[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
ELECTRICITY COMPETITION--Volume 3
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON ENERGY AND POWER
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JULY 15, 1999--INNOVATION AND THE FUTURE
SEPTEMBER 13, 1999--THE ROLE OF THE TENNESSEE VALLEY AUTHORITY
__________
Serial No. 106-65
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
58-510 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:
July 15, 1999................................................ 1
September 13, 1999........................................... 79
Testimony of:
Anderson, Darrell, Environment and Energy Staff, General
Motors, representing Tennessee Valley Industrial Committee. 108
Baker, James O., President, Middle Tennessee Electric
Membership Corporation, representing Tennessee Valley
Public Power Association................................... 99
Clark, Jordan, President, United Homeowners Association...... 53
D'Alessio, R. Dale, Chief Executive Officer, iSoft........... 63
Deless, Donald, President, D&C Development Company........... 66
Fleming, Larry A., President and CEO, Knoxville Utilities
Board...................................................... 103
Larson, Lyle D., Counsel, TVA Watch.......................... 111
Medford, Mark, Executive Vice President, Customer Service,
Tennessee Valley Authority................................. 93
Mertens, Hans, Manager, Government Affairs and Planning,
Williams Distributed Power Services, Inc................... 57
Mittleman, Gary, President and CEO, Plug Power............... 13
Perry, Ronald L., President, Commercial Energy of Montana.... 7
Philbin, Edward J., former Chairman, Federal Maritime
Commission and former Chairman, Interstate Commerce
Commission................................................. 20
Randolph, Kenneth E., Senior Vice President and General
Counsel, Dynegy, Inc....................................... 17
Tribone, Thomas A., Executive Vice President, AES Corporation 24
Material submitted for the record by:
Ferrell, James E., Chairman, Coalition for Fair Competition
in Rural Markets, prepared statement of.................... 144
(iii)
INNOVATION AND THE FUTURE
----------
THURSDAY, JULY 15, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Largent, Burr,
Rogan, Shimkus, Wilson, Pickering, Fossella, Bryant, Ehrlich,
Hall, McCarthy, Sawyer, Markey, Pallone, and Wynn.
Staff present: Cathy Van Way, majority counsel; Curry
Hagerty, majority counsel; and Rick Kessler, minority
professional staff.
Mr. Barton. If everyone could find a seat, we are told that
Congressman Hall is going to be a little bit late and we are
going to go ahead and convene the hearing.
The Chair would recognize himself for an opening statement.
I would like to welcome everyone to today's hearing on
electricity utility restructuring. Today's hearing will focus
on competition and innovation.
This will likely--and I think you all would say
``thankfully''--be our last day of oversight hearings on this
subject. Next Thursday we will hold our first day of
legislative hearings on a bill that is being drafted literally
as I speak, and I hope that everyone, members and witnesses
alike, will come prepared to discuss specifically what should
and should not be included in a comprehensive Federal
restructuring bill.
Today's hearing is a good transition for future legislative
hearings because it shows us the possibilities that the future
holds for electricity consumers if we in fact allow competition
to flourish.
We would not even be here discussing retail competition
were it not for the technological advances of utility
interconnections and the ability to wheel power.
The ability to wheel power, coupled with legislative and
regulatory changes in PURPA, the Energy Policy Act, and FERC
Order 888 have radically changed the way we think about
generating, transmitting, and distributing electricity.
Consumers have benefited from those changes already through
lower prices. It is increasingly clear that there are no
technological barriers to opening up the retail electric system
to competition.
With the convergence of the utility industry with other
technology such as the Internet, the benefits consumers will
see will not just be limited to price.
Already this year we have heard from electricity providers
marketing electricity over the Internet, Internet companies
providing consumers with price and other information about
electricity, and companies developing new ways to transmit
electricity more efficiently.
Investor, municipally, and cooperatively owned utility
companies are investing in distributing generation and looking
for ways to package services like long distance telephone
service, cable television, Internet, and home security, along
with their traditional product of electricity.
At today's hearing we hope to hear about a few of the
innovations that are around the corner. Some are directed at
generating electricity in ways that are cleaner, more
efficient, and less expensive. Other technologies are being
developed on the consumption side such as meters that can read
in real time how much individual appliances are consuming, and
smart appliances that can be controlled from remote locations.
An open marketplace encourages individuals and companies
alike to invest in innovation. As retail competition sweeps the
country, this trend will only increase.
However, as we consider Federal restructuring legislation,
our task is to make sure that the marketplace is as open as
possible, that there are no barriers to these types of
innovations, and others that we may not know of yet, from
reaching the marketplace.
If we are not careful, we can stop innovation in its
tracks. I am especially interested to hear from today's
witnesses about what provisions need to be included in a
Federal restructuring bill to allow innovation to grow and
continue to bring the benefits of electricity to consumers.
Again, I welcome everyone, especially our two panels, today
to today's hearing. I am sure that everyone in attendance today
will find it very informative.
Would the gentleman from New Jersey wish to make an opening
statement?
Mr. Pallone. Thank you, Mr. Chairman.
This hearing is especially timely from my perspective
because in my District and other parts of New Jersey in the
Northeast we just experienced a series of blackouts and
brownouts.
These occurred, in part, due to old, out-of-date equipment
which needs to be replaced with new, more efficient and more
reliable technology.
We also need to emphasize conservation and provide
incentives for alternative and/or backed up forms of power that
rely less on the power grid and reduce the burden on the grid.
In addition, in order to spur growth and have our
industries compete in the domestic and international
marketplaces, innovation in technology will be increasingly
necessary.
Utilities and other companies such as we will hear from
today are working to develop products and services to provide
consumers with more reliable service in a cheaper and more
efficient manner. Removing barriers that preclude or inhibit
competition is critical to achieving these goals.
I have continually supported tax credits and other
incentives for weatherization programs, renewable energy,
voluntary energy efficiency programs for homes, buildings, et
cetera, and will continue to do so.
We must make sure we provide affordable power that is
reliable and efficient for all consumers. By doing this, we
will improve protection of air quality and our natural
resources, as well.
The experience in my District highlighted the real need to
bring new technologies to market as quickly as possible. For
example, hospitals, police, and fire stations could use
distributed generation as backup power sources to make their
own energy service more reliable.
To this end, incentives to promote distributed generation
and renewable energy technology such as are included in the
administration's bill would be worthwhile, in my opinion.
Superconductivity is another method that would facilitate
power transmission and reduce the amount of energy needed by
maintaining more power as it travels across the power lines.
Therefore, I would support efforts to provide increased funding
for research and development for superconductivity.
Implementing innovative methods in technologies would
increase system reliability as well as the efficient use of
energy, and thereby reduce impacts to the environment and lower
costs for consumers and industry alike. And so we would have a
win/win situation all around.
I will be introducing a bill probably next week that also
will promote energy efficiency and renewable energy
technologies, and in particular my bill aims to increase the
use of fuel cells and other emerging technologies.
I look forward to hearing from our witnesses and working
with them and other members of this committee to promote these
exciting technologies.
Thank you again, Mr. Chairman.
Mr. Shimkus [presiding]. I thank the gentleman from New
Jersey.
I would just like to welcome the panel also. I have been on
the committee for 3 years, and energy deregulation has been
probably one of the consuming things that I have been doing as
a Member of Congress. It has really changed even in the 3 years
that I have been here.
It is really an exciting time. I have been able to watch
industry as industry is repositioning itself to meet this new
era. We are working aggressively in a way that is much
different than I have experienced in even other subcommittees
as far as having a working group.
As many of you know, we have been sitting down across the
aisle with the chairman and the ranking member working on
energy dereg, and that is why this hearing is so important
today to make sure we have our sights not just on the present
but continuing on into the future.
I appreciate the comments from the gentleman from New
Jersey because about this time last year in the Midwest we
experienced the high price spikes. But I am encouraged by the
fact that the market really is responding quickly as we see new
generation projected in the Midwest.
As many of you who have been following the issue know, part
of the working group's main concern has been also on the
reliability in the transmission system and to make sure that,
as we enter this new era, that the power is able to be
transmitted and received from a lot longer distances than under
the old regional monopoly system.
That is where I think technology is going to be exciting,
too, because it is going to open up a new arena that helps us
to continue to start thinking outside the box, which is
difficult when you are trying to learn about the box. It is
more difficult to think outside the box if you are spending a
lot of time just trying to understand the box to begin with.
So that is why I look forward to the hearing today. With
that, I would like to yield to the ranking member, Congressman
Hall, from Texas.
Mr. Hall. Mr. Chairman, I thank you. I thank you for the
hearing.
We have pretty well come to understand or to believe that
we are nearing the last of the hearings on electrical
restructuring, if some of the rumors that I hear and some of
the direct information that I get, we hopefully are approaching
a time when we will really get down to business and start
putting stuff together where you men and women can look at it
and advise us and help us. We thank you for the help you are
going to do for us today.
The issue today is innovation and change in the future. As
I look over the witness list, for the most part I see names of
companies that I am not terribly familiar with, or have not
been but am honored to be. This is really, Mr. Chairman, a
slice of the new face of the electric utility business. Broadly
defined, they are the innovators, the technologists, people who
dare to probe and want to deliver.
I think some of the creative thinkers are looking at this
business in new and different ways and seeing possibilities for
services and efficiencies that have not been seen before.
So I am anxious to listen to the testimony here today. I
think we need to understand their position a little bit better
and the opportunities and the barriers that they see and how we
can remove some of those barriers and how we can work with them
to help them bring their products, their technologies, and
their services to the marketplace, which is the goal of the
legislation we are attempting to write now.
I want to welcome two witnesses from Texas to the
subcommittee today. Ken Randolph, who I am very proud of. He is
with Dynegy in Houston, whose companies has been one of the
leaders in market innovation first in natural gas and now in
electricity. So he is pretty well spanning the globe for us.
I also welcome General Philbin. We are honored to have you
here, of Media Technologies. I think he lists his address as
Evergreen, Colorado, but a lot of Coloradans complain that
Texas has taken over Colorado.
And the truth is, Colorado is inhabited by people from Iowa
who do not want any more Texans.
Although this complaint has been made, Media Fusion is a
company that I think is headquartered in Dallas----
Mr. Philbin. Yes, sir.
Mr. Hall. [continuing] which is just 15 miles behind
Rockwall's water tower. You're just right down the road from us
there. You certainly got your start there, and recently opened
a research facility at the Stennis Space Center in Mississippi.
So there are a lot of good things that are going on. So,
Chip Pickering, wherever you are, we will have to share credit
with Texas for Media Fusion and its startup. It looks like it
has some great prospects for revolutionizing the delivery of
broadband services by means of the electric grid.
Mr. Chairman, as a footnote and as a member of the Science
Committee, I might also add that Media Fusion's arrangement to
conduct research at NASA's Stennis Center is a very good
example of what this committee and what the Science Committee
in this Congress has tried to do, to get this example of public
and private sector working together to bring facilities and I
guess brain power together to yield benefits for all of us.
I am looking forward to the testimony today, and I yield
back the balance of my time.
Mr. Shimkus. With that, we will move to Congressman Ed
Bryant, the Gentleman from Tennessee.
Mr. Bryant. Thank you, Mr. Chairman.
I want to thank this committee, as our ranking member said,
for having so many hearings on this very important issue.
Certainly today is a little bit different approach than what I
am used to seeing. I am fairly new to the committee and look
forward to hearing the testimony from both panels.
It was a late night last night. I think we finished voting
after midnight. So there are probably several of our colleagues
who have not started moving around very fast today, and we
apologize for that.
Also, I know from my own standpoint I will have to leave
and go to another subcommittee meeting very shortly on another
very important issue of health care. Then, beyond that, to
another meeting on TVA which is, as most of you would expect,
is a very important issue to Tennessee as we begin to talk
about not deregulation but restructuring. We are probably going
to re-regulate in whatever we do.
But I think it is important to have you gentlemen here
today. I have reviewed some of the statements, and I intend to
review all of the statements and listen to as many of you as I
can.
I am particularly interested in the second panel, the
homeowners and the home builders and what they are saying about
this. Again, this is not a stranded cost issue, but I notice
the homeowners' representative talks about the effect, in
reality not in theory, of what is actually happening in
California with stranded costs and something of a negative
impact there.
But I think the home builders are talking about how
Congress should help out with innovation and the ways that we
can perhaps incentivize in the tax code, and kind of get out of
the way and let things happen and not be an obstructionist in
any way.
I think, as technology develops and your ideas are out
there, we as a Congress do not need to stand in the way, and
certainly health care is another area where the technology is
so far ahead of us in Congress right now that we just need to
sit back and listen and then be prepared to take your advice
very wisely given and use it, again not to be a hindrance, but
to let you folks work. And hopefully in the end certainly the
country will benefit by it.
With that, Mr. Chairman, I look forward to this and yield
back my time.
Mr. Shimkus. The gentleman yields back his time.
The Chair now recognizes the gentleman from California, Mr.
Rogan, for an opening statement.
Mr. Rogan. Mr. Chairman, thank you.
I do have an opening statement. I ask unanimous consent of
the committee that I simply have it introduced for the record.
It would be redundant of me to keep delivering the same opening
statement every time we have one of these hearings. I am a
great supporter of deregulation. My State of California is one
of the leaders in that effort. But rather than bore everybody
with my same pronouncements, I simply ask unanimous consent to
insert it into the record.
Mr. Shimkus. Is there objection?
[No response.]
Mr. Shimkus. Without any objection, so ordered.
[The prepared statement of Hon. James Rogan follows:]
Prepared Statement of Hon. James E. Rogan, a Representative in Congress
from the State of California
Mr. Chairman, I thank you for holding this hearing on how our
growing technology industry can enhance our efforts to promote a
competition-based electricity industry.
I would also like to share my appreciation for each member of
today's panels. You represent the many companies which can make the
power industry thrive through innovation and competition. Without the
high technology developments generated over the past several years, our
economy would not be thriving. I look forward to seeing the ingenuity
of our high-technology industry help prepare the electricity industry
for the next millennium.
As you know, California is often at the forefront of business and
public policy in America. Southern California's high-technology
industry continues to provide a major boost to our national economy and
serves as a leader in software and technological advancements. In
addition, in 1996, California passed electricity restructuring
legislation when I was Majority Leader in the State Assembly.
Our state's leading technology businesses, in combination with our
efforts to create a competitive electricity industry, will provide
Californians with greater options, reduced electricity rates, and
increased access to the best electricity services. It is my hope that
this hearing will demonstrate how the rest of the nation can benefit
with this type of partnership between a competitive electricity
industry and a vibrant technology industry.
In addition, I am interested to learn more about how software
products can improve electricity services for consumers. It is my hope
that Mr. D'Alessio's testimony will discuss exactly how utility
companies that are deregulated benefit from the type of software his
company, iSoft, produces. Further, I am curious to know how web-enabled
billing can enhance a competitive electricity industry.
Again, Mr. Chairman, I appreciate your ongoing efforts to explore
every aspect of electricity restructuring policies. I look forward to
hearing the testimony of the witnesses.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
Mr Chairman, I want to commend you for holding this hearing today
on competition and innovation. The issues we will consider today and
how we ultimately deal with them can have far-reaching and long-lasting
impacts. Over the next few weeks, Congress can act to either encourage
or stifle innovation in retail electricity markets.
I know that with you at the helm we will pass legislation that will
foster innovation. Consumers will surely benefit from new value and
conveniences in the new retail marketplace for electricity. New
technology reduces costs and increases options for residential,
commercial and industrial consumers. In crafting comprehensive
electricity legislation we must unleash competition and innovation to
have a profound impact on products and services available to American
electricity consumers.
As in the telecommunications industry, once competition begins to
be unleashed, innovation flourishes. Telephone consumers now have
digital phones with voice mail, call waiting, text messaging, and even
games. They can pay for using those phones according to usage or with a
flat rate for both local and long-distance calling. No more black
rotary phones, if anyone can still remember them.
Similarly, innovation in the electricity sector is happening at
every level: generation, transmission, distribution, and at the point
of consumption. In the future consumers may be able to buy electricity
from the supplier of their choice tailored to their own particular
situation rather than being forced to buy the only package offered from
the monopoly allowed to serve their street.
Like the telco's of yesteryear, the utility industry is not
accustomed to providing consumers with new choices, money-saving
services, or bonuses to increase customer satisfaction and
convenience--at least not until the onset of competition. Now with
retail competition upon us all types of suppliers are beginning to
explore and bring to consumers new technologies and find ways to
package services in ways that fit the needs of individual families or
businesses.
New opportunities and products will have a direct relationship on
American consumers and American competitiveness. Giving consumers what
they want, at a price they can afford to pay will open markets, create
a new pool of skilled jobs and cut prices for America's hottest
commodity--electrical power.
The role technology plays in reducing costs and increasing options
for residential consumers is central to the Subcommittee's
consideration of legislation. As we develop bipartisan consensus we
must put in place strong provisions that assure that there are no
barriers to keep out new entrants and innovators in electricity
markets.
Mr. Chairman, I look forward to hearing the testimony.
Mr. Shimkus. Now we will move to the panel.
There are some benefits to not having a lot of members
present. You do not have to sit through all the opening
statements and we can go straight to the panelists.
So I would like to recognize for 5 minutes, and as is the
process here in the Commerce Committee, your full written
statements you have already submitted, we would like for you to
attempt to summarize conversationally with us for 5 minutes and
then we will have a chance for a round of questions after the
panel has conducted the testimony.
So I would like to recognize Mr. Ron Perry, President of
Commercial Energy of Montana, and again for 5 minutes. You may
begin.
STATEMENTS OF RONALD L. PERRY, PRESIDENT, COMMERCIAL ENERGY OF
MONTANA; GARY MITTLEMAN, PRESIDENT AND CEO, PLUG POWER; KENNETH
E. RANDOLPH, SENIOR VICE PRESIDENT AND GENERAL COUNSEL, DYNEGY,
INC.; EDWARD J. PHILBIN, FORMER CHAIRMAN, FEDERAL MARITIME
COMMISSION AND FORMER CHAIRMAN, INTERSTATE COMMERCE COMMISSION;
AND THOMAS A. TRIBONE, EXECUTIVE VICE PRESIDENT, AES
CORPORATION
Mr. Perry. Thank you, Mr. Chairman.
I am grateful for the invitation to address you and your
colleagues today. Thank you for the opportunity.
My name is Ron Perry and, with my wife Barbara, we founded
Commercial Energy of Montana in 1997. Commercial Energy is a
small, customer-focused marketer of natural gas and electricity
in Montana.
Our company is an aggregator of the local mom and pop gas
producers of northern Montana. This model is very similar to
how Dynegy was started about 12, 13 years ago by Mr. Watson.
We are different from other aggregators in that we market
directly to the end-use customer. From our point of view,
electricity competition in Montana has been a great success. In
2 years, Commercial Energy has become Montana's largest non-
utility-affiliated energy marketer.
Our customers are a cross section of Montana. We serve over
90 percent of the eligible hospitals in the State, the best
hotels in every city including Glacier Park Lodge, Hooterite
Colonies, small manufacturers, dry cleaners, even branches of
national chain stores.
We are talking with the irrigation districts to help our
farmers lower their costs of energy in running their rural
farms in Montana.
In fact, in total we provide energy for more than 40
percent of the eligible gas businesses in the State and for
more customers than any active electricity marketer in the
State of Montana.
Our success is due in part to the fact that Montana was the
first low-cost-of-power States to deregulate. That decision has
been very good for us and for our businesses.
During the first 2 years of operation, our customers have
saved over 30 percent on their natural gas bills. They have
also saved 5 to 10 percent on their electricity bills based on
how much risk they were willing to assume in the marketplace.
For one of our rural hospitals, a 100-bed hospital, that
means saving about $25,000 a year. That is just the beginning.
We believe that deregulation creates new jobs and opens up
a $500 billion industry to customer choice. That will be a
diverse and dynamic competitive market with a variety of market
segments for providers to focus on.
Entrepreneurial firms like ours understand these
segmentations, whether it is industrial customers, residential
customers, or commercial accounts. And we even understand the
geographic market segments.
We choose the segments that offer the best returns. The
fact that Montana is a rural State tells us a lot about how
these energy markets are actually going to function, especially
when we think that half the population lives in these States.
Large businesses, including the largest power suppliers,
will concentrate their work in the 40 metropolitan areas. That
is understandable. But in places like Montana we do not have 20
different marketers on television and radio and on the
telephone espousing their virtues.
That does not mean there is not competition. All it means
is that business is conducted in a different way. It is
personal, and those relationships are more important than just
simply having the lowest price.
I would remind the committee that the world's largest
retailer did not start in Houston, Texas, or New York City.
Wal-Mark started in a little town called Bentonville, Arkansas,
that we had never heard of, but they did it in an
entrepreneurial way and came out of nowhere.
That is what is going to happen with energy, we believe.
Our company looked at the energy market that way. We
realize that that customer relationship is the key. The
advantage of an open market is that you can have real product
integration as well that breaks down traditional lines.
We started with a natural gas relationship and leveraged it
to an electricity relationship. We understood that to grow we
need to add these revenue streams to our company.
In the future, that might mean consumers will buy energy
from the same company that provides them their Internet
service. Or it might mean that their Internet provider sells
them energy. Or it just might mean Microsoft takes us all out
of the business. But even through all that, maybe even buy it
through your local supply store.
For the residential market, there is another intriguing
opportunity. Because of the Internet and the grocery store, the
only two places we actually go to buy anything anymore, they
open up whole new opportunities, whether Amazon.com puts one
more page in their web and forms an alliance with Dynegy is one
option.
Similarly, Proctor & Gamble could become a competitor,
packaging power in different boxes, a green box, a coal box,
and a cheap box, and put it on a grocer's shelves.
Those are the types of options that deregulation allows us
to think about. We see these possibilities. That is why we are
committed to working with our customers establishing a business
relationship and developing a quality of service that lowers
their total bill.
We can do it in a number of ways. We have done it without
technology. We have done it more on a customer service level.
For example, we help customers choose the most efficient fuel
source, whether it is natural gas or electricity.
We allow them to weigh the advantages of onsite generation,
which many hospitals are considering. And we help them find new
efficiencies in transmission distribution metering.
Mr. Chairman, that is the type of innovation you get in a
deregulated market. In our experience, that innovation works
best when it is left alone.
You cannot mandate a company to be creative. All you can do
is give us the freedom to create these market opportunities and
we will show up.
Does that mean we are out of time?
Mr. Shimkus. We are not real hard core. I mean, if you have
got one or two more----
Mr. Perry. One page.
Mr. Shimkus. Again, just summarize real quickly if you have
another point you want to make.
Mr. Perry. We need a little bit of help on the Federal
level in a couple of areas.
One is in FERC's rulemaking. They need to be open to
market-based alternatives rather than cost-based alternatives.
For example, in our energy imbalancing. We are working with
that in Montana.
A second is net metering of customer-sited generation so
that we have more distributed generation in the grid. Because
local utilities tend to oppose that. And so a Federal mandate
allowing that power to flow back in would be helpful.
And third is connectivity. Chairman Hecker from the FERC
addressed this in an earlier hearing, the idea being that the
grid has to be a grid and it has to be nationwide. It cannot be
regional. Those are three recommendations that we make. Thank
you.
[The prepared statement of Ronald L. Perry follows:]
Prepared Statement of Ronald L. Perry, President, Commercial Energy of
Montana, Inc.
i. the future of energy deregulation
Montana is the first ``low-cost of power'' state to deregulate in
the country. My discussion will focus on how Montana might serve as a
beacon of both the successes and potential pitfalls of competition.
Based on that experience, we see three critical strategies that will
evolve as electricity deregulates:
A. Market Segmentation
B. Product Integration
C. Quality of Service
A. MARKET SEGMENTATION
It is unlikely to see the large energy players in all markets,
whether defined as geographic areas or types of users. Their cost of
sales is simply too high to justify the effort. But we will see niche
players created to satisfy any unmet needs. By definition, that is how
entrepreneurial companies are created, by solving some need either
unseen or ignored by a company with the resources to address the issue.
Deregulation will create many new jobs as people see the opportunity of
a $500 billion industry opening to customer choice. We offer Montana as
a good example.
1. User Segments
In Montana, just like nationally, electricity consumption is
divisible about 40/40/20 between industrial users, residential users,
and commercial businesses.
Industrial users benefit from aggressive pricing from four
regional suppliers (Illinova, Enron, Idaho Power, & Avista).
These users rely almost completely on price in making their
decisions and exhibit little brand loyalty, typically bidding
one year contracts.
Residential users have little knowledge of the process, lots
of questions, and very small consumption. The potential gross
profit for such an account might be only $40 per year. No
significant inroads have been made by any marketer to date in
Montana.
Commercial users are the smallest niche, but with the average
customer using 2,500 megawatts per year, (about $70,000 for the
power each year) and an average gross margin of $1.00 per
megawatt, a direct sales effort is cost justified. In Montana,
two companies compete for this segment, with CE owning the
lion's share at this time.
2. Geographic Segments
Half of this country lives in rural America. However, big business
does its work in the forty largest metropolitan areas. As we have seen
in California, Georgia, Pennsylvania and the rest of the east coast,
there is no lack of competitive activity in the urban areas. In
Montana, we do not have twenty marketers on television, radio, and on
the telephone espousing their virtues. But business might be done a
little differently in these rural areas, where a personal relationship
is far more important than the cheapest price on a fax machine.
Allstate sells homeowners insurance in these areas through its
neighborhood office program, Edward Jones sells its brokerage services
in a similar manner, and it wasn't that long ago that Wal-Mart only
existed in these very same towns.
B. PRODUCT INTEGRATION
Commercial Energy's business model is premised on building a solid
customer relationship. The question becomes how deep can we grow that
relationship? Alternatively, does the initial customer relationship
have to come from an energy background, or can it simply be based on
trust and years of experience with a given vendor?
1. Business Segment
Commercial Energy first created a natural gas supply relationship,
and leveraged it to include electricity. A small market such as Montana
requires this growth to extract as many relevant revenue streams as
possible to justify the cost of a direct sales and marketing effort. It
may be possible for us to cost-effectively provide long distance and
internet services to these same customers. But there are also
corollaries: A company with a pre-existing business relationship, such
as its internet service, could leverage back to energy. If Microsoft,
with its strong emphasis on corporate customers, decided to pursue
energy, what or who could impede its progress? And that avenue has
virtually no geographic impediment. By the same token, small businesses
may find their local business supply store, aka Staples or Office Max,
a more than eager supplier.
2. Residential Segment
So if we speak of the customer relationship, we must glance at the
residential user. They have two consistent shopping venues: The grocery
store and the internet. The internet is almost too easy: Amazon.com
simply adds electricity to its books and videos. It creates a
relationship with a large trading house like Enron and captures a
portion of the market, and probably the portion that is the most likely
to buy competitive energy early. On the other hand, Procter and Gamble
can be a formidable competitor, and if they decided to package green
power, next to coal power, next to cheap power on your grocer's shelf,
you have another simple channel to reach the customer.
C. QUALITY OF SERVICE
At Commercial Energy, we believe that the Quality of Service will
become the beacon that our customers judge us by, not our price. In
Montana, we are seeing companies offering just energy consulting
services while owning no energy, suppliers wanting to just wholesale
their power to the retail marketer, and energy managers like Commercial
Energy, that offer both. To us, Quality of Service is all about that
commitment to lowering the Total Energy Bill. But there may be many
iterations of this concept, for instance:
1. BTU Management
By leveraging sales of both electricity and natural gas, suppliers
can offer to assist customers in using the most cost-effective fuel
source. To be truly effective, some will go as far as to assist
customers in lowering overall consumption through performance
contracting. In this manner, deregulation will actually foster energy
efficiencies and conservation, by using the market as the price signal.
One of the unfortunate implications of bundled utility service is that
it has in the past encouraged uneconomic usage by not sending the right
price signals to customers. Detailed bills put that information in a
customer's hands, and the rational ones will act on it.
2. Customer Sited Power Generation
Detailed bills also provide a customer and his supplier with the
information needed to decide if making power on-site is a preferred
alternative to purchasing off the grid. We fully expect to see a
revolution in on-site generation. When a customer pays $0.05/kilowatt
in a competitive environment, but can buy the engine, the fuel to run
it, and maintain it all for less than $0.04/kilowatt, that customer
will make the investment. We are seeing our rural hospitals evaluate
this option as a viable means of gaining a return on their investment
in backup systems mandated by state and federal laws. From a national
perspective, this redundancy of generation can diminish our reliance on
the grid and system-to-system interconnects over the coming decade.
3. Utility Cost Management
In rural areas like Montana, regulated Utility services
(transmission, distribution, demand, and metering) comprise from 50% to
60% of the business customer's total bill. Ultimately, saving a
customer a nickel on the utility side of the bill is far better than
beating a competitor by a penny on the commodity. Commercial Energy
creates services designed to fulfill this commitment of a lower Total
Bill.
4. Local Aggregators
In Montana, the Montana Hospital Association (MHA), the League of
Cities and the Montana School Board Association have attempted to
aggregate their members to competitively purchase electricity. As
someone who grew up in southern California and worked in Miami,
Chicago, New Orleans, and Orlando, I can say that people are far closer
to their local governments here than in urban states, and this may
offer some help of market alternatives for the residential customer.
Let the government that is closest to the people develop market
alternatives. They may best serve the will of the people. Montana has
also passed a law allowing non-profit aggregators, such as our local
Electricity Co-operatives, to be considered for the supplier of last
resort function. This alternative has happened fully three years ahead
of mandatory residential deregulation. All of these aggregators have
the choice of buying on a more or less wholesale level from the
national competitors.
ii. barriers to innovation and workable competition
Innovation works best when it is left on its own. Creativity simply
happens, it cannot be mandated. To date, the States appear to be
learning from each other as they proceed to deregulation. We support
the notion that any federal legislation should respect the laws of
states that have enacted deregulation prior to the federal. But federal
legislation can and should take a leadership role in promoting
electricity deregulation to those states that may be slow to evolve.
States should not be allowed to get in the way of their constituents
because of unfounded fears that competition will not appear or
protectionist attitude towards their incumbent utilities. The record in
Montana is clear. Even rural states will benefit from deregulation. But
there are issues that deserve consideration on a national level:
A. COST-BASED FERC RULEMAKING
The FERC must be encouraged to be more open to alternate methods of
facilitating competition. One example is the Energy Imbalance service
whereby we settle each month on the relative over and under supply of
power by marketer. By keeping this process simple allows new entrants,
such as the local aggregators, to join the market without an
overwhelming learning curve. To date, the FERC has stuck by its
historical approach of cost-based ratemaking rather than allowing the
market to creatively solve the problem. Montana Power has proposed
settling these imbalances through a Cash-Out at the published daily
rate. It is public, administratively simple, and fair. This is the type
of situation where an administrative agency should pull back and let a
state experiment. If it fails, there are at least forty other states to
try something different. I remind Congress that the administrative body
that is closest to the people being regulated may well be the most
effective (or credible) body to impose rules.
B. LACK OF NET METERING OF CUSTOMER-SITED GENERATION
Over twenty states already have laws allowing net metering of solar
or wind powered generators of less than 50 kilowatts. Local utilities
typically oppose anything greater as it potentially diminishes their
revenue recoveries. National legislation requiring that all electric
utilities allow customer-sited generation of up to one megawatt of
natural gas fired generation would give real encouragement to the
growth of sited generation. Local PSC's would provide access for the
end user to sell any reasonable unused capacity back to the customer's
marketer for redistribution without any additional transmission charges
(probably within the citygate). Not only would this encourage
development of distributed generation, it would also minimize our
reliance on the national power grid.
C. LACK OF REGIONAL CONNECTIVITY
In Montana, we can only take electricity from the west and south,
which limits are purchasing opportunities to about six generators. It
also limits are ability to arbitrage power from other regions, or to
take our power in lower priced months to other regions. An effectively
competitive supply situation requires that markets not be artificially
constrained. To Montana's north, no connections exist directly to
Alberta. To the east, we are hamstrung by the NERC's DC Interconnect, a
vestige of the MAPP reigonal system tie to the WSCC region. The
frequency synchronization is a problem that prevents volumes from
flowing in marketable segments of less than 25 Megawatts. Intra-region
reliability is important, but the federal government should be creating
national connectivity, which creates a level playing field for all
regions. The benefits are numerous. Building additional infrastructure
would (1) facilitate our exportation of power to Canada (Alberta
deregulates January 1, 2001), (2) provide lower priced power to rural
Montana, (3) help in exporting Bonneville Power's cheap hydropower to
eastern states, and (4) increase competition amongst generators for
more workable competition.
D. GROWING OLIGOPOLY POWER
Customers want choice because that leads to better service.
However, as utilities have sold their generating assets, we are seeing
a greater concentration of capacity in fewer hands. This may be cause
for concern as these asset sales continue. Of greater concern to
Commercial Energy are the attempts by the largest wholesalers of power
to impose overly stringent credit requirements on customers and
marketers. Curiously, these requirements are almost identical from one
to another. One would expect a competitive market to develop
competitive alternatives, especially companies so astute at managing
risk. We have antitrust legislation in place, but it is not practical
for a small company to fight a $1 billion plus marketer in federal
court. Congress should make its intent clear that collusive practices
will not be tolerated. Banks lending policies are scrutinized by
regulators, which has insured the stability of our banking system for
sixty years. Possibly the Congress, through FERC or the Department of
Justice, should assume a similar responsibility for oversight of the
fairness of credit evaluations by the national marketers of the niche
players.
E. FEDERAL POWER SALES TO SMALL BUSINESSES
As the current owners of the federal power systems at BPA and TVA,
the federal government has the ability to encourage sales of power by
these entities to deserving small businesses. Commercial Energy is a
certified HUBZone Empowerment Contractor, yet it is not encouraged to
buy from the Bonneville Power Administration. To date, BPA has used
even stricter credit standards than Enron Capital & Trade. It seems odd
that a federal agency that gives preference to SBA vendors when it is
buying goods and services cannot do the same when it is selling goods
and services to SBA vendors. Using these federal assets in such a
manner would be a great encouragement to the development of the small
markets in the surrounding areas, whether that be Montana or Tennessee.
When these systems are privatized, using the proceeds from the sale to
pay for the costs of increasing the connectivity between the NERC
Reliability regions suggested above is another means of enhancing
competitive alternatives.
F. STANDARDIZED LICENSING REQUIREMENTS
We have seen our national competitors support standardized
licensing requirements of electricity marketers as a means to ease
their entry into disparate states. On the surface, a template of
licensing procedures might be helpful to states. However, one of the
risks of such an approach is that it may stifle the entrepreneurial
companies that will emerge precisely because the process is unique
state-by-state. That uniqueness deters the national competitors from
establishing an early retail presence in a deregulating state, and
instead forces them to concentrate on their wholesale opportunities. By
leaving this flexibility with the states, we encourage the development
of indigenous marketers, rather than a drain of cash to Houston.
Federal legislation should set limits on how onerous the licensing
requirements can be on marketers, but not set minimums. The goal must
always be to develop workable competition, not perfect competition.
summary
Adam Smith advised us over two centuries ago to trust in the
invisible hand of the marketplace. That invisible hand has served us
well. The state legislatures are on the right track. Solutions are
being formulated, jobs have been created, customers are receiving
better service, and it works in places like Montana, where few thought
it could.
We at Commercial Energy of Montana are honored to have this
opportunity to present our thoughts on the opportunities before us and
the nation. If we can offer the committee any further details or data,
please do not hesitate to ask.
Mr. Shimkus. Thank you very much, Mr. Perry.
Now we will move to Mr. Gary Mittleman, President and CEO
of Plug Power from Latham, New York.
Welcome.
STATEMENT OF GARY MITTLEMAN
Mr. Mittleman. Thank you, Mr. Chairman, and members of the
committee, for inviting me here today.
Fuel cells are going to change the world as we know it
today. It is not a new technology. It is actually a very well-
proven technology that has been used by NASA for decades. But
now because of cost reductions this space-age technology can be
made a reality right here on Earth.
What we are talking about is an energy machine, a box the
size of a dishwasher that can go either in your basement or
right outside our house, something that can have a natural gas
line or a propane line going into one side and enough
electricity to power your whole house come out the other side.
