific thing.
        Mr. Wolens. Go ahead.
        Mr. Burr. Are the Texas utilities that hold nuclear
    generation fully funded in their decommission funds?
        Mr. Wolens. I believe so. Do you know the answer to that?
        Mr. Sibley. Yes. I believe the answer is yes; they are
    fully funded.
        Mr. Burr. They are fully funded?
        Mr. Wolens. And then what we did is, as Senator Sibley
    said, on stranded costs that are not nuclear we sent it out to
    the marketplace for the marketplace to put a value on it
    because we are not so smart that we can do it.
        But you have got to send it out to the market in one way or
    another for the market to put a value on the stranded cost,
    except for nuclear. On nuclear there will be an administrative
    test.
        Mr. Burr. Could I ask you to hold for a second? I ask the
    indulgence of the chair to yield to somebody else while I run
    for a vote.
        Mr. Barton. Okay. We are going to recognize the
    distinguished gentleman from Illinois, Mr. Rush, then.
        Mr. Rush. Thank you, Mr. Chairman. I want to commend you on
    this hearing and I want to thank the individuals who are
    testifying today for being here.
        First of all, I would like to ask Mr. Sibley if you don't
    mind, and anybody else can join in on this, but Chairman Bliley
    indicated that he would no longer insist on a Federal mandate
    and a date certain for States to enter into competition.
        And recognizing that many States have already begun the
    competitive process, is it your opinion that a date certain
    provision is required, or should States be left to determine
    themselves when to enter into competition?
        Mr. Sibley. I think the States ought to be left to
    determine on their own what date they enter, if at all. If they
    choose to stay out that wouldn't offend me at all either. This
    is a very complicated issue. The State of Texas chose January
    1, 2002, but we took a lot of things into consideration in
    doing that.
        How long will it take us to get an independent system
    operator? I think you all referred to it as an RTO. How long
    does it take to get stranded costs paid down enough to where
    you can make this without punishing the consumer? Getting
    computer systems to talk to each other so that you can have a
    reconciliation about how much electricity was put into the
    system, by whom, and how they get their money out.
        So there are a lot of very complicated issues and it takes
    time. This is not like going out and building a Little League
    baseball field where we just get more people out there and we
    get it done quicker. There are some things that take time to
    come together.
        So, every State I guess, finds themself in a different
    dilemma or different situation. California is moving ahead,
    Texas will be lagging; come 2002 we will be ready. Other States
    may be further behind than that.
        So I wholeheartedly support the idea of each State making
    its own decision about when they're going to do it or in my
    opinion, even if they do it. If Alabama chooses to stay out I
    would support them in that.
        Mr. Rush. Well, is there anybody else on the panel who
    might have a differing position on this? Does everybody agree
    with this?
        Mr. Wolens. I have a concurring opinion, and I think that
    you look at the marketplace of politics and supply and demand,
    and I think that it will get there on its own because there
    will be a political, which is to say, a policy interest in
    driving down prices which will generally happen in competition,
    No. 1.
        I think that States will experience a capacity problem and
    those that don't, don't, but there will be a lot that do and
    they will reach the policy decision that you can solve capacity
    issues with competition. And I think that No. 3, that because
    of mergers and acquisitions, the marketplace will politically
    and as a matter of policy, bring the issue home to those States
    so that you get to the same place which is, States will do it
    on their own.
        Mr. Svanda. I concur but would also like to add one comment
    and that is, in Michigan we certainly respect the other States
    who don't want to move at the same pace or maybe even in the
    same direction.
        But it would be extremely helpful to the development of a
    true marketplace not to have in place a mandate telling all of
    the States that they have to move in a particular direction at
    a particular time, but a deadline by which each State needs to
    give this consideration and indicate to all the rest of us,
    which direction that State is headed, so that we can understand
    how they will or will not be a player in the marketplace.
        Mr. Sullivan. Since I seem to be sort of out here by myself
    in the position that Alabama has taken, and I certainly don't
    infer that I'm smarter than all these other guys at the table,
    we just have utility rates, electric rates, that are a lot
    lower than most other States. But I----
        Mr. Barton. What is the average homeowner cost per kilowatt
    hour for electricity?
        Mr. Sullivan. It is under 6 cents.
        Mr. Barton. Okay, but 5.5, 5.9?
        Mr. Sullivan. It just depends on how you figure the
    particular rate, but it is----
        Mr. Barton. But between 5 and 6 cents per kilowatt hour?
    And that is mostly coal generated I think, isn't that correct?
        Mr. Sullivan. Yes, about 60 percent of our generation comes
    from coal, but we do have a good mix in Alabama. But the point
    is this: if we find that what other States are doing is going
    to bring our rates down even further, you can bet your boots
    that we are going to rush to try to emulate what those States
    are doing.
        Mr. Barton. I took some of your time, Congressman.
        Mr. Rush. Mr. Chairman, I have another question. Mr.
    Svanda, you indicated that Congress should take the lead in
    moving the country to a framework in which the competitive
    market can flourish. You also indicated that as we do so we
    should not protect special interests but instead, let the
    market function. Can you explain what do you mean by special
    interests and what are those special interests?
        Mr. Svanda. Sure. I did attempt to provide a couple of
    examples further in the text to include things like, a resource
    portfolio in the legislation I think would be better dealt with
    by the marketplace itself. And again, I provided a couple of
    additional examples of that, in both micro turbines and fuel
    cell technology.
        And coming from Michigan we tend to keep an eye on what is
    going on in the automotive industry. We have companies making
    huge investments right now in perfecting fuel cell technology
    so that it can be utilized in automobiles. And I am confident
    with that kind of investment that if a fuel cell can bump along
    our public streets and highways that it is going to be a
    tremendously reliable, clean, efficient sort of connection for
    our homes or small businesses, or those kinds of applications.
        And that is a marketplace-driven kind of investment right
    now. I would for one, hate to see the investment that is being
    made to perfect fuel cell technology be overridden artificially
    because some legislative or regulatory decision got made that
    moved some other technology ahead of fuel cell technology.
        Mr. Rush. Thank you, Mr. Chairman. I yield back.
        Mr. Barton. Thank you, Congressman Rush. I am going to
    recognize Congressman Burr again who has returned. Before I do
    that, I am going to ask that State Senator Sibley be excused.
    He and I have a luncheon engagement we were supposed to have
    been at 15 minutes ago. So I know the Honorable Mr. Wolens will
    more than capably take care of the interests of Texas in this
    debate. And I will certainly come back and if the panel is
    still empaneled, Mr. Sibley will come back----
        Mr. Sawyer. Mr. Chairman, before the Senator goes, Senator,
    you had made some mention about responding to the four
    questions that I asked in my opening statement. I don't know
    whether or not you had the opportunity to do that. I was voting
    during some of your comments. Would it be possible just to take
    a moment to summarize that?
        Mr. Barton. Sure. And then we will recognize Mr. Burr.
        Mr. Sawyer. Thank you.
        Mr. Sibley. As I had it down, you asked, should you honor
    State bills. I think my answer to that is yes. Transmission
    capacity, interstate, I think you do need to look at capacity
    because I do believe that given the arcane nature and who is
    controlling all this, that you need to have a market power
    test. I would encourage you to do that. I am not picking out a
    number for you. We picked 20 percent but you pick out what you
    think would work.
        The role of FERC I think, is the role of the referee. I
    think you can be pivotal and I think it is crucial that you do
    get into transmission and that you make some decisions about
    whether or not there are transmission constraints, because that
    will affect these market power tests that you might want to put
    in.
        So if somebody has 20 percent of the generating capacity in
    a certain area or in a TRANSCO, because of transmission
    constraints they may actually be 80 percent. So I do think it
    is critical that you do look at that.
        And in the siting of new transmission, I think you ought to
    do that. Personally I don't see that as a competitive issue or
    a proprietary issue. I see that as a natural monopoly, just
    like the siting of a highway. And so I would encourage you to
    do that.
        Mr. Sawyer. Thank you very much, Mr. Chairman. I appreciate
    your flexibility.
        Mr. Stearns [presiding]. I think Mr. Burr is entitled to
    finish his questioning. Mr. Burr is recognized.
        Mr. Burr. I thank the Chair and I apologize to the
    witnesses, the challenges we are faced with to be in two places
    or three places at once. Let me go to Mr. Sullivan and right
    down the line and ask a similar question.
        Did the rates in your States allow the decommissioned fund
    of nuclear facilities to be funded at an adequate amount as it
    relates to their decommissioning cost in the future, Mr.
    Sullivan?
        Mr. Sullivan. In Alabama, we are pretty fortunate. We are
    not going to have very much stranded costs in our State. As a
    matter of fact, a couple of other years we won't have any
    stranded costs in Alabama. But when it comes to
    decommissioning, the funding that has been set aside is going
    to be adequate.
        Our plans are not to be decommissioned any time soon.
    Sometime early in the next millennium we will start
    decommissioning unless the licenses are re-approved.
        Mr. Burr. Mr. Svanda.
        Mr. Svanda. Well, generally speaking, the funds are
    adequate. We in fact, have a plant going through
    decommissioning right now, and generally speaking the funds set
    aside have been adequate.
        Mr. Burr. Does Maine have any nuclear?
        Mr. Nugent. We certainly do.
        Mr. Burr. I am glad to hear that.
        Mr. Nugent. Or, we did, and therein lies the problem. The
    fund was fully adequate until the plant failed to be able to
    perform adequately and it was decided to shut it down early. So
    for its usage up until that time it was fully funded. However,
    since it is closing short of its projected date in 2008, that
    portion is unfunded and that part will be picked up: is being
    litigated, will be settled, it will be a number, it will go
    into stranded costs.
        Mr. Burr. So should this committee be aware of the fact
    that as PUCs look at the decommissioning costs they did it over
    a period of time, lifespan of that generation facility and
    anything short of that lifespan would affect the
    decommissioning funds that they had to work from, or the sale
    of a nuclear facility might potentially affect the size of the
    fund, or the challenge of the sale? Would that be accurate?
        Mr. Sullivan. Mr. Burr, all of those statements are
    accurate.
        Mr. Burr. Okay, let me go to Michigan one more time because
    I happen to be a rate payer in Michigan and I am troubled when
    I hear that you are not supportive of reciprocity because that
    tells me that there are really no plans in Michigan to have a
    retail market that is open, therefore I have no choice as a
    ratepayer; not that I am not receiving the best service and the
    lowest price from my current power source.
        But I think that clearly I think that reciprocity,
    believing that no date certain is important in legislation is a
    healthy incentive to make all States consider strongly,
    competition in their marketplace. Let me give you one more
    opportunity to make the case for why reciprocity is bad.
        Mr. Svanda. Well, I apologize for making the impression
    that I thought reciprocity was bad. I do not think it is a bad
    thing. In fact, that is something that we would encourage in
    Michigan. However, my comments were to the point that a State
    who chooses not to be in the competitive marketplace on behalf
    of its citizens, should not be in a position to restrict its
    companies from competing in our marketplace.
        Mr. Burr. So where is the incentive for you to offer an
    open marketplace in your State?
        Mr. Svanda. It is an open marketplace that invites
    investment, invites access to be gained onto the transmission
    system to move power into the State.
        Mr. Burr. But clearly, you don't allow outsiders to come in
    but you allow your investor-owned or co-ops or generating power
    to go out? You'd like to see it go out but nobody else come in,
    is that what you are saying?
        Mr. Svanda. Not at all. No, we in fact, invite investment,
    invite companies to utilize the transmission system to move
    power into Michigan. My statements are fully in the context of
    moving to an open marketplace and we don't want some potential
    competitor artificially restrained from providing service into
    our State.
        Mr. Burr. I am not sure that I am clear on it but I will
    handle any clarification in writing, if that is okay with you.
        Mr. Svanda. Absolutely.
        Mr. Burr. Let me go to you for one last question, Mr.
    Sullivan. Define market powers for me.
        Mr. Sullivan. I think in the context in which it is being
    used in the restructuring of the electric industry, market
    power simply means that there would be an excess of control
    over the power in any given market by one company. And of
    course, which speaks to reciprocity as well.
        Mr. Burr. Does market power exist today anywhere?
        Mr. Sullivan. Well, I think market power exists in every
    certificated area where monopolies are still in existence
    throughout the United States.
        Mr. Burr. So monopolies allow market power to exist?
        Mr. Sullivan. I think monopolies are market power, per se.
        Mr. Burr. Okay. I thank you and I thank the panel.
        Mr. Stearns. I thank the gentleman. The next one in order
    is Mr. Bryant of Tennessee, in order of appearance. Mr. Bryant,
    are you ready?
        Mr. Burr. He is not ready.
        Mr. Stearns. Mr. Largent from Oklahoma is recognized for 5
    minutes.
        Mr. Largent. Thank you, Mr. Chairman. Mr. Sullivan, I
    wanted to ask you some questions. You made some pretty strong
    statements against competition in Alabama. Why should the
    consumers in Alabama not have a choice?
        Mr. Sullivan. Mr. Largent, I think it depends on what your
    goal is. If your goal is choice, they should have choice; if
    your goal is the lowest possible price and the highest possible
    quality of service, then I think you ought to do whatever you
    need to do in order to assure that that is the goal that you
    reach.
        Mr. Largent. And so you are saying that if you give
    consumers choice that reliability would suffer?
        Mr. Sullivan. I am saying this. I am saying that we have
    learned through some of the other States that have already
    preceded us to go into a competitive market, that transitioning
    from regulation to competition is not a free ride.
        For instance, in California we have learned that putting in
    their ISO out there cost $300 million to establish and that
    there is going to be a pretty high cost to maintain and operate
    that ISO on an annual basis.
        Now, our rates in Alabama again, are 17 and 19 percent
    below the national average. And we know that if we put in the
    mechanisms to offer retail customers and Alabama customer
    choice there is going to be some cost to that. Those costs in
    Alabama may be higher than the benefits to be derived at this
    point in time.
        In other States where the cost would be the same but the
    rates are higher, then the benefits could easily outweigh the
    costs in those States. And that is why I am saying that we have
    to look at this whole process of transitioning from regulation
    to competition on a State-by-State basis.
        Mr. Largent. One of the things that you said was that
    reliability would be jeopardized.
        Mr. Sullivan. I think it will be. Because I think when
    there is no obligation to serve, or conversely, there is no
    market assured, that you are going to find that there is going
    to be a reluctance for generators to come in and invest in a
    given market until perhaps they are assured that there will be
    some market there that would allow them a reasonable return on
    their investment.
        The problem is that there is, in a lot ways, maybe up to a
    2-year lag from the time a plan is constructed till the time it
    comes on-line. So I think that you get into a situation where
    your reserves could fall below that magic 10 percent that my
    friends from Texas were talking about earlier.
        Mr. Largent. Give me an example of a market that a
    generator would be reluctant to serve in.
        Mr. Sullivan. I can't answer that question. I can just tell
    you that in Alabama they would have to come in and acquire
    property at some cost. Which for instance, Alabama Power
    Company already owns; it would not have to acquire.
        And we have seen this in the last case that if we
    certificated additional power in Alabama, that it was hard for
    other companies to come in and compete and put in generation in
    Alabama as cheaply as the incumbent company could do it.
        Mr. Largent. Why was that?
        Mr. Sullivan. It is because the incumbent company already
    owned the land on which the generating facility was going to be
    built, and so there was a cost there that the others would have
    had to have incurred that the incumbent didn't have to incur.
        Mr. Largent. It didn't have anything to do with the special
    relationship that the incumbent utilities had with the State
    PUC?
        Mr. Sullivan. I don't understand that question.
        Mr. Largent. Well I mean, there is definitely a
    relationship, long-standing relationship, between your
    incumbent utilities in the State of Alabama and with the State
    PUC that grants the siting abilities for new generation to be
    built. And we have seen those problems in a lot of States, not
    just Alabama. So that there is not only a problem in getting
    approval for new generation, but then it also creates a lot of
    other problems.
        Mr. Sullivan. No sir. What we looked at in this particular
    case, were the numbers. And obviously, it was going to cost
    more to come in and acquire the property, build the plant, than
    it would to just build the plant on property that was already
    acquired. And I don't think there is any more of a special
    relationship between the Alabama Public Service Commission and
    the utilities that we regulate than there would be between--
    well, let me just leave it at that. There is not.
        Mr. Largent. There have been numerous panels that we have
    heard from on the issue of deregulation. To my knowledge, you
    are the first to testify that they felt like reliability would
    actually suffer as a result of deregulation; which I found your
    statements were interesting.
        I also wanted to ask Mr. Wolens, you dealt with and hit
    pretty strongly the issue of adequacy of generation. I wanted
    to ask you this question and that was, do you feel like that as
    we move into a world of competition that the generation
    adequacy would improve or not?
        Mr. Wolens. Absolutely. The market will call for it and it
    will come, because we have to have it. And we have to have it
    for health reasons, we have to have it for safety reasons. And
    it is just like goods and it is just like clothing. And you and
    us in State government, and people in city councils,
    governmental officials who get elected are never, ever going to
    put reliability at issue. It ain't going to happen.
        And part of our concern is, what do we do about
    reliability? We were concerned that if go messing around with
    something and we louse it up, that you are going to have every
    constituent in the world calling you at home and telling you
    that the lights are flickering.
        So we can't louse this up at all and reliability is a huge
    issue and it is going to become an issue if you do nothing.
    Now, where I disagree, I disagree with very much of what this
    gentleman says from a substantive point of view. It makes me
    wonder what it is going to hurt by permitted dereg? If no one
    comes to invade his State to offer lower prices, then they
    don't come. It doesn't hurt anything.
        But procedurally, if he doesn't want it, if the State
    doesn't want it, the State doesn't get it. But I go back. I
    believe that the marketplace of politics and the marketplace of
    public opinion and especially public policy, at some point
    brings deregulation there, because you are going to need it on
    generation at some point, you are going to need it on rates at
    some point, and you are going to need it on mergers and
    acquisitions at some point.
        Mr. Largent. Yes. Well, I couldn't agree more with your
    remarks, and in fact, that is what I was going to say to Mr.
    Sullivan. Is that most of the proposals, and right now I would
    suspect all of the proposals that would be coming forward from
    the Federal Government, would allow the State of Alabama to opt
    out of any competition if they showed that there was a
    particular class of consumer that would be ill-affected by
    competition.
        So it clearly gives the States the ability to opt-out. Or
    if a State has already moved like Texas, they get to basically,
    grandfather in all the language that the State of Texas does.
    So it really is handling this issue of State power versus
    Federal power with kid gloves in giving deference to the States
    at every turn.
        My last question--I know I see my time is up--is back to
    you, Mr. Sullivan. I guess the only point that I would want to
    make is that not all low-cost States like the State of Alabama,
    share your view. There have been a number of States that are
    low-cost States.
        Texas would be a low-cost State--Oklahoma, Arkansas would
    be low-cost States--have already moved electricity
    restructuring in their States, alone. Do you have an
    explanation for that, or a rationale?
        Mr. Sullivan. Well, not living in those States, no sir, I
    don't have a definitive explanation, but I can tell you what I
    think. If we move continuously into restructuring the way that
    we started, a lot of that impetus has been provided by the
    technological advantages that have been given through
    generation with combined cycle gas turbines.
        And those three States that you happened to mention are all
    States that fuel combined cycle gas turbines with their
    petroleum products. And I can see a definite advantage to
    Oklahoma and to Texas and to Arkansas if we are generating more
    electricity with natural gas.
        And it seems to me that those States would be trying to do
    everything that they could for their individual economies to
    sell more natural gas if they could provide more generation
    capacity through combined cycle gas turbines.
        Mr. Stearns. The gentleman's time has expired. The
    gentleman from Texas, the ranking member, Mr. Hall is
    recognized for 5 minutes.
        Mr. Hall. Thank you, Mr. Chairman. I guess my first
    question really ought to be to Mr. Wolens. The three beautiful
    women that you've consulted a time or so there, are they
    members of your staff?
        Mr. Wolens. The older of the women is the speaker of my
    house.
        Mr. Hall. Which one is that?
        Mr. Wolens. It is my wife who I am proud to tell you has
    entered the family business and has run for public office and
    is member of the Dallas City Council; my wife, Lauramela.
        Mr. Hall. I am very well aware of that.
        Mr. Wolens. And then our two daughters, Alex and Lilly.
        Mr. Hall. President and vice president; it is a question
    about which will be.
        Mr. Wolens. But I pay attention to the speaker of the
    house.
        Mr. Hall. I believe you, and you show good judgment. She is
    one of the youngest and most articulate and most active members
    of any of the Nation's larger metropolitan area councils, and
    we thank you for the time you give and for the encouragement
    you give to Steve.
        We talked here and I really have been out and I don't know
    what questions have been asked, but just I have a general
    question on what we ought to do at the Federal level. We all
    want to know that and we want to know what is really best to
    do, the way we get it is what we get from that table there,
    from people that are smarter than we are, that have gone
    through situations that are similar to ours or that they have
    some particular knowledge. And then we put it all together and
    try to write a bill from it.
        I guess my question would be to you and to each of you, the
