[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.
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    \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
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    \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
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    \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).
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                             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.
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    \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.
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    \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.
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    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.]
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