Because we are not using conventional means of making this
electricity--it is not combustion; it is electrochemical--it
does it in a highly environmentally friendly way, a very
efficient way, and in a way that will save consumers money.
I would be remiss at this point if I did not thank Congress
for funding both the Department of Energy and the National
Institute of Standards and Technology for the programs that
they have undertaken in helping all of these distributed
generation technologies become a reality.
A few words about Plug Power. We started 2 years ago with
22 people. We are now the Nation's largest fuel cell company
employing over 260 people.
Our backers include Detroit Edison, Mechanical
Technologies, Inc., Southern California Gas Company, and
General Electric. Together with General Electric we will be
distributing our product on a global basis.
We are well on our way to making this real. A year ago we
set up the first house using a fuel cell and we have been
running this fuel cell completely independent from the grid,
proving that this technology really does work.
Fuel cells, in a lot of ways, are something like personal
computers. It is a form of distributed generation and, just
like personal computers did not replace the large mainframe
computers, we do not believe that fuel cells will replace
central station plants and the grid as we know it today.
But we do think they are going to dramatically change the
landscape.
Just recently, and in fact we have heard again today about
the severe heat waves that have hit the Northeast causing
rolling blackouts and brownouts. The answer to solving these
problems is not building more large central-station generating
plants.
It is not building more transmission and distribution
towers. The answer lies with distributed generation. It lies
with things like fuel cells that can help solve the problems as
we go forward.
What makes the fuel cell so exciting to us is several
factors. One is its efficiency. On producing straight
electricity it is about as efficient as anything else out
there. It will produce at a 40 percent efficiency rate. But a
fuel cell, because it is in the house, we can capture the waste
heat coming off the fuel cell and we can use that to help heat
the home in the wintertime and produce hot water.
When we do this, we are looking at efficiencies that will
rival 80 and 90 percent.
Fuel cells will also greatly improve the reliability of
electricity as we know it. Weather outages, whether they be
from ice storms, lightening strikes, heat waves, that can take
down power lines, that is not going to happen with the fuel
cell in someone's house.
Perhaps best of all, fuel cells are environmentally
friendly. We are looking at a device that could make smog and
acid rain a thing of the past. When it comes to carbon dioxide
or greenhouse gases, because of the higher efficiencies of fuel
cells, we are looking at something that can cut the amount of
greenhouse gases by one-half. And for the customer, we are
looking at savings of up to 20 percent.
Mr. Chairman, to truly open our energy markets and give
customers a real choice, we need to break down some of the
barriers that exist today.
These barriers, such as interconnection and disconnect
charges, could stop not only fuel cells but all forms of
distributed generation right in their tracks.
What we suggest is that we work together with our national
labs and have a test bed of fuel cells across the country. We
are talking about hundreds of fuel cells that customers and
public service commissions alike can see, they can understand,
and we can get to first-hand experience what the advantages,
and what some of the issues will be in deploying this new form
of distributed generation.
Plug Power has a vision. It is environmentally friendly. It
is more reliable than the grid. It installs easily. It uses
commonly available fuels. We are not talking about hydrogen. We
are talking about natural gas or propane. And it is going to
save the consumers money.
Our partners have committed over $100 million to make this
real, and it is becoming real faster than we know. If you have
a minute after the hearing, I would love you to be able to take
a look at the demonstration unit on my right that we brought
with us.
Mr. Chairman, again I thank you for the invitation and the
opportunity to share our views on competition.
[The prepared statement of Gary Mittleman follows:]
Prepared Statement of Gary Mittleman, President and CEO, Plug Power
Mr. Chairman and Members of the Committee, thank you for inviting
me here today. I would like to tell you about progress in residential
fuel-cell technology and the benefits that it could provide for our
nation.
A fuel cell is an ``energy machine'' for the home or small
business--an on-site, distributed power generation device that produces
electricity through an electrochemical process, rather than through
combustion. The core of this process converts hydrogen--extracted from
a fuel such as natural gas, propane, or gasoline--and oxygen into
electricity with significantly lower emissions than those from even the
cleanest fuel-combustion processes. Thanks to breakthroughs in fuel-
cell technology, what was once only affordable for the space program is
now within reach of the typical homeowner.
I would be remiss if at this point I did not thank the Congress for
funding the Department of Energy and the National Institute of
Standards & Technology programs that have made breakthroughs in this
technology possible.
Plug Power is the United States' largest developer of proton
exchange membrane fuel cells. Our company was created in June of 1997
with 22 people as a joint venture between DTE Energy, parent of the
electric utility Detroit Edison, and Mechanical Technology Inc. Today,
Plug Power employs 260 people and our partners now also include General
Electric Power Systems and Southern California Gas Company. We believe
the first mass market for fuel cells will be residential and small-
business power generation and are focusing our efforts on
commercializing small-scale stationary systems. Through General
Electric--our distribution partner--we plan to sell residential fuel
cells nationwide beginning in 2001.
Our first product will be about the size of a dishwasher, able to
supply a typical-sized residence, or small business, with its complete
electricity requirements. We're well on our way. In June of 1998, Plug
Power unveiled a prototype fuel-cell system that for over a year now
has been used to provide the electricity needs of a residence located
in Albany, New York. This is the first home to be powered by a fuel
cell independent of the grid.
We do not propose replacing traditional, centrally generated
electricity with fuel cells. Rather, fuel cells will help to fulfill
the needs for power as we become a more electronic society. Power
plants and the grid will remain a part of our infrastructure. After
all, cellular telephones have not eliminated traditional telephones,
but they have changed the topology of the telephone network, making it
vastly more user-friendly, pervasive and a driver of productivity.
Fuel cells can do the same for power. They can dramatically change
the old paradigm of centrally generated electricity by giving consumers
clean, dependable electricity independent of grid constraints. Just in
the last two weeks, we've seen record-breaking heat waves in the New
York metro area that have stressed our electric utility infrastructure.
This has caused blackouts and rolling brownouts, as power companies
have not been able to keep up with the demand for power. Is the answer
to build more large, costly power plants and transmission systems? We
do not believe so. Rather, we think the answer lies in the use of
innovative distributed technologies, like fuel cells, where such
problems can be virtually eliminated.
Residential fuel cells possess a number of benefits. First of all
they're efficient. Our initial commercial units will operate on natural
gas or propane, and are expected to achieve 40% electrical efficiency.
When excess heat generated by the fuel cell is captured and used for
hot water or heating, overall efficiency can exceed 80% and even 90%.
Another advantage is reliability. On-site power from a fuel cell
offers reliable power generation that is not affected by weather-
related outages. Fuel cells contain no moving parts, rendering the
system both easy to maintain and relatively noiseless.
And perhaps the most compelling benefit of this technology has to
do with the air we breathe. Fuel cells can significantly contribute to
the abatement of environmental effects from combustion-based power
generation by reducing emissions to near zero. Smog-causing particulate
matter and other pollutants--such as acid rain produced by nitrous
oxide and sulfur dioxide--can become a thing of the past. Carbon
dioxide, more often called ``greenhouse gas,'' can be reduced by half
when the fuel cell is designed to capture waste heat.
Add to all these benefits that of economy. Fuel cells cost less to
operate--in many cases, offering 20-percent cost savings over grid-
supplied electricity.
Mr. Chairman, in this era of deregulated, open energy markets,
competition and consumer choice are the arbiters of the market. But to
truly open our energy markets and give consumers real choice, we need
to break down some of the barriers that still exist. From
interconnection standards to stand-by fees and exit charges, consumers
are faced with barriers that can keep fuel cells out of the
marketplace. A national standard on interconnection would go a long way
towards leveling the playing field so that innovative technologies,
such as fuel cells, can bring true consumer choice.
How can we move ahead? Our national labs could serve as an
important test bed for the deployment of innovative technologies.
Working in concert with our national labs across the country, we would
like to site several hundred units in the field to gain real experience
in working with state public utility commissions to address consumer
benefits, system standards and interconnection issues. Through this
type of test-and-evaluation plan, we could accelerate the adoption of
this technology and gain real experience in addressing the issues that
confront distributed generation on a national level.
The Plug Power product vision is an environmentally friendly fuel
cell, more reliable than the grid, that installs easily, uses readily
available fuels, saves consumers money, powers the whole house and is
the size of a dishwasher. Our partners have committed over $100 million
to accomplishing this vision. The vision is becoming very real, very
quickly. If you have a minute after the hearing, I invite you to take a
look at a Plug Power 7000 demonstration system. Field trials with these
alpha test units will begin this fall.
Mr. Chairman, thank you for the invitation and the opportunity to
share our views on innovation and competition within our energy
markets.
Mr. Shimkus. Next is Mr. Ken Randolph, Senior Vice
President and General Counsel of Dynegy, Incorporated, and I
will say, as we talked earlier, welcome to Illinois and I hope
you provide me as good a service as Illinois Power once did.
You are recognized for 5 minutes.
STATEMENT OF KENNETH E. RANDOLPH
Mr. Randolph. Good morning, Mr. Chairman, and members of
the committee. By the way, we are delighted to be in Illinois
and continuing to operate Illinois Power once we consummate the
merger at the end of the year in the first quarter.
Dynegy is one of the country's leading marketers or energy
products and services, and we commend this committee for your
efforts in examining whether Federal legislation is needed in
order to facilitate the realization of the anticipated $20-
plus-billion of customer savings expected from electric
deregulation.
We think this suggests everyone ought to keep their eye on
that ball because that is really what it is all about.
In Dynegy's view, establishing a competitive market without
regulatory burdens and cross-subsidies is the best way to both
maximize customer savings and enhance reliability.
Mr. Chairman, Dynegy believes that there are at least five
distinct benefits that customers realize from electric
restructuring.
One, extending existing wholesale power sales and price
risk management services to industrial and large commercial
customers who can become more competitive in world markets.
Two, providing low-cost power to residential and small
commercial customers via sales to aggregators or retail
alliances.
Three, building new, efficient, and environmentally
friendly gas-fired merchant power plants to meet base,
intermediate, and peaking loads. Competitive power producers
are building and developing more than half of the 92,000
megawatts of announced merchant capacity that will be built by
2003.
For example, last month Dynegy brought on line, following
an unprecedented 5-month construction timetable, a 250 megawatt
gas-fired peaking plant outside of Chicago, and we are
developing gas-fired power plants in North Carolina, Georgia,
Kentucky, and Louisiana.
We probably hope that we, or wish that we had that 250
megawatts on line in the Northeast. We could have helped meet
some of that demand. But you will notice we are not having the
same situation in the Midwest this year.
In addition to providing clean, low-cost power, these new
merchant plants will enhance the reliability of the
transmission grid by acting as a surrogate for increased
transmission capacity and will do so without creating a new
generation of potential stranded capital costs.
Four, we are acquiring generation divested by regulated
utilities optimizing its use and making it more efficient.
Five, there will be a whole host of other services that
will benefit consumers as a result of electric deregulation and
restructuring, and that will be covered by the other panelists
today.
As you know, retail electric restructuring is proceeding
rapidly. Over 20 States are already done. However, in order to
maximize customer savings from electric restructuring, which I
think is the goal to keep in mind, we believe that Congress
should take bold action in three areas:
First, and bear with me on this one, we still believe
Congress should establish a date certain such as January 1,
2002, for all States to implement retail customer choice. A
national deadline will avoid regional market distortions and
maximize customer savings nationally.
Second, we believe that Congress should provide incentives
for utilities to divest generation and provide FERC with
authority to order divestiture of generation assets to mitigate
market power and any stranded-cost claims.
The market has demonstrated that the single biggest factor
in reducing so-called ``stranded costs'' has been the decision
by utilities, either by their own volition or as a result of
State electric restructuring laws, to divest generation. In
addition to minimizing stranded costs, divestiture of
generation mitigates utility vertical market power and helps to
mitigate utility marketing affiliate issues.
Third, we believe Congress should repeal PUCA and repeal
PURPA prospectively. These laws have simply outlived their
usefulness. Repealing PUCA will facilitate additional utility
merger and acquisition activity, which will allow for billions
of dollars of costs and inefficiencies to be squeezed out of
the system quicker.
Prospective repeal of PURPA, including eliminations of the
restrictions on utility ownership of QFs and EWGs will expedite
and enhance the voluntary renegotiation of those high-priced,
above-market contracts, and we have done some of that. And it
can be done in a way which will save millions for consumers and
not adversely impact QF owners and lenders.
However, if a date certain and incentives for divestiture
are not in the cards, then Dynegy would recommend that Congress
pass a limited bill now eliminating PUCA and PURPA, allow the
States and the markets to proceed for the next 18 months and
come back in 2001 and examine the need for a comprehensive
bill.
We believe that the last thing that we need in this market
is additional mandates or cross-subsidies for things like
renewable mandates and so forth that would simply add costs to
the system and dilute the benefits.
Thank you again for allowing me to testify today.
[The prepared statement of Kenneth E. Randolph follows:]
Prepared Statement of Kenneth E. Randolph, Senior Vice President and
General Counsel, Dynegy Inc.
Good morning, Mr. Chairman and Members of the Committee, my name is
Ken Randolph and I am Senior Vice President and General Counsel of
Dynegy Inc. Dynegy is one of the country's leading marketers of energy
products and services. Through its leadership position in natural gas
gathering, gas processing, transportation, independent power generation
and marketing of energy, Dynegy provides energy solutions to our
customers in North America and the United Kingdom. Dynegy is one of the
leading examples of a company working with its customers to capture the
opportunities created by electric deregulation and the energy
convergence trend. Most recently, on June 14, 1999, Dynegy announced
the execution of definitive agreements for the merger of Dynegy and
Illinova, the parent company of Illinois Power, an electric and gas
utility that serves approximately 650,000 customers over a 15,000
square mile area of Illinois. The merger will create a $7.5 billion
company, which is expected to own and/or control more than 15,000
megawatts of gross domestic generating capacity, average North American
natural gas sales of 9.1 billion cubic feet per day and serve more than
950,000 retail customers. Subject to regulatory approvals, the merger
is expected to close late in 1999 or in the first quarter of 2000.
Dynegy commends this Committee for its efforts in gathering
information and attempting to determine the extent to which federal
legislation is needed to facilitate the realization of the anticipated
$20+ billion per year of customer savings expected from electric
restructuring while enhancing the reliability of the electric grid. In
Dynegy's view, establishing a competitive market without regulatory
burdens and cross subsidies is the best way to both maximize customer
savings and enhance reliability. Mr. Chairman, Dynegy believes there
are at least five distinct benefits that consumers will realize only if
providers are allowed to compete. These include:
Extending existing wholesale power sales and price risk
management services to industrial and large commercial
customers.
Providing low cost power to residential and small commercial
customers via sales to aggregators or retail alliances.
Building new efficient and environmentally friendly gas-fired
merchant power plants to meet base, intermediate and peak
loads. For example, last month, Dynegy brought on line
(following an unprecedented five month construction timetable)
a 250 MW gas-fired peaking plant outside Chicago and is
developing gas-fired power plants in North Carolina, Georgia,
Kentucky and Louisiana. Competitive power producers are
developing more than half of the 92,000 MW of announced
merchant capacity to be built by 2003. In addition to providing
clean low cost power, these new merchant plants will enhance
the reliability of the transmission grid by acting as a
surrogate for increased transmission capacity and do so without
creating a new generation of potential stranded capital costs.
Acquiring generation divested by regulated utilities,
optimizing its use and making it more efficient.
Providing a whole host of other services that will benefit
consumers. For example, providers will offer services to
encourage greater energy efficiency. In order to give consumers
even greater control over costs providers may also offer hourly
pricing programs that will encourage use during off-peak hours
or evaluate the possible installation of distributed
generation.
As you know, retail electric restructuring is proceeding rapidly in
the states with over 20 states having adopted customer choice, most of
which will be fully effective on or before January 1, 2002. However,
there is a critical missing link B development of a robust, liquid
wholesale power market. Dynegy believes that federal electric
restructuring legislation could enhance the development of both retail
and wholesale power markets, and in so doing, maximize savings for
customers resulting from competition. Mr. Chairman, to accomplish this
goal the Congress must take bold action in three areas.
First, it must ESTABLISH A DATE CERTAIN for all states to
implement retail customer choice. A national deadline will
avoid regional market distortions and maximize consumer cost
savings nationally. Dynegy believes a January 1, 2002
nationwide deadline provides the appropriate balancing of
national and state interests.
Second, it must provide incentives for utilities to DIVEST
GENERATION and provide FERC with authority to order divestiture
of generation assets to mitigate market power and stranded cost
claims. The market has demonstrated that the single biggest
factor in reducing so-called stranded costs has been the
decision by utilities (either on their own volition or as a
result of state electric restructuring laws) to divest
generation. Contrary to claims previously made by utilities,
these generation assets have brought premium prices, in some
cases more than double book value--and Dynegy has bought some
of the divested generation assets. In addition to minimizing
stranded costs, divestiture of generation mitigates utility
vertical market power, and helps to mitigate utility marketing
affiliate issues.
Third, it must REPEAL PUHCA AND REPEAL PURPA, PROSPECTIVELY.
These laws have outlived their usefulness. Repealing PUHCA will
facilitate additional utility merger and acquisition activity,
allowing for billions of dollars of costs and inefficiencies to
be squeezed out of the system quicker. State PUCs can then do
what they do best which is allocating the savings delivered by
competition between ratepayers and utility shareholders.
Prospective repeal of PUHCA (including the elimination of
restrictions on utility ownership of QFs and EWGs) will
expedite and enhance the voluntary renegotiation and
restructuring of high priced above market power sales
agreements to better reflect current market realities. Based on
experience, the competitive market can provide opportunities to
renegotiate and restructure these contracts in a way which will
save millions for consumers without adversely impacting QF
owners and lenders.
If a Date Certain and Incentives for Divestiture of Utility Owned
Generation are not going to be part of Federal Electric Restructuring
legislation, then Dynegy suggests that this Congress pass a limited
bill repealing PUHCA and PURPA now, allow the states and the market to
proceed for the next 18 months, and re-examine the need for federal
electric restructuring legislation in 2001. What the competitive market
and consumers don't need in federal electric restructuring legislation
are renewable mandates which would be paid for by consumers and models
show would come at the expense of clean-burning, efficient natural gas
fired generation. The competitive market and consumers also don't need
to have federal electric restructuring legislation used as a backdoor
vehicle to implement the Kyoto treaty or otherwise to divert consumer
savings from electric restructuring to pay for greenhouse gas
reductions or for social programs. The future of the electric power
industry has never been brighter and Dynegy encourages Congress to
remove the barriers that exist today to achieving the savings that can
be delivered by the competitive market and to avoid calls for cross
subsidies or the creation of new barriers that will interfere with or
dilute the benefits of competition.
Mr. Shimkus. Thank you.
Next we have Maj. Gen. Ed Philbin, Executive Director of
Media Fusion Corporation. Welcome, and you are recognized for 5
minutes.
STATEMENT OF EDWARD J. PHILBIN
Mr. Philbin. Thank you, Mr. Chairman, members of the
subcommittee, as the designated Executive Director of the
proposed field test activities of Media Fusion Technology at
the Stennis Space Center in Mississippi. I am here to inform
you of the new and innovative services that the corporation
plans to provide by its revolutionary technology.
In light of my past regulatory experience as Chairman and
Commissioner of the Interstate Commerce Commission, and as
Acting Chairman and Commissioner of the Federal Maritime
Commission, I will also offer my views on the possible barriers
which would prevent these services from being offered to
consumers.
There have been many attempts to utilize the electric power
grid for the transmission of communications signals, all of
which have met with little or no success. All of these attempts
have utilized the alternating current within power lines as a
signal carrier.
Media Fusion utilizes the magnetic sheath around the power
line created by the alternating current within the power line
as the signal carrier. This technique overcomes the obstacles
encountered in the past by others.
Since much of this data is proprietary and is in the patent
process, I will say no more about it. However, I will mention
many of the services that will accrue to customers and
utilities when this technology using the electric power grid
for communications transmission is perfected.
It is called Advanced Subcarrier Modulation Technology and
it offers data, video, and voice transmission over the power
grid at faster than 2.5 gigabits per second with guaranteed
authentication of the user's identity.
Media Fusion believes it is the only organization to have
solved the problems of access to homes, limited bandwidth, and
prohibitive capital costs.
The corporation is currently in the process of negotiating
relationships with electric utilities, telecommunications
companies, cable companies, information subscriber
organizations, and technology manufacturers.
All applications may be licensed to competing markets
equally. Although content providers may compete in their
current formats, all share the need for reliable and verifiable
security programs and all stand to benefit from the use of the
Media Fusion pipeline.
This technology will provide highspeed information networks
for rural areas, elementary schools, and developing nations;
improve grid management, enabling electric utilities to predict
material failures causing brownouts or worse; and provide
secure financial transactions and e-commerce of all kinds.
This technology will make possible real telecommunications
deregulation and cheaper electrical services as utilities
obtain more efficient means of managing their grids.
Media Fusion Technology will be an enhancement to the
Internet, an unregulated market, the growth of which would have
been stifled by regulation.
This technology is also the solution to the final mile.
That is what the FCC calls it, and it is the final entry point
into every home and business which marks the greatest barrier
to competition in telecommunications because it is controlled
by regulated companies and industries.
And finally, due to its speed and security, this technology
will open the door to competition in a myriad of other
industries.
Other applications will result from Media Fusion's
extremely accurate electrical measurements. As the Media Fusion
neural network can recognize the smallest changes in appliance
electricity use in the home, the system can provide profiles of
customer appliance use.
Collectively, these user portraits represent demographic
and market trends.
And finally, the historic electrical industry's request for
remote meter reading solution will be ended. Media Fusion can
supply remarkably accurate customer kilowatt usage information
to power companies for billing purposes.
In the United States, patents on powerline communications
were first filed in the 1930's. Soon afterwards, the electrical
and communications industries were isolated by regulation for
economic reasons. Telephony and electricity grew up separately
until divestiture and deregulation.
Since the 1996 Telecommunications Act spread deregulation
of electrical utilities across the States, powerline
communication has again become a topic of interest in the
United States and Europe and the Far East.
Media Fusion's technology imbeds signals on the magnetic
wave to offer a superior and less expensive solution for
powerline communications.
Using the magnetic wave, Media Fusion's signals are
insulated from transformer effects, and also offers higher
bandwidth capacities enabling Media Fusion to offer more
services of voice, video, and data over the same pipeline.
Even nonpowerline communications and data services have
difficulty matching Media Fusion's capacity and low cost. Any
assumption that Media Fusion is in competition with telephone
or cable companies is incorrect.
Media Fusion offers a pipeline to any company that wishes
to use it to optimize its network and reach more customers. The
bandwidth capacity of Media Fusion's pipeline can support as
many content providers as wish to use the network.
Media Fusion will not only empower existing communications
companies but also revolutionary new patents on components of
the system from polymers to magnetics that will lend themselves
to positive developments in many other industries.
Many startup companies with new technologies are concerned
with premature regulation, and Media Fusion is no exception.
In a move to prevent misunderstanding among regulators of
powerful communications firms that may wrongly perceive Media
Fusion's technology as a threat, Media Fusion proactively seeks
the support of Congress.
We have briefed numerous House and Senate committees to
that effect.
As Media Fusion Powerline Communication technology does not
apply to today's regulated categories, communications or
energies, we realize the need to brief Federal and State
communications energy regulatory authorities on this new
technology.
To date, the company has been able to develop its
technology free of any regulatory burdens. However, there is
concern that regulatory uncertainty could undermine the ability
of electric utilities and others to offer powerline
communications generally--for example, by sending mixed signals
to investors as to the feasibility of such deployments. The
speculation is that there may be an attempt to subject Media
Fusion to some degree of regulation, however light, by the
Federal Communications Commission, as a competitive local
exchange carrier when providing local telephone service and
possible cable regulation when providing video service.
Mr. Shimkus. General, can I ask you to kind of summarize
real quick the last page?
Mr. Philbin. Basically, my regulatory experience has been
that the rule really should be that no regulation should be
applied until there has been a problem identified as adverse to
either the public interest or the public in general, and I
would suggest that in this particular area--especially in light
of this new developing technology--that the rubric should be
applied. Don't fix it if it ain't broke.
[The prepared statement of Edward J. Philbin follows:]
Prepared Statement of Edward Philbin, Executive Director, Media Fusion
Technologies
Good morning Mr. Chairman. I am Edward Philbin. As the designated
Executive Director of the proposed field test activities of Media
Fusion Technologies at the Stennis Space Center in Mississippi, I am
here to inform you of the new and innovative services that the
corporation believes will be provided by its revolutionary technology.
In light of my past regulatory experience as Chairman and Commissioner
of the Interstate Commerce Commission, now transformed into the Surface
Transportation Board, and as Acting Chairman and Commissioner of the
Federal Maritime Commission, I will also offer my views on the possible
barriers which would prevent these services being offered to consumers.
There have been many attempts to utilize the electric power grid
for the transmission of communication signals, all of which have met
with little or no success. All of these attempts have utilized the AC
current within powerlines as the signal carrier. Media Fusion utilizes
the magnetic sheath around the power line created by the AC current
within the power line as the signal carrier. This technique overcomes
the obstacles intrinsic to using the AC current as the signal carrier.
Since much of this data is proprietary and is in the patent process, I
shall say no more about it; however, I will mention many of the
services that will accrue to consumers and utilities when this
technology using the electric power grid for communications
transmission is perfected. ASCM technology offers data, video and voice
transmission over the power grid at faster than 2.5 Gbs with guaranteed
authentication of the user's identity. Media Fusion believes it is the
only organization to have solved the problems of access to homes,
limited bandwidth, and prohibitive capital costs. The corporation is
currently in the process of negotiating relationships with electric
utilities, telecommunication companies, cable companies, information
subscriber companies and technology manufacturers. All applications may
be licensed to competing markets equally. Although, content providers
may compete in their current formats, all share the need for reliable
and verifiable security programs, and all stand to benefit from the use
of the Media Fusion ``pipeline.''
This technology will provide high-speed information networks for
rural areas, elementary schools and developing nations; improve grid
management, enabling electric utilities to predict material failures
causing brown-outs or worse; and provide secure financial transactions
for banks, brokerage houses and e-commerce of all kinds. This
technology will make possible real telecommunications deregulation and
the costs of electrical services could drop as the utilities obtain
more efficient means of managing their grids. Media Fusion technology
will be an enhancement to the Internet, an unregulated market, the
growth of which would have been stifled by regulation. This technology
is also the solution to the ``Final Mile'', i.e., the final entry point
into every home and business, which marks the greatest barrier to
competition in telecommunications because it is controlled by regulated
companies and industries. Finally, due to its speed and security, this
technology will open the door to competition in a myriad of other
industries.
Other applications will result from Media Fusion's extremely
accurate electrical measurements. As the Media Fusion neural network
can recognize the smallest changes in appliance electricity use in the
home, the system can provide profiles of customer appliance use.
Collectively these user portraits represent demographic and market
trends. And, finally, the historic electric industry quest for a remote
meter-reading solution will be ended. Media Fusion can supply
remarkably accurate customer kilowatt usage information to the power
companies for billing purposes.
In the United States, patents on power line communications were
first filed in the 1930s. Soon afterwards, the electrical and
communications industries were isolated by regulation for economic
reasons. Telephony and electricity grew up separately until divestiture
and deregulation. Since the 1996 Telecommunications Act, and the
spreading deregulation of electrical utilities across the states,
powerline communication has again become a topic of interest in the
United States, in Europe and the Far East.
Media Fusion's technology embeds signals on the magnetic wave to
offer a superior and less expensive solution to powerline
communications. Using the magnetic wave, Media Fusion's signals are
insulated from transformer effects and also offer higher bandwidth
capacities enabling Media Fusion to offer more services--voice, video
and data. Even non-powerline communications and data services have
difficulty matching Media Fusion's capacity and low costs.
Any assumption that Media Fusion is in competition with telephone
or cable companies is incorrect. Media Fusion offers a pipeline to any
company that wishes to use it to optimize its network and reach more
customers. The bandwidth capacity of Media Fusion's pipeline can
support as many content providers as wish to use the network. Media
Fusion will not only empower existing communications companies, but
also revolutionary new patents and components of the system, from
polymers to magnetics, will lend themselves to positive developments in
many other industries. Many start-up companies with new technologies
are concerned with premature regulation. Media Fusion is no exception.
In a move to prevent misunderstanding among regulators or powerful
communication firms that may wrongly perceive Media Fusion's technology
as a threat, Media Fusion proactively seeks the support of Congress.
The Corporation has presented positively received briefings to the
House Science Committee and the Senate Commerce Committee.
As Media Fusion's power line communications technology doesn't
apply to today's regulated categories -communications or energy--we
realize the need to brief federal and state communications and energy
regulatory authorities on this new technology.
To date, Media Fusion has been able to develop its technology free
of any regulatory burdens; however, there is concern that regulatory
uncertainty could undermine the ability of electric utilities and
others to offer powerline communications generally, e.g., by sending
mixed signals to investors as to the feasibility of such deployments.
Speculation is that there may be an attempt to subject Media Fusion
to some degree of regulation, however light, by the FCC as a
competitive local exchange carrier (CLEC) when providing local
telephone service and possible cable regulation when providing video
service. But, forcing a new, revolutionary technology into an old
regulatory mold merely because it bears some resemblance to an old,
existing regulated technology makes very little sense. To do so is more
likely to obstruct or to completely stifle full development of the
technology rather than nurture it. The approach I urge is to impose no
regulation on this new technology, which when perfected, will amount to
a paradigm shift in telecommunications technology, unless and until it
creates an identifiable problem adversely affecting the industry and/or
the public. In short, I would apply the old rubric: ``If it ain't
broke, don't fix it.''
The FCC and the states should expressly acknowledge that new
technologies such as Media Fusion's are in the public interest and
should be encouraged. Regulators must be careful not to burden new
technologies with the regulatory baggage of ancient regimes. There are
several ``regulatory models'' actively being applied to different
industries, even as discrete industries and services begin to merge. As
new technologies emerge, it is critically imperative that government
refrain from requiring a particular regulatory classification so that
technology and economics, rather than regulation, can guide the
deployment of advanced services. Finally, the federal and state
governments must be mindful of the incentives of incumbent providers
and be prepared to act in the event they impede the competitive
provision of advanced services such as those of Media Fusion.
I appreciate the invitation to appear before the Subcommittee and
applaud its willingness to look beyond today's horizon to new
participants in the advanced communications services market. Electric
power line communications hold vast potential to provide these services
to the public and serve the public interest. As a company dedicated to
the development, installation and management of a low-cost
infrastructure to provide reliable voice, data and video communications
over the electrical power grid, Media Fusion welcomes the opportunity
to play a leading role in the deployment of advanced data capabilities.
To meet the pro-competitive goals of the 1996 Act, Congress should
expressly find that such developments are in the public interest and
refrain from imposing any unnecessary regulation that could impair the
development of this new technology.
I will be pleased to answer as best I can any questions you may
have.
Mr. Shimkus. Thank you very much.
I now turn to Mr. Tom Tribone, Executive Vice President of
AES Corporation from Arlington, Virginia. Welcome, and you are
recognized for 5 minutes.
STATEMENT OF THOMAS A. TRIBONE
Mr. Tribone. Thank you, Mr. Chairman and good morning.
We are proud also to be a new member of the community in
Illinois, Mr. Chairman. We are the company that is in the
process of merging with CILCO----
Mr. Shimkus. If you would, just pull that microphone a
little bit closer to you and make sure that that switch is on.
We are high-tech here, so it has to be fairly close.
Mr. Tribone. Okay. My name is Tom Tribone, Executive Vice
President of AES Corporation.
As I was preparing my comments for today, my young
daughters asked me what I was going to talk about. I could not
help myself but to say ``the amazing disappearing natural
monopoly.'' Any of you who are still reading to your kids at
night like we are will understand how those kinds of things
just pop out once in awhile.
But this idea that the scope of the electricity monopoly is
really quite small, and that free markets work has been a
guiding principle of our work at AES since the beginning. It
will be the central theme of my comments today.
I have given some background material on AES in my written
statement and I will not try to cover it all now. Suffice it to
say that we are I think the largest global power company. We
are serving almost 100 million people in over 49 countries, and
we have a tremendous amount of experience in competitive
markets both here at home and abroad.
We happen to think that private business can be a major
force for positive change in the world, so we have designed our
organization to try and do just that and to be enjoyable at the
same time.
I am not going to talk about those aspects of our company
in detail now because I would like to stick with the
disappearing, or at least the quickly shrinking natural
monopoly.
I have asked the experts in this field of regulation for a
little history, and it turns out that in the early days of
regulation it was correctly recognized that the provision of
certain services was a natural monopoly and therefore had to be
completely regulated. So electric, gas, railroads, telephone,
all fell into that category.
Then what happened over time is that anything that had any
connection with any of these regulated industries was included
in the regulatory scheme also.
An example was that when the trucks began to compete with
the railroads, the trucks were regulated too.
It seems that the turning point in this thinking was
sometime in the 1970's when Alfred Kahn, who was then
regulating in New York, was setting prices for those old black
rotary telephones when he thought to ask the question. Why did
the phone company have a monopoly on the production and sale of
telephone sets?
You probably remember how clunky those old phones were.
Your fingers would slip out when you tried to dial fast, and
there just was not any choice. It was a monopoly, and that is
what we had.
My friends in the UK tell me that the consumers over there
had even a worse time because they, for their emergency number,
instead of 911 like we have here, they had 999. You can imagine
trying to dial in an emergency 999 fast with your fingers
slipping out of one of these clunky old phones. But that was
the state of play when Alfred Kahn first recognized that some
of this natural monopoly thinking had to change.
So telecommunications of course--and we have heard a little
bit here from the General--has made a lot of progress since the
days of the black phones. In electricity we have made some
progress, too. But really we are only starting.
Although a part of the electric sector has experienced free
markets and competition for awhile, that part has been
relatively small. Our company, AES, has always operated in this
competitive sector of the market.
We did not have a protected monopoly base to start from,
and we have grown from a startup to a $20 billion enterprise
today in this competitive sector.
I think our growth, in and of itself, is probably one of
the strongest statements I can make today about how open
markets will work in electricity.
At AES we have had experience with many different
regulatory models around the world. The one thing that we see
over and over is how in each new iteration of the restructuring
of the industry the competitive, consumer-centric part grows
and the monopoly regulated part gets smaller and smaller.
Here in the U.S. in the 1980's, when some competition was
first introduced by PURPA to a small portion of the generating
sector, all of us were surprised at the creativity and
innovation that occurred.
The scope of what we could do back then was quite limited
by today's standards. Only about 2 percent of the sector was
opening up to competition each year. But AES did manage to
introduce a few new ideas then.
We became the biggest buyer of clean coal technology that
could burn coal with 90 percent less sulfur and nitrogen oxide
emissions. These emission levels are standard today, but back
then it seemed pretty radical to almost everybody.
We were also the company that pioneered the idea of
planting trees to offset the greenhouse gases produced by
burning fossil fuels.
Other countries have now gone all the way to open and free
competition in electricity, and they have completely
restructured their electric sectors.
We have investments in many of these countries, and in
every case we found the same thing. Free markets can and do
work in electric. They are perfectly capable of setting prices
and quality for electric services.
In fact, we have seen that in every case where markets have
been open and deregulated, prices have fallen and service has
improved.
In my written testimony, I gave an example of Argentina
where prices fell by 50 percent, but that could just as well
have been Australia or the UK.
Maybe to sum up, I can give you a thought to reflect on the
next time you hear someone mention a phrase that represents one
of the central sticking points in this whole debate during the
transition in the electric sector, the so-called ``obligation
to serve.''
Under the cost-plus regulatory system we have today, we
often hear that utilities have this burdensome obligation to
serve anyone who wants electricity. But to a company like us,
AES, this apparent burden is a valuable privilege and we would
pay to have it.
I hope you can see from my comments how for us thinking in
terms of a market where a customer can vote and has choice it
is transformed from an obligation to serve into what keeps a
company like us going, the opportunity to serve.
Thank you.
[The prepared statement of Thomas A. Tribone follows:]
Prepared Statement of Thomas A. Tribone, Executive Vice President, AES
Corporation.
My name is Thomas A. Tribone and I am Executive Vice President of
the AES Corporation. My company is headquartered here in the Washington
D.C. area. We are one of the largest global power companies with over
30,000 megawatts of generating capacity, 14 million retail customers
and 27,000 employees.