    odds are a little better than that--I've got one Texan and
    three others there--what are the problems that need to be fixed
    at the Federal level to facilitate whatever course of action
    your State has taken? And Jim, I don't believe your State has
    acted yet. Do you like the Texas bill?
        Mr. Sullivan. I have not read the Texas legislation but
    from what I understand about it I think it's a definite step in
    the right direction. And fortunately, I'm going to have the
    benefit of waiting and seeing how that bill affects Texas and
    then respond and react to that.
        Mr. Hall. Well, I think Texas did that with the California
    bill and other bills. We have benefited by the bills that have
    already passed and some of the trial and errors there. Has the
    State of Maine or Michigan, have they acted? Do you have a bill
    from your legislatures?
        Mr. Nugent. I will let Dave speak to Michigan although I
    once served as public servant in Michigan. Maine actually
    passed the law first, then handed it to the Commission to
    develop implementing rules.
        With regard to what the Federal Government might do here,
    one thing I think ought to be given serious considering is
    encouraging the FERC to establish joint boards with the State
    and Federal regulators that would cover the same areas as the
    independent system operators, so as to craft the best
    regulations for that particular region.
        Mr. Svanda. Michigan does not currently have legislation on
    the books, and I noted while you were out of the room that our
    efforts to move through the Public Service Commission have been
    derailed somewhat. Just this week on Tuesday our Supreme Court
    ruled on a very narrow issue that we could not do some of the
    things that we have been doing.
        And so that puts into question where we stand in our move
    to a competitive marketplace. We are a competitive or
    competition-driven State and are moving as hard and fast as we
    can in that direction. Our legislature has been involved in
    other issues like cutting taxes and things like that.
        They have certainly been aware of what we have been doing
    and I know members of the committee, or at least members in our
    legislature, have ways of signaling us if we are not doing
    things in a manner that is consistent with their viewpoints,
    and we have not been receiving those signals.
        So we were moving as quickly as we could without that. Now
    we are kind of back to a restarting juncture and we will figure
    it out from here again.
        Mr. Hall. Well, with yours in abeyance and Mr. Sullivan's
    State has not acted, Mr. Nugent, you all have acted but you are
    going to go out and come in again, is that what I understand?
        Mr. Nugent. Go out and come in again, it is for
    legislation?
        Mr. Hall. Yes.
        Mr. Nugent. We have a very extensive and comprehensive
    restructuring law, and it puts us on target to start next March
    1.
        Mr. Hall. My question then would be directed to you and to
    Mr. Wolens, then. How can we facilitate the course of action
    that your State has taken, or to be more Texan with it, how can
    we screw it up?
        Mr. Nugent. Maine's point of view is markedly different
    from Texas'; not necessarily in the end result. But we are a
    very small piece. We are not large enough to create our own
    market. We have to develop or depend on a region-wide market
    developing throughout New England and perhaps even more
    broadly, into adjacent parts of Canada and New York.
        We work cooperatively with the other Commissions in the
    Northeast, especially in New England, and it would be helpful
    to us, I think, if we had as I say, the joint Boards
    established with some FERC and State Commission members to
    develop policy with regard to transmission systems that would
    support a robust market across all of New England. Ultimately
    to be decided on by the FERC but at least the solution
    developed by a joint Board.
        Mr. Hall. Mr. Chairman, can I have another 30 seconds for
    Mr. Wolens?
        Mr. Stearns. With unanimous consent, so ordered.
        Mr. Hall. Go ahead, Steve.
        Mr. Wolens. I have studied this for 3 years and I have got
    hundreds of hours in this issue, and I would beseech you and
    Congress to do something that your States can't do because we
    don't have the power to do it. And it deals with those areas,
    those power regions that serve multiple States.
        No. 1, please help us solve transmission issues between
    States, and those are the soda straw issues. No. 2, help us in
    those States where we can't control the independent systems
    operator. And in those power regions that just haven't
    developed an ISO, help us in those power regions that have not
    developed tariffs of their own because we can't do it in Texas,
    especially for those three other power regions that affect us.
        And finally, help us in those same areas where market power
    is an issue; that is the issue of a company that exercises
    undue influence in the market. It was Congressman Burr that
    wanted to know how to define market power, and heck if I know.
    Because if we knew you could cut the size of the FTC in half.
        FTC figures out with the Courts that Coca Cola can have 85
    percent of the market and there is no market power; that Lay's
    Potato Chips can have 76 percent of the market, or Gillette
    with their Sensor Razor can have 87 percent of the market and
    that is not the exercise of undue market power.
        And we come back to Texas and say if it is over 20 it is
    too much. But I can't influence it and we in the States can't
    influence what happens in other power regions that we don't
    have jurisdiction over and you have the jurisdiction over, and
    please help us.
        Mr. Hall. Mr. Chairman, I am done. And I, after thanking
    Mr. Wolens once again and Dave Sibley for ushering that bill
    through and our good Governor for signing it, just like I hope
    he is going to be signing bills up here for the next 4 years. I
    yield back my time.
        Mr. Stearns. I thank the gentleman. I will take my 5
    minutes at this moment.
        Mr. Sullivan, I asked the staff to go back to see what your
    residential rates are, the range of them, because I thought it
    would be interesting. We show that your low is 5.2 cents and
    your high is 9.69. So it appears to me that with that kind of
    range--that is for residential--a lot of people in the
    residential are paying a pretty stiff rate here.
        Mr. Sullivan. I would imagine that some of those rates are
    reflective of the co-ops Muni systems that are doing business
    in Alabama. In Alabama we do have an anomaly that most other
    States don't have. Most States have their own co-ops and
    municipal systems.
        In Alabama, the northern third geographic of our State is
    TVA territory, so we have not only IOUs and co-ops and Muni
    systems, we also have a dominance of TVA in the northern part
    of our State.
        Mr. Stearns. Let me ask you this. Do you folks feel FERC is
    headed in the right direction? You know, they recently issued a
    Notice of Proposed Rulemaking on Regional Transmission
    Organizations. Maybe just quickly just go down and ask if you
    feel FERC is headed in the right direction. Representative
    Wolens?
        Mr. Wolens. Congressman, I am not qualified to comment on
    that.
        Mr. Stearns. Okay. Mr. Sullivan?
        Mr. Sullivan. In my judgment, FERC is headed in the right
    direction. Where I may differ from some of my other colleagues
    is, I would like them to take it a little bit slower rather
    than faster.
        Mr. Stearns. Okay.
        Mr. Nugent. I guess I do represent just the opposite
    opinion in that I think FERC is moving too slowly. I think that
    they have opportunities to recognize the regional differences
    that exist in this country and to allow for those regional
    differences to work in an overall system.
        But they have had, for example in the Midwest, they had 6
    or 7 States step forward and say, we are interested in your
    leadership in creating a functional marketplace in our
    territory. We are interested in your leadership and guidance in
    creating an ISO.
        And we also indicated that we were giving them an
    opportunity to not create a one-size-fits-all solution around
    the country but to work with us individually. And they didn't
    exercise that opportunity that was given to them by Midwestern
    States. And so I think they're moving too slowly.
        Mr. Stearns. Okay.
        Mr. Nugent. I think the cooperative approach or the
    voluntary approach that they have suggested is appropriate at
    this point. You should know that the regulators in New England,
    New York, and Pennsylvania, New Jersey, Maryland, PJM, have
    organized a conference with FERC cooperating with us, this
    October to look at how we can advance that whole thing.
        I would hate to see a very large transmission organization
    established which would give us some difficulty in just trying
    to wrap ourselves around it. We have worked hard to establish
    one in New England. I think that is far enough. I would hate to
    see it pushed to go more broadly, but are willing to discuss
    the issue.
        Mr. Stearns. This seems to me a key area, this transmission
    area. Should we on the Federal side, help FERC? Should we be
    involved with giving them more responsibility in this area of
    the transmission lines? Yes or no? Just coming down.
        Mr. Nugent. I think it is possible that they may need some
    additional authority perhaps paralleling what they have in the
    gas area, which has been a more competitive field than
    electricity has. Deregulation is ahead of the curve there. But
    it ought to be done in close cooperation with the States.
        Mr. Stearns. You don't think it could be done just through
    a market situation? The FERC needs to step in?
        Mr. Nugent. I think transmission will continue to be a
    single transmission grid, and because it is in a monopoly
    position it will continue to have to be regulated and therefore
    will need State and Federal regulators.
        Mr. Stearns. Does anyone disagree with that? No, you all
    agree with that?
        Mr. Sullivan. I would just to that, that again, you have in
    TVA and the PMAs, you have some anomalies there and you are
    going to have to incorporate that into whatever you do as far
    as transmission is concerned. Because FERC does not have
    jurisdiction over that.
        Mr. Stearns. Just going to Representative Wolens, your
    testimony earlier. I have to admire you folks because in a
    sense what you did put in is price controls and you took the
    utilities and broke them out, and you got the support of the
    utilities to do that, as I understand what you are telling me.
        Mr. Wolens. Correct.
        Mr. Stearns. And the incentive was that once it was over
    that they would be able to compete and have a larger market
    share. And when you approached them initially, were they
    receptive to that idea?
        Mr. Wolens. Well, I should tell you that in January 1997
    when this idea came upon us--it came upon us in the 1993
    session, 1995 session. The Texas legislature meets for 5 months
    at the beginning of every odd-numbered year. So we studied it
    in 1993, 1995, 1997. The utilities came to us and said, please
    do nothing.
        Mr. Stearns. Right. They didn't want controls to be broken
    up, obviously.
        Mr. Wolens. By May they said please do everything; please
    do something.
        Mr. Stearns. And what caused that?
        Mr. Wolens. Specifically, I believe it was an adverse
    ruling before the Public Utility Commission for a particular
    investor-owned utility, and the investor-owned utilities were
    concerned about how the Public Utility Commission was going to
    exert influence over prices.
        Mr. Hall. Will the gentleman yield?
        Mr. Stearns. Sure; gladly.
        Mr. Hall. You know, we had an awful lot of them who, on the
    first day said, let us do everything, do it tomorrow; came
    later saying, hey hold up, too. So that is the reason that we
    are so proud of our legislature and Maine that has already
    acted, acted timely.
        They vacillated. At one time, one group was over here and
    the other group over here, and then the next time we talked to
    them they would be here and then the next time here.
        And that is the reason I think that Chairman Bliley and
    Chairman Barton have shown good judgment in getting all the
    testimony we could have, pulling in everyone that we could get
    information from, not rushing to judgment, and trying to get a
    business decision rather than a Congressional guess. And I
    thank you. I yield back my time.
        Mr. Stearns. I thank the gentleman and my time is expired.
    I will ask the gentleman from Tennessee, Mr. Bryant, is
    recognized for 5 minutes.
        Mr. Bryant. Thank you, and again, I thank the very
    distinguished panel for their testimony. Mr. Wolens on the end
    from Texas, I guess my first question has to be, in relation to
    Tennessee, where is Texas?
        Mr. Wolens. It is to the left, it is to the North, and it
    is all around you.
        Mr. Bryant. Good. Thank you. In the restructuring scheme
    that Texas has come up with, how do you protect the issues that
    would relate to rural areas? How did you get those areas on
    board? What assurances do they have, particularly in terms of
    reliability and a competitive price? How did you bring them
    into the fold?
        Mr. Wolens. You know, many of our rural areas are served by
    co-ops. In Texas we have 85 consumer-owned cooperatives, ten of
    which do generation and transmission. And we treated the co-ops
    as we did the municipally owned utilities and said that when
    you folks want to come into the new world, you will let us
    know.
        So we let the Boards of the co-ops and of the Munis make
    their decision when they come in, and they will decide when
    they come in.
        Mr. Bryant. Are there any standards? I know my colleague
    from Oklahoma mentioned at a State level there are provisions
    in some of our proposed bills that would allow them to opt out,
    you know, if they had a certain group of customers and so
    forth. But within the State of Texas there is no standard? It
    is just if they want in or out?
        Mr. Wolens. No, it is whether they want in. They are out
    until they want in, and we gave them even more control over
    their service area than we do under the status quo. There is
    less regulation by the Public Utility Commission.
        There will be some oversight on the reliability issue but
    there will be very, very little; with the idea, the notion
    being, that they are investor-owned electricity companies, and
    if they decide to go in a different direction, then they decide
    to do it because they own it.
        Mr. Bryant. Mr. Sullivan, I tend to agree with a lot of
    your comments in terms of, I notice I have quit calling this a
    deregulation bill because I have a feeling it is going to be
    involving a lot more regulation and talk more about
    restructuring.
        But you mentioned the subject of TVA, and I would solicit
    your comments on a Federal restructuring bill. What would you,
    in terms of your relationship with TVA and its relationship
    with the northern one-third of the State, how would you like to
    see TVA treated in a Federal bill?
        Mr. Sullivan. I think TVA points out pretty well what I am
    trying to say about this whole issue of restructuring and that
    is, the answer for restructuring is not just to say no. The
    answer is, let's transcend from regulation to competition, but
    in the interim, as we have seen in all the legislation that has
    been passed in all the States, there is going to be sort of an
    artificial market established.
        And during that time we are going to need to be very
    careful because if we give up too much regulation and the
    market is not yet fully enforced, then there are some dangers
    there. There are some caveats that must be mentioned.
        At this point in time I have heard no State or Federal
    solutions to the problem of how we are going to handle TVA and
    Bonneville. And the point that I am trying to make is that we
    need to go slow on some of these issues until we can come up
    with these answers.
        I don't have an answer but my answer is, we need to
    establish a dialog between or among TVA and the other
    surrounding States so that we can do what is fair to all the
    States, do what is fair for TVA and the IOUs that interface
    with TVA.
        And the same thing is true for the Northwest and the
    Bonneville area and the other PMAs. The point is, there are
    some areas of the country in which we just need to slow down
    and make sure that we are doing what is right and fair for
    those regions.
        Mr. Bryant. Follow-up to my colleague from Florida's
    question about transmission lines, is there any disagreement
    among the four of you that as far as the interstate lines go,
    that basically they should be subject to the same set of rules?
    There needs to be some consistent regulation? Mr. Sullivan?
        Mr. Sullivan. I think it is critically important, and I
    think FERC has already addressed that in their Rules 888 and
    889. But I think it is critically important that we do have
    open and equal access as we transcend into retail competition.
        Mr. Bryant. Thank you. Thank you, Mr. Chairman.
        Mr. Stearns. I thank the gentleman. We have Mr. Pickering
    from Mississippi is recognized for 5 minutes.
        Mr. Pickering. Thank you, Mr. Chairman. Mr. Sullivan,
    coming from Mississippi, very similar to Alabama and very
    similar with the power, the fuel mix, the demographics in many
    ways, and knowing that we had a strategic advantage that has
    helped us attract a large number of jobs from Mercedes in
    Alabama to other manufacturing; because we do have a low-cost
    region. And so my intent and objective is to make sure that we
    have the strategic flexibility to maintain that strategic
    advantage.
        But let me ask you from the most recent announcement by the
    chairman of this committee, Chairman Bliley, in which he
    announced that we would be going forward but without a Federal
    mandate of a date certain, or in essence, something that would
    give States flexibility, if we go forward on that basis and we
    address the critical issue of reliability and the provisions
    that are being proposed now have broad consensus among States
    and the other shareholders, stakeholders in a reliable
    network--if we address the issue of transmission, if we
    acknowledge the State's rights and authority in addressing
    stranded costs, if we make sure for rural areas that there is a
    universal service requirement--if we do a bill of that nature,
    is that something that you can support?
        Mr. Sullivan. I have never been against any bill that would
    allow competition to evolve and allow it to become effective
    appropriately. And from what you have described it is my
    understanding that that is what you would be trying to
    accomplish. So the answer would be yes.
        Mr. Pickering. Thank you very much, Mr. Sullivan. Mr.
    Nugent, let me go back to some of the questions that you were
    having with Mr. Largent on reciprocity. And I want to try to
    get a better understanding, because as well as with
    transmission, reciprocity is going to be a difficult issue to
    address in this debate.
        Now, you were saying that if your State chose not to have
    retail--okay, excuse me, I am sorry. It should be Mr. Svanda
    from Michigan. I apologize. Thank you for your correction.
        But as far as reciprocity, if a State did not go to retail
    market or retail choice, but you would still support that State
    being able to allow investment and generation and open up their
    transmission system to distribute and deliver power outside of
    the State. Is that my understanding of your position?
        Mr. Svanda. That is correct, and especially so that they
    could be a competitor in the State of Michigan.
        Mr. Pickering. But not a competitor at the retail level? A
    competitor in the generation and a competitor at the wholesale
    or in the distribution of transmission, but not in the real
    market, is that----
        Mr. Svanda. No, a competitor at both wholesale and resale
    so that electricity generated in another State, even though it
    had not opened up the marketplace to its own residence and own
    businesses, that generation could in fact, become a viable
    competitor within Michigan.
        Mr. Pickering. Within Michigan. But what if Michigan did
    not open its market with your own people to be able to come
    into your State, invest in generation? Will outside of the
    State but not give reciprocal access to your market?
        Mr. Svanda. No, I do not think that would be fair, but my
    comments and the point that I have been trying to make is that
    what I laid out is from the perspective of an open Michigan
    marketplace. It is not from the perspective of a----
        Mr. Pickering. A closed----
        Mr. Svanda. [continuing] government protected current
    situation.
        Mr. Pickering. Thank you very much and I look forward--we
    do want to maintain the maximum flexibility for States to move
    forward. We are learning from the models such as Texas and
    other States that have moved forward. It does help and instruct
    and direct and guide us in the work that we are now facing.
        And so I appreciate this panel, I appreciate your all's
    perspectives and the chairman's leadership on this issue and
    look forward to working each of you as you go forward.
        Mr. Sawyer. Before the gentleman yields back, would you
    yield for just a moment?
        Mr. Pickering. Yes.
        Mr. Sawyer. Do you mind my mentioning the subject that we
    talked about earlier today?
        Mr. Pickering. No, not at all.
        Mr. Sawyer. I am going to have to forego my round of
    questions, but within the last 24 hours both Mr. Pickering and
    I have been subject to some fairly intensive lobbying over
    radio and directed telephone calls from a group called Citizens
    for State Power; presumably speaking on behalf of State's
    rights to determine their own future.
        They have been calling into my district, cold-calling
    customers and saying, do you want your electric bill to have to
    subsidize electric utilities in Seattle? And if you don't would
    you like us to transfer your call to your Congressional office?
        Let me just go on record here on behalf of both Mr.
    Pickering, who I suspect is being subjected to exactly the same
    kind of thing----
        Mr. Pickering. I am not sure if it has hit. It is planned;
    I am not sure if it has hit yet.
        Mr. Sawyer. Anybody is free to say anything they want and
    to the politics. We are all big kids and we can deal with that.
    But that is so misleading of the issues at stake in this very
    serious argument, that I think it really does a disservice even
    to the very issues that they seek to advocate for.
        And I wanted to get that on the record and I really
    appreciate the gentleman's flexibility in allowing me the time
    to do it.
        Mr. Pickering. Thank you, Mr. Sawyer, and----
        Mr. Hall. Where can I have them call if they don't call
    you?
        Mr. Sawyer. Pardon me?
        Mr. Hall. Where can I have them call if they don't call
    you? I will retract that.
        Mr. Sawyer. The gentleman from Texas I know, would give
    them accurate information before he undertook such a thing.
        Mr. Barton. Well, I am on the Oversight Investigation
    Subcommittee and we have jurisdiction over telecommunications,
    and if the gentleman wishes to pursue it a little more
    seriously, there are avenues that can be pursued in a
    bipartisan fashion.
        Mr. Sawyer. If they keep this up and don't even come in and
    have the decency to come and talk to us before they undertake
    this sort of thing, I think that would make some sense.
        Mr. Barton. Okay. Are there any other members present who
    wish to ask questions of our first panel? If not, gentlemen, I
    want to thank you for your courtesy in attending and testifying
    at great length. And we will keep the record open for a number
    of days; perhaps a small number of weeks.
        There may be other questions for the record that we will
    ask you, and if you do get such questions we would ask that you
    reply as quickly as possible because we hope to put a bill
    together and move to a mark-up sometime in mid-to late-July. So
    thank you for your testimony and you are now excused.
        We would now like to have our second panel come forward, if
    I can get to the second page on my list here.
        We have a group of local officials and co-ops. Welcome
    gentleman. We have with us now on our second panel, the
    Honorable Preston Bass who is the Mayor of Stantonsburg, North
    Carolina. We have Mr. Gene Argo who is the President and
    General Manager of Midwest Energy in Hays, Kansas. We have Mr.
    Gregory Wortham who is the Chief Operating Officer of 1st
    Rochdale, a cooperative of New York City in New York. We have
    Mr. Larry Watson who is the General Manager and CEO of City
    Light and Water of Paragould, Arkansas. And we have Mr. John
    Tiencken?
        Mr. Tiencken. That's very good. Yes.
        Mr. Barton. Mr. John Tiencken who is the Executive Vice
    President and Chief Legal Officer for the South Carolina Public
    Service Authority.
        Gentlemen, welcome all of you. Your statements are in the
    record in their entirety. We are going to start with Mayor
    Bass. We will give each of you 7 minutes to expound on that,
    and hopefully then we can have some questions. So Mr. Bass,
    welcome to the subcommittee and you are recognized to speak.

     STATEMENTS OF HON. PRESTON BASS, MAYOR, CITY OF STANTONSBURG,
       NORTH CAROLINA; GENE ARGO, PRESIDENT AND GENERAL MANAGER,
     MIDWEST ENERGY; GREGORY L. WORTHAM, CHIEF OPERATING OFFICER,
       1ST ROCHDALE COOPERATIVE; LARRY WATSON, GENERAL MANAGER,
      PARAGOULD LIGHT AND WATER COMMISSION; AND JOHN H. TIENCKEN,
       JR., EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, SOUTH
                   CAROLINA PUBLIC SERVICE AUTHORITY

        Mr. Bass. Thank you. Mr. Chairman and members----
        Mr. Barton. You really need to put that microphone close to
    you, Mayor, and speak very forcefully into it.
        Mr. Bass. Mr. Chairman, members of the subcommittee, on
    behalf of the North Carolina towns of Lucama, Black Creek,
    Stantonsburg, and Sharpsburg, thank you for this opportunity to
    tell you of the wonderful changes that have recently come to
    our towns.
        As the Mayor of Stantonsburg I witnessed these developments
    firsthand and am proud that our citizens have benefited from
    them. Our road to lower cost power began in 1995 when the towns
    of Black Creek, Stantonsburg and Lucama aggregated our electric
    loads and searched for a better deal, a supplier who could
    generate our electricity at a less expensive rate.
        We were able to shop the market because of the Energy
    Policy Act of 1992; a Federal law which allowed wholesale
    customers such as these three towns, to shop the open power
    markets and obtain lower cost power supplies. We are thankful
    for the actions of current and former Congressmen and
    Congresswomen that voted to enact this bill.
        Mr. Barton. Mayor, could you cease? We are going to have a
    15-minute vote on the Rule on the Banking Bill. Since you have
    just started, would you all like to take a lunch break?
        Mr. Bass. Fine with me.
        Mr. Barton. And then what we will do is, we will come back.
    It is one o'clock. Let us come back at 1:45 and I don't care if
    the audience doesn't come back, but I want the panel back here
    at 1:45. And we will just start over with the Mayor and get
    this all wrapped up.
        Because you all have been patient all morning and I have
    got to go sneak off and eat lunch. And there is a cafeteria
    here in the Rayburn down in the basement, or you can walk
    across the street. Just go straight in across the street and
    there is a cafeteria in Longworth right on the ground floor.
        So we are recessed until 1:45.
        [Brief recess.]
        Mr. Barton. The subcommittee will come to order. We have
    our panel back present and Congressman Burr is in the Annex and
    I am hopeful that Mr. Sawyer and Mr. Hall may be on their way.
    So we are going to reconvene.
        Mayor Bass, you had been recognized so we will just restart
    the clock and you can either start all over or start where you
    had interrupted your testimony.
        Mr. Bass. Okay, Mr. Chairman. I think I will just start
    over then, if it is all right with you.
        Mr. Barton. That is fine.
        Mr. Bass. On behalf of the North Carolina towns of Lucama,
    Black Creek, Stantonsburg, and Sharpsburg, I thank you for this
    opportunity to tell you of the wonderful changes that have
    recently come to our towns.
        As the Mayor of Stantonsburg I witnessed these developments
    firsthand and am proud that our citizens have benefited from
    them. Our road to lower cost power began in 1995 when the three
    towns of Black Creek, Stantonsburg and Lucama aggregated our
    electric loads and searched for a better deal, a supplier who
    could generate our electricity at a less expensive rate.
        We were able to shop the market because of the Energy
    Policy Act of 1992; a Federal law which allowed wholesale
    customers such as these three towns, to shop the open power
    markets and obtain lower cost power supplies. We are thankful
    for the actions of current and former Congressmen and
    Congresswomen that voted to enact this bill.
        In May 1996, town representatives appeared before the U.S.
    House of Representatives Committee on Commerce, Subcommittee on
    Energy and Power, to discuss our ongoing wholesale power
    project. Three years later we are back and are proud to
    announce that we successfully completed our project and cut our
    wholesale electric costs in half.
        We are also happy to announce that another nearby town has
    now also successfully completed a wholesale power project.
    Earlier this year the town of Sharpsburg, North Carolina,
    shopped for a supplier with a better rate and cut its power
    costs by roughly 40 percent.
        Three years ago our towns had some of the highest electric
    rates in the country. Typical residential electric rates were
    in the range of 11 to 12 cents per kilowatt hour. Now each town
    has cut its retail electric rates at least 25 percent, and
    growth is returning to the towns.
        In Sharpsburg, where the lower cost wholesale power has
    been available for only 6 months, the town has already cut
    rates 12 percent and is currently examining further rate cuts.
    Examples of economic growth and improvements in citizen's
    quality of life through the lower electric rates abound in each
    town.
        In Black Creek an electrical contractor employing
    approximately 35 people recently relocated to the town, due in
    part to the lower electric rates. A developer attracted by
    lower electric rates is now constructing a large, new
    subdivision in the town.
        In Lucama, many residents are senior citizens and are often
    forced to live primarily on social security checks. The rate
    cut has meant huge savings and now senior citizens are no
    longer sitting in the summer heat, afraid to turn on the air
    conditioning for fear of high electric bills that they cannot
    afford to pay.
        Furthermore, the town may not yet be done cutting retail
    rates. Later this summer the Board will examine the possibility
    of cutting their rates even further. In my town of
    Stantonsburg, new home applications are on the rise: from six
    per year before the power project to 25 applications since the
    project was completed.
        Due to the completion of this wholesale power project the
    Town Board has cut residential rates approximately 33 percent,
    which translates into annual savings of $499 for the typical
    residential consumer.
        In Sharpsburg, the largest subdivision in the town's
    history is now being constructed. The subdivision is over 100
    acres and will be home to approximately 200 families.
        The 12 percent rate cut that the Town Board approved in
    early 1999 lowered residential rates to roughly 8 cents per
    kilowatt hour. The further rate cuts that are anticipated will
    lower the town's residential rates to some of the lowest in the
    Southeast, and perhaps the country.
        The towns of Black Creek, Lucama, Stantonsburg, and
    Sharpsburg are fortunate that we were able to reduce energy
    costs to our citizens. Other towns in North Carolina are not as
    fortunate since North Carolinians' electric suppliers are
    regulated by the State and these citizens must wait for passage
    of retail customer choice legislation before they can cut their
    rates.
        Contrary to what you might have heard through your other
    sources, North Carolina is not a low-cost State. Our State's
    average adjustable cost is higher than the national average.
    And our average residential cost is the second highest in the
    Southeast.
        Jobs are being lost in our State specifically due to high
    electric rates. We know from experience that the State's
    electric industry must be changed. Our towns will be ready for
    electric retail competition when it finally arrives in our
    State. We began our preparation by entering into relative
    short-term, wholesale power supply contracts which will free us
    to offer customer's choice to our citizens about the same time
    as it may become available in others with our State.
        Then we will examine which alternatives will give our
    citizens lower electric rates. It does not matter to us whether
    we buy the electricity for our citizens or they purchase it
    themselves. Our primary concern is that our citizens obtain the
    lowest cost and most reliable electricity available.
        Also in preparation of retail customer choice of
    electricity all four towns are now upgrading their individual
    electric systems to improve system reliability. For the
    subcommittee's review we have included two newspaper articles
    of the town's formal testimony that have been written about our
    power supply projects. As you can see, we have shown our
    doubters that small consumers will also benefit from electric
    competition.
        I thank you for your invitation to appear before you today.
        [The prepared statement of Hon. Preston Bass follows:]
     Prepared Statement of the Towns of Black Creek, Lucama, Stantonsburg,
                                 and Sharpsburg
        In May of 1996, the Towns of Black Creek, Lucama, and Stantonsburg
    appeared before the U.S. House of Representatives, Committee on
    Commerce, Subcommittee on Energy and Power to discuss our ongoing
    wholesale power project. At that time, we understood that we were some
    of the first, if not the very first, municipalities in the country to
    aggregate our energy loads and purchase power on the open power
    markets. Being first is never easy as we encountered numerous obstacles
    on our path to lower cost power.
        The bigger utilities in our state said that three small towns in
    Eastern North Carolina would never be able to attract enough attention
    in the open market to get lower electric rates. They said that we were
    simply too small and that no power supplier would want to serve towns
    that were almost entirely residential loads. Now, three years after we
    first appeared before this subcommittee, the Towns of Black Creek,
    Lucama, and Stantonsburg are proud to return and announce that we
    successfully completed our project and cut our wholesale electric costs
    by approximately 50%.
        The Towns of Black Creek, Lucama, and Stantonsburg are also happy
    to announce that we are not now alone in successfully completing a
    wholesale power project. Earlier this year, the Town of Sharpsburg, NC,
    joined us by completing its wholesale power project and cut its power
    costs by roughly 40%.
        The Towns of Black Creek, Lucama, Stantonsburg, and Sharpsburg were
    able to cut their power costs due to the Energy Policy Act of 1992
    (EPACT). This federal law allowed wholesale customers, such as these
    towns, to shop the open power markets and obtain lower cost power
    supplies. We are thankful to the actions of current and former
    Congressmen and women that voted to enact this bill. Due to their
    strong actions, we were able to drastically cut the rates that our
    citizens pay for electricity.
        Three years ago the Towns of Black Creek, Lucama, and Stantonsburg
    had some of the highest electric rates in the country. Typical
    residential electric rates were in the range of 11 to 12 cents per kWh.
    Now, each town has cut its electric rates at least 25% and growth is
    returning to the towns. In Sharpsburg, where the lower cost wholesale
    power has been flowing for only six months, the town has already cut
    rates 12% and is currently examining further rate cuts. Each town is
    also now upgrading their distribution systems as well as making
    payments on the new substations and distribution lines needed to
    complete the projects.
    Power Project Results
        Examples of economic growth and improvements in citizens' quality
    of life due to lower electric rates abound in each town.
        In Black Creek, an electrical contractor that employs approximately
    35 people recently relocated to the town due, in part, to lower
    electric rates. A developer, attracted by the lower electric rates, is
    also now constructing a large new subdivision in the town.
        In Lucama, many residents are senior citizens that often live on
    social security checks alone. The 25% cut in the town's electric rates
    means that these senior citizens and other town residents will save
    over $300,000 per year. All four towns have about 1,000 customers each.
    Savings of this magnitude are huge for the typical consumer. Hopefully,
    senior citizens will no longer sit in the stifling summer heat afraid
    to turn on their air conditioning for fear of high electric bills that
    they cannot afford to pay. Furthermore, the Lucama Town Board may not
    yet be done cutting retail rates. Later this summer, the Town Board
    will examine the possibility of cutting rates even further.
        In Stantonsburg, new home applications are on the rise as the
    result of the completion of the towns' wholesale power project in
    February of 1998. Stantonsburg received no more than 6 residential
    applications in the two years before completion of the project. Now,
    less than 18 months after completion of the project, the town has 25
    new home applications. Since the completion of this wholesale power
    project, the town board has cut residential rates approximately 33%,
    which translates into annual savings of $499 for the typical
    residential consumer using 1,000 kWh's per month.
        In Sharpsburg, the largest subdivision in the town's history is now
    being constructed. The subdivision is over 100 acres and will be home
    to approximately 200 families. The 12% rate cut that the town board
    approved in early 1999 lowered residential rates to roughly 8 cents per
    kWh. The further rate cuts that are anticipated will lower the town's
    residential rates to some of the lowest in the southeast, and perhaps,
    the country.
    Rates in North Carolina
        The Towns of Black Creek, Lucama, Stantonsburg, and Sharpsburg are
    fortunate that we were able to reduce energy costs to our citizens.
    Changes in federal law allowed us to improve the lives of our citizens
    as well as our local economies. Other towns in North Carolina are not
    as fortunate. Since the vast majority of North Carolinians take retail
    electric service from investor-owned utilities regulated by the state,
    these citizens must wait for passage of retail customer choice
    legislation before they realize any meaningful cuts in electric rates.
        Contrary to what you might have heard through other sources, North
    Carolina is NOT a low cost state. Our state's average industrial cost
    is higher than the national average and our average residential cost is
    the second highest in the southeast.
        Jobs are currently being lost in our state specifically due to high
    electric rates. Recently, for example, a textile plant in Goldsboro, NC
    moved its operations to South Carolina, citing high electric costs as
    the reason for leaving our state.
    Preparing for Retail Electric Competition
        The Towns of Black Creek, Lucama, Stantonsburg, and Sharpsburg will
    be ready for retail electric competition when it finally arrives in our
    state. Given the high rates that exist in our state, coupled with the
    fact that over 21 states have now passed customer choice legislation,
    we know that the state's electric industry must be changed.
        We began our preparation for retail customer choice in electricity
    by entering into relatively short-term wholesale power supply
    contracts. All four towns have contracts that end no later than Dec.
    31, 2002, which will then free us to offer customer choice in
    electricity to our citizens at about the same time as it MAY become
    available to others within our state.
        If legislation is passed that will give municipalities the choice
    of opting out of customer choice in electricity, we will examine which
    of the following two alternatives will give our citizens lower electric
    rates:

    1. the towns continue to act as load aggregators and purchase power
            supplies for our consumers; or
    2. our individual consumers purchase their own power supplies and the
            towns will deliver those power supplies to our citizens.
        Since each town is currently acting as a distribution utility and
    does not own any generation assets, we believe that the financial
    condition of the towns' electric systems will not be affected by retail
    electric competition. It does not matter to us whether we buy the
    electricity for our citizens or they purchase it themselves. Our
    primary concern is that our citizens obtain the lowest cost and most
    reliable electricity available.
        Also in preparation for retail customer choice in electricity, all
    four towns are now upgrading their individual electric systems to
    improve system reliability. Old copper wire is being replaced, old
    poles are being replaced, and distribution lines in heavily wooded
    areas are being moved. Service has been, and will continue to be, a top
    priority for us regardless of who buys the electricity for our
    citizens.
        Small consumers can and are benefiting from electric competition.
    The Towns of Black Creek, Lucama, Stantonsburg, and Sharpsburg are
    living examples of such success.

        Mr. Barton. Thank you, Mayor, we appreciate your testimony
    and it sounds like you have got a real success there in what
    you have done and the benefits you have been able to bring your
    constituents. So we are very pleased with that.
        Mr. Argo, we are going to now recognize you. Your statement
    is in the record in its entirety and we will recognize you and
    then hopefully have some questions for you after the others
    have spoken. Welcome to the subcommittee.

                         STATEMENT OF GENE ARGO

        Mr. Argo. Thank you. My name is Gene Argo. I am President
    and General Manager----
        Mr. Barton. Really pull the microphone up. These
    microphones do not work well if they are not really close to
    you.
        Mr. Argo. That may be good, too. I am President and General
    Manager of Midwest Energy and I thank you for the opportunity
    of allowing me to testify as a rural energy provider. I would
    also like to, I guess I am in the right climate for it, thank
    the State of Texas for moving ahead. I am grateful for them for
    that, but more grateful to them because my daughter went to
    work for the State of Texas this morning at 0800.
        Mr. Barton. Whereabouts?
        Mr. Argo. In Austin.
        Mr. Barton. Oh, not in the State office up here. Well, that
    is good. And she is working in the Capitol?
        Mr. Argo. I am not sure where her office is but it is in
    Austin.
        Mr. Barton. But it is the State of Texas itself? Well, very
    good. We will check up on her for you.
        Mr. Argo. I would appreciate that, and the Bank of Dad
    appreciates that, too.
        I would like to point out that Midwest Energy is a rural
    electric cooperative. We serve 35,000 electric customers with
    over 10,000 miles of distribution in transmission line. This
    equates to 3.5 customers per mile. We also serve 43,000 natural
    gas customers and 2,000 propane customers. These customers are
    located in 39 counties covering over 21,000 square miles.
        As we are all very well aware, there have been more change
    in the energy business over the last five than in the previous
    60. We recognize that change is accelerating and often
    difficult to accept. No one has ever said that change in this
    industry would be easy, but at Midwest energy we think
    competitive markets will bring benefits for all customers, both
    urban and rural.
        We believe that prices will become more competitive,
    choices will increase, and utility companies have and will
    become more innovative. No one knows for sure what the exact
    impact of the electric restructuring will be in rural
    communities, or urban communities for that matter.
        Midwest Energy however, has taken the position as a rural
    energy cooperative, that our customers will, and have already
    benefited, from competitive market in other areas of the energy
    industry. That basically is why we believe electric
    restructuring will add value for our customers.
        There currently are no Kansas legislative initiatives in
    place for electric restructuring. Midwest Energy has been in
    the forefront of the movement to provide competitive markets
    for our customers. We were the first cooperative in the United
    States to file open access transmission tariffs with the
    Federal Energy Regulatory Commission, and we announced a
    proposed, open access program in 1997.
        Midwest Energy has filed for electric rate unbundling at
    the Kansas Corporation Commission as part of that voluntary
    program. Wholesale competition is basically in place with the
    passage of FERC Orders 888 and 889. This has enabled our
    wholesale customers to shop for the best prices for electric
    energy.
        We support maintaining service territories in place as
    currently certified, thus preventing duplication of physical
    distribution facilities. We also proposed that reciprocity
    should prevail.
        Electric utilities in the State are somewhat encumbered by
    the lack of enabling legislation in Kansas. In 1996 however,
    the Kansas legislature authorized and formed a Retail Wheeling
    Task Force.
        Along with a 3-year moratorium to study the issue the
    results of this task force were recommended legislation
    requiring unbundling by January 2000 and full, retail, open
    access by July 1, 2000. The bill was never enacted.
        Rural electric providers can and will take necessary steps
    to protect assets and provide added value with good service and
    reasonable prices. Whether as a result of pending open markets
    or good business strategies, Midwest Energy and others have
    already initiated this process.
        The steps Midwest Energy took to increase member value
    under new business conditions began after the passage of the
    Energy Policy Act of 1992, FERC Orders 636, 888, and 889, and
    are included in the written testimony.
        Let me emphasize that preparing for competition in our case
    does not mean reducing customer service. In a world of
    corporate downsizing we have chosen not to send customer calls
    to a distant call center and to keep all local offices and
    service centers open. We are also hiring more customer service
    representatives to provide extended hours.
        While this might not work for others this plan fits our
    customer service objective in a very competitive environment.
    As we continue to examine restructuring of the electric
    industry, it is important to understand a very significant
    difference between the energy commodity and the delivery
    systems that are in place and required to deliver the service.
        For many if not most rural cooperatives, the cost of the
    commodity is well over half of the cost of the electric bill.
    It is this portion that will initially be subject to
    competitive forces and is the focus of current restructuring
    movement. Suppliers will compete to earn the customer's
    business.
        Too many assume that every high priced supplier will be
    guaranteed a place at the table, that high-cost power will
    simply flow to low-cost States in some sort of cost averaging,
    and everyone's place in the market will be preserved.
        Frankly, I am not aware of any other competitive market
    where high-priced providers are guaranteed a right to my
    business. Only if they improve efficiency and lower costs will
    they remain in the market.
        I will move ahead and close simply by saying that
    competition in the service delivery area will, and in some
    cases, already surfaced. Construction, maintenance, billing,
    and other services are changing. New technologies such as
    disbursed generation, may even replace the high-cost, rural
    delivery system in some situations.
        This can and will continue to occur with or without
    restructuring or legislation. As a rural energy provider with
    firsthand experience in these markets, I can sincerely say that
    the energy customers benefit from competition. And I thank you
    for allowing me to testify.
        [The prepared statement of Gene Argo follows:]
    Prepared Statement of Gene Argo, President and General Manager, Midwest
                                  Energy, Inc.
        Good morning. My name is Gene Argo. I'm President and General
    Manager of Midwest Energy, Inc. I thank you for the opportunity to
    testify as a rural energy provider.
        Midwest Energy is a rural energy cooperative. We serve 35,000
    electric customers with over 10,000 miles of distribution and
    transmission line. This equates to 3.5 customers per mile. We also
    serve 43,000 natural gas customers and 2,000 propane customers. These
    customers are located in 39 counties, covering over 21,000 square
    miles, in central and western Kansas.
        As we all are very well aware, there has been more change in the
    energy business over the last 5 years than in the previous 60. We
    recognize that change is accelerating and often difficult to accept. No
    one has ever said that change in this industry would be easy, but at
    Midwest Energy, we think competitive markets will bring benefits for
    all customers--both urban and rural. We believe that prices will become
    more competitive, choices will increase, and utility companies have and
    will become more innovative.
        No one knows for sure what the exact impact of electric
    deregulation will be in rural communities, or urban communities for
    that matter. Midwest Energy, however, has taken the position as a rural
    energy cooperative, that our customers will and have already benefited
    from competitive markets in other areas of the energy industry. That,
    basically, is why we believe electric deregulation will add value for
    our customers.
        There are currently no Kansas legislative initiatives in place for
    electric restructuring. Midwest Energy has been in the forefront of the
    movement to provide competitive markets for our customers. We were the
    first cooperative to file open access transmission tariffs with the
    FERC and we announced a proposed Open Access Program in 1997. Midwest
    Energy has filed for electric rate unbundling at the Kansas Corporation
    Commission as part of that program.
        As you know, wholesale competition is basically in place with the
    passage of FERC Orders 888 and 889. This has enabled our wholesale
    customers to shop for the best prices for electric energy. We support
    maintaining service territories in place as currently certified, thus
    preventing duplication of physical distribution facilities. We also
    propose that reciprocity should prevail.
        Electric utilities in the state are somewhat encumbered by the lack
    of enabling legislation in Kansas. In 1996, however, the Kansas
    Legislature authorized and formed a Retail Wheeling Task Force, along
    with a three-year retail wheeling moratorium, to study the issue. The
    result of this Task Force was recommended legislation in the form of a
    bill that would require unbundling by January 1, 2000, and full retail
    open access by July 1, 2000. The bill was never enacted.
        In preparation for a more competitive environment, rural electric
    providers can and will take necessary steps to protect assets and
    provide added value with good service and reasonable prices. Whether as
    a result of pending open markets or good business strategies, Midwest
    Energy and others have already initiated this process.
        For example, the steps Midwest Energy took to increase member value
    under new business conditions began after the passage of the Energy
    Policy Act of 1992, and FERC Orders 636, 888 and 889.
        These steps included:

    --The divestiture of older, costly base load generation in favor of
            flexible energy and capacity agreements with a major supplier.
            Several years ago, Midwest Energy made the decision to sell
            several generating facilities. The decision was financial, in
            that it was going to take an excessive amount of investment to
            upgrade these facilities to meet power pool requirements. This
            decision was made easier with deregulation on the horizon.
    --In 1997, Midwest Energy initiated an ``Open Access'' program designed
            to offer more choices to all classes of customer, beginning
            with the unbundling of electric bills into transmission,
            distribution and generation components. In the near future, we
            plan to offer optional rate plans including a ``green'' power
            plan using environmentally friendly generation, an ``indexe''
            rate plan tied to farm commodity prices, or to the price of
            oil, and a fixed rate plan. All of these will be offered as
            choices to customers.
    --Last year we established an unregulated marketing affiliate giving
            our members the opportunity to participate in margins not
            previously available. This affiliate is now competing in
            several states, selling an energy commodity to industry, small
            business and residential customers both inside and outside our
            regulated service territory.
    --For the last six years, we have continued to address potential
            competition by upgrading and increasing services in the areas
            of technology, construction, maintenance, marketing,
            organizational improvements, and customer choice.
        Let me emphasize that preparing for competition does not mean
    reducing customer service. In a world of corporate downsizings and
    office closings, we have chosen not to send customer calls to a distant
    call center, and to keep all local offices and service centers open. We
    are also hiring more customer service representatives to provide
    extended hours. While this might not work for others, this plan fits
    our customer service objectives in a competitive environment.
        As we continue to examine deregulation of the electric industry, it
    is important to understand the very significant difference between the
    energy commodity and the delivery systems that are in place and
    required to deliver the service.
        For many, if not most rural cooperatives, the cost of the commodity
    is well over half the overall cost of the electric bill. It is this
    portion that will initially be subject to competitive forces and is the
    focus of the current restructuring movement. Suppliers will compete to
    earn customers' business. Too many assume that every high priced
    supplier will be guaranteed a place at the table; that high cost power
    will simply flow to low cost states in some sort of cost averaging and
    everyone's place in the market will be preserved. Frankly, I am not
    aware of any other competitive market where the high priced providers
    were guaranteed a right to my business. Only if they improve efficiency
    and lower costs will they remain in the market.
        In addition to the commodity, the other significant component of
    utility bills is the cost of the delivery service. There is no question
    that delivery to sparsely populated rural areas has for decades cost
    more on a per customer basis. I doubt that will change, and it is
    independent of the cost of generation. But we should not let the higher
    cost of rural delivery blind us to the opportunities presented by
    competitive supply options. Our rural cooperative distribution system
    is owned by our members and should be operated to their advantage.
    Rural electric distribution cooperatives do an excellent job of
    controlling delivery costs while providing quality service.
        Competition in the service delivery area will and, in some cases,
    has already surfaced. Construction, maintenance, billing and other
    services are changing. New technology such as dispersed generation may
    even replace the high cost rural delivery system in some situations.
    This can and will continue to occur with or without legislation or
    deregulation.
        The point is--rather than do nothing and predict doom, we suggest
    energy providers strive to develop business strategies for a new era,
    designed to add value in open markets. After all, in our case, coop
    members own the system. We owe them nothing less.
        As a rural energy provider with first hand experience in open
    markets, I can sincerely say that energy customers benefit from
    competition. Thank you for the opportunity to testify before you today.

        Mr. Barton. Thank you, Mr. Argo, and we will keep an eye on
    your daughter down in Austin, Texas. There are some pretty fast
    people down there, so I will make sure the Governor gives her
    some protection from those wild Texans.
        Mr. Argo. I would sure appreciate that.
        Mr. Barton. We are next going to hear from a very unusual
    co-op in New York City. And I am told, Mr. Wortham, that you
    are from Texas, is that right?
        Mr. Wortham. That is correct. When Senator Sibley was a
    freshman member of the State Senate my office was across the
    hall from him.
        Mr. Barton. So you know, we had to go to New York but we
    were very careful in who we chose to come from New York to
    testify. So you are recognized----
        Mr. Wortham. It is the experience of diversity. It is very
    good.
        Mr. Barton. That is true. You are recognized. Your
    statement is in the record in its entirety and you are
    recognized for 6 or 7 minutes to elaborate on it. Welcome to
    the committee.