AES was started by Roger Sant and Dennis Bakke (both former energy
officials in the Ford Administration) in late 1981. I have been working
with Roger and Dennis since early 1982. We began as a non-utility
generator developing Independent Power Plants in the United States and
from our first power plants in Texas, Pennsylvania and California we
have grown to a $20 billion global company today. AES is working in
over 49 countries, serving the electricity needs of over 100 million
people. All of this growth has taken place in the competitive sector of
the power industry here In the United States and abroad. We have seen
the beneficial effects of introducing a competitive model in the
electric sector over and over again as we work to help meet the world's
need for electricity. I plan to describe some of our experience for you
in my testimony today.
The map below indicates where AES is doing business:
[GRAPHIC] [TIFF OMITTED] T1439.001
We believe that private business, operating in a free market
environment, can be one of the major forces for improving the human
condition in the world today. On a macro level commerce is, in the
words of Michael Novak, ``mysteriously knitting the people of the world
together.'' At AES we are vividly reminded of our own small role in
this process when we host a company event at our headquarters here in
Arlington, Va. Those AES meetings look like the United Nations--people
are here from all over the world, many in their native dress and, we're
proud to say, all of them either already fluent in or earnestly
learning English. In our last company-wide meeting we had people from
at least the following countries present: Argentina, Australia,
Bangladesh, Brazil, Canada, China, Dominican Republic, Kazakstan,
Georgia, Hungary, India, Korea, Mexico, Netherlands, Pakistan, Panama,
Poland, Russia, Singapore, Sri Lanka, United Kingdom, United States,
Uganda and the Ukraine.
On a less global, personal level we believe that business is a
noble calling that should allow each person to experience the
fulfillment that can only come from making a contribution to the world.
To this end, AES has developed a set of principles that we aspire to
live by and that guide our decision-making. We strive to act with
integrity and fairness, conduct our business in a socially responsible
manner and to have the most enjoyable and fun workplace ever. This
latter aspiration has led us to a very decentralized organization in
which our leaders give up decision making power to those closest to the
decision. I've listed some of the characteristics of our organization
in the following table:
[GRAPHIC] [TIFF OMITTED] T1439.002
Ultimately, our hope is that our organization allows each
individual to maximize his or her God-given ability to make their best
contribution to the world.
Our growth in the 1980's took place exclusively in the United
States. In those days the US electric sector had not really introduced
much competitive reform but PURPA did create some space for competition
for new generating capacity. We built new state-of-the-art power plants
in several states, not only Texas, Pennsylvania and California but also
Connecticut, Hawaii, Oklahoma. All of these early plants
sold their output to local electric utilities that operated under a
regulated monopoly franchise.
Looking back from where we are today, there was not much scope for
creativity, innovation and customer choice in this early stage of
reform. Customer preferences and open markets were not really under
serious policy debate back then. But even the limited competition of
this era allowed us to introduce several innovations to the market
that, although taken for granted today, seemed fairly radical to others
in the industry at the time. One example was our wide adoption of clean
coal technology (with much lower sulfur dioxide and nitrous oxide
emissions) for producing electricity; another was our idea to plant
trees to offset the greenhouse gases produced by burning fossil fuels.
In addition to the organizational, technical and environmental
innovation I've mentioned, we pioneered several new commercial and
financial structures that are standards in the industry today. In the
80's, however, the range of ideas that we could try we were quite
limited by the industry's legal structure. I can remember feeling that
we could unleash a lot more creativity in the industry if we could
introduce a more market-driven, competitive and consumer-centric
structure.
Much more change came in the late 1980's and into the 1990's. Our
experiences up to that time in the United States had led us to the
conclusion that there was a much more socially effective model for the
provision of electricity. It seemed clear to us that most of what was a
regulated monopoly industry would yield much better results for society
as a whole if we could somehow give consumers of electricity a vote in
what they bought and who they bought it from. Roughly speaking, it
seemed to us that the only natural monopoly was the transmission and
distribution system--this part of the industry must remain regulated
(albeit under a new model). The rest of the electric sector's functions
(again roughly speaking, the generation and marketing of electricity)
could be best accomplished in a freely operating market where customers
have choice. This basic industry model can be diagrammed as follows:
[GRAPHIC] [TIFF OMITTED] T1439.003
As these ideas were gaining some currency in policy circles several
countries began to restructure their electric sectors along these
lines. The most important first-movers in this regard were the United
Kingdom and Chile. These basic elements where laid out in the UK in a
1989 white paper published by Margaret Thatcher's government. The white
paper outlined a new competitive model for the electric sector and it
drew upon many of the elements that had already been adopted earlier in
the decade in the Chilean model. In the 1990's these ideas spread
rapidly and many other countries have successfully reformed their
electric sectors using this basic structure.
Our experience has been that where this new paradigm has been
adopted electricity prices have fallen and quality of service has
improved. As real life example we can look at the price of electricity
in one of the most open and competitive markets--Argentina. As you can
see from the graph below prices have fallen dramatically since the
Argentine competitive model was adopted in 1992:
[GRAPHIC] [TIFF OMITTED] T1439.004
AES is a major participant in the Argentine market. We have been
able to thrive there by offering customers better service at a lower
price. We participate in all seg-
ments of the industry, including the delivery business. The electric
delivery businesses that we have invested in are regulated under a new
model that focuses on the price to the consumer, not cost. The
Argentine government published a fixed schedule of yearly prices and
then auctioned off the delivery businesses. The fixed schedule of
prices was attractive to AES because we could plan our business with
some certainty. That allowed us to make long term investments to
improve service. The prices were attractive to consumers too, because
they decline every year for the next ten years. Another, somewhat more
subtle factor present in this Argentine scheme is the introduction of
an element of competition even in the monopoly delivery segment. By
auctioning the delivery business they were able to directly capture any
monopoly premium for their citizens without the heavy-handed regulation
that can distort markets.
A colleague of mine at AES, Mr. Robert Venerus, has a good
conceptual description of this new paradigm. He calls it ``The
Shrinking Natural Monopoly.'' Our current industry structure here in
the US was designed in the 1930's around the concept of regulation of
natural monopolies. What Mr.Venerus means is that the empirical
evidence coming in from over a decade of electric sector reform around
the world teaches us that a relatively small part of the chain of
activities involved in the provision of electric services is a natural
monopoly. Now, as we restructure the largest and most important
electric sector in the world here at home we know that many functions
that were traditionally heavily regulated can be provided more
effectively by a competitive market. Customer service, metering,
billing--these are all commercial activities that are not monopolies
and can be competitively provided.
The only parts of the system that still have the characteristics of
a natural monopoly are the ``bottleneck'' facilities, namely the
delivery system. For markets to work we need many sellers to be able to
reach many buyers through an effective delivery system and we only have
one ``bottleneck'' delivery system. For the most part it's privately
owned so everyone needs open and non-discriminatory access to our
delivery grid on a common carrier basis. Ensuring such open access can
only be done at the Federal level. Under conditions of open access,
market forces are perfectly capable of setting prices. We have a lot of
experience in this area and, as I've noted, it's our belief that the
delivery service monopoly is best regulated on price not cost of
service or profit. These older models have resulted in bad investment
decisions and huge stranded costs that stifle competition. The most
effective form that this regulation can take is a contract between the
regulating entity and the owner of the delivery system that establishes
prices (and service quality) for the delivery service. This contract
should also contain mechanisms to share any productivity gains that the
owners make with consumers.
Such structures have worked well for both consumers and investors.
AES alone has invested over $3.0 billion in delivery businesses since
1996, all of them with contract-based, price regulation. Companies have
much more impetus to bring forth creative, new ways of doing business
under such a system because they can increase their profitability.
Consumers get a known, stable price and receive a share of the benefits
from any productivity gains. Here I should mention that a company like
AES, with a wealth of experience and ideas in the delivery of
electricity from around the world, is severely restricted by current
law from sharing what we have learned with consumers here at home in
the United States.
Maybe a good way to sum up is to give you a thought to reflect on
the next time you hear someone mention a phrase that represents one of
the central sticking points of the current debate-- the ``obligation to
serve.'' Under the cost-plus regulatory system we have today we often
hear that utilities have this burdensome ``obligation to serve'' anyone
who wants electricity. To a company like AES, coming at it from our
perspective of service in open and competitive markets, that glass
isn't half empty--it's quite full. To us this so-called burden looks
like a valuable right; we would pay to have it. I hope you can see how
for us, thinking in terms of a system where the customer can vote, it's
transformed from an ``obligation to serve'' to what keeps a company
like us going--namely the ``opportunity to serve.''
Thank You.
Mr. Shimkus. Thank you, Mr. Tribone.
We will conduct ourselves in the same manner we asked the
panel to. We will limit ourselves to 5 minutes for questions,
and then we will get through the panel.
So I will push the light for myself, and I will recognize
myself for the first 5 minutes.
I would like to kind of highlight. It is always beneficial
to listen to all the testimony, and I am just end up kind of on
the obligation to serve.
We balance a couple of things. We balance the national
interest, and also our local constituent interests. Mine is a
very rural District, over 300 miles, 19 counties mostly small
towns, agriculture.
So I want to first move to Mr. Perry and ask. Could you
specifically talk about providing service to the rural sector?
Could you just elaborate on that more?
Then really I guess the issue will be, we are talking about
the retail market now, how do you perceive being able to go out
in Montana 50 miles down and service a small section of rural
Montana.
Mr. Perry. The way we look at it is, for the larger
customers or industrials in the larger cities you know there is
lots of competition, and price is everything, and margins are
narrow.
So we look for the places where there isn't competition
because, as much as we are competitive, we like winning more
than we like competing.
So if we can earn an additional margin there, that makes it
worth the cost of sales to go see those customers or an
aggregate of those customers and that becomes much simpler.
In Montana, the examples I can point to are Montana
Hospital Association. They put together the 40 rural hospitals
that we have and as a group came to us and said we would like
to purchase together. That makes it easier.
We have an irrigation district as well that has approached
us and said we represent a group of farmers, and how can you
help us? Am I getting to your question?
Mr. Shimkus. Well, you are and we continue to follow up
with questions, but in the hospital association you believe a
Federal bill would have to ensure the ability to aggregate,
which is what you are doing with the hospital association?
Mr. Perry. We did not need a law that allowed them to do
that. They did it on their own. It is amazing how smart
customers are. They will figure out a way to extract a value in
the market, and I think that what deregulation or restructuring
allows us to do is allows those customers an opportunity to
think about how they can take advantage of the system.
Mr. Shimkus. But you definitely would not propose anybody
eliminating the possibility to aggregate?
Mr. Perry. Absolutely not.
Mr. Shimkus. Okay, let me go to Mr. Mittleman with the same
question on the fuel cells. I think we are all going to be
excited about fuel cells. I have always--I think it is part of
freedom, if we could disconnect ourselves from the umbilical
cord of wires, I think Americans would feel a little freer.
Talk about the actual perceived cost and how that would
affect a retail consumer out in Montana, which is really a low-
cost power State.
Mr. Mittleman. Mr. Chairman, if I may I would start by
telling a little story.
Last September we had a guy drive up in his pickup truck.
He came up to our receptionist and he said, I think his exact
quote was, ``Honey, I want my fuel cell. Where's the loading
dock?''
And she very politely explained that we are still under
research and development and we have not got any to sell.
And he said, ``No. You don't understand. I'm here for my
fuel cell.''
He reached down and he picked up a brown paper bag, a
grocery bag, and he said, ``Look. I've got my $10,000.''
And he opened it up and there was $10,000 of cash in the
bag. This man was ready to drive off with his fuel cell.
It turned out that he was a farmer that drove about 50
miles to our location from outside of Bennington Vermont. He
said. When I lose my electricity, which happens to him quite
often because it's a rural community and he is at the end of a
distribution line, he said it's not an inconvenience to me;
this is my livelihood. It is my way of life. I can't pump
water. I can't milk my cows. I can go out of business.
Paying $10,000 for a fuel cell is a bargain.
Mr. Chairman, just quickly getting to your question about
cost, within a few years after we're commercial we believe the
cost of a fuel cell will be between $3,000 and $5,000 installed
in a customer location. This will be approaching $500 per
kilowatt.
Now in comparison, if we look at the conventional grid
system today, a power plant will cost $600. The transmission
and distribution lines will cost another $400. For a total of
$1000.
So we are looking at something within a few short years of
being one-half the capital cost of the traditional grid.
Mr. Shimkus. Thank you very much.
My time has expired. I will turn to the ranking member, Mr.
Hall, for 5 minutes.
Mr. Hall. Thank you.
Mr. Mittleman, I imagine your farmer missed that radio that
he watched Rush Limbaugh on, too.
Mr. Hall. I think, Mr. Randolph, let me talk to you a
moment or so about the position or the role that FERC ought to
play and how they ought to come into it.
There are thoughts on the committee that they ought to be
severely curtailed; some that think we ought to leave them
about where they are; others that want to put more authority on
them.
I notice that the role that FERC is going to play in the
new market, how can they do that without additional Federal
guidance? And what guidance do you recommend? And you do that
with your--I know you are familiar with the recent decision by
the 8th Circuit and the effect it is going to have and the
requirement it is going to spawn onto this committee to either
write them around that decision or be relegated to wait for 2
years before we can have any type of real knowledge as to what
position FERC is going to have.
Do you have some opinions on that?
Mr. Randolph. Yes, sir. We believe that FERC probably does
need some expanded authority. What I talked about today was
addressing the market power concerns, giving them some
authority to order divestiture of generation in order to
address market power concerns and additional stranded costs.
But they probably do need some additional authority to
address the 8th Circuit's decision. This is an interstate
market. To allow power to move more freely between regions, to
alleviate regional disparities, and so forth, they could
certainly use additional authority.
We are quite active at FERC and would love to work with
them on any proposal they would have for additional authority
here.
Mr. Hall. I think from your testimony you indicated that
Dynegy is merging with a utility and are in the process of that
now that has some various generating units.
Yet, it is a little hard for me to understand. You state
that Dynegy supports incentives for divestiture of generating
assets. You seem to say that you believe that Congress has to
encourage divestiture.
Is that a carrot? Or is that a Thou Shalt? Why is it that
you are not satisfied with leaving it to the States?
Mr. Randolph. Well, there is a lot of interstate activity.
The States can only go so far. We have seen a disparity between
what different States do with generation. But to address our
particular situation, the utility that we are merging with is
in fact divesting 20 percent of their generation.
They have signed a definitive agreement to sell their 900
megawatt nuclear plant to Amergen, and that deal will close
before we close our merger with them. They have spun out their
remaining generation to a nonregulated affiliate.
So that is an example where we are in that very situation
where we are seeing divestiture of generation.
Mr. Hall. Did you work some or have some input with the
Texas law that they recently passed down there?
Mr. Randolph. Yes, sir, we did.
Mr. Hall. You seem to be calling for FERC authority to
order divestiture of generation. How does that square with the
Texas provision that gives some direction to utilities with
market power problems to take a different approach to it?
Mr. Randolph. Well the Texas bill, all in all, was in our
view better than not having a bill at all. It does have a
January 1, 2002 date certain. And as it relates to divestiture,
they did not go that far but they did order the utilities to
engage in these capacity auctions of 15 percent.
Now at one point in time they were going to require
utilities to divest down to the 20 percent level in terms of
market share within ERCOT. At the very last minute in that
bill, there was a provision that got passed that allowed
utilities to pass through environmental upgrades in their
stranded cost recovery which allowed them to exclude that from
the calculations, effectively eliminating divestiture of
generation.
We opposed that, but supported the bill anyway.
Mr. Hall. I'll take just another 30 seconds if I might, Mr.
Chairman.
You seem to be at a position where the authority FERC has
now you want to leave it where it is, maybe not enlarge it? Or
if you do enlarge it, enlarge it with a precatory clause or
something that leaves some States rights involved in it? Is
that kind of your position?
Mr. Randolph. Yes, sir, that's basically the position. I
mean, tremendous progress has been made in this market both at
the State level and in the market itself.
Mr. Hall. I met with a group this morning. Someone in the
group indicated that the court had indicated that if the
Congress did not address the decision that they were going to
give some priority to making a decision where we are not hung
out for 2 years.
I yield back--the chairman is getting after me right now. I
yield back my time.
Mr. Shimkus. There is no time to yield back, Mr. Hall,
but----
I will recognize the gentleman from Oklahoma, Mr. Largent,
for 5 minutes.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Randolph, I would like to follow up on Mr. Hall's
questions. You said that the utility in Illinois was divesting
about 20 percent of their generation assets.
Why are they doing that?
Mr. Randolph. They are doing that because it is a nuclear
plant. They only operate the one nuclear plant, whereas the
party that they are selling it to operates seven or eight
nuclear plants, and it is just simply more efficient to do it
that way.
Mr. Largent. So it is not a market power issue?
Mr. Randolph. Well it is not a market power issue, but it
is in fact a divestiture of 20 percent of the generation.
Mr. Largent. But FERC did not order it?
Mr. Randolph. They did not. And in fact a lot of it is
occurring. Utilities are deciding on their own volition to
divest.
Mr. Largent. Right. But you are saying you want FERC to
have the ability to order divestiture, even though utilities
are divesting on their own.
My question is. Do you think that market power abuse occurs
more as a result of generation, or transmission?
Mr. Randolph. I think it is a little bit of the chicken and
the egg. I think it is both. There are potential for market
power abuses in terms of the, as Mr. Tribone was talking about,
obligations to serve, things like capacity benefit margins and
so forth, where that can be utilized in terms of the control
over the transmission to sell say generation that they have at
higher prices to other utilities, and it is difficult to get
at.
Mr. Largent. What I would like you to do is explain to me
an example of market power abuse in generation when you are now
living--imagine the day when we are living in a deregulated,
ordered open access world on transmission--explain how market
abuse would occur on the generation side.
Mr. Randolph. Oh. It really, I guess, relates to if you are
in a load pocket where there is limited transmission, and you
define the market that you just simply cannot get outside of
that area because of the transmission limits.
Mr. Largent. So what you are describing is in all
likelihood a temporary problem at the beginning of the
transition to a deregulated market?
Mr. Randolph. We certainly hope that it would be temporary,
but our experience has been that it has been very difficult to
get new transmission capacity added.
Mr. Largent. I understand that.
Mr. Shimkus. Would the gentleman yield just on the point of
your previous question?
Mr. Largent. Certainly.
Mr. Shimkus. The selling of the Clinton power plant was not
a forced divestiture.
Mr. Randolph. No, sir.
Mr. Largent. You actually were selling it.
Mr. Randolph. Correct.
Mr. Shimkus. So no one is telling you to do it. You are
doing it--I mean, they are doing it of their own volition.
Mr. Randolph. We are not merged yet.
Mr. Hall. Would the gentleman yield?
Mr. Shimkus. Yes.
Mr. Hall. I understand the pattern of sales where they have
one or fewer of such. It is a pattern that is established. It
is a sensible business decision rather than a forced Federal
decision; right?
Mr. Randolph. Yes, sir. Absolutely. But however you get
there, the point is that it is a significant reduction in
market power whether done voluntarily or with incentives or
sticks from the Federal Government.
Mr. Shimkus. And I will give the gentleman back the time
that we usurped, but thank you.
Mr. Largent. Let me just ask you one final question about
that divestiture. How did they do in terms of the value that
they got in the return on their investment? In other words, how
did they do in relationship to their book value on that nuclear
plant?
Mr. Randolph. It is significantly below value. That is
where the bulk of these stranded costs are in the nuclear
assets, but there are a lot of above-book-value offsetting that
in some of the other assets.
Mr. Largent. On the other utilities----
Mr. Randolph. Correct.
Mr. Largent. [continuing] generating facilities.
Mr. Tribone, you had a comment?
Mr. Tribone. Yes, Mr. Largent.
First, we are a large producer in your State. We have the
AES Shady Point Plant. But I wanted to sort of----
Mr. Shimkus. Mr. Tribone, could you bring the microphone a
little closer again?
Mr. Tribone. I'm sorry. I wanted to chime in on this point.
We are facing these issues all over the world, not just here in
the 50 States.
I think that the key issue is the access, the transmission
and distribution system. So that companies like us who are in
the competitive sector can have the access.
You will see us more and more as we have access, and really
only the Federal Government can ensure this, because it is not
a State by State thing, it is regional or national, and you
will see us more and more moving toward the customer as we have
that access.
I mean, our company is starting a new company called Power
Direct, a brand name to deal directly with the customer. And I
am sure Dynegy is doing the same kind of things.
But these issues, I think you had it right on the money.
The generation market power is usually locational in nature,
and there have been a lot of solutions to that. And as you say,
that is a temporary problem.
The main thing is that there is a system for access to the
customers over these bottleneck facilities. That is the key
thing for us.
Mr. Largent. The truth is, even in a transitional phase
that a lot of the things that we are seeing today like fuel
cells and distributive power, they really will mitigate the
market power issue, the locational market power issue as well.
Isn't that true?
Mr. Tribone. Yes. My remarks were sort of the shrinking
natural monopoly, and right now I think most people would say
the only thing that is left is the wires. But some of these
technologies people would say there is not even a monopoly
there anymore. I mean, those can eliminate that monopoly.
Mr. Largent. If I could just one more question, since you
took some of my time, I wanted to ask Mr. Perry a question
about Montana.
Mr. Shimkus. You gave me that time, remember?
Mr. Largent. Actually, I didn't, but that's okay.
Talk about ``market power.'' Mr. Perry, you talked about
kind of the aggregation going on with the hospitals in Montana.
I guess Montana's population is what, about six or seven
hundred thousand people?
Mr. Perry. Nine hundred thousand.
Mr. Largent. Nine hundred thousand. So you are getting
close to having two Representatives in the House. That would
not be bad.
Mr. Perry. Yes, Congressman Hill is looking for a cousin.
Mr. Largent. As long as you send another good one like Rick
Hill, we will be fine.
The question I have, you know I can see how there is a
value of aggregating hospitals or large businesses,
manufacturing plants, in Montana, but the question that a lot
of members on this committee would say is. What about the small
guy? The farmer that is just out there in the corner of
Montana? Is that a customer that you guys are going to appeal
to and seek as a customer, even if he does not have the ability
to aggregate with some irrigation group that he is associated
with?
Mr. Perry. On a purely residential level, I am not sure
that we are the right company to reach out to that customer.
That is why my testimony talked about issues like Amazon
reaching that customer, or a retail grocery store, something of
that nature. I am not sure that we are the best for that.
But on a reasonable-sized user, we like to do business face
to face. What I look at in restructuring, one of the beauties
is one work, ``information.'' It is not about choice and it is
not about price, it is about information.
If I tell a rural farmer that when he runs his pivot at 2
in the morning, he can buy cheaper power because off-peak power
is 30 percent cheaper in the Northwest grid than it is on-peak,
and he says, gee, I never knew that from my utility before.
Of course he did not because the utility's incentive is
throughput, not efficiencies. He will adjust his consumption
just like we adjust our consumption on telephone long distance.
Right?
We do not call at 4:55, we wait until 5 after 5 and get
that ten-cent-a-minute rate, or eight-cent, or whatever the
discount is after hours.
Electricity offers that same thing. We need to give the
customer the right price signal. And that is what we do, is
develop products like that. Once you have that, then those
users that can modify behavior will benefit.
Mr. Largent. So in your view there will not be any rural
customers at any level that will fall through the cracks as a
result of deregulation?
Mr. Perry. You are still going to have the low-income. For
example, and the LIEAP program maybe addresses that, the Low-
Income Energy Assistance-type stuff. There is still going to be
an issue there.
There are going to be the customers that choose not to be
more efficient users of the grid, whether they are businesses
like a retail store is actually an inefficient and expensive
cost-of-service customer. They should pay a little bit more
because they cost more.
We are giving everyone the right pricing list to be more
efficient. So we actually accomplish a couple of goals in the
restructuring.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Shimkus. Thank you.
Now I would like to turn for 5 minutes to co-chair of the
Restructuring Working Group, Mr. Tom Sawyer from Ohio.
Mr. Sawyer. Thank you, Mr. Chairman.
I gathered we started at 9:30 this morning. Everybody had
such a good time last night that we just stayed over? Is that
what happened?
Mr. Shimkus. You can tell if I am in the chair and that not
that many people showed up----
Mr. Sawyer. I apologize for missing most of your
statements. I really thought we were starting at 10. It is my
fault.
Let me just begin by saying I think that one of the things
that Mr. Tribone said at the end of his commentary is
enormously important. That as we struggle with questions of
restructuring, it is very difficult to depart from the
terminology and the way of thinking that has defined an
industry for a century. So let me just offer a couple of
observations.
Then what I would really like you to do is, from the point
of view of changing technology, talk to me about how those
observations will be effective and will change.
First of all, I believe that this is happening not because
Fred Kahn got a vision in the late 1970's, but rather because
the technology changed and made it possible for the kind of
thing that he ultimately described and led to; and that that is
happening throughout this industry in ways that you represent
leading edges of.
That is to say, in brief, that this whole exercise that we
are going through in the States and here is happening not
because it should have happened a long time ago, but now for
the first time and increasingly in recent years it can happen.
Understand that it seems to me is very important in shaping
our direction.
The second is that, at least in this transitional phase,
that transmission takes on a new and very unaccustomed role
from what it was developed for and becomes actually the
backbone of competition; and that if we are going to make
competition work, that we need to pay very close attention to
how we deal with transmission among, across, and within
markets. That also goes right to the heart of what all of you
are doing.
And the third is that, even to the degree that we talk in
terms of this disaggregation of components of a vertically
integrated industry, that when we talk about generation,
transmission, and distribution that we need to prepare for a
time when those functions not only will be disaggregated but
will in many different ways become indistinguishable.
I am not going to be able to make this point if you are all
paying attention to the changing of the Chair over here.
The critical question is the degree to which generation,
per se, substitutes for transmission, substitutes for
distribution, and that we are coming into a world in which the
notion of load pockets as a problem of transmission may just as
easily be solved by a distributed generation system as it would
be by a FERC Order requiring the development of transmission.
Having said all of that, can you talk to me about the way
in which we ought to deal with, primarily, the way we build a
transmission system, a regional, cross-market grid that
anticipates that change in technology, whether it is the
technology of line loss, or new-generation capacity, or
whatever it may be?
[No response.]
Mr. Sawyer. Dead silence.
We are sitting here looking, for example, at FERC authority
in terms of transmission. We are doing it in terms that are
traditional to FERC authority. their ability to monitor the
transfer of assets among what used to be service territory,
rate of return driven public utilities.
You are talking about a very different world. building a
transmission system that goes beyond what we have today; the
equivalent of a U.S. highway system in the 1950's. Yes, it
interconnects with itself, but it was never designed to do
that. Never designed to do it.
What we are trying to do is, at least in this transitional
phase, build an interstate highway system, but we do not want
to overbuild it. And we do not want to put in place regulatory
structures that may make sense in a transitional, natural
monopoly, but may make no sense in the world that you are
preparing for.
Can you talk to me about how we build that?
Mr. Mittleman?
Mr. Mittleman. Mr. Sawyer, I may be able to help out a
little bit. One of the customers that Plug Power and G.E. will
be selling to is a rural electric cooperative. The individual
who runs that company made a very insightful comment. He said
that he views his distribution network as the stranded costs of
the future; that as new forms of distributed generation come
around, there may not be a need, or as great a need for
transmission distribution as what we have today.
So I think part of the heart of the matter comes around how
fast will new technologies come about so that they can
supplement the grid as we know it and we do not have to build
out quite as fast.
What I can tell you is that we will be commercial. Plug
Power will have commercial product in 2 years. I can also say
that the first year of this commercial product is going to be
minuscule. We are not looking at having millions of units in
the first year, or even the second.
It will probably, if the transition of our technology
happens in a way which is similar to what we saw with microwave
ovens, VCRs, cell phones, other very successful technologies,
it is typically 20 to 30 years from the time that the
technology is first introduced to the time that it is fully
penetrated within the market.
So that could put us into 2020, 2030. To the extent that we
will need more transmission and distribution lines to meet the
short-term, my gut says, yes, we probably will. But my gut also
says to be a little bit careful because these new technologies
will be coming along quickly, and where they will first come
along will be to meet the gaps so that people will not have to
put in the stranded costs of the future.
Mr. Largent [presiding]. The gentleman's time has expired.
Mr. Sawyer. It has, indeed, but we do have a comment here
if we could hear it, briefly?
Mr. Largent. Sure.
Mr. Sawyer. Thank you, sir.
Mr. Randolph. If I could add to that, I certainly agree
with distributed generation, fuel cells, energy efficiency in
the long term being a surrogate, but in the short term what is
happening now is these gas-fired merchant plants are being laid
down as quickly as possible.
I think if you tried to guess what was going to happen with
the transmission network with everything that is coming on line
in the next three to 4 years, whatever guess you make would
probably be wrong.
But if anybody is in the best position to make that
judgment on a national level, it is the FERC. It is a very
complex subject. You are going to need a lot of input from a
lot of people.
Mr. Largent. Mr. Tribone?
Mr. Tribone. To directly answer your question, there is not
an easy answer in the U.S. But as I mentioned, we are in 49
countries. Every other country went to a single-owner common-
carried system. Of course here we have 50 different
jurisdictions, and maybe 150 different owners of the
transmission system, so it is very complex. But that is the
only model I know of out there that works.
With the new regulatory structure on that common carrier,
but other countries were able to do it easier because they
started from a base of not 50 different jurisdictions with so
many owners.
Mr. Sawyer. Thanks for your flexibility, Mr. Chairman.
Mr. Largent. The gentleman from North Carolina is
recognized for 5 minutes.
Mr. Burr. Thank you, Mr. Chairman.
Mr. Mittleman, I would just make one comment on your
remarks. I think they are 100 percent accurate, if we let the
market drive the maturing process. Without allowing the market
to do it, I am not sure that you will see this development that
you saw with the microwave oven, or the cell phone, or anything
else.
The one distinct difference was the Federal Government did
not have a finger, a hand, a foot into those industries that
limited at what pace the development could take place, or the
opportunity for the markets that they could get into. And I
think that is the real reason that this panel has been
assembled to talk about innovation and other things.
I want to move to Mr. Randolph real quick. Define for me
``market powers''. Define for me market powers.
Mr. Randolph. Basically the ability to extract a higher
price from the market, or to deny a competitor access to the
market.
Mr. Burr. Define for me market powers as it relates to a
deregulated world, assuming that we write the right bill,
define for me where market powers could exist.
Mr. Randolph. Okay. In the deregulated world, that is going
to be on the transmission and distribution assets. Generation
is highly competitive.
Mr. Burr. You cannot have market power problems in
generation if you move to retail competition? Is that correct?
Mr. Randolph. On a national level that is correct. You may
be able to define a market to where that might exist because of
a load pocket.
Mr. Burr. Mr. Perry?
Mr. Perry. We have done a lot of studying of market power
and have used the Harvard Business School theory of that. One
of the five competitive forces is the power of a supplier. That
is defined not on a national but on a market-by-market basis,
whether that is in Montana or Northwest Region, or Southeast
Region, and supplies if they are oligopolistic and control most
of the supply, they have market power.
Mr. Burr. Would you agree if this committee, if this
Congress, does the correct job in legislation, which means that
at some point you have no monopolies left, that you would not
have a market power generation problem? You may have some
limitations that exist still with the transmission grid, but in
fact are we not seeing--in fact, Mr. Randolph, you are building
a gas-fired facility I think in Rockingham, North Carolina? Am
I correct?
Mr. Randolph. Yes.
Mr. Burr. Others are building facilities around the
country. I would imagine that one of the site decisions has to
do with population shift, has to do with current generation
load in a given area, probably some consideration was made when
those site determinations were made based upon the transmission
lines, the lack of adequacy or the adequacy; and that you would
not put a new generation facility at a place where the
population was declining or where there was a new transmission
feed that did not have limitations?
Are those correct assumptions on my part?
Mr. Randolph. Absolutely.
Mr. Perry. Certainly.
Mr. Burr. Let me go to the divestiture, because I will be
honest. Out of everything I have heard today, most of it I
agree with totally. The one thing I do not agree with is the
increase of authority for FERC.
I believe that that is headed in the wrong direction and is
in fact the wrong thing to do when you talk about deregulation.
The company you are merging with has divested generation
other than nuclear? Am I correct?
Mr. Randolph. They have divested out of the utility to a
non-regulated affiliate their other generation.
Mr. Burr. So they have got an affiliate that is going to
hold onto the generation now?
Mr. Randolph. Right. But they have done both, and they have
netted it all together.
Mr. Burr. But there are companies that are divesting
themselves of generation other than nuclear? Am I right?
Mr. Randolph. Oh, absolutely. And we've bought some of it.
Mr. Burr. Exactly my point. Why does FERC need to be
involved in directing that sale, encouraging that sale? Is the
market not doing it today? And in fact if we accelerate the
deregulation, if we go from 22 States to 50 States, will that
not serve as an incentive itself for you to make business
decisions based upon properties you would like to now own, or
no longer own?
Mr. Randolph. It could. It is possible that it could do
that. But in your question earlier about market power and
specific markets, in some cases you may end up with somebody
that has got 80 percent market share----
Mr. Burr. Understand that my definition of ``market power''
is a monopoly.
Mr. Randolph. Okay.
Mr. Burr. My attempt is to not have monopolies after this.
And I think that is the--if you have retail competition, true
competition, then monopoly is the only definition of market
power. Because I cannot force all the competitors to be the
best. All I can do is make sure that there is an atmosphere to
encourage as many competitors as possible; right?
Mr. Randolph. Yes.
Mr. Burr. And the development of fuel cells, and other
things, to hold everybody else honest.
Yes, sir?
Mr. Tribone. In thinking about this divestiture and
elimination of monopolies, this is probably heresy but really
what we should be thinking about is divesting the transmission
systems. I mean, generation is not the issue.
Mr. Burr. I will assure you there is no person more
passionate to get the transmission piece right than Mr. Sawyer
who asked the question on it, and I think that is the will of
the subcommittee and full committee as well.
Let me ask one last question and then I need to go make
this vote.
Should FERC continue to have the authority over mergers? Or
should we take this opportunity to place that authority at the
FTC and DOJ where a majority of the merger authority in America
exists today, with a referral to FERC for the expertise?
Would anybody like to comment on that?
Mr. Tribone. Yes. I mean I think as I have said that one
area with the Federal Government is really the transmission.
The second is this whole area of investment, and mergers, and
so on.
I did not mention it in my comments, but we, although we
have all this experience that I talked about and ways of
organizing and ways of doing things in competitive markets, we
as a non-utility company are severely restricted from
investments here in the U.S.
So that is another area where I think we need to have some
changes at the Federal level, especially the Holding Company
Act, which is very restrictive.
We cannot invest here in the U.S. And the mergers I think
are best handled by not so much at the SEC and FERC, but by the
FTC and the normal antitrust agencies I think would be the best
way to do it.
Mr. Burr. Any other comments? I have decided I am going to
miss the vote.
Mr. Randolph. As long as FERC maintains the ability to
utilize their expertise, whether it actually goes through the
FERC or through the FTC, I think that is the critical piece
because they do have so much expertise in this area. It would
be a shame to lose that.
Mr. Burr. Well I think if you looked at the history of the
FERC and the DOJ today, they certainly reach out to the
agencies that have the greatest expertise for their comments on
most mergers, if not all mergers.
The difference is that FERC up to this point has not had a
tremendous amount of mergers, and the process is very slow. I
think most of you would agree that in today's business
atmosphere to wait for 18 months for a determination by FERC as
it relates to a potential new business partner does not
necessarily serve as an incentive for the attraction of capital
for that new business, and in fact technology--Mr. Mittleman
may have his Fuel Cell up and running by then, and every
decision that you set a a criteria for the merger might be out
the window by the time somebody determined that it was okay.
Any other comments?
I welcome the chairman back. Glad to have you. I would
yield back at this time.
Mr. Barton. And what is your name?
Thank you.
We have several Congressmen who want to come back and ask
this panel questions, so I am going to ask some questions and
hopefully we will have very informative but also somewhat
lengthy answers--so we can hold the fort until the calvary
arrives again.
My first question is to you, Gen. Philbin. You are
testifying today at the request of Congressman Tauzin who is
fascinated by this new technology that you and your associates
are trying to put together.