                     STATEMENT OF GREGORY L. WORTHAM

        Mr. Wortham. Thank you, Mr. Chairman, and members. We
    appreciate the opportunity to come here and explain very
    briefly what the Nation's newest rural electric cooperative is
    doing in New York City, which some might consider an ultra,
    high-density rural area.
        We are a provider of energy and telecommunications services
    throughout New York City, organized initially by housing
    cooperatives to serve housing cooperatives, which are privately
    owned, owner-occupied housing. About 1.5 million residents in
    New York City live in housing cooperatives. But as we have
    moved into the early months of our operation we have already
    moved well beyond serving housing cooperatives.
        At the current time, after 3 months of electric competition
    in which we have been involved, we service families and
    businesses throughout all five boroughs of New York City and
    Westchester County: office towers, small businesses, churches
    and synagogues, individual families and homes and apartments
    all across the metro region. And basically every ethnic group
    and every socio-economic category, customers from Park Avenue
    to Harlem.
        Just to give you some idea, we service currently in 130
    zipcodes in New York City and another 24 in the suburbs of
    Westchester County. We will also be expanding as the markets
    expand. We expect to be actively involved in the competitive
    market in New Jersey in the metro areas when that opens up
    beginning this fall.
        Also, we have sought additional authority from the Public
    Service Commission in New York to service territories
    throughout upstate New York which we expect to have later this
    week or next week.
        We are actually actively involved with rural electric
    cooperatives throughout the country to deliver a lot of our
    services: our wholesale power services, our utility
    interaction-type services, and some of our back office
    services. We have contractual relationships with electric
    cooperatives in rural areas of North Carolina, Indiana,
    Kentucky, Ohio, and Illinois.
        We are currently and expect to continue to be, a
    cooperative that receives no government financing; its entirely
    privately financed and we are a taxable corporation. The
    example that has been set by 1st Rochdale has evolved in
    parallel with similar initiatives in other metro areas and is
    also serving as a model for those other areas.
        The city of Washington, the District of Columbia, are
    looking very seriously at forming a metropolitan cooperative as
    one option for their consumer residents. In California as you
    are well aware, the residential market for those tens of
    millions of customers has been left fairly bare of those
    choosing to serve them. So credit unions in California are
    looking at the concept of forming an electric cooperative.
        In Detroit and in other parts of Michigan, both urban
    legislators and manufacturers in Michigan are looking at the
    concept of forming new types of cooperatives. And we have also
    been very active working with cooperative organizations and
    other consumer groups in Chicago to form a metropolitan
    cooperative there in cooperation with the rural electric
    cooperatives of Illinois.
        Some of the critical issues that we have seen is that a
    consumer-owned alternative must be enabled in each particular
    jurisdiction. We have seen that rural, urban and suburban
    consumers want the cooperative opportunity. Although we
    certainly don't advocate that there would be any type of
    requirement that people belong to a cooperative we certainly
    have seen that people in unexpected territories like the
    concept of having that as one of their options.
        We believe that is a critical part, as Chairman Bliley
    said, of making sure that the customer remains the focus in
    customer choice, and we believe this is one way to accomplish
    that. We have also seen the real world impacts of market power,
    at both the wholesale level and the retail level.
        We are working actively with other parties to form the New
    York Independent System Operator, which the good news for us is
    that it is seven IOUs instead of the one that we use as our
    regulator in New York City. But unfortunately, that still is a
    remnant of the past type of electric market and is not
    representative of the competitive market that Congress and the
    Federal regulators are attempting to create.
        On the retail level we are reminded every day about market
    power. The New York Public Service Commission has delegated to
    the investor on utilities the right to be the regulator. So our
    official regulator in the city of New York is the Consolidated
    Edison Company of New York, the monopoly that is supposed to be
    broken up through this activity.
        They set customer backout rates in-City capacity
    thresholds, which of course they own all the capacity in the
    city so that is somewhat of a problem. But they are divesting
    and so next year that transition period will essentially be
    over and we will have more options. They also impose
    significant restrictions on the ability of the customers to
    sign up for competitive companies.
        On the other hand, while we do have some options for
    capacity in nearby territories, Con Edison has already
    consolidated with one of those so that the Orange & Rockland
    Utility is now essentially a subsidiary of Con Edison, which
    further restricts opportunities for new development.
        Also, the micro turbines, other types of distributed
    generation, fuel cells, solar opportunities that we are looking
    into, Consolidated Edison as the dominant utility, has the
    ability to set rules which are essentially above and beyond the
    engineering and cost structures of other utilities, which
    retards the opportunity for those types of technologies to
    develop.
        In closing, what we would like to say is that although the
    New York State plan is not perfect we support the primary role
    of the States to determine the unique aspects of their own
    territories and how to implement retail wheeling in those
    States.
        And we also believe that Congress can play a major role in
    ensuring at least a minimum level of consumer protection in any
    State that chooses that act. Thank you very much.
        [The prepared statement of Gregory L. Wortham follows:]
    Prepared Statement of Gregory L. Wortham, Chief Operating Officer, 1st
                              Rochdale Cooperative
        Mr. Chairman and Members of the Subcommittee, it is a pleasure to
    have this opportunity to discuss the cooperative perspective on state
    and local issues that are arising as customer choice becomes more
    prevalent in the electric power industry.
    Background of 1st Rochdale Cooperative
        1st Rochdale 1 Cooperative is a consumer-owned provider
    of energy and telecommunications services in metropolitan New York
    City. 1st Rochdale Cooperative is the only consumer-owned provider of
    electricity participating in the competitive market in New York.
    ---------------------------------------------------------------------------
        \1\ 1st Rochdale Cooperative is named after the village of
    Rochdale, England where the modern cooperative movement was established
    in 1844. From that beginning, cooperatives have established a
    consistent set of principles that characterize cooperatives as a unique
    form of business enterprise: (1) voluntary and open membership; (2)
    democratic member control; (3) member economic participation; (4)
    autonomy and independence; (5) education, training, and information;
    (6) cooperation among cooperatives; and (7) commitment to community.
    For more information about cooperatives in general and 1st Rochdale
    Cooperative specifically you may consult www.1stRochdaleNYC.net.
    ---------------------------------------------------------------------------
        1st Rochdale Cooperative was developed by New York City consumers
    and is governed by them. An alliance of New York City housing
    cooperatives created 1st Rochdale Cooperative to maximize local control
    over opportunities that will emerge from new competitive environments
    in the energy industry and to provide for aggregated procurement and
    delivery of other goods and services consumed regularly by the owner-
    residents of New York City's housing cooperatives. Roughly 1.5 million
    New York City residents live in housing cooperatives--privately owned
    multi-family housing from low-income neighborhoods to multi-million
    dollar apartments.
        1st Rochdale Cooperative was initially envisioned as an aggregator
    that would merely maximize the consumer market position of
    participating housing cooperatives and seek to negotiate the best
    possible deal for electric power on a joint procurement basis.
    Likewise, 1st Rochdale Cooperative was initially conceived as a vehicle
    that would serve primarily the housing cooperatives that established
    1st Rochdale Cooperative. In the fast-paced evolution of the
    competitive electric industry, however, both of these initial
    limitations have been overtaken by events.
        First, because of the complimentary skills demonstrated over
    several decades by the Nation's rural electric cooperatives, 1st
    Rochdale Cooperative became convinced that a contractual business
    alliance with electric cooperatives would enable New York City housing
    cooperatives to play a much more comprehensive role in their own
    procurement of power. Mere retail negotiation would evolve upstream to
    include wholesale acquisition and retail delivery (over the regulated
    transmission and distribution systems of intervening regional
    utilities).
        Second, more than a year before its first delivery of electricity,
    significant commercial accounts approached 1st Rochdale Cooperative to
    sign up for cooperatively procured electric power. Based on such
    customer demand, as described below, 1st Rochdale Cooperative is
    already providing services to every class of customers--from large
    Manhattan office towers to single-family homes on Staten Island, for
    example.
    1st Rochdale Cooperative's Current Scope
        Only three months into electric operations, 1st Rochdale
    Cooperative now provides electric energy to families and businesses
    throughout all five boroughs of New York City and Westchester County.
    1st Rochdale Cooperative's customer base includes large housing
    cooperatives, small housing cooperatives, office towers, small
    businesses, religious institutions, and individual families in homes
    and apartments throughout the metro region. 1st Rochdale Cooperative's
    customers represent dozens of ethnic groups throughout the City, from
    Park Avenue and Central Park West to Harlem and Washington Heights,
    Staten Island and Coney Island to New Rochelle.
        As an indicator of the socio-economic and geographic breadth of
    those consumers who have already chosen a cooperative electricity
    provider in the Nation's largest city, 1st Rochdale Cooperative serves
    customers in more than 130 zip code areas within New York City (34 in
    Manhattan, 45 in Queens, 14 of 26 in The Bronx, 31 of 52 in Brooklyn,
    and 10 of 14 zip codes on Staten Island), and its customers are spread
    across another 24 zip codes in suburban Westchester County.
        Later this summer, 1st Rochdale Cooperative will begin providing
    satellite television to hundreds of families in The Bronx. Thereafter,
    1st Rochdale Cooperative will offer the service to other housing
    cooperatives throughout the City whose boards and residents have
    requested the service. 1st Rochdale Cooperative will also begin
    providing high-speed Internet access and other telecommunications
    services to housing cooperatives and commercial customers later this
    summer.
    1st Rochdale Projected Short-Term Growth
        As new products and services are added and as electricity customer
    choice expands in and around New York City, 1st Rochdale Cooperative
    will demonstrate significant growth even in the next year.
        1st Rochdale Cooperative will actively participate in the
    competitive electric power market in New Jersey. Pursuant to recently
    enacted statutes and ongoing state regulatory implementation, 100
    percent of New Jersey customers will have choice of electric energy
    providers beginning on October 1, 1999. 1st Rochdale Cooperative will
    apply for retail provider status pursuant to New Jersey law and expects
    to be serving residential and commercial customers in New Jersey later
    this year.
        Currently certified by the New York Public Service Commission to
    serve in the metropolitan New York territory of the Consolidated Edison
    Company of New York, 1st Rochdale Cooperative has applied to the Public
    Service Commission--and expects to receive imminent authority--to serve
    residential and commercial customers throughout most of the territory
    of Upstate New York.
        Even with the continued restrictive phase-in of electricity
    customer choice in New York, 1st Rochdale Cooperative will demonstrate
    marked market growth within New York City and Westchester County next
    year. Serving both residential and commercial customers, 1st Rochdale
    Cooperative will offer electricity and other energy and
    telecommunications services to tens of thousands more New York families
    and businesses next year. When Consolidated Edison allows 100 percent
    of metro New York customers to have unrestricted access to a
    competitive market in 2002, 1st Rochdale Cooperative will be a secure
    participant in the competitive landscape with a firm commitment to
    remain in the energy and telecommunications markets for as long as 1st
    Rochdale Cooperative continues to bring value to its customers.
        1st Rochdale Cooperative exhibits the cutting-edge innovation that
    has been characteristic of the Nation's rural electric cooperatives
    since they began serving ``impossible'' territories that investor-owned
    utilities repeatedly spurned more than a half-century ago. 1st Rochdale
    Cooperative is committed to demand-side management and state-of-the-art
    dispersed generation that will benefit customers and increase
    reliability within the physically constrained New York City area--which
    lies on three islands and a peninsula. 1st Rochdale Cooperative will
    sponsor a demonstration project of the new 75-kilowatt Allied Signal
    micro-turbine technology at a housing cooperative in Midtown Manhattan.
    1st Rochdale Cooperative is actively pursuing mechanisms to utilize
    rooftop solar energy applications at a housing cooperative in The
    Bronx. 1st Rochdale Cooperative will also respond to its customers'
    requests by offering natural gas and heating oil by the end of 1999.
    Urban-Rural Partnership
        Although 1st Rochdale Cooperative is the Nation's first
    metropolitan cooperative to over electricity on the open market, 1st
    Rochdale Cooperative has a strong operational bond with the Nation's
    rural electric cooperatives. Rural electric cooperatives--which have
    been providing reliable and competitively priced electricity to their
    millions of consumer-owners across the United States for more than 60
    years--have developed innovative, high-quality skills in the electric
    power industry that have been invaluable to the start-up and continued
    successful operation of 1st Rochdale Cooperative. 1st Rochdale
    Cooperative is a member of the National Rural Electric Cooperative
    Association and receives its (100 percent private market) financing
    from the National Cooperative Services Corporation, an affiliate of the
    National Rural Utilities Cooperative Finance Corporation. 1st Rochdale
    Cooperative's telecommunications offerings to New York City families
    and businesses are facilitated by the National Rural Telecommunications
    Cooperative.
        1st Rochdale Cooperative combines the unique skills of the New York
    City housing cooperative family with those of the rural electric
    cooperatives. While strategic decisions are governed and implemented by
    New York City consumers, 1st Rochdale Cooperative has chosen to enhance
    start-up operations by calling on certain electric industry skills of
    rural electric cooperatives.
        Power supply operations are coordinated through an alliance of
    Midwestern generation and transmission cooperatives in North Carolina,
    Indiana, Kentucky, Ohio, and Illinois. ACES Power Marketing, Inc.
    (www.acespower.com), provides 1st Rochdale Cooperative with wholesale
    power trading floors at rural electric cooperatives in Indiana and
    Kentucky. In addition, the North Carolina Electric Membership
    Corporation provides energy forecasting services for 1st Rochdale
    Cooperative at its 24-hour control room in Raleigh, North Carolina.
        In addition to the extensive customer service network that 1st
    Rochdale Cooperative has established throughout New York City, a
    customer service call center is operated for 1st Rochdale Cooperative
    at a rural electric cooperative in Wake Forest, North Carolina. North
    Carolina rural electric cooperatives also provide 1st Rochdale
    Cooperative with billing and payment remittance services. Metropolitan
    electric cooperative operations solidify and increase jobs at rural
    electric cooperatives through fee-for-service contracts.
    Private Financing
        1st Rochdale Cooperative receives no government financing. 1st
    Rochdale Cooperative's financing comes completely from the private
    market under the primary auspices of the National Cooperative Services
    Corporation, an affiliate of the National Rural Utilities Cooperative
    Finance Corporation, based in Herndon, Virginia. 1st Rochdale
    Cooperative has received start-up capital infusions from New York City
    housing cooperatives and from rural electric cooperatives. 1st Rochdale
    Cooperative is a taxable corporation, subject to all applicable
    federal, state, and local corporate taxation.
    Other Metro Interest
        Many other urban areas not currently served by electric
    cooperatives are now taking advantage of the opportunities presented by
    evolving customer choice to introduce a consumer-owned alternative for
    metropolitan residents--so that may have the same community focused
    energy providers as 75 percent of the geographic area of the U.S.
        Regulators and consumer leaders here in the City of Washington are
    seriously evaluating formation of a cooperative electricity provider
    for the residents and businesses of the District of Columbia. Urban
    legislators in Detroit and large manufacturers are working with
    Michigan's rural electric cooperatives to expand the not-for-profit
    reach of electric cooperatives in that state. In California, the
    shocking absence of companies even offering electricity to the Golden
    State's tens of millions of residential consumers has led credit unions
    to investigate formation of urban electric cooperatives. At the same
    time, California's leading agricultural cooperatives have already
    formed the California Electric Users Cooperative--which began supplying
    electricity to cooperatively owned manufacturing facilities and their
    member farmers at the very outset of California's competitive
    electricity market.
        Officials from 1st Rochdale Cooperative and national cooperative
    organizations have also been actively working with diverse consumer
    leaders in Chicago to create a metropolitan electric cooperative there
    as the competitive electric market develops in Illinois. In Chicago, as
    in most of the other initiatives, local community leaders have thorough
    knowledge of the local market and a strong desire to control their own
    fate under customer choice--but often lack certain skills unique to the
    utility industry. As has been the case with the rural electric
    cooperatives pivotal in the operation of 1st Rochdale Cooperative, the
    Illinois rural electric cooperatives have been working with Chicago
    community leaders to address utility issues. The very skills lacking
    among many interested consumer groups--such as utility operations,
    power supply scheduling, and billing--are at the core of activities
    undertaken by rural electric cooperatives on a daily basis for decades.
    As consumers actively search for ways to fully participate in a
    customer choice market, there is natural affinity between metropolitan
    consumer-based organizations and rural electric cooperatives.
    Critical Lessons
        1. A consumer-owned alternative must be enabled in every
    jurisdiction. Actual results in competitive markets have demonstrated
    through free enterprise that consumers--rural, suburban, and urban--
    clearly want a cooperative option. 1st Rochdale Cooperative certainly
    does not advocate a mandate that consumers be required to join a
    cooperative, but we strongly advocate that any legislative or
    regulatory restructuring initiative must enable a consumer-owned
    option. The 1st Amendment to the Constitution guarantees the right of
    the people peaceably to assemble. Citizens should not be prohibited
    from joining together in consumer-owned entities to provide products
    and services for mutual benefit. ``Customer Choice'' must be designed
    around the customer and the customer's choice. ``Customer choice''
    should not be a mere euphemism for a regime that only considers the
    well-being of energy companies and energy companies' choice of whether
    to serve.
        2. Our real world experience has demonstrated that market power--at
    both the wholesale and the retail level--is a serious threat to
    efficient development of a truly competitive market in electricity that
    will benefit consumers in the long run. As the structure of the
    wholesale market continues to evolve from the Congressional directives
    encompassed in the Energy Policy Act of 1992, market power continues to
    be a challenge. For example, as New York's high-voltage transmission
    system is in the midst of transition from the New York Power Pool
    (controlled by the state's seven investor-owned utilities) to the New
    York Independent System Operator, 1st Rochdale Cooperative is actively
    working to ensure that the governance of the new wholesale institution
    actually results in an ``independent'' system operator. Our concern is
    heightened by the fact that the state's seven investor-owned utilities
    are now effectively six due to consolidation (so far). The
    ``independent'' system operator must facilitate evolution of the
    competitive market that the Congress, federal regulators, and state
    legislators and regulators are striving to create. New market
    institutions such as ``independent'' system operators must not merely
    perpetuate the monopoly industry structure that these bold legislative
    and regulatory initiatives have been designed to replace.
        On the retail level, 1st Rochdale Cooperative is reminded at every
    turn of the dampening effect that market dominance has on the evolution
    of a fully competitive retail market. As examples--first, the New York
    Public Service Commission has delegated to the Consolidated Edison
    Company of New York the authority to regulate the implementation of
    customer choice within its service territory--including such basic
    elements as setting customer back-out rates (called ``shopping
    credits'' in the Consolidated Edison territory), in-City power capacity
    thresholds, and restrictions on customer enrollments.
        Second, Consolidated Edison has led the way in regional
    consolidation by acquiring Orange & Rockland--one of the few nearby
    territories that could serve as a source of new generation for the
    constrained metro New York area. Similarly, on Long Island, the
    symbiotic relationship between the Long Island Power Authority
    (regulator of customer choice on Long Island) and the Keyspan companies
    (designers of customer choice on Long Island and a competitive
    electricity supplier throughout metro New York) raise questions among
    many consumers, especially when zero Long Island customers are taking
    competitive electricity despite the existence of a ``competitive''
    market on Long Island since April 1999.
        Third, the local monopoly utility also controls the fate of
    consumer-controlled technologies such as dispersed generation--which
    will enhance local power reliability at a time when even Consolidated
    Edison may have difficulty meeting its own 80 percent in-City capacity
    requirement. Consolidated Edison has authority to set interconnection
    requirements, and their unique requirements exceed those of many other
    local utilities, thus decreasing the savings to consumers of new
    technologies. As the local distribution utility, Consolidated Edison
    also has authority to impose standby charges that could further
    significantly reduce customer savings and thus the fledgling market for
    new technologies that enhance reliability, produce energy more
    efficiently, and increase the customer's role in their own energy
    management.
    Conclusion
        1st Rochdale Cooperative appreciates the opportunity afforded by
    the Subcommittee on Energy and Power to present our views on the
    current state of the competitive electric industry and to advocate
    protections for customers in a ``customer choice'' environment.

        Mr. Barton. Thank you, Mr. Wortham. We will make sure that
    the big city boys from Stantonsburg and Paragould don't take
    advantage of you rural, mid-Manhattan electric co-op guys here.
    We will provide any protection that you need just like we will
    Mr. Argo's daughter at Austin.
        Mr. Wortham. Thank you very much, Mr. Chairman.
        Mr. Barton. Mr. Watson, we are glad to have you here from
    the great State of Arkansas. We put your statement in the
    record and we will recognize you to summarize it.