I am an engineer and made As in physics, but I must admit I
have no clue at all about what it is you are trying to do.
What, if any, provisions should we put in the electric
restructuring bill that deals with the type of technology and
the type of product that you hope you and your company can
provide?
Mr. Philbin. Well the Congress can do two things with
regard to this technology.
No. 1 is to make public statements that this type of
technology is in fact in the public interest and should be
encouraged and nurtured.
The other aspect is that we should be allowed, with no
regulation until some problem arises that requires regulation,
to develop this technology as best we can and as quickly as we
possibly can.
Mr. Barton. Now your technology, the service, the product,
you use the electromagnetic field that is generated around a
wire that is transmitting electricity?
Mr. Philbin. That is correct.
Mr. Barton. You use that field, and you generate within
that field, or you transmit within that field the electronic
signals? Is that correct?
Mr. Philbin. That is correct. We use a microwave laser to
inscribe the signals on the magnetic corona around the wire.
Mr. Barton. So if there is no electricity going through the
wire, then you do not have a medium for your----
Mr. Philbin. Absolutely correct.
Mr. Barton. [continuing] product? Okay.
So do you pay a fee to the transmitter of the primarily
electrical current to use that electro magnetic field?
Mr. Philbin. I am sure that that is what the transmission
companies and generation companies would want. But what we wish
to do is to pay for all these things by licensing the
technology to content providers of audio, video, and data and
make our profit in that regard.
Mr. Barton. If I am Texas Utilities and I have a cross-
country transmission line, what you are saying is you license a
provider who then goes to Texas Utilities and pays a fee to use
that electro magnetic field?
Mr. Philbin. It could work that way. Or the company itself
might want to get into that kind of a business, which would
require the ability, without regulatory burdens, for an
electric company to go into that type of business, thereby
creating competition in the entire field.
Mr. Barton. Okay. Well, of all the people that are
testifying today, your part of the industry is the most exotic
in terms of what I an tell.
Let me ask the general panel this question. Is distribution
unbundling? That is, requiring regulators to allow retail
competition for products and services related to the
distribution of electricity, as an example metering, necessary
to bring the full benefits of competition to retail electric
consumers?
Does anybody want to answer that? Mr. Perry?
Mr. Perry. In Montana, we have not unbundled the meter, per
se. The utility still owns it and maintains it and operates it.
What is critical to us at this point is not the meter but
the data that the meter can give us, the hourly interval data
that allows us to shape and buy our power, balance it and so
forth. That is much more critical than owning that piece of
hardware.
There is other information that the meter can do, and I am
not an expert on that kind of thing. I think the larger
companies can speak to the ideas of using that as a cable, or
an Internet provider, and so forth and so on. But what is
critical is having incremental data every hour of every day and
the ability to reach out and grab that data on almost an hourly
basis.
Earlier we talked about technology. The one thing that we
are struck by is that we could not have deregulated power 5
years ago without the Internet, because the Internet allows us
to transmit huge streams of data back and forth between the
utility and the suppliers and the marketers so that we can
schedule and balance.
That is much more critical to us than the piece of hardware
sitting at the customer's site.
Mr. Barton. A similar question, and then I am going to
yield. Karen, have you already asked questions?
Ms. McCarthy. No, but you can come back to me.
Mr. Barton. Yes, we will get back to you.
But, Mr. Pickering, you have not asked questions, right?
Mr. Pickering. Right.
Mr. Barton. My last question before I yield to Mr.
Pickering is. How important to the deployment of distributed-
generation technology is it to include provisions regarding net
metering in our expected bill?
Mr. Mittleman, you look interested in taking a crack at
that.
Mr. Mittleman. Thank you, Mr. Chairman.
In one aspect, net metering would be a blessing for Plug
Power and for distributed generation. We would redesign our
unit. We would design a unit that would be a baseload unit
sitting at someone's house producing----
Mr. Barton. Is this your Fuel Cell over here?
Mr. Mittleman. This is our Fuel Cell off on my right.
Mr. Barton. Okay.
Mr. Mittleman. And when there were peaks, we would rely on
the electric utility grid to meet those peaks. And when there
were valleys, we would sell back to the electric utility
company.
Prior to forming Plug Power, I was a vice president with
Detroit Edison Company. I recognize that this could be the
worst nightmare come true for an electric utility company,
having to backstop distributed generation devices to running
baseload and just provide the type of service, the peaks, and
then having to accept electricity when they did not want it.
We have taken the proactive step of designing our unit so
that it can run completely independent from the grid. It is
self-sustaining. It can meet all the peaks and valleys of the
home without the grid interconnection.
What is very, very important to us are two things:
One, many utilities talk about a disconnect charge, or an
exit fee. If a homeowner was currently using the system and
decided not to, they might have to pay some large amount of
money to disconnect. That in itself could stop distributed
generation in its tracks.
The second is having a type of connection with the grid so
that if for some reason the Fuel Cell went down, we could flip
back to the grid within a very, very short time period. We are
talking 1/15th of a second. That is designed into the system
that you see right now, and we would like to work with people
like the Department of Energy and appropriate national bodies
to design Federal interconnect standards to help make that
happen.
Mr. Barton. Good.
The Chair would recognize Mr. Pickering for 5 minutes.
Mr. Pickering. Thank you, Mr. Chairman.
Mr. Philbin, General Philbin, I wanted to follow up on some
questions that the chairman started. I know that you are doing
work down at Stennis Space Center, which is in my State of
Mississippi.
In answering some of the questions as to is this technology
feasible, has there been any, at this point, demonstration or
market testing of the technology that you proposed and are
working on?
Mr. Philbin. In the laboratory the proof of concept has
been done by the Chief Scientist Luke Stewart. The purpose of
the activity at Stennis is to do a full field test on an
electric grid, which we think we could do within 3 months after
funding.
We think that we could probably field the entire system
within 14 months after we start the first field test. That has
not been begun yet.
Mr. Pickering. You mentioned 3 months after funding. Your
funding source is private, public----
Mr. Philbin. Private.
Mr. Pickering. [continuing] a combination? Private?
Mr. Philbin. Private.
Mr. Pickering. A partnership with Scana? Is that correct?
Mr. Philbin. That is one of the things being contemplated.
Mr. Pickering. Yes. But you have other private sources? Is
your financing in place so that you can keep the schedule?
Mr. Philbin. Financing is not in place, but we are dealing
with a number of companies, both American and foreign.
Mr. Pickering. Now in Europe this technology has been
demonstrated? Is that correct?
Mr. Philbin. It has been demonstrated, but not using the
technology that we are using. And it is probably unique to the
European area where the number of transformers per house is
much fewer than they are in the United States. So the problem
of getting through transformers is much more difficult.
Mr. Pickering. How do you propose to overcome the
transformer and the differences in the grid between the Europe
and American models?
Mr. Philbin. Well, because we are using the magnetic
component of the wave, it goes through the transformer without
scrubbing the signals off. The transformer basically in most
applications where the AC current itself has been the signal
carrier scrubs off all the signals. And there are so many more
transformers in the United States, the problem is exacerbated
by the very number of transformers.
In Europe they have been using work-arounds, which do not
seem to be very feasible. One is to wire around the transformer
so that the signal does not go through the transformer at all,
and there are other workarounds.
In Britain, because of the fewer number of transformers,
they have been able to service through the transformers a small
number of houses. But it is a very limited application.
What we are looking at is nationwide, Coast-to-Coast,
border to border.
Mr. Pickering. And you believe you can overcome the
transformer issue?
Mr. Philbin. We do. We know that we can.
Mr. Pickering. You mentioned regulatory uncertainty as it
concerns or relates to your deployment of this technology.
What do you mean specifically by regulatory uncertainty? As
you know, in the 1996 Telecommunications Act there was a
provision related to PUCA, but all other electric utilities by
the State preemption of imposing a barrier to telecommunication
competition.
There should not be, as I interpret the Act, there should
not be a barrier to your entry or your use of electric utility
grids to deploy telecommunications services. Is that your
interpretation?
And if not, what is the regulatory uncertainty that you
see?
Mr. Philbin. At the present time, that is our
interpretation. But there is always the problem with regulatory
mindsets that if they see something new coming down the pike,
they might want to try to force it into an existing regulatory
model because there are similarities between what we are doing
and some existing model.
We are concerned that that may occur, and financiers are
also concerned about it, as well. It is the potential for
regulation that is more of an impediment than anything else.
Mr. Pickering. You have a Notice of Inquiry before the FCC
at this time? Is that correct?
Mr. Philbin. Before the FCC?
Mr. Pickering. The FCC. We have briefed the FCC, and the
preliminary viewpoint was that, because we are using the
magnetic component that it does not apply; that the current
regulations of the FCC do not apply.
Mr. Pickering. So right now it appears positive in that
direction?
Mr. Philbin. At the moment it does, but we are afraid the
mindset may change.
Mr. Pickering. Mr. Mittleman. When is your deployment
scheduled for the Fuel Cell and your product?
Mr. Mittleman. We had a demonstration unit running a year
ago, which is still running. We will have alpha units
throughout this year. Beta units, or what we call
precommercial, next year. And starting in 2001 we will have
commercial units available.
Mr. Pickering. And what is your strategic plan, or
marketing business plan? What kind of penetration do you think
you can achieve by the year 2001?
Mr. Mittleman. At this point in time we are not releasing
the specifics of that plan. However, it will be in the range of
thousands, maybe tens of thousands, but not hundreds of
thousands and not millions.
Mr. Pickering. And over a 5-year period?
Mr. Mittleman. By 2005 we expect to have approximately 1
million Fuel Cell Units built in total.
Mr. Pickering. Thank you, very much.
Mr. Barton. The gentleman's time has expired.
Mr. Pickering. Thank you, Mr. Chairman.
Mr. Barton. The gentlelady from Missouri is recognized for
5 minutes.
Ms. McCarthy. Thank you, Mr. Chairman. And thank you very
much for this panel today.
I would like to ask the panelists to respond to a general
question, and then I would like to follow up with a more
specific question for a couple of panelists.
But given the success you have had with technology and
innovation, what is really needed from the Federal level to
help foster the continued development that you seek? And what
do you most fear in terms of Federal action?
Any of you may respond.
Yes, Mr. Tribone.
Mr. Tribone. From my standpoint, I would mention two things
I think that are really at the top of the list for us.
One is. Only the Federal Government can address this issue
of access to the transmission system, access to customers,
because that is such a bulkanized system here in the U.S.
The second thing for us is the restrictions on companies
like AES who have this broad wealth of experience in serving
customers all over the world from investing here in the United
States--and that is the Public Utilities Holding Company Act.
That is very restrictive with respect to companies like us.
I think Dynegy is the same way. Companies who are not
already utilities who are in the competitive sector really are
restricted from investing in the electric sector here.
So those are the two main things for the Federal
Government. I think the thing to fear would be that we try to
do something in this whole debate that is so comprehensive that
nothing can get done. I think I would prefer to see some things
that can get done get done versus waiting for a whole
comprehensive package, if we cannot get a comprehensive
package.
Ms. McCarthy. Any other panelists? Yes, Mr. Mittleman.
Mr. Mittleman. I think an important role that the Federal
Government has played in the past, and I hope they will
continue to play, is the support that has been lent to
distributed generation technologies through agencies like
Department of Energy and NIST, Department of Defense.
Many other countries are heavily supporting these types of
technologies. We at Plug Power believe that we need public/
private partnerships to make this a reality; that we cannot do
it by ourselves. But with the Federal Government and with State
governments we can make it real.
And we are right now at a place in time where the U.S. can
be propelled into a leadership position in fuel cell
technology, and we hope that will continue.
Ms. McCarthy. Mr. Perry?
Mr. Perry. Thank you. Two concerns.
One is that the FERC, as aggressive as they have been
toward getting to a market-based situation, become even more
aggressive in regards to specific issues like balancing within
a State.
In Montana we have proposed a way to balance on a market-
based rate, and the FERC came back and said ``cost-based.''
Except the utility that is doing the balancing invests no costs
anymore. They sold their generating assets. So we need a more
open-minded view to let the States be laboratories when the
States are willing to be laboratories, and when they are not
maybe there is some Federal to push them that way, but in
general if a State is willing to do something, let the FERC
pull back and let them.
In the longer term our issue is more related to oligopoly
power. I look down the panel and I see Dynegy and AES and they
scare a small company like us. Because if they become too
large, or if for example Bonneville Power makes it difficult to
buy directly from a Federal agency, which it has been difficult
for smaller companies to do, those are all good ways to let the
market evolve, whether it is the Fed selling directly to small
SBA-based type of companies, or the large companies not being
too aggressive in things like credit policies.
So we need to have a balance there. And I think what
Congressman Largent was talking about earlier was the
Department of Justice and using enforcement there, I think that
would probably be okay.
Ms. McCarthy. Anyone else?
[No response.]
Ms. McCarthy. I come from the State of Missouri and we have
a 6.3 cents per kilowatt hour for residential customers and a
5.5 cents per kilowatt hour for our commercial customers, and
our legislature is moving forward on legislation follow a this
study from our Public Service Commission so we can be ready to
deregulate.
And while the bill has not passed, it does address
customers and how they are able to purchase power. I want to
tell you about that, and then I want to ask a broader question
about all of our customers.
Under the bill the customers would be able to purchase
power from a Public Service Commission certified retail
electric provider under a standard offer, or an individually
negotiated contract with that retail electric provider, or a
market aggregator who would negotiate with that retail electric
provider, or an incumbent electric utility as a supplier-of-
last-resort.
But my questions to Mr. Randolph and Mr. Tribone and anyone
else who would like to weigh in is about the customer and the
idea of real-time purchasing as a consumer.
It is very appealing on its surface. What education do you
see will be needed to afford the average consumer the knowledge
base to manage their own energy usage? And further, what
accommodation would you propose to ensure that individuals who
might otherwise be economically disadvantaged or possibly less
sophisticated are not left with expensive energy to power their
home?
Noting that Missouri's kilowatt hour is very attractive how
do the consumers prepare to compete to keep the same attractive
kilowatt hour?
I must confess to you, my worst fear is that they are not
going to if we do not do something to educate them, and they
are going to be competing with the commercial users and the
bigger users and end up with a higher kilowatt hour, and they
are going to get angry not at you but at us, Mr. Chairman.
So I would love your thoughts on us.
Mr. Barton. ``At us, Mr. Chairman''?
As soon as they answer this question, we are going to go to
Congresswoman Wilson, but answer the gentlelady's questions
before we go to the next questioner.
Mr. Randolph. Okay. Different companies, as you have heard
from this panel, have different market strategies in terms of
the customers that they market to. There are plenty of
companies out there that are targeting marketing to the
residential customers and may be able to do that in the most
efficient manner possible.
Someone mentioned the possibility of Amazon.com reaching
those rural and small residential customers.
So whether you get it directly from a utility marketing
affiliate, a Dynegy, an Enron, an AES, or an aggregator, I
think ultimately those customers will be reached and that will
be in terms of being competitive on the generation side, which
is only one component of what that customer sees.
The other component, competition on the transmission and
distribution side, I think is going to come from things like
Fuel Cells and distributed generation and so forth that you
have heard from other panelists, and that presents a very real
possibility to keep those rates competitive.
And then further as it relates to the Public Utility
Holding Company Act, if we get some of those barriers out of
the way then you may see additional efficiencies with the T&D
companies as they get together and eliminate redundant costs,
and that lowers those costs as well.
Mr. Tribone. Yes. I would say that this whole area of
educating the public has been one of our weakest areas. I
mentioned earlier, possibly before you came in, that we were
starting a new company called Power Direct to serve residential
customers, and most of the investment we are making there is
going to be on educating the consumer as to what is available.
As far as your question about the lowest-income consumers,
that is an issue we have to be careful about. The best way I
think that we have seen to handle that is to have, for the
lowest-income customers, explicit help and an explicit subsidy
versus trying to build that into the market system. Because
there is no question that they need help, and to just make that
explicit is probably the best way. So that is what we would
recommend.
We are working in some systems like that around the world
and it has worked fairly well.
Ms. McCarthy. Mr. Perry?
Mr. Perry. We make the assumption, whether it is a small
commercial customer or a homeowner, that information is good
and they will make rational decisions.
One part of this unbundling is to show them the
transmission costs, the distribution costs, the supply costs,
and the demand side of that as well.
The customer starts to look and says, wait a minute. I am
paying that much more for that component of my bill? If I
manage that, I can save my own money, whether that is using
Fuel Cell technology or just managing how I use energy in my
house.
But right now what the customer does not have is that
information. He has got a one-line bill from the utility and it
has got a price, $50 a month, $100 a month. So he does not even
know what he is supposed to manage.
The utilities did that, with all respect to them, fine, but
they did that because there was not a goal to be efficiently
using energy; it was just to put it through to make their 11
percent rate of return.
Once you get out of that world and you give the
information, customers act rationally. Those that do not ought
to be penalized. Is that not the nature of our business, or our
government?
Ms. McCarthy. Mr. Chairman, if you would indulge me in one
quick follow up to that comment?
Mr. Barton. Well if it is quick. We have extended the 5
minutes to about twelve already.
Ms. Wilson. Mr. Chairman, I would be happy to yield my time
to the gentlewoman from Missouri.
Mr. Barton. Well----
Ms. McCarthy. You are most gracious.
In addressing the consumer I quite agree with your
response, but I had really a two-pronged concern. Yes, I
believe if educated they will in fact act rationally, and if
they do not there are consequences. That is the real world.
I am worried about in the arena of competition and what is
available to them, if we do not act at this level, or empower
the States and the public service commissions to make sure they
address it, that those good rates, those reasonable rates now
being experienced across the Nation will not be available to
the consumer to even obtain. Perhaps I did not make that second
point, and I do not want to take any more of the committee's
time with an answer. Perhaps we can visit individually about
that, but I would welcome any thoughts any of you have on that.
Thank you very, very much, Mr. Chairman, and I thank the
Lady for her graciousness, and I hope you will not penalize
her.
Mr. Barton. Oh, don't worry about that.
Does the gentlelady from New Mexico wish to ask questions?
Ms. Wilson. I yield the balance of my time.
Mr. Barton. The gentleman from Massachusetts, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman, very much.
Mr. Philbin, on page 3 of your prepared testimony you say,
``As the Media Fusion neural network can recognize the smallest
changes in appliance electricity use in the home, the system
can provide profiles of customer appliance use.''--customer
appliance use. ``Collectively these user portraits represent
demographic and market trends.''
What kind of information can your system collect about the
consumer?
Mr. Philbin. About the consumer, only his electricity use
and the type of appliance using the electricity. The amount and
the type.
Mr. Markey. So for example let's take the toaster, the
washing machine, the refrigerator, the TV set, the computer,
let's go through that.
So you could tell how long each one of those things was in
use in a home in the course of a day?
Mr. Philbin. And the amount of electricity that it used.
Mr. Markey. Depending upon what? Excuse me?
Mr. Philbin. On the amount of electricity that it consumed.
Mr. Barton. Would the gentleman yield on that point?
Mr. Markey. I would be glad to yield.
Mr. Barton. How do you know it is the toaster as compared
to the computer? I thought an electron was an electron?
Mr. Philbin. There are algorithms, very complicated
algorithms, that are a part of this system. It is not a very
simple system; it is a very complicated system. And there are
special polymers that we are developing at the University of
Southern Mississippi Polymer Institute, and these are the types
of things that will make these algorithms for us.
This is a very, very useful system for the electric
generation and transmission industries. They have been looking
for this type of sensitivity in measurement of the electric
consumption for a long time. And it can be used because of its
specificity to predict things like brownouts and other
breakdowns in the system before the occur.
Mr. Markey. So they could then gather specific information
about me?
Mr. Philbin. They could.
Mr. Markey. They would know, for example--a telemarketer
would know when I was home by the fact that the stove was on,
you know----
Mr. Philbin. Yes.
Mr. Markey. [continuing] at around 6:30 at night. So if
their plan was to bother me when I was having dinner, they
would know just when the stove was on. The telemarketer could
get a profile of when every stove is on in every community so
they know exactly when people are sitting around their kitchen
table to get the maximum benefit from their telemarketing
campaign.
Is that right?
Mr. Philbin. Our technical people predicted that there
would be this concern amongst the consumers.
Mr. Markey. Yes. And I think it is a pretty legitimate
concern. And I can see where telemarketers--It is a
telemarketers dream in a lot of ways to be able to figure out
when that stove is one, because that is what they are looking
for. That is the maximum point of impact for this community.
So are there any restrictions on the use of this data right
now?
Mr. Philbin. No there is not that I am aware of.
Mr. Markey. Do you think that consumers should be entitled
to be able to protect--do you think consumers should be able to
protect against the re-use of this information for purposes
other than that which they originally intended?
In other words, they intend the electricity to be used only
to cook that second-day ham hash. They do not intend it to be a
profile that a telemarketer can use in order to telephone them
while they are now eating?
Mr. Philbin. I would agree that they have a right to
privacy in this arena, as in all others, actually. And I would
say, no, I would not want that used against me by telemarketers
calling me when I was home. Telemarketers are bad enough the
way they are just doing it in the blind.
Mr. Markey. Thank you, Mr. Chairman.
And let me ask you, if I may, Mr. Triboney, or Tribone?
Mr. Tribone. ``Try-bone.''
Mr. Markey. Tribone. You say that there is a shrinking
natural monopoly. The question for you is this. If transmission
and distribution remain price-regulated monopolies, how can we
encourage innovation and increase efficiency in these
bottleneck facilities?
Mr. Tribone. Yes. Well today we mainly have cost-plus
regulation. I think all of you who have been in this arena of
restructuring can see really how badly and how poorly that has
served us.
So I think that we have to move to a different type of
regulation. It definitely still has to be regulated. We have
talked about that here, and the role of the Federal Government
in regulation of access.
But the model that we have seen that has worked that we
were actually working in other countries is that the regulator
enters into a long-term contract with a price, a known price,
in it ahead of time with the transmission or distribution
company.
That price can be declining. It should be declining so that
consumers get the benefit over time. But it is a known price.
And because the price is known and it is not regulated on a
cost-plus basis, any creativity, innovation, new ideas that
come out are shared between the company making them and the
consumer.
So that is the structure that has worked best that we have
seen, and we have seen a lot of them.
Mr. Markey. In the telecommunications industry we call that
price caps. Is that what you are talking about?
Mr. Tribone. Yes, price cap. Similar to price cap.
Mr. Markey. Thank you.
Thank you, Mr. Chairman.
Mr. Barton. Thank you. And I will let the gentleman know
that we will work with him on privacy protection in the
electricity restructuring bill. You and I have a little more
influence on that than we may have had in financial services
that was on the floor several weeks ago.
Mr. Markey. Thank you, Mr. Chairman.
Mr. Barton. Does Mr. Ehrlich of Maryland wish to ask
questions?
Mr. Ehrlich. I apologize for my lateness. Following up on
the gentleman's line of questioning, I guess if you really
wanted to fool telemarketers you would just keep the lights and
everything on all day. That would really throw them off.
Mr. Philbin, let me just follow up in a serious vein here
with respect to this information. It is not sold, or no one can
gain access to this particular profile information with regard
to use, correct?
Mr. Philbin. We have contemplated that the data would be
used by the electric generation and transmission companies. We
had not thought of the telemarketing things, except in some
wild thoughts our technical people had. We thought of it as a
tool for the grid itself.
Mr. Ehrlich. A tool for the grid, and maybe to educate
consumers as well?
Mr. Philbin. Yes, as well.
Mr. Ehrlich. Okay. Thank you.
I yield back, Mr. Chairman.
Mr. Barton. I think that concludes the first round. We are
not going to have a formal second round.
I have one question, and I think Mr. Shimkus has one
question.
General, I want to clarify your relationship with NASA. My
understanding is that the relationship is more of a landlord,
that your company rents space from facilities that they own. Is
there a more formal relationship than that?
Mr. Philbin. With NASA directly?
Mr. Barton. Yes.
Mr. Philbin. No, there is not. We are contemplating working
with some of the NASA scientists at Stennis Space Center for
various parts of what we are putting together, but primarily we
have a direct landlord-tenant relationship with the Mississippi
Enterprise. It is a State operation which includes the Center
for Higher Learning, and we are going to be working very
closely with the Center for Higher Learning in their capacity
as a very sophisticated computer operation.
Mr. Barton. Thank you.
Mr. Shimkus, for the last questions of this panel.
Mr. Shimkus. Thank you, Mr. Chairman.
I think more than cost for constituents and consumers, I
think reliability will be the issue that a lot of careers will
succeed for fail on.
So, Mr. Tribone, I have a question. In your testimony you
talk about South America. Can you address. Was it not in Brazil
that there were some reliability or production problems by your
corporation? And can you explain, or give us a brief background
on that and what has caused that to maybe not be a problem
anymore?
Mr. Tribone. Sure. Well, in general the companies that we
have been involved with have been improving the reliability
were all companies that were formerly owned by the government.
So we have improved those markedly.
The number of outages, the length of outages have improved
by 30 to 40 percent.
I am not sure exactly what you are referring to but it may
be something that happened in Rio de Janeiro 2 years ago in the
summer, similar to what we had in New York City last week.
Actually, because of the El Nino effect, they had the 30
warmest days on record. So they had 30 days in a row of what we
had here on the East Coast last week, or 2 weeks ago.
What happened is, the system held up fairly well but there
were thousands of old transformers that we had not had a chance
to change out yet. We did lose part of the city. And I am going
to say this somewhat facetiously, but it was a small part of
the city but it was where a lot of journalists lived so it got
a lot of publicity.
Mr. Shimkus. Oh, I cannot believe you would get a lot of
press because of that.
Mr. Tribone. We have invested a lot in the system since
then. We have everything changed, and we have gone through two
summers since then without any issues in Rio.
Mr. Barton. Well we could say they make us sweat so it is
good that you made them sweat, but we will not say that.
Mr. Shimkus. Thank you, Mr. Chairman. Again, on the
reliability issue I think that needed to be part of the record,
because there is no perfect system, but we are striving to
develop one and those concerns have to be addressed.
I yield back, Mr. Chairman.
Mr. Barton. Thank you.
We want to thank this panel for your participation this
morning and your lengthy participation. There may be written
questions as a follow-up. If so, we hope that you will reply
fairly expeditiously because we expect to be marking a bill up
within the next two to 3 weeks.
So this panel is excused.
Mr. Barton. We would now like to hear from our second
panel. If Mr. Jordan Clark will come forward, Mr. Dale
D'Alessio, Mr. Hans Mertens, and Mr. Don Deless.
Gentlemen, welcome. Your entire statements are in the
record. We are going to ask each of you to summarize in 5
minutes.
We will start with Mr. Clark and go right down the line.
Mr. Clark is the President of United Homeowners Association
headquartered here in Washington, DC. So we welcome you. Your
testimony is in the record, and we acknowledge you for 5
minutes to summarize it.
STATEMENTS OF JORDAN CLARK, PRESIDENT, UNITED HOMEOWNERS
ASSOCIATION; HANS MERTENS, MANAGER, GOVERNMENT AFFAIRS AND
PLANNING, WILLIAMS DISTRIBUTED POWER SERVICES, INC.; R. DALE
D'ALESSIO, CHIEF EXECUTIVE OFFICER, iSOFT; AND DONALD DELESS,
PRESIDENT, D&C DEVELOPMENT COMPANY
Mr. Clark. Well thank you, Mr. Chairman, and members of the
committee, for inviting us back. We were here I guess about 20
months ago when you started talking about electric
deregulation.
Many things have changed since then. I want to reiterate
that whatever is decided as far as a deregulated market, the
people that are most affected are homeowners.
We spend $80 billion a year on electricity. For most of us,
that is a lot of money. For most homeowners, it is the second
biggest bill they pay. For a lot of homeowners, about 30
percent, especially the elderly, it is the biggest bill they
pay. So whatever is done has a great effect on us not only in
paying our electric bill, but in paying for services and goods.
If we can reduce the electric bills of those people who
provide us with the goods we buy, such as a Wal-Mart which
spends I guess about $640 million on their utility bills to the
mom and pop grocer, we can in effect reduce the cost and put a
lot more money back into our pockets, which we can then spend
on the economy, invest, or perhaps even save.
But making sure all consumer classes are treated fairly in
the electric deregulation era is really what we are all about.
That means residential, commercial, and industrial.
So far, we feel that perhaps we have not been treated as
fairly as we should have as far as residential customers are
concerned.
As you well know, the States have taken the initiative on
deregulation. I do not envy you your job. If I were still a
staffer up here, I am not quite sure what I should do on this
issue. You are between a rock and a hard place. We know that
States rights are the issue today for a lot of people, and
should be, and this has been traditionally a market and a
commodity that was controlled by the States on a regional basis
if you look at grids. That has worked very well.
But a new day is dawning, and we want to make sure that it
is done properly. So we will have legislation I assume in this
Congress on electric deregulation.
And we want to make sure----
Mr. Barton. Say that with a little more enthusiasm.
Mr. Clark. We know we are going to have legislation from
the committee to the floor and passed this Congress. We want to
make sure that the residential customers are treated fairly and
that it is done properly, and I am sure you do, too. That is
why we are here.
But as I said, we are not too thrilled about what has
happened in the States. In the 25 States that have looked at
deregulation or have passed deregulation, there have been some
problems with the way it is done. I am going to mention the
dirty word of ``stranded costs.''
I have conservatively put in my statement that that is
about $100 billion that we residential consumers and some
commercial customers are going to be paying for the price of
deregulation. It is probably closer to $200 billion, and will
actually settle out to about $160 billion by the time it is
done.
If we spend $80 billion a year on electricity and we save
20 percent a year on that, that gives us $16 billion. But if we
are paying $160 billion for that, it is going to be quite a
while before we realize any gains. So we want to make sure
Congress understands how that is working in the States.
We think that the way it has been treated, not in all
States but certainly some, and things are getting a little bit
better; certainly the California system was transmitted to some
States but Ohio seems to be doing a fairly decent job
considering deregulation as far as stranded costs are concerned
in other States. We have won some battles, but we basically
lost the big battle on the stranded cost issue.
But I am not here to debate stranded costs; just to let you
know that the future does depend on what has happened in the
past, and will depend on what happens in the next few weeks as
far as considering legislation.
Let me point out one example very quickly of how
deregulation was not done properly. In California $28 billion
was given as stranded costs. It came out of the consumers
pockets, and is still coming out of consumers pockets.
The tradeoff was a 10 percent reduction in our electric
bills. If you add the cost of stranded costs to the electric
bill, it is really a 20 percent increase in our electric bill.
So we do not think that is fair.
In effect, also stranded costs reward inefficient electric
companies. They come in and say, well, we have these costs
we're not going to get paid for. If we got o deregulation, we
have to compete. Therefore, we want to get paid for them.
The efficient companies do not have stranded costs. I think
it is very inequitable and a terrible precedent to set in this
country. There is a company in Pennsylvania, an electric
Company, they have $4.7 billion in stranded costs. They went
around and bought some nuclear power plants, which is the basis
their stranded costs in the first place was based on.
So they mismanaged nuclear power plants, got $4.7 billion,
and went out and bought some more. That is a terrible
disadvantage to anyone who wants to go in and compete, because
if I have a $5 billion cash drawer I can keep competition out
of my market pretty quickly.
I see the red light on. Let me just say that in considering
legislation there are a few things we would like you to have in
the final package.
Prohibition of exit and entry fees. We think Congress
should at least make itself known as to how they should be
handled.
We have to ensure equal access to the marketplace by all
consumer groups, residential and commercial and industrial.
And the right to aggregate is very important. Aggregation
now can be had by homeowners, and that should not be impeded in
any way by whatever we do here, or by what the States have done
or will do.
Also, billing. Require concise, accurate, and timely
billing. We have seen the telecommunications legislation that
was passed. Billing has been quite a problem, which is being
corrected, but if a homeowner cannot understand the bill there
is less reason to change.
Mr. Barton. Mr. Clark, we have got three more folks here.
We have got your written statement.
Mr. Clark. So basically I would ask the Congress to make
sure that we do get fair treatment and equal treatment as
residential customers and consider some of the recommendations
we have made.
[The prepared statement of Jordan Clark follows:]
Prepared Statement of Jordan Clark, President, United Homeowners
Association
Mr. Chairman and Members of the Committee, thank you for the
opportunity to return to the Committee and express our consumer views
on electricity deregulation and its present and future effects on
competition, innovation and the future as it relates to the country's
68 million homeowners, otherwise known as residential customers.
Given the fact that a properly deregulated industry should produce
new players, old players with new ideas, new products and services,
more customer choice and lower prices, I'll let the industry
representatives look into the future and tell of their goods and
services forecasts for the energy marketplace. How and when a truly
deregulated market comes about is another question.
America's 68 million homeowners have the most to gain or lose in
the outcome over electricity deregulation. Not only do they
cumulatively purchase more electricity than commercial and industrial
users, they buy more goods by far than any other consumer group. Those
goods all have an electric bill attached. If we can lower a Wal-Mart's
$640 million utility bill, a manufacturer's cost of producing goods,
even the local donut shop's energy bill, consumer savings will be
realized. Everybody benefits.
The monthly electric bill for most homeowners is second only to
their mortgage payment. For approximately 30% of older Americans on
fixed incomes who don't have a mortgage, it can be the biggest drain on
their pocket book.
Not only can deregulation reduce the $80 billion homeowners spend
each year on electricity, lower electricity costs will reduce the price
we pay of goods and services giving us more disposable income to pump
back into the economy, invest or place in a savings account.
A 20% reduction in electric rates will put $16 billion a year back
in homeowners' pockets. Federal budgetary savings over ten years could
exceed $245 billion and public schools could save approximately $27
billion in their electric bills. That could translate to a savings of
$27 billion in local residential property taxes and $245 in federal
taxes.
Making sure that all consumer classes (residential, commercial and
industrial) are treated fairly and that deregulation does achieve its
goal of a competitive marketplace are the principal challenges that
Congress and the states have faced and will continue to address.
To date, the legislative agenda and subsequent deregulation have
been controlled by the states. Congress, for better or worse, has let
the individual states decide the course of deregulation.
Unfortunately, in many of the 25 states which have or are in the
process of implementing deregulation, residential consumers are being
forced to pay an unprecedented price for the process. Namely, well over
$100 billion in add-on fees to their incumbent electric companies. Not
one penny of the $100 billion, which the industry calls ``Stranded
Costs'', goes toward the purchase of electricity by the consumer. In
addition, the billions collected from consumers by the incumbent
electric companies has in most cases had a negative effect on
competition, producing the opposite of its intended results.
For example, California consumers under deregulation legislation
passed in 1996 will pay $28 billion in stranded costs to their
incumbent utilities. In return, residential consumers will receive a
10% reduction in their rates. Sounds like a good deal until the
electric bill arrives and the homeowner finds charges for ``CTC''
(Competition Transition Charge) and ``Trust Transfer Amount'' which add
30% to the bill. After the stranded cost charges are added, the 10%
``legislated rate reduction'' produces a 20% increase the electric
bill.
It gets worse. Instead of bringing competition into the lucrative
residential California marketplace, the stranded costs have produced
the opposite results. Potential competitors are simply staying out of
California's residential market until the stranded costs are paid off.
The profit margins are just too little.
The same can be said in other states such as Pennsylvania, where
high stranded cost recovery was allowed.
In addition to keeping real competition out of the marketplace
until stranded costs are paid off, stranded costs give the utilities
who receive them an extraordinary economic advantage over their
potential competitors. For example, after receiving stranded costs
totaling $4.7 billion, a Pennsylvania utility bought additional nuclear
power plants adding to its capacity in anticipation of real
deregulation. The irony of that particular situation is that the
utility in question justified its request for stranded costs on the
argument of the negative worth of its present nuclear plants.
In effect, stranded costs reward inefficient electric companies
with huge amounts of consumer dollars which in turn are used to compete
with efficient companies who have no so-called stranded costs. Bad
management is handsomely rewarded while the well managed efficient
companies are penalized. A dangerous precedent set by the states in the
stranded costs debate.
I am not here to debate the ``stranded cost'' issue. After three
years of fighting the battle, we recognize the fact that the majority
of state legislatures in granting the stranded costs have sided with
the power brokers of the electric industry and are not about to revisit
the issue unless they are forced by the courts or an enlightened
electorate. But it is absolutely essential that we recognize that
residential customers are being required to pay unprecedented sums of
money to their electric utilities as the price for deregulation, and as
a result a truly deregulated marketplace is years away from reality.
In considering any legislation, we hope that Congress will do what
is necessary to insure that consumers get what they pay for in stranded
costs and what we were promised by the states and the industry: a
competitive marketplace, real choice, savings, additional services,
reliability, aggregation, universal access and other benefits a
deregulated industry will produce.
Due to the necessity of interstate transactions to bring about real
deregulation, Congress under the Commerce Clause of the Constitution
can if it chooses set parameters in the deregulation process being
carried out in the states.
On the other hand Congress can also let the states do as they
please, for better or worse, until forced to address issues between
states affecting electricity or to address inequities or inefficiencies
in the marketplace.
We hope that in the passage of electric deregulation legislation
that Congress truly represents the consumer and mandates the following:
The prohibition of exit, entry or similar fees being charged
to consumers when they purchase electricity or other energy
services.
Equal and timely access to electricity and energy related
services for residential, commercial and industrial customers.
The right of any consumer of electricity or other energy
services to join with other consumers for the purpose of
aggregating their purchasing power.
That a customers rights and opportunities to obtain
alternative electricity or other energy services should not be
unduly hindered, restricted or discouraged.
A customers right to clear, concise, accurate and timely
billing procedures which do not discourage or inhibit the
continuation of the present provider or the choice of a new
one.
That the awarding of stranded costs does not discourage
competition or distort the marketplace.
That the payment of stranded costs must be equitably divided
among all three consumer groups: residential, commercial and
industrial.
I appreciate the reluctance of Congress to interject itself any
more than it should into an arena which has traditionally been
controlled by state government, especially in establishing rates.
However, since ``only Congress can ensure that a competitive retail
electricity market is established throughout the United States'', it
has no choice but to address the issue if it wants deregulation and
real competition for consumers to be brought about in a timely,
efficient, effective and fair manner.
We do not feel that federal legislation should preempt the states
ability to oversee the electricity industry within their borders.
However, we do feel that the existing monopolies with few exceptions
have exerted their well established political influence in key states
to the detriment of the consumer and benefit of themselves.
Electric deregulation because of its unprecedented economic impact
on all Americans is not an issue that Congress should debate for years.
We hope that the Committee will move forward with legislation which
will truly bring about real competition in the marketplace as soon as
possible.
Again, thank you for the opportunity to address the issue and we
look forward to working with the Chairman and other members of the
Committee to bring about an effective, efficient and fair deregulation
of the electricity industry.
Mr. Barton. I would now like to hear from Mr. Hans Mertens?
Am I saying that right?
Mr. Mertens. It is Hans Mertens.
Mr. Barton. Hans Mertens, who is the Manager of Government
Affairs and Planning for Williams Distributed Power Services in
Tulsa, Oklahoma, the home of Congressman Steve Largent.
So we are glad to have you and to let you have 5 minutes to
summarize your written statement.
STATEMENT OF HANS MERTENS
Mr. Mertens. Thank you, Mr. Chairman. Good morning, members
of the committee.
Mr. Barton. Speak closely into the microphone, please, sir.
Mr. Mertens. I will fix that.
I am delighted to be with you this morning. I do believe I
have an important and exciting message for you all as it
relates to distributed generation.
My formal comments are summarized for you in a 17-page
document that looks something like this, and I would invite you
to peruse that.
As I prepared for today's session, my greatest concern was
knowing that this committee has wrestled with the issue of
electric deregulation and such for the last 2 years, and I
would have nothing new to say.
I must tell you, in listening to the insightful questions
that I heard this morning, I am much relieved that the search
for a great solution continues, and hopefully by using my time
this morning to recount some personal experiences I may be
instructive on how we should proceed in this matter, and I
respectfully ask your help on certain issues.
In 1981 my title was Chief Engineer, and I worked for Con
Edison New York. I became convinced around that time that
distributed computing--we call them PCs now--was a good
investment to allow engineers to be more productive.
At the time, Con Edison, and quite frankly most large
corporations, were mainframe shops. The theory? Only the big,
important stuff needed to be computerized. If you wanted to
computerize a process, go through some torture.
And if you prevailed and the program needed to be written,
and if you had a big application and you could tolerate that,
that was fine. But if you needed something done quick, forget
about it.
Remember, we were still abbreviating 1981 as 1981' and that
was done strictly to save storage space. Clearly we needed some
flexibility.
In that environment, I went to the president of the company
to get approval for the purchase of a Texas Instrument 64KB
machine. It came with two 5\1/4\ disk drives, a stack of
floppies each with 360KBs of memory, and when I assembled it it
covered the entire desk top.
I was proud to think I had control over my own destiny. I
was firing a shot across the bow of the climate-controlled
mainframe machine, and the vice president of our mainframe
shop.
My boss and a lot of other bosses approved the purchase,
warts and all, and changed history once and forever.
Today I cannot help but point to the similarities in the
power generation area. Distributed generation faces formidable
market barriers, some of which are unnecessary and represent
corporate hysteria, while others relate to incumbents
protecting their turf.
When AT&T was everyone's phone company in the 1970's, the
best minds from its Bell Labs Division, Holmdel New Jersey,
were used to justify that when somebody plugged a telephone
into the jack in their house it could bring down the entire
network system. Now that was if the telephone was purchased
from Sears rather than the one manufactured by its Western
Electric Division and leased by New Jersey Bell to its
customers.
Well I think many of you remember those days. I have some
contemporaries in front of me. And witnesses at that time
predicted that the best telephone system in the world would
quickly degrade.
Today I think we all know that Bell Labs has loosened and
competes with New Jersey Bell, now known as Bell Atlantic, and
AT&T is attempting to enter local markets in a big way.
Things do change, and I would offer that as a good analogy
to where we are going.
Well I have already confessed to being a reformed engineer,
and in that capacity I assure you the technology is available
today to allow distributed generation to integrate effectively
with all power grids and be a viable part of the market.
I have participated on a number of different task forces. I
am a member of the New York ISO Transition Team, and a lot of
issues that surface in those capacities tell me that this is
very doable.
I have the utmost respect for the utility industry, and I
fully expect it to survive and thrive in the restructured
market of tomorrow. My pension depends on that for sure. But
changes are needed.
Large, central generators can be bad. Having all
distributed generation is not an optimal solution either. I
believe both generation forms, in appropriate balance, is good,
and an objective of partnering, not just tolerance, is best.
But much like the telephone jack red herring of yesteryear,
I often hear experts predict the dire consequences of
connecting DG units into the grid.
When forced to accept distributed generation as an energy
source, these experts burden new projects with expensive
interconnection requirements intended to kill projects. And
when projects do survive, then standby charges for power costs
are designed to hurt project economics some more.
Conversely, when old central generation units are retired,
there is seldom an attempt to encourage distributed generation
and thereby avoid placing new unit into rate base.
I have one closing thought. Williams and the DPCA,
Distributed Power Coalition of America, strongly believe in
choice. Where competition exists and robust markets are
encouraged, the consumer benefits.
A national vision needs to be articulated by the U.S.
Congress that promotes restructuring while preserving regional
uniqueness. I look forward to your questions.
Thank you, Mr. Chairman.
[The prepared statement of Hans Mertens follows:]
Prepared Statement of Hans Mertens, Manager, Government Affairs and
Planning, Williams Distributed Power Services, Inc. on Behalf of the
Distributed Power Coalition of America
Mr. Chairman, thank you for the opportunity to testify before the
Subcommittee today on innovation in the electricity delivery system.
Few innovations offer as much promise for American consumers as
distributed generation, which encompasses a variety of technologies,
including onsite generation, storage and power controls. Together,
these new technologies offer greater reliability and energy savings. I
am here today to tell you about the hybrid applications of distributed
generation that my company is pursuing as part of a global market
strategy for our customers.
Williams Distributed Power Services is a subsidiary of The Williams
Companies, a multinational corporation active in most aspects of the
energy industry and also in communications. Our whose business units
include five major natural gas pipeline systems that span the length of
the mainline United States, energy production and energy marketing,
including the creation of distributed generation solutions for our
customers.
Williams is also a member of the Distributed Power Coalition of
America (DPCA), a national group comprised of equipment manufacturers,
energy service companies, natural gas and electric utilities and
others. The DPCA has been involved on a federal and state level in
initiatives that address distributed generation technology.
The Promise of Distributed Generation
Distributed generation is not new. It has been with us for decades
in the form of backup generator units, cogeneration facilities and
remote generation. In fact, Thomas Edison's first electric generating
unit--the Pearl Street Station in New York City--was a distributed
energy system. What has changed is the breadth of technological
solutions now available in the marketplace, combined with a rapidly
changing electric industry that will require greater flexibility in
meeting complex needs.
Distributed generation is generally defined as power production
located in close proximity to the market, either as: on-site generation
at an end user's site, generation installed at a utility substation, or
generation installed in close proximity to several users, which are
tied directly to the generator.
This equipment could be installed on the ``customer side'' of the
meter or the ``utility'' side. It can be grid connected and operated in
parallel to the electric system, or operated entirely separately from
the grid as a ``power island.'' A variety of parties could own it,
including the utility, the end user, an energy service company, the
manufacturer, or some other third party.
Finally, distributed generation encompasses a wide range of
technologies, including turbines, reciprocating engines, renewable
energy sources and storage systems, all of which are available in
today's market. In the very near future advanced or emerging
technologies, like fuel cells and microturbines, will be added to that
list.
The benefits of employing small, dispersed generation throughout
the grid include increased reliability. In cases of natural disasters--
hurricanes, ice storms--distributed generation could allow individual
sites (or in some cases, whole sections of the grid) to remain in
service. DG units could also protect the United States from widespread
economic disruption in the event that major electric facilities
failed--which has happened in other countries as a result of terrorist
action or natural disaster.
Power quality is another major issue for those customers whose
operations cannot tolerate wide variances in load that often occur on a
utility system. Microchip manufacturers or companies that rely on
sensitive computer equipment may choose distributed generation as a
strategy to reduce productivity losses.
Small DG units will also play a vital role in providing back-up and
peaking services. In an increasingly deregulated market, these small
units can mitigate against price spikes. Real-life experience indicates
that the capitol cost of such equipment can be recovered quickly.
In many areas of the country, electric utilities are reaching their
capacity for peak load. Electric demand continues to grow while
uncertainty in the market discourages investment in large, central
plants. Many utilities are counting on customer-owned units to pick up
the slack. In some areas of the country utilities are creating
incentives for their customers to install equipment and allowing the
capacity to be available at critical times.
Disbursed generating technology also provides flexibility to
bolster service on constrained parts of the grid, or as an economic
alternative for remote sites, like rural or mountainous regions, where
few customers are available to share the cost of laying new electric
line.
Finally, on-site generation automatically creates at least a 6-10
percent efficiency gain because it eliminates the electricity that is
normally lost as electrons travel through transmission and distribution
lines from central generation plants. In addition, advances in
technology have resulted in units that have greater overall efficiency
than central generation, particularly when the waste heat is used in a
cogeneration or district heating and cooling application. Increased
energy efficiency translates into fuel savings. And it saves money!
Using less fuel to produce the same amount of electricity also
means fewer greenhouse gas emissions. In addition, advanced distributed
generating technologies can dramatically reduce or eliminate many
pollutants, including NOX, SOX, CO2,
mercury and particulate matter. Distributed generation has the
potential to alleviate pollution in the Northeast and elsewhere. As
Congress, Administrative agencies and state governments wrestle with
ways to reduce a wide range of pollutants, it should consider the
positive benefits of onsite generation.
Uniting Technology and Innovation in the Marketplace
Williams Distributed Power Services has been in the forefront of an
emerging industry to integrate technological solutions to meet the
needs of our customers. Our mission is to develop and provide
competitive, repeatable distributed power solutions by utilizing the
best technologies and taking advantage of the many resources of
Williams.
Our services are driven by customer demand and the result has been
a stream of orders, both from the domestic and international sectors.
Today our company has projects totaling $6.7 million that are near
finalization. Our completed projects include base load power and steam
for a Canadian university, a resource recovery project in the West,
summer peaking projects in the Midwest and West Texas, and a
reliability enhancement project in Mexico.
What are some of the leading customer issues? Power quality tops
the list. Manufacturing and service companies in today's world operate
equipment that is increasingly sensitive to power surges, spikes, noise
and harmonics that they now experience with the existing electric grid.
Companies also want to remain competitive in a global market, which
means that they are concerned about saving money on peak shaving, or
avoiding the costs of power outages.
The Williams Technology Demonstration Center in Tulsa, Oklahoma,
has demonstrated that our approach can solve reliability problems for
commercial and industrial customers. A demonstration site that combines
several critical technologies has been in operation since October of
1997. This demonstration incorporates three technologies into what we
have called the ``Premium Power Solution'': the Capstone Microturbine,
an advanced recyclable battery system designed by Powercell, in
Cambridge, Massachusetts, and an advanced power control system.
The PowerBlock Premium Battery
The PowerBlock Premium Power battery is a highly-efficient, zinc
oxide storage system that is rechargeable and designed for use with
virtually any electric power source. The PowerBlock offers 100 percent
discharge and may be cycled several times daily for uninterruptable
power supplies, peaking, load leveling and other distributed resources
applications. This new storage system also requires less than half the
space of conventional batteries.
In addition, the Zinc-Flow Technology of the PowerBlock system is
made of recyclable plastic, uses a salt solution instead of acids, and
is low cost, while providing superior energy and power density.
The result is a dramatic increase in efficiency. To provide a
comparison, the Williams Resource Center for UPS, also located in
Tulsa, requires an 80 kW generator to supply 20 kW hours of
electricity. This is a traditional on-site generating operation. Using
the new technologies, however, our Premium Power demonstration site
requires only 50 kW of installed capacity to deliver 100 kW hours of
power! This means that we can deliver five times the amount of kilowatt
hours of electricity, using about 40 percent less installed capacity!
These are only some of the technologies that Williams intends to
employ at customer sites. Our company has executed letters of intent
with 10 major suppliers and customers to develop a suite of options
ranging from 30 kW to 20 MW and low cost telecommunication systems for
controlling, monitoring and dispatching energy. In addition to the
Powerblock TM Power Storage and Conditioning System that I
have already described, our partnerships also include exciting new
equipment that can serve a variety of customer loads.
Capstone Microturbine
Williams has contracted with Capstone and Kohler Corporations to
install the 28 kW Capstone microturbine for onsite generation. This
unit has extremely low emissions, is very compact, and is commercially
proven. The Capstone has relatively low capital and operating costs,
has good potential for combined heat and power applications, and can be
easily integrated with storage devices.
The Capstone Turbine is excellent for use in resource recovery, for
use in non-attainment areas, mini grids, and in commercial
applications.
Solar Mercury-50 Turbine
Solar Turbines is commercializing its 4.2 MW Solar Mercury-50
turbine generation in November, 1999. This is a high simple cycle
turbine with a 40% efficiency and low life-cycle costs. It has low
emissions, can use different fuels, is suitable for remote operations.
In addition, this new generation of turbine technology can be installed
quickly and has potential for waste-heat recovery.
This unit can easily be used for distribution grid support, base,
intermediate or peaking supplies for municipal customers, rural
electric associations, as well as for sites in cities.
Caterpillar Power Module
Williams' also plans to take advantage of the Caterpillar Power
Module, which is a mobile generating unit with an 1,825 kW capacity. It
can be fueled by diesel or natural gas and is capable of operating in
parallel with a utility power source as a load management system with
provisions for standby operation feeding an isolated electrical load
network. It also has the capability of operating in remote locations
with the use of communication equipment.
State of the Art Control Equipment
Encorp's ``Virtual Power Plant TM'' Solution is a state-
of-the-art software and hardware package for remote controlling,
dispatching, monitoring and paralleling on-site power sources with the
utility grid. This equipment is economic and can be used to control and
dispatch power generation from multiple sites.
Mobile Cogeneration
Our company also plans to take advantage of mobile cogeneration
equipment. We have an agreement with Gentor, which produces a 3.0 MW
Mobile Cogeneration Unit. This equipment is fully skid-mounted and
produced up to 30,000 lbs./hour of steam. It is nearly 70% efficient
with dual fuel capability. This equipment is suitable for industrial
cogeneration applications, hospitals, universities, paper plants and
gas processing plants. And the technology is available now.
Who will benefit from strategic planning? Customers who are seeking
less expensive electricity prices, customers with remote power needs,
and those who require premium power. The ``Premium Power'' hybrid that
Williams created also saves money. In the example I gave earlier, the
Williams' UPS building required over $4.5 million to install a
generating system. Using the ``Premium Power'' site cut that cost in
half
The Need for a National Vision
The new market reality is that generation and storage resources
make technical and economic sense. Traditional government hand-out
programs are not the answer. In fact, Williams has the ability to meet
these needs today. But we do need to ensure that the market is free and
fair for all participants.
As you know, 24 states have already acted upon electric
restructuring legislation, including some of the most populous states
such as California, Texas and New York. The DPCA is working at the
state level to ensure that new regulations encourage the installation
of distributed power, and the results thus far are encouraging. At some
point, however, a national vision needs to be articulated by the U.S.
Congress. We believe that comprehensive federal restructuring
legislation will help to create a national vision for the future of
electric power delivery.
One important issue the DPCA feels Congress should address is the
creation of national interconnection standards for distributed power
units. If you purchase an electric appliance today, that appliance will
work throughout the United States. There is one set of safety and
connection standards for appliances, developed in part by the
Underwriters Laboratory. However, standards for the interconnection of
generation equipment to the grid vary from state to state and even from
utility to utility. It is critical that the United States develop a
national standard for the interconnection of this equipment, so that a
piece of equipment can be purchased (or leased) and installed in a
relatively straightforward and timely manner.
It is essential that we minimize barriers to entry for new market
participants. This would include creating guidelines for the amount of
time allowed to process interconnection requests and siting
applications. It would also include the creation of a national system
for approving specific pieces of generating equipment, or even
combinations of equipment for onsite use. There should also be
reciprocity between states, so that a set of equipment approved in New
York could be used in another state without undergoing a separate,
redundant procedure for approval. The United States government could
create a National Data Sheet to ensure that, once approved, equipment
can be universally accepted. Such standards would encourage more
customers to take advantage of self-generation, by taking some of the
uncertainty out of the process.
The Administration's ``Comprehensive Electricity Competition Act''
(H.R. 1828) includes in Section 405 a provision for small-scale
distributed generation interconnection. In addition, the legislation
introduced by Congressmen Steve Largent and Ed Markey (H.R. 2050) also
includes interconnection standards for distributed generation. The DPCA
supports these provisions, and appreciates the efforts of the
Administration and of Reps. Largent and Markey.
It is important to note that the provisions anticipate
participation by non-governmental entities, including the Institute for
Electronic and Electrical Engineers, in the development of these
standards. We believe that interconnection standards should build in
safety and reliability without creating unnecessary and burdensome
expenses that would make distributed power equipment uneconomic.
Both of these bills also include accelerated depreciation for
smaller-scale generation equipment, which is in step with real-world
business planning. And both measures contain tax incentives for certain
sizes of cogeneration equipment, which will act as an incentive for
Americans to install the most energy efficient systems that are now
available.
The DPCA also has some concerns about exit fees and/or transition
charges, to the affect that they discriminate against distributed
generation. We recognize that this is largely a state issue, and that
Congress may very well leave such matters up to the individual states.
If the Congress does create a federal policy on stranded cost recovery,
however, we urge you to consider a prohibition on exit fees or other
transition charges that ``unduly discriminate'' against distributed
generation.
Conclusion
Distributed generation promises to change the electricity industry
in much the same way that personal computers changed the face of
computing. PCs have revolutionized our economy, bringing computing
power to the desks of tens of millions of Americans. The same future
awaits the electricity industry. Distributed generation can bring
reliability, power quality, and lower costs to all classes of
consumers.
The Chairman of this Committee, Tom Bliley, has often talked about
the need for greater customer choice in electricity. We agree. We
believe, however, that the ability for a customer to generate his/her
own electricity is perhaps the ultimate form of customer choice. Such
ideas sound far-fetched today. But so did cellular phones and personal
computers just a few short years ago. Competition tends to lead to more
technical innovation and better products and services for everyone. The
DPCA thanks this Committee for being an advocate for change.
I want to thank you once again for giving me the opportunity to
testify.
Mr. Barton. Thank you, sir.
We would now like to hear from Mr. Dale D'Alessio who is
the Chief Executive Officer of a company called iSoft. I
thought that was probably a diaper company, but I am told it is
not.
Mr. D'Alessio. Afraid not, Mr. Chairman.
Mr. Barton. It is headquartered in Vienna, Virginia. We
welcome you. We will put your statement in the record and give
you 5 minutes to summarize it.
STATEMENT OF R. DALE D'ALESSIO
Mr. D'Alessio. Thank you.
Mr. Chairman, members of the committee, I am honored and
pleased to address the subcommittee----
Mr. Barton. Speak closely into the microphone. These
microphones are not very good.
Mr. D'Alessio. Okay. I am honored and pleased to address
the subcommittee regarding innovations for the future of
electricity competition.
This is an issue that is on the forefront of everyone's
mind in the utility industry. But first I would like to thank
Congressman Steve Largent for the opportunity to be here.
Thank you, Congressman.
I want to go on record to state that I am not here to
promote or challenge deregulation. I am here to address how
companies like iSoft can help the utility industry have a fair
and level playing field in a deregulated market.
The utility industry may be moving into a very dynamic
environment similar to what the telecommunication industry has
just experienced.
Recently, the telecommunications industry changed from a
single-source, noncompetitive environment to a competitive,
deregulated environment.
Suddenly the consumer had a choice of carriers and multiple
services. Most telecommunication computer systems were not
prepared to handle this change.
When MCI began their Friends and Family Program, AT&T could
not adjust their system to compete with them. They had to drop
to a flat rate. They lost valuable market share by not being
prepared.
Not being prepared can create drastic financial
consequences such as the loss of market share, profit, and
customers.
There are numerous companies that have developed
applications geared toward handling this competitive
environment. They have proven themselves in the
telecommunications industry.
The software issues associated with deregulation and
competition have been solved. With the onset of possible
deregulation, utility companies will need the ability to create
and modify customer price plans to maintain their competitive
edge.
They will also need to easily add services and business
segments as their customer base expands. And with this
expansion comes the need to view and manipulate data from many
sources. The software industry has these capabilities now.
We often hear the same concerns from customers, whether
they are in the telecommunications, utility, health care, or
other industries. They typically fall into four classic
categories: mergers and acquisitions, customer service,
customer billing, and E-commerce.
First, mergers and acquisitions. The objective of a merger
or acquisition is to leverage the strength of two companies.
Solutions for convergent billing help companies achieve this
successful merger by rapidly integrating dissimilar systems and
their information. By deploying pricing plans quickly, IT staff
can provide customers with improved services and a fresh image
of that new company.
Second, customer service. What increasingly sets
organizations apart is their level of customer service. It is
also vital for profitability. For it costs less to keep an
existing customer than to acquire a new one. In fact, in most
businesses customer service is a critical element of survival.
The challenge is to understand the customer's needs and
aspirations and to service them effectively. Solutions for
convergent billing leverage and share customer information by
integrating all of the company's diverse data streams,
providing a complete view of the customer base.
Additionally, these solutions help create new services
quickly and present real-time access to information enabling
better customer service.
Third, customer billing. iSoft is one of a number of
companies that currently provide solutions that turn the vision
of a convergent bill into a reality, reducing the time
necessary for implementation and, in the process, lowering the
cost and leveraging existing IT infrastructure.
Fourth and finally, e-commerce. Business on the Web is
growing fast but has yet to reach its full potential. What is
holding it back? Its integration. The most difficult challenge
facing most companies on the Internet is integrating their web
site with their existing systems.
But e-commerce means more than just connecting your
customer with web-enabled facilities. It means interactive and
dynamic customer service and management. Today's solutions for
convergent billing offer some of the most advanced options for
integrating the web with existing billing and IT systems.
Mr. Chairman, I hope I have provided a little insight into
how companies like iSoft can help a deregulated utility
industry. Thank you for your time.
[The prepared statement of R. Dale D'Alessio follows:]
Prepared Statement of R. Dale D'Alessio, CEO, iSoft Corporation
Mr. Chairman, Members of the Committee, I am honored and pleased to
address this subcommittee regarding innovations for the future of
electricity competition. This is an issue that is on the forefront of
everyone's mind in the utility industry. But first, I want to thank
Congressman Steve Largent for the opportunity to be here today.
I want to go on record to state that I am not here to promote or
challenge deregulation. I am here to address how companies like iSoft
can help the utility industry have a fair and level playing field in a
deregulated market place.
The utility industry may be moving into a very dynamic environment
similar to what the telecommunications industry has just experienced.
Recently, the telecommunications industry's landscape changed from a
single source non-competitive geography to an extremely competitive
deregulated market. Consumers have a choice of carriers for a
communications service: long distance, local, mobile and more. Most
information technology (IT) systems were not prepared to handle this
change. When MCI began their ``Friends and Family'' calling plan AT&T
was not prepared to adapt its calling plans to compete with MCI. As a
result, AT&T lost valuable market share.
Not being prepared can create drastic financial consequences to any
company such as loss of market share, loss of profit and loss of
customers. There are numerous companies that have developed
applications geared toward handling this competitive environment and
they have proven themselves in the telecommunications industry. The
issues associated with deregulation and competition have and are being
addressed in the telecommunications market and are being solved from an
IT perspective. Not only can iSoft Corporation and other companies
provide solutions to be competitive in deregulated markets but their
products are also reasonably priced and may allow companies to leverage
their existing technology investments. iSoft as a small company has
partnered with Convergys Corporation, one of the world's largest
billing entities, to provide a total billing and customer care
solution.
With the onset of possible deregulation, utility companies will
need the ability to create, add and modify customer price plans to
maintain their competitive edge. They will also need to easily add new
services and business segments as their customer base expands. And,
with this expansion comes the need to view, manipulate and modify data
from many sources. The IT industry provides these abilities.
Solutions are currently available that allow a robust enterprise
integration capability which provides access to data between databases
and other applications, regardless of the type of system or file
format. A company's unique business expertise can be captured and
automatically applied and the flow of their business processes can be
automated. The time to implement business and pricing policy changes
and add new services can be reduced from months to days or even hours.
And there is no requirement for expensive programming skills.
We often hear the same concerns from customers, whether they are in
telecommunications, utilities, healthcare, insurance or other
industries. They typically fall into four classic categories. Although
you may call them by different names, you will recognize the business
issues: mergers and acquisitions, customer relationship management,
customer billing and E-commerce.
First, Mergers and Acquisitions. The objective of a merger or
acquisition is to leverage the strengths of two companies. The
relationship can be very complex, with integration or consolidation of
business processes, assets and even cultures. Get it right, and
successful consolidation can create opportunities for cross-selling,
better service and cost reduction. Get it wrong, and chances are the
benefits of the merger will be lost. It goes wrong when a company fails
to adequately integrate IT systems, this may result in the loss of key
people, important customers and even shareholder confidence.
The redundancy of multiple data centers and processes needs to be
eliminated. Users from both companies need to be able to share
information across varied platforms. Success will very much depend on
the speed of integrating these applications, connecting the networks
and deploying an application strategy that enables the users to be
productive.
Solutions for convergent billing help companies achieve a
successful merger by rapidly integrating dissimilar systems and their
information. By deploying pricing plans quickly, IT staff can provide
customers with improved services and a fresh image for the new
business.
Second, Customer Relationship Management. What increasingly sets an
organization apart is its level of customer service. It is also vital
for profitability, as it costs less to keep an existing customer than
to sell to a new one. In fact, for most businesses, customer service is
``the'' critical element for survival. From call centers through Web
browsers, IT is the primary means of customer service delivery today
and excellent customer service requires flexible, speedy, and
responsive IT systems.
Nevertheless, the challenge is to understand customer needs and
aspirations, and to service them effectively. Solutions for convergent
billing leverage and share accumulated customer information by
integrating all of a company's diverse data streams, with a complete
view of the customers' information. Additionally, these solutions help
create new services quickly and present real-time access to
information, enabling better relationship management and greater
opportunities for cross selling and customer retention.
Third, Customer Billing. In the past, billing systems have not
delivered a convergent bill because of technology issues, like linking
existing data systems and customer care, tax, accounting and a host of
other applications with the new billing system or extending it to the
Web. However, technology has evolved and today convergent solutions are
a reality.
iSoft is one of a number of companies that currently provide
solutions for convergent billing that turn the vision of convergent
billing into reality, reducing the time necessary for implementation
and, in the process, lowering cost and leveraging existing IT systems.
If companies are challenged with maximizing their business value with a
billing application, there are solutions that offer rapid integration
and implementation between all other applications, with minimum risk.
Additionally, today's software allows companies to achieve a truly
convergent bill through integration of software products with their
existing systems. Data can be available to people and processes in and
beyond the enterprise, when and where they want it.
Fourth and finally, E-commerce. Business on the Web is growing
fast, but has yet to reach its full potential. What is holding it back?
Integration--the most difficult challenge facing most companies on the
Internet is integrating their Web sites to their existing systems.
But, E-commerce means more than just connecting your customer with
Web-enabled facilities. It means exploiting the immediacy of the Web to
build a new and dynamic relationship with customers by providing
innovative and compelling services like electronic bill presentment and
electronic payment. Today's solutions for convergent billing offer some
of the most advanced options for integrating the Web with existing
billing and IT systems.
Mr. Chairman, I hope I have provided a little insight on how
companies like iSoft are poised to help utility companies prepare for a
deregulated market place. Again, I want to thank you for the
opportunity to be here today and I will be pleased to answer any
questions you or the other members may have.
Mr. Barton. Thank you, sir. And thank you for finishing on
time. That is a nice precedent.
Mr. D'Alessio. Thank you.
Mr. Barton. Last but not least, Mr. Don Deless, who is the
president of D&C Development Company in Wayne, Pennsylvania,
and he is here representing the National Association of Home
Builders.
Welcome. Your statement is in the record, and we will give
you 5 minutes to summarize it, sir.
STATEMENT OF DONALD DELESS
Mr. Deless. Thank you, Mr. Chairman, and members of the
subcommittee, as was said, my name is Don Deless and I am
Chairman of the National Association of Home Builders' Energy
Subcommittee, a land developer, and an energy consultant from
Wayne, Pennsylvania.
I appreciate the opportunity to testify before you today on
electric deregulation and innovative technology in the future.
I would like to first speak about NAHB's position on
electric deregulation, and then talk about innovation.
NAHB supports deregulation, provided it is done in a fair
and comprehensive manner and housing affordability is not
negatively impacted.
NAHB was pleased to hear that Chairman Bliley is not going
to pursue date-certain Federal legislation. NAHB has long been
concerned about forcing deregulation on States that are not
prepared. This could be disastrous.
We remain concerned about the administration's deregulation
proposals which gives even more regulatory power to the Federal
Energy Regulatory Commission and sets intractable levels of
renewable energy sources that will ultimately be paid for by
the public.
A priority for NAHB is to keep housing affordable. NAHB's
No. 1 concern is what will happen with infrastructure and the
price of new homes under deregulation. A vast majority of the
States incorporate into the overall rate base the cost of
infrastructure.
Distribution lines, transformers, meters, all of which are
required for new residential development. These costs are
currently not separated out as a connection charge to a lot or
a new home.
Unfortunately, under deregulation the utility will likely
charge for these infrastructure fees. In California, where
deregulation is furthest along, our builders have seen hookup
fees as high as $3500 being directly leveled on the home buyer
and builder.
Even a small increase in the cost of building a new home
could significantly hurt potential home buyers and home
builders. NAHB advocates language in any deregulation bill
directing infrastructure fees not be passed on to the home
builder or buyer.
This leads me to the issue of stranded costs. NAHB believes
it is important that any stranded costs be spread equitably
over the customer base. There needs to be guarantees that the
small customer will not shoulder a disproportionate burden of
stranded cost recovery as nontraditional energy sources court
larger, more appealing customers.
Finally, I would like to talk about the beneficial energy
incentive programs and the possibility of technology innovation
in the future.
NAHB believes there are important energy programs that also
must be preserved as we move toward deregulation. Continuing
these programs is of the utmost importance of we are to
encourage innovative energy technology in the future.
Continuing voluntary energy efficiency programs and rebates
to builders and homeowners are important along with allowing
builders and utilities to continue to use brand names
established for voluntary energy programs.
There needs to be a concerted effort to preserve these
programs in a deregulated industry. The building industry has
found that technology innovation is very difficult and hard to
market without incentives. Market trends have shown that there
is less interest in energy efficiency when utility rates and
bills are low.
Innovative incentive programs help spur the introduction of
innovative technology into residential construction. Once these
technologies take hold of the mainstream market, the costs of
the product will come down, therefore offering the consumer a
cost-effective and affordable product.
Another way of spurring innovative technology is to offer
energy efficient tax credits. NAHB applauds Congressmen Markey
and Largent for including this type of incentive in their
deregulation bill 2050.
Although NAHB has concerns with some of the levels of
energy efficiency required for new homes to qualify for the
credit, we believe these incentives are important if we truly
want to move energy efficiency technology forward.
In conclusion, NAHB hopes that in any deregulation bill
Congress will carefully address the impact of infrastructure
costs and consider the importance of incentives for stimulating
innovative technologies in a deregulated market.
Thank you.
[The prepared statement of Donald Deless follows:]
Prepared Statement of Donald Deless on Behalf of the National
Association of Home Builders
Good morning Mr. Chairman and members of the Subcommittee, my name
is Don Deless. I am Chairman of the National Association of Home
Builders' (NAHB) Energy Subcommittee and am a land developer and energy
consultant from Wayne, Pennsylvania. I also am a former employee of
PECO Energy Company where I worked in their marketing department for
over 30 years. I appreciate the opportunity to testify before you today
on electric deregulation and innovative technology in the future.
The National Association of Home Builders and its 197,000 member
firms have enjoyed a long-standing relationship with the utility
industry. As you can imagine, the issue of electric power deregulation
and its potential impact on our members and the customers that we serve
is of major concern to the home building industry. As an industry
comprised primarily of small businesses, and as one of the most
regulated industries in the nation, home builders are very sensitive to
regulations or barriers that stifle competition, increase home buyer
costs, or unfairly favor one interest over another.
I would like to first speak about NAHB's position on deregulation
and then talk a bit about innovative technology in the future with
deregulation. NAHB supports deregulation, provided it is done in a fair
and comprehensive manner and housing affordability is not negatively
impacted. We are pleased that Chairman Bliley is not going to pursue
``date certain'' federal legislation. NAHB has long believed date
certain legislation would be a mistake. NAHB believes forcing
deregulation on states that are not prepared could be disastrous.
Moreover, a federal structure by nature does not adequately consider
local and regional concerns that might better be addressed by
individual states. We remain concerned with the administration's
deregulation proposal which gives even more regulatory power to the
Federal Energy Regulatory Commission and sets impracticable levels for
renewable energy sources that will ultimately be paid for by the
public--in particular the residential customer. NAHB believes that this
committee must thoroughly consider how deregulation will effect
infrastructure costs and ultimately the cost of a home.
Specifically, NAHB believes the utility industry, legislators and
regulators need to adopt an economic and regulatory framework that
provides safeguards to ensure the following: 1) Residential customers
should not pay higher rates; 2) Housing affordability must not be
negatively impacted; 3) Residential customers should not bear unfair
burdens in stranded asset recovery; and 4) Programs beneficial to home
buyers should not be eliminated. I understand that this committee is
addressing many of these issues. However, NAHB wants Congress to
understand the infrastructure concerns the building industry has under
electric deregulation. In addressing deregulation, we have to ensure
that competition is fully and fairly achieved, and that all Americans
benefit from the competition and choice. Higher costs for the customer
and home buyer are critical issues for the home building industry. All
classes of customers--residential, commercial, and industrial--whether
large or small users, should equally benefit from rate reductions.