                        STATEMENT OF LARRY WATSON

        Mr. Watson. Mr. Chairman, I am not from Texas but my son
    was born in Abilene, Texas, while I was in the Air Force there
    during the Vietnam War, so its a small world.
        Mr. Chairman, members of the committee, it is an honor to
    testify before you today with regard to State and local issues
    in electricity competition. While my comments today are my own,
    they are consistent with the views of the American Public Power
    Association.
        Mr. Chairman, with respect to public power in Arkansas and
    the rest of the country, I would like to make it clear that
    public power supports competition, and supports Federal
    legislation to deal with several key issues.
        Public power systems have long played a vital, pro-
    competitive role in the electric utility industry, serving as a
    comparison yardstick against which consumers can judge the
    performance of other utilities. At this critical point in the
    evolution of our industry, public power supports the enactment
    of Federal legislation that facilitates and encourages State
    adoption of retail competition by removing Federal barriers and
    addressing interstate commerce issues.
        Above all else however, public power supports local control
    and self-determination, and therefore continues to oppose a
    Federal mandate for retail competition. The citizens of
    Paragould made the decision in 1938 to operate their own
    electrical utility when they could not get the service they
    needed at affordable rates, and they remain happy with that
    decision today.
        State retail competition laws, including Arkansas', have
    respected local authority and have allowed each public power
    community to decide for itself whether and when to participate
    in retail competition based on local circumstances. Local
    control has worked well for decades to keep rates low and
    service standards high. We agree with the State policymakers
    who have found no justification to cede any more of that
    control to other levels of government.
        In Arkansas, public power actively participated in efforts
    at the State and local level to adopt retail choice
    initiatives. As I learned at our annual national conference
    last week, this was also the case for public power systems all
    around the country that had recently passed legislation; that
    public power was an active constructive participant throughout
    the process.
        In our State there will be great political and economic
    pressure to opt-in to competition, but each municipal system
    will be able to set their own transition timetable.
        We in public power have also tried to be constructive in
    focusing the debate in Washington. Most recently, again at our
    conference last week, APPA passed a resolution commending two
    members of this subcommittee, Congressmen Largent and Markey,
    for their efforts in constructing bipartisan comprehensive
    legislation.
        Among the many aspects of the bill, Congressman Largent and
    Markey addressed the primary barrier to public power's
    involvement in a competitive energy market, the private use
    issue, by including the provisions of H.R. 721, the Bond
    Fairness and Protection Act by Congressmen J.D. Hayworth and
    Bob Matsui, in their bill.
        We appreciate that very much, as well as the co-sponsorship
    of Representatives Cox from California, Boucher from Virginia,
    Eshoo from California, and McCarthy from Missouri, among many
    others, for H.R. 721.
        The private use limitations on tax-exempt financing, the
    primary vehicle for financing State and local government
    infrastructure projects, limit public power's ability to
    participate in a competitive market. These limits include
    competing to retain our existing customers, replacing lost
    load, and placing transmission facilities in a Regional
    Transmission Organization; an RTO.
        There are other aspects of necessary Federal restructuring
    legislation that relate to protecting and enhancing what we
    have accomplished in Arkansas that I would like to touch on
    briefly.
        We believe in the need for strong provisions to protect
    consumers against market power abuses, including: FERC
    authority to prevent abuses from occurring; the need to
    strengthen national reliability standards for the interstate
    transmission grid; and an unconditional grandfathering
    mechanism that respects the State decisions that have already
    been made with respect to competition, including State
    decisions to respect local control and allow public power
    systems to opt-in to their new competitive market structure.
        Mr. Chairman, I do not have a longer written statement but
    have included provisions from our legislative efforts in
    Arkansas, as well as references to other previous
    communications that expresses APPA's position on the various
    aspects of restructuring. I look forward to answering any
    committee questions. Thank you again for the opportunity to
    testify.
        [The prepared statement of Larry Watson follows:]
     Prepared Statement of Larry Watson, General Manager, Paragould Light
                              and Water Commission
        Mr. Chairman, Members of the Committee, it is an honor to testify
    before you today with regard to State and Local Issues in Electricity
    Competition. While my comments today are my own, they are consistent
    with the views of the American Public Power Association, APPA here in
    Washington.
        Arkansas passed a competition bill a couple months ago in April,
    that provides for: Competition of all customer by January 1, 2002, but
    not later than June 30, 2003. In the Arkansas bill investor owned
    utility and cooperative will offer customer choice on that date.
    Municipal utilities have the right to opt in to competition on that
    date, opt in when their City Council or governing board chooses at a
    later date. In Arkansas, all parties worked for 15 months to finally
    get a consensus bill that was passed by our legislators.
        Mr. Chairman, with respect to public power in Arkansas and the rest
    of the country, I would like to make it clear that public power
    supports competition, and supports federal legislation to deal with
    several key issues. Public power systems have long played a vital, pro-
    competitive role in the electric utility industry, serving as a
    comparison ``yardstick'' against which consumers can judge the
    performance of other utilities. At this critical point in the evolution
    of our industry, public power supports the enactment of federal
    legislation that facilitates and encourages state adoption of retail
    competition by removing federal barriers and addressing interstate
    commerce issues.
        Above all else, however, public power supports local control and
    self-determination, and therefore continues to oppose a federal mandate
    for retail competition. The citizens of Paragould made the decision in
    1938 to operate their own utility when they could not get the service
    they needed at affordable rates, and remain happy with that decision
    today. State retail competition laws, including Arkansas', have
    respected local authority and have allowed each public power community
    to decide for itself whether and when to participate in retail
    competition based on local circumstances. The track record that public
    power has maintained since we began serving our communities over a
    hundred years ago and has proven to work for our citizens and states
    have seen no reason to alter that longstanding governing authority.
        In Arkansas, public power actively participated in efforts at the
    state and local level to adopt retail choice initiatives. As I learned
    at our annual national conference last week, this was also the case for
    public power in other states that had recently passed restructuring
    legislation--that public power was an active, constructive participant
    throughout the process. In our state there will be great political and
    economic pressure to do so. But they will each be able to set their own
    transition timetable.
        We in public power have also tried to be constructive in focusing
    the debate in Washington. Most recently, at our annual conference last
    week, APPA passed a resolution commending two members of this
    subcommittee, Congressmen Largent and Markey, for their efforts in
    constructing bipartisan comprehensive legislation. Among the many
    aspects of the bill, Congressmen Largent and Markey addressed the
    primary barrier to public power's involvement in a competitive energy
    market, the private use issue, by including the provisions of H.R. 721,
    the Bond Fairness and Protection Act by Congressmen J.D. Hayworth and
    Bob Matsui, in their bill. We appreciate that very much, as well as the
    cosponsorship of Representatives Boucher (VA) and Eshoo (CA) for HR
    721. The private use limitations on tax-exempt financing, the primary
    vehicle for financing state and local government infrastructure
    projects, limit public powers' ability to participate in a competitive
    market. These limits include competing to retain our existing
    customers, replacing lost load, and placing transmission facilities in
    a Regional Transmission Organization (RTO).
        There are other aspects of necessary federal restructuring
    legislation that relate to protecting and enhancing what we have
    accomplished in Arkansas that I would like to touch on briefly. We
    believe in the need for strong provisions to protect against market
    power abuses, including FERC authority to prevent abuses from
    occurring; the need to strengthen national reliability standards for
    the interstate transmission grid, and a clean grandfathering mechanism
    that respects the state decisions that have already been made with
    respect to competition, including state decisions to respect local
    control and allow public power systems to opt-in to their new
    competitive market structure.
        Mr. Chairman, I do not have a longer written statement, but have
    included testimony from our legislative efforts in Arkansas, as well as
    references to other previous communications that expresses APPA's
    position on the various aspects of restructuring, and I look forward to
    answering the committee's questions. Thank you again for the
    opportunity to testify.

        Mr. Barton. Thank you, sir, and thank you for being back on
    time. You were the only member of this panel that actually was
    back by 1:45.
        We want to now welcome our last witness but certainly not
    least, Mr. John Tiencken who is the Executive Vice President
    and Chief Legal Officer for the South Carolina Public Service
    Authority.
        I might let you know that my mother's family are the
    Hamptons from South Carolina, and General Hampton was a great
    Governor and Civil War leader in South Carolina. So we are glad
    to have you here. Your statement is in the record, and we will
    let you summarize it. Welcome.

                   STATEMENT OF JOHN H. TIENCKEN, JR.

        Mr. Tiencken. Thank you very much, Mr. Chairman. You have a
    very distinguished lineage. Mr. Wade Hampton is well thought of
    even today in South Carolina.
        My name is John Tiencken and I am Executive Vice President
    and General Counsel for an organization known as the South
    Carolina Public Service Authority. Now that is a State-owned
    utility. We are also known by the name of Santee Cooper. We are
    located in Monks Corner, not far from Charleston; a little town
    there on the coast of South Carolina.
        We are here today however, representing the Large Public
    Power Council, a group of 21 of the Nation's largest, publicly
    owned utilities. Our members serve 6 million direct retain
    customers and we own collectively, 44,000 megawatts of
    generation and we have 24,000 miles of transmission line.
        We serve, Mr. Chairman, in the State of Texas through the
    Lower Colorado River Authority and through the city of Austin,
    but we also have members in California, Arizona, Florida,
    Georgia, New York, Tennessee, and other States.
        I would like to focus my remarks if I may, on two issues.
    The first issue was mentioned briefly by Mr. Watson and that is
    of very great importance to public power and that is the
    private use issue. I realize that this may not be the
    appropriate venue or forum for private use action, however we
    believe that private use is a necessary component of any
    complete deregulation package, and that is key and necessary
    for the support of public power to have some sort of private
    use reform.
        Private use restrictions of course, are imposed by the Tax
    Reform Act of 1986 and by prior law. They prevent public power
    companies from selling power to private parties except under
    certain very specific and regulated conditions.
        And if a private use sale takes place the tax exemption for
    those bonds used to finance the plant which supplied the power,
    is jeopardized. If we lose the tax exemption we of course, will
    have significantly higher costs and we believe that that's an
    unacceptable result.
        With the time constraints we have I would like to give you
    at least one example of a real life situation that we have to
    deal with, with private use, and that private use on our
    system, we have a number of big industries, ones that draw a
    significant amount of power.
        We cannot currently sell to those industries under any kind
    of special contract. The only type of arrangement we can make
    whereby we sell our power to those industries is under our
    rates schedules. A special contract is a private use contract.
    When competition comes, however, those industries will be
    looking for a special deal, and they can get a special deal now
    from private power companies but they can't get one from us
    because of the private use restrictions that we have.
        We are going to be faced with a choice: either give those
    companies a special contract and risk our tax exemption, or the
    possibility of the loss of a customer in the long-run. So those
    are bad choices and unacceptable in the long-run. We hope that
    there would be some fix for that, and there is a solution which
    has been proposed.
        That solution is found in Mr. Largent and Mr. Markey's
    bill, and their proposal is to grandfather existing debt and
    eliminate private use with respect to that debt only. For
    construction of future generation we would issue taxable debt,
    and we believe that this is a fair solution to the private use
    dilemma and one that could be a reasonable resolution that
    might be acceptable.
        We have another issue that we would like to talk about and
    it is a concern with regard to the jurisdiction of the FERC
    over transmission. We do not believe it is desirable or
    necessary that FERC have complete jurisdiction over public
    power transmission. First, we are already subject to the open
    access rules of the Energy Policy Act of 1992; those which have
    helped Mayor Bass so much over there in North Carolina.
        Second, we would simply be adding an additional layer of
    regulation on top of our existing regulation because our
    transmission rates are set by officials, elected and appointed
    public officials, and we are not private parties and we do not
    have a profit motive.
        Nevertheless we believe that there is a middle ground on
    this issue as well, and that is the codification of an approach
    that the FERC in fact used with Santee Cooper and with other
    members of the LPPC. Santee Cooper proposed this approach to
    the FERC in its rulemaking under Order 888 and was in fact,
    adopted by FERC for voluntary filings.
        And it is essentially a Golden Rule. We file a tariff with
    the FERC which says that anyone who uses our transmission
    system will be treated the same as we treat ourselves; thus the
    Golden Rule. This is the so-called comparability standard and
    it has in fact, worked.
        A reasonable middle ground would be to require all public
    power transmission owners to file such a tariff giving FERC the
    authority to make sure that the tariff was in fact, comparable.
        I would certainly refer you to the rest of my comments in
    writing, and thank you very much for the opportunity to appear
    before you today.
        [The prepared statement of John H. Tiencken, Jr. follows:]
     Prepared Statement of John H. Tiencken, Jr., Executive Vice President
    and General Counsel, South Carolina Public Service Authority on Behalf
                       of The Large Public Power Council
        Good morning. My name is John Tiencken, and I am the Executive Vice
    President and General Counsel of the South Carolina Public Service
    Authority (Santee Cooper). I am here this morning on behalf of the
    Large Public Power Council (``LPPC''). I would like to commend the
    members of the Commerce Committee for their careful and deliberative
    look at how to restructure the electric industry for the benefit of all
    consumers, and I appreciate the opportunity to appear before you today.
    There are many issues to be addressed, but I will focus my comments
    today on three matters of greatest importance to LPPC's customers--the
    private use restrictions, which stand to deny public power customers
    the benefits of competition; the ``flexible'' mandate proposed by the
    Administration and Members of this Committee, which could create
    uncertainty and litigation; and the unnecessary expansion of FERC
    authority over transmission.
    Background
        The Large Public Power Council is an association of 21 of the
    largest state and locally-owned electric utilities in the United
    States. Our members include the largest publicly-owned retail and
    wholesale electric power systems in the country. Our members directly
    serve approximately 6,000,000 direct retail customers, and own and
    operate over 44,000 megawatts of generation, or about 11 per cent of
    the nation's total capacity. In addition, we own and operate in excess
    of 24,000 circuit miles of transmission lines. Our members are located
    throughout the country in states including Texas, Arizona, California,
    Kentucky, Florida, Georgia, New York and Tennessee
    Private Use
        The first issue I would like to address today is private use
    restrictions. These restrictions, enacted by Congress in the 1986 Tax
    Reform Act, were written prior to the advent of a competitive electric
    industry. Today, these restrictions form a serious barrier to open
    competition and customer choice. Because of the pace of deregulation in
    the states, it is important that Congress act immediately to fix this
    problem. While I know that the changes to the tax code are not within
    the direct purview of this subcommittee, let me suggest that this
    subcommittee is a proper forum for helping to recognize the problem and
    recommend a potential solution.
        Public power systems have no practical source of external financing
    other than the municipal debt markets. Unlike private companies, public
    entities cannot issue stock. The private use rules which apply to our
    financing, simply stated, provide that no more than the lesser of 10
    per cent, or $15 million of a power plant or transmission line financed
    with municipal debt, can be sold under contract to a private entity. In
    a regulated monopoly world that existed prior to competition, this
    requirement was problematic but manageable. In a competitive world, it
    is has very serious consequences for our members, which have tens of
    billions of dollars in outstanding tax-exempt bonds held by thousands
    of small as well as institutional investors.
        In practice, here's what the private use rules mean in a
    competitive environment, which already is a reality in the wholesale
    markets and which is becoming a reality in the retail market for nearly
    half of all the states:
        1. In a competitive environment, large customers will seek and
    obtain special tailored contracts to meet their specific needs, just as
    they do in buying any product. Because of outdated private use rules, a
    public power utility may be unable to offer such a contract, even to
    customers in their own service territory that they have been
    successfully serving for decades. This could deny that customer the
    best choice in the market, and will lead to loss of customers for the
    utility for reasons that have absolutely nothing to do with price or
    quality of service.
        2. If a public power system loses a customer in a competitive
    environment (and all utilities will lose customers), the public system
    may be unable to re-market the generating capacity it had built to
    serve that lost customer as a result of the private use rules. Thus,
    any excess capacity that a public system has may become idle and
    unproductive for the economy solely as a result of the private use tax
    rules. Inability to resell the capacity can lead to significant
    financial losses and reductions in overall economic efficiency. In
    turn, the remaining customers of that utility would pay higher costs.
        3. In its recent order, FERC has strongly encouraged that all
    transmission-owning utilities participate in Regional Transmission
    Organizations (RTOs). We support the development of RTOs as important
    to the establishment of competitive markets. At the same time, private
    use rules may act to preclude effective participation of public systems
    in an RTO.
    The Solution
        Let me assure you that we as public power systems are not seeking
    to expand the use of tax exempt debt to compete in the future. We
    understand that, in the future, the rules of the road for all
    participants in the competitive marketplace ought to be as fair as
    possible, and we are working to that end. Public entities are not
    created to go out and build merchant plants thousands of miles from
    their own service territories. On the contrary, we are simply serving
    our own communities and our own customers. When our states act, we want
    to offer our customers choice; but when others come in to sell power to
    customers in our service territories, we then must be able to sell the
    capacity built for those customers in a productive manner which will
    keep costs low and at the same time enable us to repay our investors.
        Some have suggested that we must choose: either fence in our
    customers and deny them choice, or defease all our bonds, which as I
    noted above will lead to dramatically higher prices. We reject the
    notion that our customers should face a choice of being fenced in and
    denied choice or having their rates artificially increased. There
    should be no special ``admission charge'' for our customers to enjoy
    the benefits of free market competition. Unlike some of those very
    utilities that have proposed such fences, we want our customers to
    enjoy the ability to choose suppliers when our states so decide. In
    order to accomplish this, we do believe that relief from private use
    rules for existing bonds is appropriate, so that we can avoid the
    seriously adverse financial implications on our investors and our
    customers that I've discussed today.
        The good news is that Congress is currently considering a proposal
    that the LPPC believes is the right solution to the private use issue.
    The LPPC has endorsed the private use provisions of the retail
    competition bill recently introduced by Congressmen Largent (R-OK) and
    Markey (D-MA). Just as the overall bill represents bipartisan
    compromise, its private use provisions, which have also been introduced
    by Congressmen Hayworth (R-AZ) and Matsui (D-CA), represent a fair
    solution. These provisions allow publicly-owned utilities to elect to
    grandfather existing tax-exempt debt incurred to build generation
    facilities, and permits them to operate outside of restrictive current
    private use rules. In this way, publicly-owned utilities will be able
    to bring the benefits of competition to their customers. In exchange,
    publicly-owned utilities would permanently forgo the ability to issue
    future tax-exempt debt to build new generating facilities. Those
    utilities that do not elect to terminate issuance of tax-exempt debt
    would remain subject to modified private use rules.
    Jurisdictional Issues
        Another issue that raises concerns for our members is the expansion
    of FERC authority into areas that are already properly managed by
    locally-owned public power systems. LPPC members own and operate the
    bulk of the 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 transmission access provisions of the
    Energy Policy Act of 1992 (EPACT). Moreover, the majority of our
    members, including Santee Cooper, have gone beyond that and have
    adopted open access tariffs and voluntarily submitted such tariffs to
    FERC. In fact, Santee Cooper has the distinction of being the first
    publicly-owned utility to do so. These filings assure that the access
    provided for in our tariffs meet 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 with Santee Cooper and other
    public power open access filings. FERC could be given the authority to
    review public power open access tariffs for the purpose of assuring
    they meet the test of open access and comparability, but the
    legislation should not require such public entities to require the same
    FERC approval process for transmission rates to which profit-making
    entities are subject.
    Flexible Mandate
        Finally, while the LPPC supports the goals of retail competition,
    we want to impress upon the Committee that the states and publicly-
    owned utilities are in the best position to determine when and if
    retail competition is beneficial for their customers. Both the
    Administration and Largent-Markey bills mandate retail competition by
    means of what some call a ``flexible'' mandate. The LPPC recognizes a
    flexible mandate is a improvement over a hard mandate, but remains
    concerned that this form of mandate will create uncertainty and could
    invite legal challenges of local decisions. If a publicly-owned utility
    determines that retail competition will harm its customers, it should
    simply be allowed to opt-out. Utilities should not be burdened with
    providing FERC proof that customers are harmed under the nebulous
    criteria that the harm can not be ``mitigated.''
        In conclusion, the LPPC believes that the Committee is moving in a
    positive direction on retail competition issues. We would like to work
    with you to ensure that the Largent-Markey private use provisions are
    enacted by this Congress, and to modify the ``flexible'' mandate and
    FERC jurisdictional issues to ensure that the federal government acts
    only where it is necessary and appropriate. Thank you for the
    opportunity to testify before you today.