Infrastructure Costs
Topping the list of NAHB's priorities is to preserve housing
affordability. Under a deregulation scheme, NAHB's #1 concern is what
will happen with infrastructure and the price of new homes. A vast
majority of states incorporate the cost of infrastructure into the
overall rate base. These infrastructure costs include distribution
lines, transformers, meters, etc., all of which are required for new
residential development. These costs are currently not separated out as
a connection charge to the lot or new home. The manner in which hook-up
fees and transmission of electricity will be paid is a question of
utmost importance to the building industry. For example, in California,
where deregulation is furthest along, developers now pay for the
infrastructure. Hook-up fees have been as high as $3,500. These costs,
that had been previously spread across the rate base, are now levied
directly on the home builder/buyer in California. Even a small increase
in costs of building a new home could significantly hurt the home
building industry--more than 40,000 potential home buyers are forced
out of the market with every $100 increase in the purchase of a median-
priced home. Guaranteed distribution and transmission of energy service
needs to be a key area addressed in any deregulation effort, otherwise
infrastructure costs and hook up fees will fall to the builder and
developer and eventually to the home owner. This cost would deprive
thousands of families from the American dream of home ownership.
NAHB advocates language in any deregulation bill directing
infrastructure fees not be passed onto the home builder/ homebuyer.
Further, the deregulation of the electric utility industry could
also raise home prices through increased impact fees and raise the cost
of housing through increased property taxes. For years, utilities have
paid substantial sums in state and local taxes based on the value of
their assets. If changes in deregulation cause the value of those
assets to decline, their tax payments will decline as well. As these
contributions decrease, localities could turn to higher property taxes
or impact fees on new homes to compensate for the loss in tax dollar.
This would result in an increase in housing costs.
Residential Customer Costs
NAHB is concerned that large industrial and commercial customers
will be able to negotiate agreements with the lowest cost providers,
thereby creating higher costs for residential customers to compensate
for the loss of revenue. It is important to not just protect
``customers'' but specifically to protect ``residential customers'' who
may be put at a disadvantage in deregulation. The threat exists that
newly emerging energy brokers, not bound by geographic boundaries but
able to provide services to anyone, anywhere, will attempt to appeal to
the larger industrial customer by offering them lower prices.
This could mean that most home builders, the majority of which are
small businesses, would not be offered the same competitive prices of
the larger user.
Further, the cost for services that had previously been provided as
a matter of course could be shifted wholly to home builders and
homeowners. In turn, construction costs for new homes could be
significantly impacted depending on how deregulation occurs. In order
to adequately compensate the utilities for their past investments in
generation, as mentioned before, it may be necessary for electric
utilities to recover these costs through increased hook-up fees and
transmission charges for residential customers. The builder must factor
each of these potential cost implications into the construction of a
new home. Both increased electric rates and higher building costs could
adversely impact the overall affordability of new homes. No customer
should pay a higher overall rate, including transition surcharge, than
they paid prior to deregulation.
Stranded Costs
NAHB believes it is important that any stranded costs be spread
equitably over the customer base. There needs to be guarantees that the
small customer will not shoulder a disproportionate burden of stranded
cost recovery as non-traditional energy sources court larger, more
appealing customers. For example, a utility may have built a power
plant in the mid-1970's or early 1980's that produces electricity at a
cost of seven cents per kilowatt-hour. Today, low natural gas prices,
improved technology and increased competition has made it far less
expensive to generate electricity and a newer or progressive plant can
produce electricity at three cents per kilowatt-hour. The critical
question is who will make up the difference between the cost of
production from power plants that were built when costs were high and
today's lower prices? A system that allows big business to take
advantage of lower costs from competition and leave higher costs to
smaller businesses and home owners that are not yet being served by
those competitive forces is unacceptable.
NAHB is also concerned that potential home owners in rural areas
will be put at a cost disadvantage, as they will not have the purchase
power of those in more populated regions. Hook up fees in these areas
are already costly, this could spike prices even higher. Any
deregulation proposal needs to ensure that service will be provided
universally at an equitable rate.
Beneficial Energy Programs
Finally, I would like to talk about current beneficial energy and
innovative programs and how they can be successful in a deregulated
future. NAHB believes there are important energy programs that also
must be preserved as we move towards deregulation. Continuing these
programs is of utmost importance if we are to encourage innovative
energy technology in the future. For example, energy assistance
programs for low-income consumers and energy efficiency-related efforts
in the residential sector, including voluntary energy-efficiency
programs and rebates to builders and homeowners are important and
should be continued. The bulk of the expenses associated with these
important programs are currently paid for by electric utilities, which
recover these costs in the rates they charge. It is also important that
builders and utilities be allowed to continue to use brand names
established for voluntary energy programs. Case in point, there are
utilities that offer incentives if a homeowner puts in a ground source
heat pump. These energy efficient systems are new, but expensive
technology. A ground source heat pump can cost $6000-7000 more than a
standard residential unit. The utility pays for the well drilling,
which is costly, and then oftentimes offers a rebate for the equipment
to the homeowner. These kinds of incentives are important if new,
innovative energy technologies are to become marketable. The economic
pressures of retail competition will make it difficult for electric
utilities to continue to recover rebates and incentives in their rates.
This scenario could dramatically alter the strong relationship that has
been built up over decades between home builders and their local
utilities. Builders have worked jointly with their local utility for
decades to make homes more energy efficient and more affordable to the
average American. It is important that a mechanism is in place to
maintain these incentive programs. The state of California, recognizing
the need for these types of incentive programs, mandated public
benefits funds be earmarked for such initiatives. There needs to be a
concerted effort to preserve these benefits in a deregulated industry.
The building industry has found that technology innovation is very
difficult and hard to market without incentives. Market trends have
shown that there is less of an interest in energy efficiency when
utility rates and bills are low. Incentive programs help spur the
introduction of innovative technology into residential construction.
Once these technologies take hold of the mainstream market the cost of
the product will come down, therefore offering the consumer a cost
effective and affordable product.
There are other ways incentives can be offered in a deregulation
bill aside from continuing utility rebates and incentives. NAHB
applauds Congressmen Largent (R-OK) and Markey (D-MA) for including
energy efficient tax credits for new and existing homes in their
electricity deregulation bill, H.R. 2050. Although NAHB has concerns
with some of the levels of efficiency required for new homes to qualify
for a credit, we believe these incentives are important if we truly
want to move energy efficiency technology forward. In fact, NAHB
strongly supports H.R. 1358, introduced by Representative Bill Thomas
(R-CA). The legislation offers a tax credit for new and existing homes
that meet higher energy efficiency levels. We would advocate this
committee support H.R. 1358 and include it in any deregulation bill
that moves through the committee.
NAHB has long supported voluntary energy efficient measures.
Recently, NAHB's Research Center has been involved in the Partnership
for Advancing Technology in Housing (PATH) program. So far the PATH
program has been successful in spearheading new, innovative technology.
The program links key agencies in the federal government with leaders
from the home building, product manufacturing, insurance, financial and
regulatory communities in a partnership focused on technology
innovation for the future in housing. The federal government,
understanding the importance of incentives, has funded the PATH program
to speed creation and use of innovative housing technologies. NAHB's
Research Center, in conjunction with PATH and Dow Chemical Company, is
currently exploring home product applications for a new class of
insulation technology that promises dramatic residential home energy
savings. This is the type of technology advancement that can occur
through incentives.
Conclusion
NAHB believes federal deregulation legislation must provide strong
buffers against rising costs for the potential homebuyer. As I have
outlined, this issue could have a profound affect on the lives of
virtually every person who hopes to own a home. NAHB hopes that in any
deregulation bill Congress will carefully address the impact of
infrastructure costs and consider the importance of incentives for
stimulating innovative technologies in a deregulated market.
Thank you for this opportunity to share our concerns on this
important issue. I would be happy to answer any questions you may have.
Mr. Barton. Thank you, Mr. Deless.
The Chair recognizes himself for the first rounds of
questions, and I do not really have too many questions for this
group.
I want to ask our homeowner representative and our home
builder representative. Are your associations in discussions
with the distributed power people, the fuel cell people, about
how to integrate these new products into your packages,
homebuilding packages, your homeowner packages?
Mr. Deless. I think there has been some limited discussion,
but as you heard earlier they are really not available for
commercial application at this point. I think they hold promise
for obviously a business opportunity in the future when they
become commercially viable.
Mr. Barton. What about Mr. D'Alessio's product? Is that
something that could be included in a standard new home in the
future, some of that software that is put into place, and
things like that?
Mr. D'Alessio. I do not think there is any question about
it that it could be.
Mr. Barton. Okay. Well that is really the only questions
that I had.
I am going to recognize Mr. Hall.
Mr. Hall. Mr. Chairman, thank you.
My question I guess will be to Mr. Mertens. I have a
district similar to the chairman's district in Texas where we
have some larger cities, and then some rural areas.
How could distributed power be used in our district? We
already have what we think are, our electric rates are too
high, but they are considered low rates. You know, everybody
wants a little bit lower rates. But we have pretty reasonable
rates compared.
And one of our fears is that we will pass a bill here that
will, as I have said before, lower them in New Jersey and raise
them in northeast Texas, and we could not hardly live with
that. As a matter of fact, I would be standing at the
employment office the first November that came around after the
President had signed this stuff.
We are served by OUs, MUNIs, Federal Power Co-Ops, what is
the commercial viability of these technologies at the present
time? What are they going to do for my district?
Mr. Mertens. Congressman, first and foremost you are of
course familiar with the ERCOT system, which is separate and
apart from New Jersey, so I think you have preserved yourself
as far as not shipping any power up there.
But focusing locally, distributed generation----
Mr. Hall. I've got to read Markey's part of that Markey-
Largent Bill, though before I totally and completely trust
that. Go ahead.
Mr. Mertens. The distributed generation option I think is a
fine option. Williams Company has aligned itself with a number
of leading manufacturers--Caterpillar, Solar Turbines, and so
on--with the express intent of customizing a solution to every
user out there.
If a rural electric has a need for a peaking unit, a
baseload unit, an isolated unit somewhere, that is the solution
that will be drafted.
As far as the economics, that is where some of my earlier
comments come into play. It is a complex issue. There is a
desire on many parties to burden wires' charges, and then if a
customer chooses to exit the distribution system, carry those
fees with them.
That makes distributed generation in some cases less
economically attractive.
If we could get past some of that and place the burden, the
cost burden, where it properly belongs, then the solutions of
keeping low-cost power available to everyone are evident. It is
just a matter of pushing the numbers, putting fuel in here,
taking electricity out there.
Again, it is a variety of packages, depending on the
solution you seek.
Mr. Barton. Would the gentleman yield real briefly, Mr.
Hall?
Mr. Hall. Sure.
Mr. Barton. Do you see any reason to have any disconnect
charge or connect charges? There would seem to be some need to
have some fees for that, but do you share that? Or do you think
it should just be plug and pay like we have in telephones now?
Mr. Mertens. I think a stranded cost recovery mechanism is
appropriate in some fashion to be determined. One of the key
elements on any successful solution for distributed power is
having access to the grid during periods of maintenance, during
periods of peak demand, or in some cases just for flat-out base
generation.
In all cases, we would always seek the lowest cost
solution, and that does not always mean the distributed
generation equipment is going to give it to you.
It may become that distributed generation is a peaker that
benefits the whole system and is in fact entitled to reverse
stranded costs because it benefits the utility.
It is, quite frankly, in the imagination of the drafters of
the solution that I would put trust.
Mr. Hall. Mr. Chairman, I still have a little bit of time,
don't I?
Mr. Barton. Sure.
Mr. Hall. Mr. Mertens, you expressed the concern that
varying utility standards would make it difficult to build a
standardized distribution energy product.
Let's talk a little bit about the establishment of a
standard and whether or not it takes legislation to do it.
Would you expand a little bit on your testimony on that?
Mr. Mertens. Certainly. I have participated in this type of
activity so I can speak to it first hand.
While the public posture of some utilities is that we
welcome distributed generation, with the other hand they also
say, and by the way I just need this interconnection device
which by the way costs $200,000.
So in one way I am receptive, in another way I am not
receptive.
As I go to 50 States, 300 various utilities, each utility
today is entitled to protect their system in any fashion that
they want, from a technical viewpoint. In doing so, there are
some very creative engineers out there that not only go with
belts and suspenders, but they also put sky hooks in place.
Those are some of the things that I believe in a national
vision can be espoused and encouraged by different agencies,
perhaps NERC, to minimize those.
Alternatively, as an example we have Better Homes &
Gardens' seal of approval. If we got to the point of having a
national data sheet and some sort of a national standard that
everybody could say, yeah, that covers 99 percent of the cases,
and come out with that, and then let everybody work toward that
as an appropriate standard, that would be very comfortable.
But what is important is that not each utility be allowed
the full discretion to overbuild.
Mr. Hall. Mr. Chairman, I thank you.
Mr. Barton. Do you have another question?
Mr. Hall. I would yield back my time.
Mr. Barton. Recognize the gentleman from Oklahoma, Mr.
Largent.
Mr. Largent. Thank you, Mr. Chairman.
Mr. Mertens, I wanted to ask you a question about
distributed generation.
What is the net effect of distributed generation if we were
in a full-blown deregulated electricity arena and we had
actively integrated distributed generation around the country,
what would the net effect be on the transmission system in this
country?
Mr. Mertens. Certainly distributed generation can be tied
into the transmission system, but most applications would tie
into the distribution system; but my answer will respond to
both.
In most cases, by situating a source of generation remote
from a central generator, it can do nothing but help the
integrity of the transmission or the distribution system. In
many cases, not only will it help those systems, but it will
defer costs of stringing new wires, installing capacitants,
doing a variety of technical things to maintain system
reliability.
Montreal, I think we all remember the terrible snow storm
about 2 years ago, the ice storm. If distributed generation was
in place during that period of time for some of the system,
that terrible hardship that those folks lived through would
have been vastly reduced.
Mr. Largent. Does distributed generation need to have
backup that is connected to the grid?
Mr. Mertens. Congressman, we can design DG in a number of
ways. Depending on the side of the load, you could put multiple
units in, and in that fashion assure reliability as good as the
transmission system today.
We have a wonderful electric system, and so to try to
duplicate that kind of reliability takes hardware.
Mr. Largent. Yes.
Mr. Mertens. Ideally, you would put a single unit in place
and then rely on the grid to provide you backup service during
periods of maintenance, provide you backup service when the
inevitable maintenance problem happens.
Mr. Largent. Let me come at this from a little bit
different direction because you guys are going to be marketing
not just to the United States but all over the world.
Mr. Mertens. Yes.
Mr. Largent. And if we were to be able to back up 100 years
and start over with developing a national grid, or an electric
system like, well, truthfully, like a lot of Third World
countries are in the condition they are in today, the grid
probably would not look like it does today, given the
technology of fuel cells and other distributed generation
capacities or abilities. Is that correct?
Mr. Mertens. I think that is a very accurate statement.
Mr. Largent. Well, Mr. D'Alessio, I wanted to ask you about
iSoft. We had a chance to talk earlier, and some may have
gotten a misperception, and it might have been me, but from my
understanding the software you are talking about, principally
you are targeting at this time the utility companies and giving
them the ability to do some unique software capabilities in
terms of moving into this new arena as we move into
deregulation.
Could you just maybe elaborate a little bit more on what
exactly iSoft is doing and who you are marketing to?
Mr. D'Alessio. Certainly, Congressman.
Our initial target was the telecommunications industry.
They were struggling with the issue of multiple services being
provided to a single customer, and getting those issues onto
one bill so the customer would receive one bill for that.
But also they were dealing with the ability to issue
multiple different pricing plans for the same type of services.
A good example would be the cellular industry where you go
and you pick out of nine plans the price plan you want for your
cellular phone.
We envision that in the utility industry you are going to
have choices like that eventually. It might be your electricity
is free on Wednesday but the rest of the week it is at this
rate. Or if you use up to this much usage, after that your rate
goes down.
Software like ours allows utility companies to price the
service to the user like that.
Mr. Barton. The gentleman's time has expired.
Mr. Largent. Thank you, Mr. Chairman.
The gentleman from Ohio, Mr. Sawyer.
Mr. Sawyer. Thank you, Mr. Chairman. I would be pleased to
yield 15 seconds to Mr. Shimkus if he wanted to make an
observation to the Chair.
Mr. Barton. Did the gentleman----
Mr. Shimkus. The observation has been made.
Mr. Sawyer. I reclaim my time, Mr. Chairman.
Mr. Barton. Okay. We will start you over again.
Mr. Sawyer. Thank you.
Mr. Mertens, let me return to the interconnection
standards. I think that is important.
Who ought to be making those determinations?
Mr. Mertens. I think it is very important that each utility
participate in that. There is a uniqueness to every electric
grid out there, and it is critical that they are part of it.
However, there needs to be some oversight. I assure you
that goldplating is not a lost art.
Mr. Sawyer. The quality of that interconnect, though, does
affect the quality of the system at some point, would it not?
Mr. Mertens. Yes, sir, it does.
Mr. Sawyer. You say that the utilities should participate.
Are you talking about generator utilities, transmission
utilities, distribution utilities? I am really concerned about
what Mr. Tribone said earlier about the importance of watching
our vocabulary because it puts us into mindsets that may not
apply.
Mr. Mertens. And you correctly observe, we have all three
types out there. And then we continue to have the vertically
integrated utility as well.
Mr. Sawyer. Sure.
Mr. Mertens. The interconnect standard, in again different
situations, if I have a small fuel cell, the interconnect
standard there would be on the distribution level. If I have a
larger unit of 250 megawatt solar, that would probably be a
transmission interconnect.
So the answer is. It depends.
Mr. Sawyer. As we try to write law here----
Mr. Mertens. Yes, sir.
Mr. Sawyer. [continuing] where should we put that
authority? Should it be in voluntary associations of service
providers of one kind or another?
Should it be overseen at the State level?
I mean, most of the kind of distributed generation that we
are talking about really falls within what could be a
traditional State purview.
Or should there be a fundamental set of characteristics
that we would expect some kind of governance organization,
whether public or private, to observe?
How should we write that law?
Mr. Mertens. Congressman, you referred to the National
Highway System earlier as a good analogy to the transmission
system, and I agree with you. I think it is a marvelous
example.
In the Highway System, we have certain standards. Bridges
can be no lower than this. Roads have to be this thick. Curves
are of such and such. And I think that is what is lacking in
the electric industry.
We do not have the fence parameters in place yet. And with
that, we can certainly work inside that fence effectively to
take care of the local interests that are important to
maintaining reliability. But we need that outside bracket so
that if we do get an outlier we can bring that person back in.
Mr. Sawyer. Thank you very much, Mr. Mertens. I appreciate
that.
Mr. D'Alessio, you talked about mergers and acquisitions.
Mr. D'Alessio. Yes, sir.
Mr. Sawyer. It is a complex and difficult undertaking these
days going through a variety of jurisdictions of various kinds.
That is probably the product of having built an industry up
over the course of a century with various standards applying at
various points in the century.
Where in a new world of restructured service should mergers
and acquisitions' decisions be observed, overseen, and acted on
in the public interest?
Mr. D'Alessio. Again let me fall back to our
telecommunications experience. The company started out as long-
distance providers. Then they acquired local carriers, ISPs,
and possibly telecommunications getting into utilities.
Now what they have done is acquired established business
bases. Each of these established business bases had their own
infrastructure which they did billing out of customer service
and a bunch of other projects.
The biggest problem was getting all of that together so
there was one unified source of data, which basically comes
down to data integration where an executive at one location can
view the data from all these different sources.
It also relates directly to convergent billing: the ability
for the one corporate organization that survives to be able to
send out one bill. The savings is drastic. As opposed to
sending out a bill for your cellular phone from one company,
the long distance bill, the ISP bill.
These companies that have the software that we are talking
about are able to generate one bill to that customer base for
all those services.
The beauty of the software that is available today is that
they do not have to lose their investment in their legacy
system. The software rides on top of that. That is probably one
of the nicest aspects of it.
Mr. Barton. Thank you.
The gentleman's time has expired.
For the last series of questions, Mr. Shimkus, the long-
suffering, very patient gentleman from Illinois.
Mr. Shimkus. Thank you, Mr. Chairman. It is an honor to be
recognized.
Mr. Shimkus. Mr. Clark----
Mr. Barton. The gentleman's time is about to expire, so----
Mr. Shimkus. [continuing] you brought up an issue that I
just need to respond to. You kept talking about the stranded
cost issue, and I think that battle has been fought and is
over, and it is really a dead horse.
So I think you need to focus on how we can make the
deregulation bill that we are going to push palatable. I mean,
23 States have moved. I am a rabid defender of what Illinois
did in a very contentious, angry process by which not everyone
walked away winners or losers, but they all walked away
standing up and moving to a new environment.
But I want to follow up on the distributed generation
aspects. And of course the chairman will understand, based upon
my numerous questions on the States' involvement, but you
brought up a good question that we are going to have to go back
and do research on the Illinois bill.
In the Illinois bill, there are going to be transition
costs for people who choose to leave their provider up until
2006. Do you think that transition cost--and I know you are not
all experts on the Illinois legislation--would even pertain to
distributed systems?
Mr. Clark. I am not sure I know that much about distributed
systems, but my point with the stranded costs, knowing it is a
dead horse, is that since we paid for the horse we want to at
least get some of it back.
So I think any further costs on the customers should be
looked at----
Mr. Shimkus. Well I really want to talk on distributed
systems, so I do think the stranded cost battle is now----
Mr. Clark. I do not know that much about distributed
systems.
Mr. Shimkus. Mr. Mertens?
Mr. Mertens. Illinois, as have many other States through
the stranded investment process, have allowed a wires' charge
for customers exiting the system.
There is a variety of approaches to that, however. New
Jersey, for instance, had a window where, if a customer elected
to develop onsite generation, they were exempted from various
charges under that circumstance.
And so the approach we might offer here is, again in the
best interests of the State, the region, the customer, how
might we craft a solution that is going to benefit them all.
Clearly a customer that builds onsite generation that has
the ability to enhance the system by in putting power in a weak
area of the grid, or in some fashion selling back on peak,
under those circumstances there should be recognition of those
benefits.
Presently, that is not part of the process. It is rare to
find anyone even asked under what circumstance can distributed
generation benefit, and should we pay for those benefits? That
is not the question.
I offered in my opening a comment about retirement, plant
retirements. You will see that in most cases when a plant is
retired a new plant will replace it. But what if distributed
generation, instead of a new plant, were offered and that new
plant, that central generation were not put into rate base.
Does that not have the ability to lower rates for all
consumers?
I think the answer generally to that is, yes. And we need
to explore that.
Mr. Shimkus. And I am going to have to recheck the Illinois
legislation, because it would be exiting from one provider but
not entering into a contract with another producer, except for
yourself. So it brings up good questions, which is the
importance of having hearings.
I thank the chairman, and I yield back.
Mr. Barton. I thank the Congressman. We are going to
conclude this hearing. This is our last oversight hearing on
the general issue. Next Thursday we are going to begin our
legislative hearings. And if the minority approves, we are
going to hold the first legislative hearings on a number of the
bills that have already been introduced, the Markey-Largent
bill, there is the Cliff Sterns bill, there is the Burr Bill,
we think there may be a Pallone bill. So we are going to give--
and Mr. Tauzin perhaps has a bill in the hopper--we are going
to take a look at the bills that have been introduced and give
those members and groups a chance to come in and comment on
those legislative items.
Then we are going to start a series of hearings on a bill
that is currently being drafted that we hope to be working with
Mr. Hall and other Democrats on in the next few days.
We want to thank you gentlemen for this testimony. There
may be some written questions to you, and we hope you will
reply very quickly to that.
This hearing is adjourned.
[Whereupon, at 12:21 p.m., the hearing was adjourned.]
THE ROLE OF THE TENNESSEE VALLEY AUTHORITY
----------
MONDAY, SEPTEMBER 13, 1999
House of Representatives,
Committee on Commerce,
Subcommittee on Energy and Power,
Nashville, TN.
The subcommittee met, pursuant to notice, at 9:29 a.m., at
16 Legislative Plaza, Nashville, Tennessee, Hon. Joe Barton
(chairman) presiding.
Members present: Representatives Barton, Whitfield,
Pickering, Bryant, Hall, and Gordon.
Also present: Representative Clement.
Staff present: Joe Kelliher, majority counsel; and Sue
Sheridan, minority counsel.
Mr. Barton. The hearing will come to order. Ladies and
gentlemen, take your seat.
I am Congressman Joe Barton from the Sixth District of
Texas and I am delighted to be in Nashville, Tennessee today to
hold a formal field hearing of the Energy and Power
Subcommittee of the Commerce Committee, U.S. House of
Representatives.
Our hearing today is on the role of the Tennessee Valley
Authority in competitive electric markets.
I want to thank Congressman Ed Bryant of Tennessee for
helping us to arrange this hearing and arrange the hearing room
through the good graces of the Office of the Speaker of the
Tennessee Legislature, the Honorable Jimmy Naifeh.
And I want to thank Congressman Bob Clement, another great
Congressman from Tennessee, who is not on the committee, but is
a good friend of mine and is on another committee that is going
to be holding a hearing on the TVA in the next 2 weeks in
Washington. Also Congressman Bart Gordon, a member of our
subcommittee, for also helping us to arrange this hearing.
I am delighted to be back in Nashville. I have come here
numerous times. Back in 1864, there was another group of Texans
commanded by General John B. Hood, who came to Nashville. They
had a pretty warm welcome. Congressman Hall and I hope that our
welcome today is not quite as warm as General Hood's was back
in 1864, but we know that we are going to have a very
productive hearing. I had the honor to represent Hood County,
which is named after General Hood, in Congress until 1990 when
we had Congressional redistricting.
I think most of the people in this room know that we are
working on this subcommittee to put together a comprehensive
Federal electricity legislative package. We want to promote
competition throughout the country in electric markets, we want
to enhance reliability, but we also want to respect the role of
the States.
With regard to the Tennessee Valley Authority, since it
goes over numerous States and has special Federal legislation
that deals directly with it, we feel that it is worthy of
special consideration and that is why we are here today.
As we put our package together, we are considering a broad
range of issues, including what the role of the Federal
electric utilities like TVA should be in a competitive electric
market. The discussion draft that is currently in circulation
includes provisions specifically relating to Bonneville Power
Administration and other Federal power market administrations
such as the Southeastern Power Administration. I have worked
with Congressmen from those regions served by those utilities
to fashion those provisions, but we do not have in the current
draft anything other than a title for the Tennessee Valley
Authority.
I had promised Congressman Bryant and Congressman Gordon
that we would work with them to fashion a package specifically
tailored to the TVA, but I want to tell the witnesses and those
in this room that I think it is imperative that we have a TVA
package in our bill. And I know there is a special relationship
between the Tennessee Valley Authority and the U.S. Congress
and the State legislatures in the regions that they serve, but
I do not think that the TVA can be out of a comprehensive
electricity bill. We need a bill that serves all 50 States, not
just all 50 States minus the States that are served by the TVA.
The key question is how to incorporate the TVA system into
the national power grid. This hearing is very important because
it will help the subcommittee determine whether we should and
how we should include TVA provisions in a bill. If there is a
broad agreement that the Federal electric legislation should
include TVA provisions, we must decide in the next 2 weeks,
quite frankly, what the elements of that package should be.
So today's hearing is not just a hearing for show and tell,
today's hearing is a substantive hearing that in all likelihood
is going to result in Federal legislation that passes my
subcommittee within the next month.
I want those of you here that have been working to put
together a consensus on how to handle the TVA issue to continue
to work with your Congressmen in the region. We would like a
consensus, if at all possible, to come from this hearing. The
region, in my opinion, should have a lot, if not total, input
into what the TVA provisions should be. It is obviously helpful
if you can speak with one voice.
The Tennessee Valley is well represented on the
subcommittee. As I've already pointed out, Congressman Ed
Bryant, Congressman Bart Gordon are both from Tennessee.
Congressman Ed Whitfield is with us today, represents the great
State of Kentucky. Congressman Chip Pickering of Mississippi
and Congressman Rick Boucher of Virginia, who I do not believe
is with us today, but is a member of the subcommittee.
As I pointed out earlier, the region is also well
represented by Congressman Bob Clement, who is with us. He and
I worked together several years ago on the nuclear licensing
reform legislation. We have a tremendous personal friendship
and he has already told me that he wants to be a key player in
this as this bill hopefully moves to the floor of the House of
Representatives. He is on the Water Resources Subcommittee of
the Transportation and Infrastructure Committee and as I
pointed out earlier, they intend to hold a hearing on this same
issue within the next 2 weeks.
I also encourage the region to be mindful of the point of
view of the rest of the country. It is going to be very
difficult to pass TVA legislation that is embraced by the
Tennessee Valley region but opposed by the rest of the country.
The biggest issue, in my opinion, to the rest of the country is
going to be whether the Tennessee Valley Authority provisions
expose Federal taxpayers to too much risk, particularly with
respect to the payment of the TVA debt.
One reason that I think Congress should include a TVA
provision in the Federal electricity legislation is to correct
a mistake that was made in 1992. Congress left the TVA out of
the Energy Policy Act of 1992. Under the 1992 law, there is
wholesale competition in every part of the country except the
Tennessee Valley. I think that that is wrong. The time has come
to give TVA's wholesale customers the same right to purchase
electricity competitively that wholesale customers outside of
the Valley have enjoyed since 1993.
I want to commend the TVA for listening to its customers
and agreeing--at least I am told that they have agreed--that
the time has come for competition in the Tennessee Valley also.
I look forward to hearing the testimony of the witnesses
today and the questions and the answers that are going to come
after the testimony.
With that, I will recognize our ranking member of the
subcommittee, Congressman Ralph Hall of Rockwall, Texas, for an
opening statement and then we are going to go to Mr. Gordon,
who has indicated that he may have another engagement that he
might have to leave our hearing prematurely.
Mr. Hall.
Mr. Hall. Mr. Chairman, I will yield to Mr. Gordon now if
he needs to leave.
Mr. Barton. Can you kind of push the little red button and
hold the microphone.
Mr. Hall. You have to push it and hold it.
Mr. Barton. Tennessee is very smart, you can do more than
one thing at a time.
Mr. Hall. We can just talk with one hand, I guess.
Mr. Chairman and members of the committee, thank you for
your presence here today. And we are here at the invitation of
the members of the delegation from Tennessee, a delegation that
the chairman has already indicated that the two of us as Texans
have high regards for. I never met anybody from Tennessee that
I did not like. Maybe I will have a new experience while I am
here, but the only one that is not here that is a close friend
of mine there is John Tanner, who lives in the same building
with me in Washington and he is a leader of the Blue Dog
organization, a group of conservative Democrats that are
courteous to the Democratic leadership and the Republican
leadership, but we just do not let them boss us around. You
know, we could survive so long as there is a close distinction
in the numbers up there, but once one party gets numbers beyond
30 or 40, why we will have a shoe factory built, you know
where. But we enjoy doing what we are doing.
I enjoy working with your Tennessee delegation. I think
first I should recognize Bob Clement, who represents the area
here where we are and have kind of an understanding and
agreement with him. He keeps telling me he is not going to run
for Governor or he is going to run for Governor. But if he ever
does, I think he is going to get elected and I have asked him
to have a Sam Houston Room to where I could sleep in the Sam
Houston Room. Whatever he is going to charge me for it, we will
work that out at a later time. I understand people pay to sleep
in those important rooms and----Bart Gordon is on committees,
we are on the same committee I guess on two committees
together. Bart has just recently--ranking on Space--led the
fight to save the space station that might mean medical
breakthroughs for us in the days ahead--one of the fine
members.
But it is hard for me not to like anybody from Tennessee
because a lot of settlers from Texas came from Tennessee and I
think your State gave birth to some of our most distinguished
early revolutionaries and statesmen, Davy Crockett and Sam
Houston, being two that I could mention right off. Davy
Crockett said--the last time he spoke to the Congress, he said
the same thing I tell them every weekend in Washington, y'all
can go to hell, I am going to Texas. And that is in the
Congressional Record, if you ever want a copy of it.
And Ed Bryant, I have no more respect for anybody in
Congress than I do for Ed, the very courageous and successful
effort he put forth during the impeachment proceedings, doing
what he felt was right and showed great leadership there, I
think places him in a place of honor and respect by all of us,
whether we agree with the thrust or not. I agreed with the
thrust he took, but some of us did not, and there was reasons
to be on either side of that issue.
And these other members here, we are honored to have them.
Chip Pickering, I do not really trust anybody as young as he
is, but he is an extra hard worker and really part of the
backbone of this subcommittee.
Mr. Whitfield gives us a reasons base. He thinks things
through, you are not going to sell him anything, he is very
solid, very thorough and very capable.
So I am honored to be here with this group. I am over-
matched, but I just try to hold my own. I came here to listen
and I think there is widespread agreement, Mr. Chairman, on
what we are attempting to achieve with utility restructuring at
the Federal level and that is the development of a workable
competitive electric bulk power market which makes some sense.
Now where many of us differ is on how to execute the transition
to make that vision a reality. So in many ways, what we are
attempting to do is to write the transition rules that will
affect one of the largest industries in the country, and we
understand that and we have to be careful with that and we have
to be thorough with that. With an industry as basic to the
economic health and welfare of this country, we cannot afford
to make a mistake.
That is the reason that this may happen this year, it may
not. I think I am almost for restructuring anything or
deregulating. As much as we can take out of Washington and
bring to the local area, I want to do it, if we can do it
sensibly. By some measures, TVA is the nation's very largest
electric utility and since TVA is a Federal corporation,
accommodating it within the giant transition rule is some
unique issues that are present with us and certainly we know
that these issues do present a major challenge as we attempt to
put together legislation on this committee.
So I am here to listen carefully and learn first-hand, and
our job is to hear the concerns about the changes. This is not
the first hearing we have had, we had a hearing in Atlanta, we
had a hearing in Chicago, we had a hearing in Dallas. We even
had a hearing in Richmond, Virginia. I do not know how that one
happened, but Chairman Bliley resides in Richmond and we had a
national hearing in Richmond. And we have had I guess 115 or 20
people testify before us. We are seeking the truth and we are
trying to write a bill that you can be proud of and that this
country can live with.
Mr. Chairman, thank you for your courtesy and your help and
I yield back my time.
Mr. Barton. Thank you, Congressman.
I want the audience to know that there was one word there
that said Sam Houston and he talked for 5 minutes. It is just
amazing what Congressman Hall can do with a little bit.
And I mean that in a positive way.
Mr. Hall. Mr. Chairman, could I be heard?
You know, things are not always like they seem. Back when I
was in the Texas Senate, we had a young man named Mark
Connally, who was John Connally's son. Everywhere Mark went
around, he would tell people I am John Connally's son. He is
talking about me now but Mark talked about himself--I am John
Connally's son, I am John Connally's son. And Nelly Connally
got him off to one side and said I doubt if people want to hear
that and I doubt if it makes you any bigger person and I doubt
if your daddy wants you going around bragging like that. Of
course, the next reception they had, Mark showed up there and
somebody walked up to him, shook hands with him and said son,
are you not John Connally's son and he said well, I thought I
was until momma said she had some doubts about it.
So you have to be careful what he says about me because our
districts border, he took the super collider away from me,
built it in his district up to a point and we finally killed
that.
I yield back my time.
Mr. Barton. We would like to hear from Congressman Bart
Gordon now.
Mr. Gordon. Thank you, Mr. Chairman, and Ranking Member
Hall, my friend from west Tennessee, Ed Bryant, and our friends
from north of us, Ed Whitfield and south, Chip Pickering,
thanks for coming to join us today. Our good staff, folks that
are going to testify today, and guests. Bob Clement and I want
to welcome all of you to the center of the universe here in
middle Tennessee, we are glad you have come to join us.
As Chairman Barton mentioned, I had two previous really
committee meetings today, one of which Ed and I serve on. He
stood in for me last Friday and so I am going to--he is going
to take the hearing here and I will stand in for him at the
other one, but I will be getting back with our staff to go over
all of this.
Also, as I was leaving the other day, Zach Wamp, who could
not be here, wants to be here, Zach is our former Chairman of
the TVA Caucus and has asked me to place his testimony in the
record.
Mr. Barton. Without objection, so ordered.
Mr. Gordon. Thank you. As well as my friend Carl Landsen,
who is the Vice President of the International Brotherhood of
Electrical Workers. Carl also served on the Tennessee Valley
Electric System Advisory Committee and he has a testimony and a
report of the Tennessee Valley Electric Advisory Committee that
he would like to place as part of the record.
Mr. Barton. Without objection.
[The prepared statement of Carl Landsen follows:]
Prepared Statement of Carl Lansden, International Vice President,
International Brother of Electrical Workers
Mr. Chairman, members of the Committee, welcome to the beautiful
Tennessee Valley and I should like to thank you for the opportunity to
address the Subcommittee on the important subject of utility re-
regulation. My name is Carl Lansden and I represent several thousand
inhabitants in the State of Tennessee and other states who are vitally
interested in the electric re-regulation bill before the Congress and
its impact upon the Tennessee Valley Authority and the 159 distributors
that TVA serves.
In 1997 a Tennessee Valley Electric System Advisory Committee was
created from stakeholders in the Tennessee Valley River Basin relative
to changes in the electrical generation and distribution industry. The
Advisory Committee was charged to create and/or develop a consensus
among regional stakeholders for a legislative proposal to define the
role of TVA in the re-regulated electrical industry. That Committee had
several meetings in Nashville, Tennessee. In March of 1998 the
Committee concluded its mission and issued a report. I shall submit a
copy of that report for your consideration.
The circumstances in the Tennessee River Basin have not changed
since that Committee spent months analyzing the impact of re-regulation
upon the inhabitants of the Tennessee River Basin and the role that the
Tennessee Valley Authority should engage in such a re-regulated market.
Inasmuch as the committee and staff from the Department of Energy spent
several months analyzing and discussing the needs of the inhabitants of
the Tennessee River Basin and the role that TVA should play in
accommodating those needs as a country, I respectfully request that the
Committee give due regard to the development of the Advisory
Committee's Report. Moreover, I respectfully request that the Committee
take cognizance of the fact that the terrain in the Tennessee Valley
region is somewhat different from that found in other parts of the
country and oftentimes it is not economically feasible to provide an
individual dwelling electricity. Prior to May 18, 1933, there was
indeed electricity generated and sold in the Tennessee River Basin, but
many of the inhabitants in the River Basin were without the benefit of
electricity because the investor owned utilities, more specifically the
Tennessee Power Company, would not provide service to those individuals
who resided outside of a metropolitan area. The reason they refused to
do was quite simple--the cost of delivering such power. It is no more
feasible today in some areas of the State of Tennessee and the
Tennessee River Basin than it was in 1933 from an economic standpoint.
I urge the Congressional Committee to remain cognizant of that as they
engage in debates over the wisdom of re-regulation or more specifically
how such re-regulation will be framed. It is my belief that the
Tennessee Valley Electric System Advisory fulfilled its obligation
commensurate with its charge. I urge members of the Committee to
analyze in detail the report enclosed herewith.
One final point I should like to make before the Committee: the
inhabitants of the Tennessee River Basin are entitled to equitable
treatment as it relates to the operation and funding of a navigation
system and/or flood control of the fifth largest river system in the
United States of America. Throughout our great country from Maine to
Washington State, the federal government funds the operation and
structuring locks to maintain a navigable channel. The inhabitants of
the Tennessee River Basin and the seven state area that it covers are
entitled to no less. Most assuredly, requiring the Tennessee Valley
Authority to use revenue garnered from the sale of electricity would
put the Tennessee Valley Authority and the inhabitants of the region at
a distinct disadvantage when it comes to the generation and sale of
electricity should those revenues be used to fund and operate navigable
streams contrary to the practice throughout the country.
Ladies and gentlemen of the Committee, I thank you for the
opportunity to appear before you in Nashville, Tennessee, this morning.
Enjoy your visit. Good luck in your deliberations and have a safe trip
back to Washington or home.
Mr. Gordon. Thank you, Mr. Chairman.
You know, since you and our ranking member are both from
Texas, Jim Baker remembers my grandfather well, and my
grandfather used to always say that every time the grand jury
met, the population of Texas increased. And some of those were
my relatives too, so we are glad that you have come back to
your roots here.
Mr. Barton. Will the gentleman yield?
Mr. Gordon. Yes, sir.
Mr. Barton. My great, great, great Ben Barton came to Texas
in 1840 from Tennessee, managed to get legally married and
father one son, Waddy Thompson, Sr., and then was killed under
mysterious circumstances.
So he did come from Tennessee though.
Mr. Gordon. Well my first name is Barton and that is my
mother's maiden name and part of our family went out there, so
we--we are not kissing cousins, but we are related some where,
I would suspect.
Earlier this year, Chairman Barton began the difficult task
of trying to craft Federal legislation to deregulate our
country's electricity industry. As many States across the
country have started to move toward restructuring themselves,
this subcommittee has moved slowly, hoping to build a
consensus. I commend the chairman for his discretion. Because
deregulation should have such a profound effect on middle
Tennessee, I sought and secured a seat on this subcommittee to
be a part of the conversation concerning deregulating our
electrical industry.
In this process, there are three priorities that I have
consistently expressed my support for and concern about.
First, ensuring that our lakes are not sold and are open to
the public.
Second, maintaining this region's low electric rates.
And third, working to strengthen rural electrification and
universal service for all rural areas.
When we in Tennessee were drawn into the conversation about
restructuring, it was not limited to electricity. TVA and the
Southeast Power Marketing Association also fills important non-
power roles in Tennessee--flood control, navigation, land
management and recreation. In middle Tennessee, we are
fortunate to be beneficiaries of some of the most beautiful
lakes in the country. These lakes, which are on the Cumberland
River, are owned by SEPA and maintained by the Army Corps of
Engineers. Any effort to overhaul the Power Marketing
Administration, specifically SEPA, could limit access to these
lakes. The people of Tennessee and the country should not have
these resources taken away from them. Already this year,
proposals have once again been offered to sell SEPA and our
lakes in middle Tennessee. I strongly oppose such proposal and
will oppose any restructuring legislation that does not
maintain open access to our lakes or does not keep them in the
hands of the public. I am committed to fighting any efforts to
sell our lakes.
We in Tennessee are the beneficiaries of low-cost power.
This low-cost power is partly responsible for our continued
economic growth. If we are to move forward with a bill in the
106th Congress, it is my hope that we have no losers, only big
winners and bigger winners. The consumer must be our first
priority. Any legislative proposal must work to reduce costs
for all consumers in all regions of the country, including low-
cost regions.
As we are here in my home in middle Tennessee, let me take
a few moments to tell you a little bit about my district which
includes 15 counties and a portion of Nashville and is south
and east of Nashville. My home town of Murfreesboro receives
its power from the Middle Tennessee Electric Membership
Cooperative, represented here today by their President Jim
Baker. The co-op serves over 120,000 customers in four
counties. The cooperatives and the municipalities should be
congratulated for bringing electricity to rural areas. In fact,
my parents' farm had power brought to it by the local
cooperative. And I want to make sure that rural areas will not
be neglected in lieu of areas that are easier and more
profitable to serve. It is no secret that it is more cost-
effective and profitable to serve New York City than it is
Lascassas or Red Boiling Springs. Rural electrification has
been successful but our work is not complete. We must ensure
continued access to affordable, reliable power for rural areas.
Now I have always found that the best way to get things
done is to use the common sense approach to finding a
consensus. If a deregulation bill is to be successful, it must
provide some benefits to all.
Thank you, Mr. Chairman, for holding this hearing and
letting me be a part of it today.
Mr. Barton. Thank you. I will tell one quick story about
Congressman Gordon. He and I were elected the same year. He was
from Tennessee, I am from Texas. His first name is Barton, my
last name is Barton and the President at the time was Ronald
Reagan, who did not have the best history of a good memory, and
there was an early vote and I was on one side with the
President and Congressman Gordon was on the other side against
the President, and it was of such significance that the
President's wife, who has a very good memory, Nancy Reagan, was
incensed about it, but she thought that I had voted against the
President and so the President called Congressman Gordon, who
had just left his office and was on travel, but the staff did
not tell the President's secretary that Congressman Gordon was
not in the office, and so Mrs. Reagan was doubly incensed
because she felt that not only had the Congressman voted
against the President, but had snubbed him by not taking the
call. But she thought it was Congressman Joe Barton that had
done this, not Congressman Barton Gordon.
And so I was at a White House reception, innocent lamb that
I was, and Mrs. Reagan came up to me and just started ripping
me, you know, and I could not figure out what it was. And we
finally unraveled the mystery, and so the next time I was
allowed in the presence of the President, Mr. Reagan, I said
Mr. President, would you please tell your wife that I am Joe
Barton, not Barton Gordon.
So whatever the deed was, I am sure Congressman Gordon was
representing his constituents, but he never incurred the wrath
and I did.
We would now like to recognize Congressman Ed Bryant, who
early on in this process I went to and asked if he would take
on the unenviable task of trying to work to develop a consensus
on the TVA issue, and Congressman Bryant said he would be--
well, I do not want to overplay it, he did not say he would be
delighted to do it, but he did say that he would do it, and he
has done an outstanding job in trying to bring some clarity to
some of these issues. And later this week, we will sit down
with he and the other Congressmen from the region to try to put
the package together.
Congressman Bryant.
Mr. Bryant. Thank you, Mr. Chairman, and I would like to
express publicly my appreciation for the courtesy that you have
given all of us in the Valley by having this field hearing in
Nashville. I want to tell you publicly what a great job Joe
Barton is doing in this subcommittee chairmanship, especially
as it relates to this issue of what some call deregulation,
what others call restructuring, of the electricity industry. He
is certainly giving everyone a seat at the table and ample
opportunity to give our views and to represent our
constituencies and we are continually assured by both he and
others on the committee that this will be a fair hearing.
Whatever type of bill we end up with, we want it to be the type
of bill that will be a bipartisan bill, that will be a fair
bill to all concerned and certainly we are in the early stages
of this process, but yet we are moving, we are operating under
some time guidelines here and so no one knows what the end
result will be, but the process is beginning to move along.
I also want to thank the chairman of the full committee,
Tom Bliley, for his role in allowing this subcommittee hearing
to be held today. I also want to thank the ranking member,
which some of you may not know who that is or what that is, but
the ranking member of course is Mr. Hall, who is here, he is
the senior Democrat member on that committee and he and Mr.
Barton--it is like a Texas love fest when you go to the hearing
and they get, as they did today, the first two statements. I
just sit back and think again of the heritage that Tennessee
has given Texas, and of course that balloon was popped today
when Bart spoke about the folks under indictment going down
there.
But they have become good citizens down there, I can say
that much. But it is a pleasure to serve with such fine people
on the committee, many of whom are here today--Ed Whitfield,
Chip Pickering, Bart Gordon, and of course, Bob Clement is not
on this direct committee, but again is a dear colleague from
our delegation in Washington.
I think we have thanked just about everybody other than the
panel members, and I know there will be a more elaborate
introduction of each one of you as soon as we all stop talking
up here, but this is the way Washington works and the hearings
work up there, and I am sure those of you that observe
Nashville, it is probably very similar to the State hearings
that occur in this very room. But I will not go through each
one of the individual presenters today, but we have a very
qualified, very competent panel to testify, certainly on
different areas, different interests, and you probably will
sense some disagreement among some of the people here today.
But we all have a lot at stake in this and I appreciate all of
you coming today and appearing here in Nashville for us.
Many of our other colleagues, both on the subcommittee and
the committee and the TVA region itself, from the TVA Caucus,
had other commitments and could not be here today. Bart has
already mentioned Zach Wamp, who is the former Chairman of the
Caucus, who has submitted his statement. Also Roger Wicker, who
is the current Chairman of the TVA Caucus, had prior
commitments but either is sending a statement or has a
representative here at this hearing--and I am not sure which it
is, but I feel Roger's presence already, so I know it is here.
He is an old roommate of mine in Washington, so I know him very
well.
But I would, Mr. Chairman, if it would be permissible for a
few days to leave the record open so that any of our other
colleagues might submit statements if they want to do so.
Mr. Barton. Without objection.
Mr. Bryant. Thank you.
Mr. Chairman, I really cannot underestimate how vital an
issue this is, this issue of restructuring, to our region. For
over 60 years, the TVA has generated our power, has made our
rivers navigable, they have provided flood control, they have
provided recreation, and they have contributed to the overall
economic development of this entire region. I hope that this
hearing will point to ways in which we can begin to look at
reshaping the electric industry while preserving the historic
role and functions of TVA. I agree very much with my colleague
from middle Tennessee, Bart Gordon, about our priorities in
this region and how important these are that we ensure a
continuity of this, not only tradition, but this way of life
that is so important to this region.
I want to ensure that--as we consider this national
electricity restructuring legislation--that we do not forget
the needs of the people of this region. And as such, I would
echo Bart's words as he spoke them.
As other areas of this nation evolve toward retail electric
competition, we are beginning to contemplate what benefits
could be derived from wholesale electric competition that the
rest of the country enjoys. And I am committed, as well as
others in this delegation, to ensuring that the people of the
Tennessee Valley region are not forgotten in this process, and
that all of our people continue to enjoy access to relatively
inexpensive, very reliable power. In fact, I have told many of
you that we have kind of become spoiled in this region. And
from a political standpoint, that is going to be a hard thing
to overcome when we have had really a tremendous system working
in this area in terms of providing inexpensive, reliable power
for years.
I believe that all of us here today understand the
magnitude of this undertaking, and that, in the end, we can all
come together to craft the best solution for the long term
benefit of our beloved region. And I would yield back my time,
Mr. Chairman.
Mr. Barton. Thank you, Ed, we appreciate that.
We would like to next hear from the Honorable Ed Whitfield
from the great State of Kentucky, who, as Congressman Hall
pointed out, is one of the very, very thoughtful members of the
subcommittee and who has taken a real personal interest in the
TVA issue. Mr. Whitfield.
Mr. Whitfield. Mr. Chairman, thank you very much. And I
want to thank all of you in the audience who are attending this
hearing today.
We recognize the importance of it and I for one have been
particularly impressed with Chairman Barton and Ralph Hall's
willingness to listen to all sides on this issue. I have only
served in Congress for 5 years, but I quickly discovered that
frequently legislation will be put out there to the committee
and no one has very much say-so about it at all. And Joe
Barton, I must say, has been open and willing to listen and is
honestly trying to come up with a compromise bill.
Obviously this is an important hearing. If we are not
successful in crafting a TVA title that protects low-cost
electricity rates and meets the economic development needs of
our area, we run the risk of abdicating that responsibility to
legislators who represent districts with high electricity costs
and who do not have access to Federal power like TVA or the
Power Marketing Administrations. I can assure you that any
title about TVA crafted for our region by legislators outside
our area would not benefit our residential, industrial or
commercial users.
Now unlike Tennessee, not all of Kentucky is located in the
TVA service area. In Kentucky, 5 electric co-ops and 13
municipal systems receive power solely from TVA. Of those 18,
all the co-ops and 10 of the 13 munis are located in the First
District of Kentucky, which I am honored to represent.
Federal power supplied by TVA and the Southeast Power
Marketing Administration is an important energy source for our
area and Kentucky, where we enjoy some of the lowest
electricity rates in the nation. And I would further say that
over 95 percent of the electricity supplied in Kentucky is
coal-fire generated. I think all of us that come from coal-
producing areas are going to be paying particular attention to
any renewable provisions in this legislation.
Throughout the Tennessee Valley, there is genuine concern
that comprehensive deregulation may result in higher rates. In
Kentucky, a task force has been appointed to study the impact
of deregulation on Kentucky's electricity consumers. That task
force is scheduled to submit its findings at the end of this
year, although I have been told that they may only recommend a
continuation of the task force and not submit any substantive
State legislative changes.
If the time to act on comprehensive electric deregulation
legislation is now, my goal is, and has always been, to make
every effort to protect our area from higher electric rates,
which may result from increased regulation of Kentucky's power
suppliers and distributors.
I look forward to our distinguished panel of witnesses
today and want to thank everyone for your participation.
Mr. Barton. Thank you, Congressman Whitfield. Did
Congressman Bryant want----
Mr. Bryant. Mr. Chairman, if you will yield just 1
additional minute. It is in my notes and I neglected that, but
I did want to recognize representatives here from our two
United States Senators. Both Senator Frist and Senator Thompson
are represented in these hearings today and I very much
appreciate their effort to be here today and what their bosses
will apply to this bill when it is in the Senate side.
And I thank you.
Mr. Barton. Thank you. I would now like to hear from
Congressman Chip Pickering. He is actually the oldest member of
this panel, but he drinks a special Mississippi water and he
has a wife who went to Ole' Miss and that combination makes him
look a lot younger than he really is.
Mr. Pickering. Thank you, Mr. Chairman. You know, she is
actually from Memphis, so that maybe the Tennessee coalition
makes that possible.
It is good to be in Nashville, it is good to be in the
Valley and I want to thank the chairman, commend the chairman
for his leadership on this issue, his openness in the process,
his willingness to come to Nashville and to the Valley and to
work with those members that represent the TVA region. He has
given us a unique opportunity to shape and influence this
legislation and I hope that we seize that opportunity and are
responsible stewards with the opportunity the chairman has
given us.
He talked about General Hood coming from Texas during a
time of conflict, and we learned a painful lesson at that
point, that peaceful political process is always preferable to
armed conflict and so some hundred and something years later,
we have filled our nation's institutions--the Congress, the
Presidency, the Vice Presidency--with southerners. Our
committee is led by Chairman Bliley. We have the majority
leader in the Senate from Mississippi, the next Chairman of
Appropriations, Thad Cochran, will also be a strong advocate.
The political leadership that we have from our region, I would
simply like to make the point that now is our time to influence
and shape the policy in a way that benefits and reflects our
region. And if we lose this opportunity, you never know when
the political winds may shift and when the positions that we
now hold as a regional perspective may be lost. And I do not
want to wake up 5, 10 years from today, much like we are now
looking at the 1992 Energy Act and saying we lost an
opportunity to move with the rest of the country toward
wholesale competition and now we are constrained and restricted
in a way that could lead to a comparative or competitive
disadvantage for our region. We want to make sure that we take
this opportunity while we have the influence, seize it, and
make sure that we can respond with the flexibility and the
strategic means possible to make sure that our region continues
to have the low-cost competitive economic advantage that we
enjoy today.
There was a speaker at an economic development conference
in Mississippi several weeks ago who was saying that the
demographic projections showed that our region, the south, will
have 40 percent of the nation's population by 2040, we are the
growth region. So if we are going to maintain the leadership
and see the economic opportunity and development that we
believe is possible, then this is an extremely important
component of being able to find the right policy with the right
leadership that makes sure that we can enjoy that.
Mississippi and Tennessee has enjoyed a good relationship
over time, although there is a constant jockeying over whether
Mississippi or Tennessee gets more or less. And we want to make
sure that Mississippi is reflected well on the board for TVA.
We also worked well together, Roger Wicker is the Chair of the
TVA Caucus and we made a deal last year, as you all know, TVA
did extremely well in the appropriations process, the debt
refinancing, the non-power appropriations, much to the dismay
and chagrin of maybe members from other regions--TVA did
extremely well, but there was a price that had to be paid.
We said okay, we will give TVA this opportunity but you
have to give us Coach David Cutcliff and Eli Manning at Ole'
Miss. And so we are enjoying the success that will come from a
good Tennessee coach.
I do look forward to the hearing and to the panel and to
the testimony today. I think we do have one of those rare
opportunities to do what is right and what is good, not only
for our region, for our country and I encourage all
stakeholders, TVA, distributors, members, competitors to find
that balance that can maintain the leadership that we have
enjoyed in our region and that we are beginning to enjoy, that
we can make a TVA that fits not only the 20th century of what
it did to build our region, but fits the 21st century that will
maintain our competitive advantage over the long term.
With that, I yield back.
Mr. Barton. We would like to remind our audience that this
legislation hopefully will have great support from this region,
but it also has to have the support of the gentleman from
southern Illinois, Mr. Hastert, and the gentleman from South
Dakota in the Senate, Mr. Daschle, if it is going to be
bipartisan--biregional I guess we should say.
When you were talking about settling things by the
political process as opposed to on the armed battlefield, our
next speaker, Mr. Clement, reached over to Ralph Hall and said
``yeah, it is better to do it by political process, if you lose
on the battlefield.''
Spoken like a true Tennessean. That is why Davy Crockett
ended up in the Alamo and did not stay with Sam Houston who
waited until the time to fight was a little bit better.
But our next opening statement is one of the most genuinely
just decent guys in the Congress and that is Bob Clement. He
and I worked on the nuclear licensing reform package where we
had to take on quite a bit of vested political power on the
House floor. And because Bob was just such a gentleman, we were
able to defuse some of the venom of that issue and win at the
time what was felt to be a very surprising victory. So I give a
lot of credit to his good wishes.
And to my knowledge, Congressman Clement is the only Member
of Congress who was there at opening day of Disneyland with his
father, who at the time was the Governor of the great State of
Tennessee back in the 1950's.
With that, Mr. Clement, for an opening statement.
Mr. Clement. Thank you, Mr. Chairman. And I might share
with you all, we have got a former U.S. Senator in the
audience, Senator Harlan Matthews, who served us ably as U.S.
Senator. Good to have you here, Harlan, very much.
Mr. Chairman and Mr. Hall, I want you all to know our
favorite expression in Tennessee, ``if it had not been for
Tennessee, there would not have been a Texas.''
And to Congressman Pickering and Congressman Whitfield and
Congressman Ed Bryant, Congressman Gordon that has already
left, it is great having you all in Tennessee. And as you all
know, I am a former member of the TVA board, I served when
President Jimmy Carter appointed me to the TVA board, when Bill
Jenkins, of all things, our colleague, resigned and I took his
place. And I am the first TVA director ever elected to the U.S.
Congress. But since that time, as you all know----
Mr. Barton. Did they consider that a step up or a step
down?
Mr. Clement. Oh, it is a step up, I believe.
But I want all of you to know this is very important to all
of us. We have got some excellent people that will be
testifying. And where better to discuss the future of TVA in a
deregulated electricity industry than here in the heart of the
Tennessee Valley. And while I am not a member of the Commerce
Committee, I am honored to join you today. I serve on the House
Transportation and Infrastructure Committee, which is the
jurisdictional committee of TVA and we will be hold a similar
hearing on TVA next week in Washington, DC.
When it comes to deregulation, I can only support a bill
that will treat the Tennessee Valley area fairly. It must
protect ratepayers and the economic development of the
Tennessee Valley region, period. Over the years, Tennesseans
have benefited greatly from the reliability and stability of
the TVA power system, and the last thing I want to see happen
is any legislation that jeopardizes our economy.
For many months, staff from the TVA Caucus, the
distributors of TVA power, the Tennessee Valley Public Power
Association and TVA have worked together trying to hammer out
differences and forge consensus on just what TVA will look like
in the future. I am proud of the progress that has been made
and know we still have some hurdles to overcome.
As we in the Valley and in Congress work in the electricity
industry restructuring, I want to offer my assistance to this
committee, the distributors of TVA, to TVA and our entire
region. I will do everything in my power to make sure the
residents of the Tennessee Valley area get a fair deal in any
Federal legislation.
It is just great having you here and we do have a great
committee here and some great people. I know we all talk about
politicians and all, but I will tell you, we have got some
great people in Congress, Democrat and Republican alike, that
really care about this country and care about its future.
Thank you.
Mr. Barton. Thank you, Congressman Clement.
We now want to welcome our panel, we do have a very
distinguished panel and it represents a cross section of the
interest in the region concerning consumption of power, the
generation of power.
We are going to first hear from Mr. Mark Medford, who is
Executive Vice President for Customer Service with the
Tennessee Valley Authority. He has testified in Washington.
After him, we are going to hear from Mr. Jim Baker, who is
the President of the Middle Tennessee Electric Membership
Corporation in Murfreesboro, Tennessee and a constituent of
Congressman Gordon.
Then Mr. Larry Fleming, who is the President and CEO of
Knoxville Utilities Board in Knoxville, Tennessee.
Then Mr. Darrell Anderson, the Environment and Energy Staff
from General Motors Corporation. He actually is from Detroit,
Michigan but obviously he is here because there is a Saturn
manufacturing and assembly plant owned by General Motors just
south of Nashville. He is representing the Tennessee Valley
Industrial Committee.
Last but not least, we are going to hear from Mr. Lyle D.
Larson, who is the counsel for TVA Watch. He is from
Birmingham, Alabama.
We are going to give each of you gentlemen 7 minutes to
summarize your written testimony and then we will have some
questions.
So we will start with Mr. Medford and then work our way to
my right, to his left. Mr. Medford, welcome to the
subcommittee.
STATEMENTS OF MARK MEDFORD, EXECUTIVE VICE PRESIDENT, CUSTOMER
SERVICE, TENNESSEE VALLEY AUTHORITY; JAMES O. BAKER, PRESIDENT,
MIDDLE TENNESSEE ELECTRIC MEMBERSHIP CORPORATION, REPRESENTING
TENNESSEE VALLEY PUBLIC POWER ASSOCIATION; LARRY A. FLEMING,
PRESIDENT AND CEO, KNOXVILLE UTILITIES BOARD; DARRELL ANDERSON,
ENVIRONMENT AND ENERGY STAFF, GENERAL MOTORS, REPRESENTING
TENNESSEE VALLEY INDUSTRIAL COMMITTEE; AND LYLE D. LARSON,
COUNSEL, TVA WATCH
Mr. Medford. Thank you, Mr. Chairman. My name is Mark
Medford and it is a pleasure to welcome you to Nashville. We
are grateful to the subcommittee for recognizing the importance
of getting electric restructuring right for the Nation as a
whole, including the residents of the Tennessee Valley. I want
to especially thank you, Congressman----
Mr. Barton. Is there a button to push for your microphone
or something? It may be on, but it does not sound like it.
Mr. Medford. Maybe I am not close enough. Is this better?
Mr. Barton. Yes, sir.
Mr. Medford. I want especially to thank you, Congressman
Bryant, for your leadership on this issue.
When I testified before this subcommittee in May, I
described how TVA is more than an electric utility. We are
responsible for flood control, navigation, economic development
and recreation for a seven-state area in addition to being the
provider of electricity to 159 co-ops and municipal utilities
and 63 directly served customers. But today, I want to focus on
how different we are from other utilities in just our role as
electrical supplier.
Of the three traditional utility functions--generation,
transmission and distribution--TVA primarily performs
transmission and generation. Unlike integrated utilities who
sell most of their power to retail customers, TVA sells most of
its power to wholesale distributors. In a restructured
marketplace, our distributors will have their choice of
suppliers and TVA will compete to retain as much of that demand
as possible. We also operate an extensive network which is
managed as an open-access system.
Much of the focus of the State efforts on restructuring
relates to separating the retail distribution function from
generation. Since TVA does not have a distribution function
except for several high voltage directly served customers,
structural changes for TVA are unnecessary to assure
competitiveness in the Tennessee Valley. Nonetheless, some of
those who would compete with us argue that TVA should not be
allowed to build new generation to meet load growth or even
replace worn out generation plants. Let me be blunt. Their
ultimate goal is to eliminate TVA completely.
Without the ability to build new generation, TVA will be
unable to meet growing demands in the Valley and unable to
replace generation no longer viable due to increasing
environmental regulations. TVA will become dependent on the
wholesale market. We refer to the result as a death spiral
because as we lose the ability to meet our customers' demands
through our own resources, we become increasingly dependent
upon an extremely volatile wholesale market. It is unlikely we
will be able to pass through these costs on a timely basis.
These restriction would, in effect, require TVA to compete with
both hands tied behind its back. Opponents of TVA hide this
death spiral goal under the cloud of subsidy arguments--no
income taxes, debt financing and our credit rating.
Mr. Chairman, I think it is apparent that these
characteristics entail no subsidy at all, but are simply an
incidence of government ownership. TVA Watch acknowledges that
there is nothing unique about TVA, all of their concerns except
TVA's bond ratings apply equally to all other governmentally
owned utilities. They freely admit that they have targeted TVA
because of its size.
If Congress were to change any of those characteristics, it
would create significant confusion in the financial markets
where municipalities use the same financing mechanisms to
finance schools, hospitals, highways, prisons and other
necessities. Since it is not feasible or appropriate to change
the characteristics being complained of, TVA Watch simply
argues against TVA's ability to build plants to compete with
them and astoundingly asserts that this death spiral is
necessary to ``level the playing field.'' The playing field
would be level, all right. All public and cooperatively owned
power systems would be leveled flat.
The real issue is whether there is a place for public power
in a competitive electric industry, a legitimate issue for
Congress to debate. But to attempt to eliminate public power in
a back door, piecemeal and uncoordinated fashion, would risk
the reliability of the Valley's electric supply, result in
significant additional cost, especially to the residents of the
Valley, waste taxpayer assets and create unnecessary confusion
and upheaval in the financial markets. One size does not fit
all in this industry for almost anything, including the type of
participants.
This summer, power demand in the Valley exceeded last
year's peak 16 times. TVA did not curtail or brown-out any firm
load. We currently estimate the need for 3000 additional
megawatts in our region by 2004, in large part because of the
already mentioned robust growth rate in the Valley. There is no
room for error, the cost of any miscalculation on power supply
in Federal legislation would ultimately be felt in the Valley.
Mr. Chairman, the strength of America's vibrant economic
system has always been its diversity which enriches
competition. There is nothing unique or unAmerican in this
diversity, it is in fact a cornerstone of our system.
Those of us who are testifying before you today may not all
agree, but with a single exception, the rest of us are
committed to what is good for the Tennessee Valley, and TVA is
committed to working with our stakeholders to ensure that all
of our customers, the large and the small, benefit from
electric restructuring.
Thank you for this opportunity to address the place of
public power in a competitive industry. I would be happy to
respond to any questions or comments.
[The prepared statement of Mark Medford follows:]
Prepared Statement of Mark Medford, Executive Vice President, Customer
Service and Marketing, Tennessee Valley Authority
introduction
Mr. Chairman, welcome to Nashville and thank you for this
opportunity to address the subcommittee at this important field
hearing. We are pleased that members of TVA delegation, led by
Congressman Ed Bryant, have asked you to come to the Valley today to
learn more about our region and the electric power needs of its
citizens.
My name is Mark Medford. I serve as TVA's Executive Vice President
for Customer Service and Marketing. My responsibilities include working
with the 159 distributors of TVA electric power and 63 direct-served
customers within the Tennessee Valley. I also have been designated the
lead TVA executive on electricity restructuring matters.
Exactly four months ago today this subcommittee held a similar
hearing on the role of federal power in a competitive marketplace. As a
participant in that hearing, I know there is substantial interest on
this panel over the future of TVA. I hope your visit to our region will
lead to an even better understanding of the unique issues that face the
Valley.
Given that TVA is a federal agency, federal legislation clearly is
required to bring about the kinds of changes to the electricity
marketplace envisioned by states in other parts of the country.
Although stakeholders in the Valley must determine whether these types
of changes are appropriate here as well, only Congress and the
President can provide the freedom for the region to begin this process.
However, just as Congress and the President have the authority to
establish this framework for discussion in the Valley, there is also
the potential for federal legislation to erect roadblocks to the
continued availability of low-cost and reliable power for the people of
our region, such as a requirement that TVA secure all future generation
facilities through long-term contractual agreements with customers. For
this reason, we applaud your decision to look to the Members of
Congress from our region to assist in guiding the subcommittee through
this process.
I would like to take some time to reiterate my comments from a few
months ago on how the Tennessee Valley Authority currently fits into
the electric power industry and how TVA can continue to serve the
public interest in a competitive environment. I would like to build on
my earlier testimony in order to address some emerging issues with
respect to your efforts to pass a comprehensive electricity
restructuring bill.
background on tva
The Tennessee Valley Authority is large and complex. TVA is a
federal corporation, the nation's largest public power producer, 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 three-member
Board of Directors to set the lowest feasible electric rates for the
Valley. TVA is a leader within the Tennessee Valley for economic
development, 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. It encompasses 11,000 miles of shoreline, more than 50 dams
and a dozen locks. About 34,000 loaded barges travel the Tennessee
River each year--the equivalent of two million trucks traveling the
roads. Before TVA, the Tennessee River flooded regularly, causing
millions of dollars of damage whenever it left its banks. Under TVA's
integrated resource management the Tennessee River is the only major
river system in the United States that has not suffered widespread
flooding in over 60 years.
TVA's power system has a dependable generating capacity of 28,417
megawatts. TVA's generation consists of approximately 61 percent coal,
28 percent nuclear, and 11 percent 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 63 large industrial and
federal customers. Essentially, TVA supplies the energy needs of nearly
eight 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.
TVA's service area is now limited by law. A ``fence'' keeps TVA
from serving customers outside its region as defined under a 1959 law.
Under the 1992 Energy Policy Act, electricity companies are prohibited
from ``cherry-picking'' customers inside the TVA region, the most
attractive of which have large, concentrated loads.
A key fact that can never be emphasized enough is that the TVA
power system currently is 100 percent self-financed through its power
revenues and public borrowings secured solely by those revenues. It
receives no taxpayer dollars to fund its operations.
tva's recent efforts to improve
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 more than $1 billion and introduced a
comprehensive Ten-Year Financial Plan to ensure TVA's cost of
power will be competitive in the coming decade.
Maintained adequate power supply and transmission capacity to
ensure reliable electricity delivery, even during prolonged
heat waves during the summers of 1998 and 1999.
Developed five nuclear units into an award-winning nuclear
program and brought Watts Bar Nuclear Plant on-line.
Began refurbishing of coal and hydropower units to increase
capacity without incurring substantial additional capital
costs.
TVA's Ten-Year Business Plan was specifically designed to ensure
that TVA will be ready for the new competitive marketplace of the
future. It's overriding goal is to keep TVA's total delivered cost of
power at a level competitive with the forecast of the future market
price of power surrounding TVA's service territory. A primary means for
helping accomplish this is to reduce debt and lower interest costs.
Over the course of the Ten-Year Plan, TVA originally envisioned needing
to cut its debt by half. However, the amount of debt reduction
ultimately necessary may differ as costs for all utilities rise,
particularly in the area of environmental compliance, and as the
forecasted market price of power grows higher. By adhering to this
sound financial strategy, TVA will remain a competitive choice of
electric power supply within the Valley.
tva's future role
It is an understatement to say this subcommittee has spent a
substantial amount of time and effort on the future of the electricity
industry. I can assure you that we in the Valley have also dedicated a
great deal of time and resources on this important issue. We look
forward to continuing to participate in this debate as you move
forward.
As you search for a bipartisan, consensus electricity industry
restructuring bill among your committee members, you will be pleased to
know there is already much agreement within the Valley on the future of
TVA. There is overwhelming support for TVA to continue its integrated
mission, managing the Tennessee River and related land resources and
maintaining its role as a low-cost integrated electric supplier for the
Valley.
Starting in 1997 with the Department of Energy's ``Tennessee Valley
Electric System Advisory Committee,'' regional stakeholders began
examining the future of TVA in a competitive electricity industry.
Every group testifying before the subcommittee today participated in
that process. Since the advisory committee issued its report, TVA has
worked extensively with stakeholders within the Valley to translate the
key principles identified in the DOE process to a legislative proposal.
The advisory committee was created 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 of TVA power, the
Tennessee Valley Industrial Committee 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. National energy stakeholders like ENRON, TVA
Watch, and the Electric Clearinghouse also participated.
In March 1998, the advisory committee submitted its final report.
Relying on the report and working with TVA and other stakeholders, the
Administration crafted a ``TVA title'' for inclusion in the its
Comprehensive Electricity Competition legislation, released on April 15
of this year. The title in the Administration bill is the product of
hard work and compromise through a formal regional process and creates
an appropriate role for TVA in a restructured environment. TVA supports
this title in the Administration's bill and greatly appreciates DOE's
impressive effort that was undertaken to integrate the interests of a
wide variety of stakeholders.
I would like to officially submit a copy of the Administration
bill's TVA title to the record for consideration by the subcommittee. I
also would like to take a few moments to highlight the key components
of this plan to help TVA and the region make the transition to more
competitive markets.
1. Equitable Competition
TVA transmission rates, terms and conditions would be subject
to regulation by the Federal Energy Regulatory Commission.
Restrictions to 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 sales of electricity outside of the existing service area
would be limited in two ways. First, TVA could only make
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 in circumstances controlled by
local power distributor decisions.