        Mr. Barton. Thank you, sir. We appreciate your testimony.
    Before we go to questions I am told Mayor Bass, that two of
    your local Mayors who participated with you in aggregation are
    here. You just happened to be the one that drew the short straw
    and lost and had to testify. If they are still in the audience
    could you introduce them to the subcommittee, please?
        Mr. Bass. Yes. If Mayor Ralph Smith of Black Creek would
    raise his hand?
        Mr. Barton. Why don't you stand up, sir?
        Mr. Bass. And Mayor Annie Beasley of Sharpsburg.
        Mr. Barton. Well, I knew she was a lady because she had her
    hat on and we are glad to have some class in this audience. We
    welcome both of you and I know that you all have worked with
    Mayor Bass and have a real success story for your constituents.
    And we are very pleased that you could come and participate
    also.
        I am going to set the clock and the Chair, I am going to
    recognize myself for the first 5 minutes of questions.
        My first question is to Mr. Wortham. Would your co-op be
    able to exist in a State that had not opened its market like
    New York? In other words, could you do what you are doing in
    Alabama, for example?
        Mr. Wortham. Not to my knowledge. We could sell other
    services like satellite television, internet services, that we
    are going to sell in New York State.
        But electricity, we could possibly aggregate to negotiate
    with to local provider to perhaps get a better deal for
    residential customers, but we couldn't participate in the
    wholesale market the way that we do, to directly go to other
    power suppliers.
        Mr. Barton. Okay. And Mr. Watson, in Arkansas who has just
    passed a restructuring bill, when does the market become open
    in Arkansas?
        Mr. Watson. January 1, 2002, or as late as 2003, but there
    would have to be some things happen for 2003, for June 30. That
    is if ISO and RTO is not set up in place in our State we have
    one predominant utility, very predominant, and if the PSC is
    not satisfied that there has been enough, maybe divesture or
    that a few of their transmission lines which right now they are
    not even a member of the reliability council in that area.
        And so those are some concerns as to, can that be worked
    out as to whether, you know, we can start by 2002.
        Mr. Barton. Now, in the interim between now and 2002, can
    your city do anything? Can it opt-in?
        Mr. Watson. No. No one can opt-in until that day. Now, we
    are preparing, like everyone else, as municipal. Of course, the
    IOUs are in for sure; co-ops are in. Municipals have to opt-in
    at that date. Our utility plan is to opt-in.
        You cannot attract new industry in this day and age if you
    are an island to yourself without competition. It won't happen.
    And that has been one of my other big jobs; is bringing
    industry to our town, and it won't happen----
        Mr. Barton. And where is Paragould?
        Mr. Watson. Paragould is 75 miles north of Memphis.
        Mr. Barton. North of Memphis?
        Mr. Watson. Right.
        Mr. Barton. So you would compete with Tennessee and I
    guess, Missouri?
        Mr. Watson. Missouri, that is right; Tennessee and
    Missouri.
        Mr. Barton. Maybe Northern Mississippi.
        Mr. Watson. When we compete for jobs, we compete with
    Northern Mississippi, Tennessee, and Missouri.
        Mr. Barton. So do you feel comfortable that if we don't
    have this, what has been referred to as the hard Federal date
    certain mandate, that there is enough critical mass that it
    will force other States to open up?
        Mr. Watson. I think it is like that young calf running
    downhill. We pride ourself in being good, economic developers
    in our small town. We have a lot of major insurers with major
    names; Fortune 500 companies. And you are not going to get them
    in the future. They are not going to be captive of anybody to
    come new. And so it is going to go that direction.
        Mr. Barton. Now Mr. Tiencken, in terms of the private use
    issue, are you comfortable with the idea of grandfathering
    existing tax exempt bonds but forcing new transmission to be
    built with taxable bonds?
        Mr. Tiencken. We prefer the language which is contained in
    the Largent/Markey Bill, Mr. Chairman, which does exclude
    transmission and allowing transmission to still be financing
    with tax exempt.
        Mr. Barton. Regardless of the load?
        Mr. Tiencken. Regardless of the load, yes.
        Mr. Barton. Okay. We have a vote on so I am going to
    reserve the rest of my questions and recognize Congressman
    Shadegg so that perhaps we can let this panel go and not have
    to come back in 20 minutes or so. So I am going to yield back
    my time.
        I have some written questions, and the fact that I didn't
    ask you two doesn't mean that I don't love you. It just means
    that we are trying to expedite things. But we will have
    questions for you in the written record.
        Mr. Shadegg.
        Mr. Shadegg. I thank the chairman and I want to begin by
    saying I deeply regret that I was not able to question the
    first panel which included the witnesses from Texas. As I have
    listened to their testimony describing the Texas legislation I
    was and I am with some trepidation, pay a compliment to Texas
    and this committee. I want to say that it sounded to me like a
    very thoughtful and very thorough legislation which addressed a
    lot of the issues of concern to me.
        I also am not certain we want to let this panel go because
    it seems to me they are a repository of a great deal of
    information, but we may, as a result of the schedule, be forced
    to do that.
        Let me start by asking any of you who might want to
    comment, if you have had a chance to look at the Texas
    legislation and would be interested in commenting on how it
    would affect you and your particular practice if that
    legislation were in fact, the model across the country for
    States?
        Mr. Tiencken. We have examined the Texas legislation. We
    are currently, in South Carolina, undergoing a review through
    both the Senate and the House, of various proposals for
    deregulation.
        That review has not yet resulted in any kind of affirmative
    action out of a committee, however, but the Texas legislation I
    think, has been a welcome addition to the knowledge base and
    another model which we can use toward identifying what's
    appropriate and the best mechanism to make sure our customers
    are well protected.
        Mr. Shadegg. Anybody else want to comment?
        Mr. Watson. I can tell you from a State that just passed,
    somebody defining predominant could be evasive. Who is a
    predominant provider, who dominates transmission or whatever?
    What percentage is that? That is of some concern to me in the
    Arkansas legislation as to the PSC will determine when they
    feel like that they are not dominant. So I wonder where that
    might come down.
        Mr. Wortham. Although I am a resident of New York City my
    father is on the Small City Advisory Committee for the Texas
    Municipal League for this restructuring bill, and it is my
    understanding that this would allow cooperatives, consumer-
    owned entities, to expand into small towns and also for
    industrials like the Houston Ship Channel and so forth, to form
    into cooperative entities.
        So in terms of the operations we do in New York City I
    believe that would be allowed under the Texas law.
        Mr. Shadegg. If I could, let me just interject a second
    question and maybe we can get a quick answer to this. The
    chairman of the full committee earlier this week indicated his
    desire to push legislation and throw support behind that and I
    believe he's going to be working with the chairman of the
    subcommittee to draft a bill.
        But significantly, in his remarks he said that he felt it
    was not necessary to include a date certain. To what extent
    does that provide you a level of comfort and the fact that
    Texas doesn't have a date certain that allows opt-in/opt-out,
    and apparently the legislation that Mr. Bliley and the chairman
    of the subcommittee are going to be pushing would also not have
    a date certain?
        Mr. Tiencken. We certainly appreciate the fact that there
    is consideration for eliminating the date certain. We think
    that that is necessary. And it gives us the flexibility as
    public power entities to migrate into what is obviously going
    to ultimately be some sort of deregulated environment
    nationwide.
        So I think that what we are looking at is, we are looking
    at the flexibility to choose. Local control is a predominant
    theme among our municipalities and State-owned entities, and we
    think that that's most important.
        Mr. Shadegg. Does anybody else want to comment on it?
        Mr. Wortham. I would echo Mr. Tiencken's response from,
    first of all our cooperative basically supports the national
    rule like the cooperative association's position that there
    should be a flexible mandate allowing a lot of choice to the
    States. And it also allows the States to be the primary entity
    and it provides minimal consumer protections for all----
        Mr. Barton. I want to let the witnesses know that we have
    got about 7 minutes and if your answers are short and the
    questions are short we will let this panel go in 7 minutes. If
    the answers are long and the questions are numerous you will
    have to come back and it will be another 30 or 40 minutes.
        Mr. Shadegg. Well, my questions won't go beyond the next 2
    minutes.
        Mr. Barton. Do you want to yield the rest of your time to
    Mr. Burr? I can see he has one or two questions. And your time
    did just expire, by the way.
        Mr. Shadegg. Yes, the last 2 minutes of which, you took. I
    just want to say that--and I will just make it a comment rather
    than a question. I have to tell you that I am deeply troubled
    by the private use issue.
        I have a great concern about Arizona. In Arizona we have
    one large IOU serving my district and one large, public power
    entity serving my district. They are at war over the private
    use issue. And I am getting all kinds of conflicting
    information.
        For example, I have literature that says to me, well, the
    IRS regulations recently enacted create both the 6-month window
    during which a public power entity could sell power without
    concern for the public use restriction, and that those
    regulations went beyond that and said, so long as a public
    power entity is selling power to replace lost load, it can
    enter into long-term contracts.
        I can't take Mr. Burr's time. I would love it if someone
    could come and try to clarify some of those issues for me. I
    also note that you are very pleased that the Markey/Largent
    legislation contains the language from Mr. Hayworth's bill. I
    am trying to figure out where the difference is.
        It seems to me both of them grandfather existing debt, and
    that therefore the biggest distinction between the two is the
    income tax provision. If that is true, fine, I understand that
    distinction. If their treatment of existing debt is different I
    would like to get an explanation of that.
        And with that I will yield back the balance of my time.
        Mr. Barton. We are going to recognize Mr. Burr. Let me make
    a quick announcement and I am going to let him Chair the rest
    of the hearing. We are going to be soliciting views from the
    subcommittee members on their input on a comprehensive bill,
    and Chairman Bliley and I are going to work with Congressman
    Hall to draft that bill during the July 4 work period. So I
    encourage all subcommittee members to answer your questionnaire
    expeditiously.
        With that, I am going to recognize Mr. Burr, let him Chair
    the hearing, and when you are concluded you can adjourn the
    hearing.
        Mr. Burr. I thank the chairman. Mayor Bass, let me just go
    to you just very briefly. How many residents called you in your
    town when you got this new power deal and complained that you
    were buying power from somebody different now?
        Mr. Bass. No one.
        Mr. Burr. Would you say that really, residents don't care
    who they get it from but they do care about the price of it?
        Mr. Bass. I think that is a correct statement.
        Mr. Burr. They look to you for the reliability aspects and
    they count on you to negotiate with firms that can deliver?
        Mr. Bass. That is correct.
        Mr. Burr. Let me ask the rest of you if there is a comment
    relative to reciprocity. I just heard two people answer yes, we
    don't like the date certain. Does South Carolina have a problem
    with reciprocity for States that are open, saying the States
    that aren't open, your utility can't come in here and sell?
        Mr. Tiencken. Speaking on behalf of Santee Cooper and not
    the large public power council in its entirety because I'm not
    sure where everyone sits on the reciprocity issue, but my
    belief is that they would share my view which is that
    reciprocity is a reasonable requirement in a deregulation bill.
        Mr. Burr. Mr. Watson?
        Mr. Watson. I agree with that.
        Mr. Wortham. 1st Rochdale cooperative is competing in New
    York City against whoever comes into the City and will compete
    in other jurisdictions where they are open. So we don't really
    have a position to favor reciprocity or not, given the
    restrictive market areas that we are competing in.
        Mr. Burr. Okay.
        Mr. Argo. Reciprocity is good. Whether or not it should be
    mandated is another question. I think the market will take care
    of it. I don't think it is going to be necessary.
        Mr. Burr. I would agree with you to a large part, Mr. Argo,
    but not many in this industry will allow their trust to be in
    the marketplace maybe, if we could get it right they will learn
    that the marketplace is in fact, the best barometer.
        In an effort to allow me time to go vote, let me take this
    opportunity to thank you for your patience. This has been an
    unusual day where we have been called in and out and in and
    out.
        I will assure you that this testimony has been very
    valuable to the subcommittee as we move forward over the next 4
    weeks to try to put together legislation. Please feel free to
    share with any members of this committee any additional
    thoughts that you might have about how we get the policy right
    on this legislation.
        This hearing is now adjourned.
        [Whereupon, at 2:35 p.m., the subcommittee was adjourned.]