3. Stranded Investment Recovery
Within one year of enactment, FERC would promulgate
regulations to establish guidelines for TVA's recovery of
stranded costs. TVA would submit a stranded cost recovery plan
to FERC for approval consistent with established guidelines.
TVA would not collect stranded investment after September 30,
2007.
TVA would use any funds recovered to repay debt consistent
with TVA's Ten-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
antitrust laws of the United States. This standard is
comparable to the antitrust standards generally applied to
municipal governmental entities.
5. Renegotiation of Wholesale Power Contracts
TVA and the distributors would renegotiate certain key
provisions of 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, the dispute would be settled by FERC.
We are pleased that this proposal, above all, affirms TVA's
continued role within the Valley to manage the river system and provide
electricity for Valley residents. However, we also take note of the new
responsibilities and limitations that TVA would have to deal with in
the emerging marketplace, such as:
For the first time, TVA would be subject to antitrust
prohibitions.
For the first time, TVA transmission rates would be subject to
FERC jurisdiction.
For the first time, TVA would be required--unlike any other
utility in the country-to renegotiate certain key provisions in
all existing full-requirement contracts with distributors
within one year of enactment, with FERC being given the
authority to make decisions if agreement could not be reached.
Almost at the same time the Administration was drafting its bill,
some members of Congress from the TVA region urged TVA to sit down with
its distributors and work directly with the Tennessee Valley Public
Power Association, which represents TVA's 159 distributors, in order to
develop a regional solution for inclusion in the restructuring
legislation before Congress. I was pleasantly surprised at the number
of areas we agreed upon. Of course, there are some outstanding
differences, just as one would expect when a seller and a customer sit
down to discuss their relationship in an emerging marketplace. In fact,
the diversity of the TVA customer base has resulted in some differences
even among our customers. Nevertheless, we are committed to continuing
our discussions with TVPPA and all stakeholders in the Valley.
As I mentioned at the beginning of my testimony, congressional
action is essential to allow the Tennessee Valley region the full
opportunity to choose to move toward a more competitive electric power
marketplace. We are committed to working with all of the members of
this subcommittee to assure that TVA has an appropriate role in a
future restructured electric power industry.
There are proposals being actively considered, however, that risk
compromising the low-cost, reliable electricity available in the
Valley.
Perhaps the greatest threat are those proposals that would hinder
TVA's ability to compete for the growing demand for electricity in the
Valley. For instance, some proposals have included a requirement that
TVA secure all future generation facilities--for the life of those
facilities--through contractual arrangements with customers. In
practice, that means TVA would be forced to find customers willing to
sign long-term (20 to 30 years) contracts tied to specific power
plants--not a likely prospect in a competitive marketplace.
Effectively, this would prevent TVA from ever pursuing new generation
resources to meet the anticipated demand in the Valley.
The TVA service territory is experiencing about four-percent demand
growth for electricity per year. This trend is projected to continue
well into the foreseeable future. While the most attractive loads may
be able to find someone to provide new generation without the shackles
of a 30-year contract, we worry whether the smaller and rural customers
will have the same opportunities. We do not think their future access
to cost competitive power from TVA should be contingent on such a
restrictive contractual obligation.
TVA, in large part, was created because other utilities found many
customers in our region unattractive and not profitable enough to
serve. It is our historic mission to provide for the current and future
electricity needs of all people in the Tennessee Valley. It is critical
to our customers that TVA continue to compete to meet their growing
electric power needs.
You don't need to look much further than this summer to see how
important this capability is to people in the Valley. Throughout our
history, TVA has never had the type of outages that other regions of
the country have experienced in recent years. Just a few weeks ago when
electric power systems that neighbor TVA and systems across the Eastern
interconnection were experiencing substantial problems associated with
record demand, TVA provided the electricity necessary to keep
businesses running, as well as homeowners' lights and air conditioners
on in the Valley.
I can tell you, though, it was not an easy job. During a 10-day
period in July, TVA surpassed our previous all-time peak demand on
eight of those days, including a Saturday. Clearly, we are at the
margins in the Valley and need to maintain the flexibility to respond
to this growing Valley demand in the future.
Another threat to the low-cost, reliable power currently available
in the Valley are attempts to make TVA look and behave exactly like an
investor-owned utility. Mr. Chairman, I for one think the greatest
strength in our electricity industry, particularly as we move to a new
marketplace, is its diversity. We have a very broad spectrum of
providers, from rural electric cooperatives to the biggest private
companies, and from municipal systems to regional federal power
providers. I believe this variety should be embraced and nurtured, not
discarded as we move forward. Public power and investor-owned utilities
make different, but very important contributions to the strength of our
Nation's electric power supply networks. The continued, viable presence
of both in a future restructured marketplace will help ensure a
reliable power supply for all on an affordable basis.
Unfortunately, some have chosen to make curious representations
about the inherent differences between public and private power as
subsidies to public power. Now, they usually talk about the benefits of
being a public power utility as a ``subsidy'' and the benefits of being
investor-owned as ``reasonable''. Well, that is understandable. They
are just trying to position themselves in the best possible way as
Congress makes decisions about the electricity markets of the future.
But, as you rightly craft your legislation to create a fair
marketplace, be wary of the claims of those who want to ``level the
playing field'' with a noticeable tilt in their direction.
Perhaps the most outlandish claims are about state and federal tax
burdens. Once you add together the taxes and tax equivalent payments
made by Valley distributors and those paid by TVA, which is necessary
to compare TVA with investor-owned utilities on an ``apples to apples''
basis, it is clear that comparable amounts are paid at the state and
local level in the southeastern region of the country. As we all know,
TVA doesn't pay federal income tax. That is hardly a secret and is
certainly not a scandal. We are a federally-owned corporation with a
mission to serve the public interest on a non-profit basis, not to
generate profits to increase stockholder wealth.
Nevertheless, I have heard some say that, because TVA has
substantial gross revenues and some investor-owned utilities have
substantial gross revenues, there is some comparison to be made in how
much tax we pay. Well, any first-year accounting student can tell you
that the federal government doesn't tax on revenue, it taxes on profit
and income. When you think of it in those terms, while investor-owned
utilities typically owe about one-third of their net earnings to the
U.S. Government as taxes, the U.S. Government receives 100 percent of
TVA's net earnings by virtue of its ownership of TVA. And, investor-
owned utilities aren't always required to immediately pay what they owe
in taxes because of their ability to defer payment. Over the years,
IOUs have amassed more than $100 billion of zero interest, subsidized
loans from the Internal Revenue Service through such deferrals. TVA, on
the other hand, has made a continuous stream of payments to the U.S.
treasury over 40 years totaling about $3 billion.
conclusion
As I testified four months ago, TVA is working hard to prepare for
a restructured future competition by reducing our debt, keeping our
electric rates low, and efficiently managing the Tennessee Valley's
integrated resource system. We have made progress in this regard, even
since we last appeared before this subcommittee.
TVA remains committed to work with this subcommittee and TVA
stakeholders to determine the nature of the future role that TVA will
play in this changing industry. Let me re-emphasize how much we in the
Valley applaud your decision to look to the Valley's congressional
delegation to assist you in your efforts.
Thank you for the opportunity to testify before this important
hearing.
Mr. Barton. Thank you, Mr. Medford.
I think all the panelists are committed to a better
America, I do not think anybody here is committed to a worse
America.
We would like to hear from Mr. Jim Baker now, who is the
President of the Middle Tennessee Electric Membership
Corporation, and I believe you have testified in Washington.
Mr. Baker. Yes, sir, I did sometime ago.
Mr. Barton. Yes, sir. We would like to hear your statement.
It is in the record in its entirety and we recognize you for 7
minutes.
STATEMENT OF JAMES O. BAKER
Mr. Baker. Mr. Chairman, Representative Bryant, members of
the subcommittee, my name is James O. Baker and if the chairman
thinks that he had name confusion problems, he ought to be
following me around about 10 years ago.
I had the opportunity to meet the President also and our
parting comments after a certain amount of chit-chat was that I
hope you and Tammy Faye's problems will be better.
So I am not sure about his, but mine have probably gotten
more complicated.
I am President of Middle Tennessee Electric Membership
Corporation, that is an electric cooperative headquartered in
Murfreesboro, Tennessee.
Middle Tennessee currently purchases all of its wholesale
power from the Tennessee Valley Authority and provides retail
electric service to more than 300,000 individuals in four
counties. It is one of TVA's largest wholesale customers and
one of the largest rural electric cooperatives in the United
States on the basis of number of members served.
But I am testifying today on behalf of the Tennessee Valley
Public Power Association, TVPPA is the regional service
organization of 160 not-for-profit consumer-owned electric
utilities in the Tennessee Valley and they include all the
municipal and cooperatively owned systems that distribute power
that is generated by TVA to 8.5 million customers over a seven-
State region. In the language of the TVA Act, these municipal
and cooperative utilities are called distributors.
TVPPA appreciates Chairman Barton's decision to hold a
hearing today on the TVA in a restructured or competitive
electric industry here in the Tennessee Valley where those that
will be most directly affected by any changes to TVA can
participate and we can contribute to the debate. We also want
to thank Representative Ed Bryant and the other members of the
subcommittee from the Valley for requesting this hearing, and
for their leadership in developing a TVA title for Federal
legislation.
We recognize that drafting a TVA title that both protects
the interests of the consumers in the Valley and makes TVA a
more competitive--makes TVA more competitive is no easy task.
However, we strongly believe that if changes are to be made by
TVA, they should be driven by our Congressional delegation
working closely with the distributors and the consumers that we
serve. The seven States that receive TVA power are among the 23
States where retail electric rates are below the national
average. For that reason, TVPPA has approached the matter of
Federal utility restructuring legislation with extreme caution.
We have opposed a Federal mandate for retail competition or
customer choice because we are not convinced that it will
result in lower cost or other benefits to our consumers. We
believe that any restructuring legislation must put the
interests of the electric consumers first.
Overall TVA has been very good for the Valley. For more
than 60 years, TVA has provided reliable, reasonably priced
power for consumers and has promoted the economic development
of this region. We believe TVA's mission with regard to
delivery of power should continue to meet the power needs
inside the Valley and that it should be able to develop the
needed resources without unnecessary or arbitrary restrictions.
At the same time though, we recognize the utility industry is
moving toward greater competition and that all utilities must
adopt to a changing environment. We know that TVA and the
distributors cannot fence ourselves off from those changes in
the rest of the electric utility industry. We know that
Congress has the authority to require changes in TVA and the
way it operates and we know that if we in the Valley do not
take a lead to restructure TVA, others will be happy to do that
for us.
Finally, if the Federal restructuring legislation goes
forward, we believe that the elimination of the statutory fence
and the anti-cherry-picking amendment provisions in the current
law that prevent two-way wholesale competition could result in
benefits to our consumers. Acting through the Government
Relations Policy Committee and the Board of Directors, TVPPA
has devoted a significant amount of time and energy over the
last 3 years to develop a comprehensive position paper
regarding the role of TVA in electric restructuring. That
document was turned into a draft TVA title and submitted with
my testimony before this subcommittee on May 13, 1999, and
could be incorporated into a Federal restructuring bill.
In this ongoing policy development process, TVPPA has
worked with TVA and with all distributors to try to reach a
consensus on a single draft title. While we continue to have
some areas of disagreement on policy and wording, we are in
substantial agreement that changes are needed in the
contractual relationship between TVA and the distributors and
in the wholesale electric market in this region. Specifically,
we agree with provisions that:
First, take down the fence that allows TVA to sell excess
power at wholesale outside the region. Concurrently, the anti-
cherry-picking provision of the Energy Policy Act of 1992
should be repealed to allow outside suppliers to sell at
wholesale inside the Valley.
Second, we believe that we need to allow current
restrictive long-term wholesale contracts between TVA and the
distributors to be shortened and modified to give the
distributors the right to purchase all or portions of their
wholesale power and energy from other suppliers subject to
rates, terms and conditions relating to the use of TVA's
transmission system to the regulation by FERC to ensure open
non-discriminatory access to distributors and others. Also to
allow FERC to determine TVA's stranded costs resulting from
shortened or canceled contracts prior to October 2007, if any,
the same standards and rules that apply to other utilities.
We would eliminate TVA's retail ratesetting authority over
distributors and allow those other non-profit and municipal
utilities to be self-regulating, as they are in the rest of the
country.
We would also apply Federal antitrust laws to TVA power
program as they are applied to other governmental entities.
In addition, TVA thinks that we should allow the
distributors to challenge TVA's wholesale rates through an
alternative dispute resolution mechanism such as arbitration or
mediation. We would limit TVA's sales outside the Valley to
wholesale, we would limit TVA's sales inside the Valley to
retail sales inside the Valley to existing retail customers.
Before closing, let me say just a minute about TVA's
position on the review of TVA's wholesale rate. As the
committee is well aware, wholesale rates of TVA are in no way
regulated by any court or regulatory forum. As we move to a
more competitive market, we think there must be a third party
review of TVA's wholesale rates. This has been a considerable
debate to us as to how that should be done. Ultimately, we have
decided that the most appropriate process would be to require
TVA and the distributors that are unhappy with the proposed
rate to participate in an alternative dispute resolution
process. We urge the committee to look at this.
We look forward to working with the committee on future
hearings and we will be happy to answer any questions at the
appropriate time.
[The prepared statement of James O. Baker follows:]
Prepared Statement of James O. Baker on Behalf of Tennessee Valley
Public Power Association
Chairman Barton, Rep. Bryant and members of the subcommittee, my
name is James O. Baker and I am the President of the Middle Tennessee
Electric Membership Corporation, a rural electric cooperative
headquartered in Murfreesboro, TN. Middle Tennessee currently purchases
all its wholesale power from the Tennessee Valley Authority (TVA) and
provides retail electric service to more than 300,000 consumers in four
counties. It is one of TVA's largest wholesale customers and one of the
largest rural electric cooperatives in the United States, on the basis
of the number of consumers served.
I am testifying today on behalf of the Tennessee Valley Public
Power Association. TVPPA is the regional service organization of the
160 not-for-profit, consumer-owned electric utilities in the Tennessee
Valley, including all the municipally- and cooperatively-owned systems
that distribute power generated by TVA to 8.5 million consumers in a
seven-state region. In the language of the TVA Act, these municipal and
cooperative utilities are called ``distributors.''
TVPPA appreciates Chairman Barton's decision to hold today's
hearing on the role of TVA in a restructured or competitive electric
industry here in the Tennessee Valley, where those who will be most
directly affected by any changes to TVA can participate and contribute
to the debate. We also want to thank Rep. Ed Bryant and the other
members of the subcommittee from the Valley for requesting the hearing
and for their leadership in developing a TVA title for federal
legislation.
We recognize that drafting a TVA title that both protects the
interests of consumers in the Valley and makes TVA more competitive is
no easy task. However, we strongly believe that if changes are to be
made to TVA, they should be driven by our congressional delegation,
working closely with the distributors and with the consumers we serve.
The seven states that receive TVA power are among the 23 states
whose retail electric rates are below the national average. For that
reason, TVPPA has approached the matter of federal utility
restructuring legislation with caution. We have opposed a federal
mandate for retail competition or ``customer choice'' because we are
not convinced it will result in lower costs or other benefits for our
consumers. We believe that any restructuring legislation must put the
interests of electric consumers first.
Overall, TVA has been very good for the Valley. For more than 60
years, TVA has provided reliable, reasonably priced power for consumers
and has promoted the economic development of the region. We believe
TVA's mission with regard to delivery of power should continue to be to
meet the power needs inside the Valley and that it should be able to
develop needed resources without unnecessary or arbitrary restrictions.
At the same time, we recognize that the utility industry is moving
towards greater competition and that all utilities must adapt to the
changing environment. We know that TVA and the distributors cannot
``fence ourselves off'' from those changes and from the rest of the
electric industry. We also know that Congress has the authority to
require changes in TVA and the way it operates and that if we in the
Valley do not take the lead to restructure TVA, others will be happy to
do the job for us.
Finally, if federal restructuring legislation goes forward, we
believe that eliminating the statutory ``fence'' and the ``anti-cherry
picking'' provisions in current law that prevent two-way wholesale
competition in the Valley could result in benefits to our consumers.
Acting through its Government Relations Policy Committee and Board
of Directors, TVPPA has devoted a significant amount of time and energy
over the last three years to develop a comprehensive position paper
relating to the role of TVA in electricity restructuring. That document
was turned into a draft ``TVA title'' and submitted with my testimony
before this subcommittee on May 13, 1999 and could be incorporated into
a federal restructuring bill.
In this on-going policy development process, TVPPA has worked with
TVA and with all distributors to try to reach consensus on a single
draft title. While we continue to have some areas of disagreement on
policy and wording, we are in substantial agreement that changes are
needed in the contractual relationship between TVA and the distributors
and in the wholesale electric market in the region.
Specifically, we agree with provisions that:
Take down the ``fence'' to allow TVA to sell excess power at
wholesale outside the region. Concurrently, the ``anti-cherry
picking'' provisions of the Energy Policy Act of 1992 should be
repealed to allow outside suppliers to sell power at wholesale
inside the Valley;
Allow current restrictive, long-term wholesale contracts
between TVA and the distributors to be shortened and modified
to give distributors the right to purchase all or portions of
their wholesale power and energy from other suppliers;
Subject the rates, terms and conditions relating to use of
TVA's transmission system to regulation by FERC to ensure open,
non-discriminatory access by distributors and others;
Allow FERC to determine TVA's stranded costs resulting from
shortened or canceled contracts prior to October 1, 2007, if
any, using the same standards and rules that apply to other
utilities but ensuring that costs are not shifted among
customer groups; and
Eliminate TVA's retail ratesetting authority over distributors
and allow those not-for-profit municipal and cooperative
utilities to be self-regulating, as they are in most states;
Apply federal anti-trust laws to the TVA power program as they
are applied to local governmental entities without the
financial penalties that would burden our consumers.
In addition, TVPPA believes the following provisions are also in
the best interest of our member distributors and the consumers we
serve:
Allow distributors to challenge TVA's wholesale rates through
an alternative dispute resolution mechanism, such as
arbitration or mediation;
Limit TVA sales outside the Valley to wholesale transactions;
and
Limit TVA retail sales inside the Valley to existing
customers. Any new retail sales would be allowed only under
restrictions agreed upon with distributors and if those sales
would not bypass local distribution facilities.
Before closing, let me explain in a little more detail TVPPA's
position on review of TVA's wholesale rates. As the committee is aware,
under current law there is no review of TVA's wholesale rates in any
court or regulatory forum. As we move into a more competitive wholesale
and retail electric market, the distributors believe it is necessary to
have some form of third party appeal to challenge rates we may find
unreasonable.
Over the course of our internal policy debate, we examined and
rejected a number of different approaches. Ultimately, we decided that
the most appropriate process would be to require TVA and the
distributor or distributors that are unhappy with a proposed rate to
participate in an alternative dispute resolution process to resolve the
dispute. We urge the Committee's favorable consideration of this
approach.
We look forward to working with Rep. Bryant and other Members of
the Committee to forge a TVA title that is fair to the region's
consumers and that permits TVA to be a competitive supplier for the
Valley.
TVPPA appreciates the opportunity to appear before the subcommittee
today to present these views and I would be happy to answer any
questions you may have.
Mr. Barton. Thank you, Mr. Baker.
We would next like to hear from Mr. Larry Fleming, who is
the President of Knoxville Utilities Board. Your statement is
in the record in its entirety and we welcome you to summarize
it in 7 minutes.
STATEMENT OF LARRY A. FLEMING
Mr. Fleming. Mr. Chairman, my name is Larry Fleming and I
am President and CEO of the Knoxville Utilities Board. I am
here today on behalf of KUB and the Memphis Light, Gas and
Water Division. Thank you for the invitation to present our
views on the topic of electricity competition and the role of
the Tennessee Valley Authority.
As you know, Herman Morris, President and CEO of Memphis
Light, Gas and Water, testified before this subcommittee in May
to present our positions on TVA restructuring. I will not
repeat the substance of Herman's testimony here, but will focus
instead on the three issues of greatest importance to KUB and
MLGW. I also have some updated material to submit for the
record.
Before I highlight the specific actions KUB and MLGW urge
this Congress to take, I would like to emphasize what may be
the most important point of all. It is essential that this
Congress do something on TVA. I know nationwide electric
restructuring is a daunting task and there are those that say
retail competition is already taking hold through actions taken
by the States and will gradually spread across the country even
if Congress does nothing. There are those who see addressing
TVA as a daunting task, as indeed it is, and favor doing
nothing on it either. But there is a huge difference between
taking a wait and see approach for the rest of the country and
taking it for TVA.
Nobody but Congress has the power to introduce competition
to the Tennessee Valley. The States cannot do it, the
marketplace cannot do it because Federal law prohibits it. It
simply will not come unless Congress acts affirmatively to make
it possible. And whereas the rest of the country already enjoys
wholesale competition for electric power, the question is
whether to mandate retail competition. The Tennessee Valley
does not yet have access even to wholesale competition. We need
this Congress to act now simply to allow the Valley to catch up
with the benefits the rest of the country have enjoyed since
1992--access to wholesale competition for electric power.
Now the specific actions that we urge Congress to take can
be summarized as follows:
1. Remove the statutory barriers to wholesale electric
competition in the Tennessee Valley.
2. Shorten the 10-year notice period in our power supply
contracts with TVA.
3. Subject TVA to the jurisdiction of the Federal Energy
Regulatory Commission.
We believe these measures are necessary to ensure full and
fair transition to competition in the Tennessee Valley. First,
the statutes that prevent Tennessee Valley residents from
enjoying the many benefits of competitive electric markets must
be repealed. It has now been 7 years since the passage of the
Energy Policy Act. Wholesale electric competition is already a
reality throughout most of the United States and nearly half
the States have already taken steps to implement electric
competition at the retail level. But America's largest power
generator, TVA, is still a federally sanctioned monopoly. The
Tennessee Valley has been walled off from the rest of the
country which continues to move forward with electric
restructuring while the Tennessee Valley is left behind.
We urge Congress to take action to tear down these walls.
There can be no retail competition in Tennessee unless or until
there is wholesale competition in Tennessee.
Neither the States nor FERC have the power to mandate
wholesale competition in the Valley and TVA is not about to
start transmitting power of other suppliers voluntarily. Why
would TVA willingly subject itself to competition for customers
inside the fence when it is prohibited from competing for
customers outside the fence? To leave these barriers in place
would be unfair to Tennessee Valley residents and could be
disastrous for the economic welfare of the Tennessee Valley
region. When new enterprises are choosing a location, will they
choose an area of the country where they will have access to
competitive power supply options or will they choose the
Tennessee Valley where there are no such options? The Tennessee
Valley has been left behind once before, we do not want to see
that happen again.
But the mere repeal of these statutes without more will not
fully open up the Valley to competition. There are other
barriers to implementation of wholesale electric competition in
this region. Our current contracts with TVA, for example, renew
automatically each year and require 10 years notice of
termination. This means that unless Congress takes action to
modify those contracts, KUB and MLGW will still be captive TVA
customers when the children born on the day the Energy Policy
Act was signed into law graduate from high school.
We have tried without success to renegotiate these
agreements, but due to the extended notice period, TVA has no
incentive to make any meaningful concessions. We need
negotiating leverage and only a shortened notice of termination
provision will give us the leverage we need. For this reason,
we strongly urge Congress to shorten the 10-year notice of
termination provisions contained in our power supply contracts
with TVA.
Finally, if TVA is going to become a market participant,
fairness requires that it be subject to the same rules and
regulations that apply to public utilities. Thus, Federal
electric restructuring legislation removing the TVA fence
should provide that FERC have jurisdiction over TVA's
transmission system, stranded costs and wholesale power rates.
First, FERC jurisdiction over TVA transmission is essential
to the development of a fully competitive power market. TVA
owns nearly 100 percent of the transmission lines in its 80,000
square mile service area. Federal legislation opening the
Tennessee Valley to competition must give FERC the authority to
mandate open access to those transmission lines and to assure
that TVA complies with the rules and regulations applicable to
all other interstate transmission owners and operators. Like
public utilities, TVA should be required to offer open access
to its transmission grid for the benefit of customers inside
the Valley and to otherwise comply with FERC's Order 888.
Second, FERC must be given jurisdiction to determine TVA's
stranded costs. KUB and MLGW are willing to pay our fair share
of TVA's stranded costs, but we believe what is fair should be
determined through application of FERC's already established
stranded cost rules. KUB and MLGW see no reason why Order
Number 888's stranded cost provisions should not apply to TVA.
Therefore, we support legislation that would give FERC
jurisdiction to determine TVA's stranded costs in accordance
with the rules and procedures established by FERC in Order 888.
Finally, TVA's wholesale power sales must be subject to
FERC jurisdiction under Sections 205 and 206 of the Federal
Power Act. Section 205 requires that all rates be on file with
the FERC and that utilities may only charge rates that are just
and reasonable. There is no sound public policy justification
for exempting TVA from these provisions of the Federal Power
Act. FERC jurisdiction over TVA's transmission system and
stranded costs will not prevent abuses of TVA's unquestionable
market power unless FERC also has the power to review TVA's
wholesale power rates. We strongly urge Congress to avoid this
regulatory gap and to provide that TVA's wholesale power sales
are subject to the same FERC jurisdiction that applies to
public utilities.
In sum, we are only seeking what most of the rest of the
country already has, the option to diversify our supply
portfolios and more flexible power contracts. We want to obtain
those benefits of competitive power markets so that we may pass
them along to all of our customers--industrial, commercial and
residential--for the good, long-term economic health of the
Tennessee Valley region.
We appreciate the opportunity to be heard on these issues
and hope that Congress will continue to take our views into
account as it moves forward with the restructuring of the
electric industry.
[The prepared statement of Larry A. Fleming follows:]
Prepared Statement of Larry A. Fleming, on Behalf of the Knoxville
Utilities Board and Memphis Light, Gas and Water Division
My name is Larry Fleming and I am President and CEO of the
Knoxville Utilities Board (``KLTB''). I am here today on behalf of KUB
and the Memphis Light, Gas and Water Division (``MLGW''). Thank you for
the invitation to present our views on the topic of ``Electricity
Competition: The Role of the Tennessee Valley Authority.''
As you know, Herman Morris, President and CEO of MLGW, testified
before this Subcommittee in May to present our positions on TVA
restructuring. I will not repeat the substance of Herman's testimony
here, but will focus instead on the three issues of greatest importance
to KUB and MLGW. I also have some updated materials to submit for the
record.
Before I highlight the specific actions KUB and MLGW urge this
Congress to take, I'd like to emphasize what may be the most important
point of all: it is essential that this Congress do something on TVA. I
know nationwide electric restructuring is a daunting task, and there
are those who say retail competition is already taking hold, through
actions taken by the States, and will gradually spread across the
country even if this Congress does nothing. There are also those who
see addressing TVA as a daunting task--as indeed it is--and favor doing
nothing on it either. But there is a huge difference between taking
this wait-and-see approach for the rest of the country and taking it
for TVA. Nobody but Congress has the power to introduce competition to
the Tennessee Valley; the States cannot do it, and the marketplace
cannot do it because federal law prohibits it. It simply will not come
unless Congress acts affirmatively to make it possible. And, whereas
the rest of the country already enjoys wholesale competition for
electric power, and the question is whether to mandate retail
competition, the Tennessee Valley does not yet have access to even
wholesale competition. We need this Congress to act now simply to allow
the Valley to catch up with the benefits the rest of the country has
enjoyed since 1992--access to wholesale competition for electric power.
Now the specific actions we urge Congress to take can be summarized
as follows:
(1) Remove the statutory barriers to wholesale electric competition in
the Tennessee Valley;
(2) Shorten the ten-year notice period in our power supply contracts
with TVA; and
(3) Subject TVA to the jurisdiction of the Federal Energy Regulatory
Commission (FERC).
We believe these measures are necessary to ensure a full and fair
transition to competition in the Tennessee Valley.
First, the statutes that prevent Tennessee Valley residents from
enjoying the many benefits of competitive electric markets must be
repealed. It has now been seven years since the passage of the Energy
Policy Act. Wholesale electric competition is already a reality
throughout most of the United States and nearly half the states have
already taken steps to implement electric competition at the retail
level. But America's largest power generator--TVA--is still a federally
sanctioned-monopoly. The Tennessee Valley has been walled off from the
rest of the country, which continues to move forward with electric
restructuring while the Tennessee Valley is left behind. We urge
Congress to take action to tear down these walls. There can be no
retail competition in Tennessee unless or until there is wholesale
competition in Tennessee. Neither the States nor FERC have the power to
mandate wholesale competition in the Valley, and TVA is not about to
start transmitting the power of other suppliers voluntarily. Why would
TVA willingly subject itself to competition for customers inside the
Fence when it is prohibited from competing for customers outside the
Fence?
To leave these barriers in place would be unfair to Tennessee
Valley residents and could be disastrous for the economic welfare of
the Tennessee Valley region. When new enterprises are choosing a
location, will they choose an area of the country where they will have
access to competitive power supply options, or will they choose the
Tennessee Valley, where there are no such options? The Tennessee Valley
has been left behind once before. We do not want to see that happen
again.
But mere repeal of these statutes, without more, will not fully
open the Valley to competition. There are other barriers to the
implementation of wholesale electric competition in this region. Our
current contracts with TVA, for example, renew automatically each year
and require ten years' notice of termination. This means that unless
Congress takes action to modify those contracts, KUB and MLGW will
still be captive TVA customers when the children born on the day the
Energy Policy Act was signed into law graduate from high school. We
have tried without success to renegotiate these agreements, but due to
the extended notice period, TVA has no incentive to make any meaningful
concessions. We need negotiating leverage, and only a shortened notice
of termination provision will give us the leverage we need. For this
reason, we strongly urge Congress to shorten the ten-year notice of
termination provisions contained in our power supply contracts with
TVA.
Finally, if TVA is going to become a market participant, fairness
requires that it be subject to the same rules and regulations that
apply to public utilities. Thus, federal electric restructuring
legislation removing the TVA Fence should provide that FERC shall have
jurisdiction over TVA's transmission system, stranded costs, and
wholesale power rates.
First, FERC jurisdiction over TVA transmission is essential to the
development of a fully competitive power market. TVA owns nearly 100%
of the transmission lines in its 80,000 square-mile service area.
Federal legislation opening the Tennessee Valley to competition must
give FERC the authority to mandate open access to those transmission
lines and to assure that TVA complies with the rules and regulations
applicable to all other interstate transmission owners and operators.
Like public utilities, TVA should be required to offer open access to
its transmission grid for the benefit of customers inside the Valley
and to otherwise comply with FERC's Order No. 888.
Second, FERC must be given jurisdiction to determine TVA's stranded
costs. KUB and MLGW are willing to pay our fair share of TVAs stranded
costs, but we believe that what is ``fair'' should be determined
through application of FERC's already-established stranded cost rules.
KUB and MLGW see no reason why Order No. 888's stranded cost provisions
should not apply to TVA. Therefore, we support legislation that would
give FERC jurisdiction to determine TVAs stranded costs in accordance
with the rules and procedures established by FERC in Order No. 888.
Finally, TVAs wholesale power sales must be subject to FERC
jurisdiction under sections 205 and 206 of the Federal Power Act (FPA).
Section 205 requires that all rates be on file with FERC and that
utilities may only charge rates that are just and reasonable. There is
no sound public policy justification for exempting TVA from these
provisions of the FPA. FERC jurisdiction over TVA's transmission system
and stranded costs will not prevent abuses of TVAs unquestionable
market power unless FERC also has the power to review TVAs wholesale
power rates. We strongly urge Congress to avoid this regulatory gap and
to provide that TVA's wholesale power sales are subject to the same
FERC jurisdiction that applies to public utilities.
In sum, we are only seeking what most of the rest of the country
already has: the option to diversify our supply portfolios and more
flexible power contracts. We want to obtain those benefits of
competitive power markets so that we may pass them along to all our
customers--industrial, commercial and residential--for the good of the
long-term economic health of the Tennessee Valley region.
We appreciate the opportunity to be heard on these issues and hope
that Congress will continue to take our views into account as it moves
forward with restructuring the electric industry.
Mr. Barton. Thank you, Mr. Fleming.
We now want to hear from Mr. Anderson. And I thought it was
interesting last night we had a dinner for some of our
panelists and some of the Congressmen and their staff, and Mr.
Anderson, who works for General Motors, said when he arrived at
the Nashville airport, even though he worked for General
Motors, he could not get a rental car because there were none
to be had. I thought that was kind of interesting, but he said
within 15 minutes they found him one.
So Mr. Anderson, you are here testifying on behalf of the
Tennessee Valley Industrial Committee. Your entire statement is
in the record and we would ask you to summarize it in 7
minutes.
STATEMENT OF DARRELL ANDERSON
Mr. Anderson. Thank you, Mr. Chairman. My name is Darrell
Anderson and I am here today in something of a dual role. My
primary job is on the worldwide facilities utilities service
group for General Motors in Detroit, Michigan, and in that
capacity, I am involved in the purchase of electricity for GM
facilities in various locations throughout the United States. I
am also here today as a representative of a group called the
Tennessee Valley Industrial Committee, or TVIC. TVIC is a not-
for-profit corporation that is composed of industries that
purchase their electricity directly from TVA, as opposed to
going through a local power distributor like NES here in
Nashville. There are currently 35 member companies in TVIC and
these companies have just over 50 plant and other facility
locations in the TVA service area ranging from western Kentucky
to Mississippi to Alabama to Tennessee. From my GM perspective,
I supervise the purchase of electricity for the Saturn plant in
Spring Hill, Tennessee, the Corvette manufacturing plant in
Bowling Green, Kentucky and for Delphi Saginaw Steering Gear
Systems in Athens, Alabama that manufactures steering gear
assemblies and other products.
From the broader perspective, the direct-served customers
of TVA account for the purchase of about 12 percent of the
electricity generated by TVA on an annual basis. That amounts
to something in the range of $600 million per year in electric
bills. TVIC members tend to be very large, basic industries in
such businesses as chemicals, paper and forest products and
primary metals such as steel and aluminum. All of us are in
highly competitive industries and we are in favor of
electricity being sold in this country on the same basis with
competition among the suppliers to serve the user needs for
electricity and fairness in those aspects of the business that
will need regulation.
My testimony today represents General Motors' position and
it is also in line with discussions of the TVIC membership on
this issue. TVIC is in the process of finalizing its position
paper on how TVA should fit into electricity restructuring
legislation, and we will provide that document to the
subcommittee as soon as it is completed. A one page summary of
this testimony has been provided as was requested.
Let me begin with some general comments on the issue.
We believe that TVA should be included in any national
legislation that leads to the deregulation of the generation
segment of the electric industry. Because of their large
service territory and generation capacity, TVA is too important
as a supplier of generation to be left out of the competitive
markets. It is also in the best interest of the Nation and the
Tennessee Valley region for TVA to continue as an ongoing and
viable utility governed by a board appointed by the President
and approved by the Senate. Under deregulation, customers who
are now directly connected to the TVA distribution/transmission
system should retain the right to that direct connection and
not be forced to take service from a distributor.
Let me address timing. If the fence goes down and TVA is
allowed to sell power beyond its current geographic region as
defined by the TVA Act, industry served by TVA should be
allowed customer choice of generation supply as soon as the
fence is removed.
In the area of generation, a separate regulatory structure
need not be created for the operation of TVA's generation
facilities. The marketplace will suffice. TVA's stranded
investment is the result of debt incurred from its nuclear
construction program. The 10-year reduction program adequately
provides for TVA's requirements for recovery of stranded
investment and no other stranded investment should be allowed.
Customers can currently use options such as cogeneration
and self-generation to minimize their electricity costs. All
options currently available should continue to be available
under deregulation and not be subject to any transition or
stranded investment charges.
As for transmission, TVA should be required to comply with
all FERC transmission rules and regulations. Specifically, TVA
transmission rates and conditions of service for industries
served by TVA should be non-discriminatory and be no more
restrictive in terms of access, rates or conditions of service
than their charges to any other transmission customer.
Another important goal of deregulation is to create large
regional transmission organizations to create a more efficient
transmission system and prevent pancaking of rates--in other
words, prevent separate charges from each transmission
organization as power is displaced through multiple grid
systems. TVA should be a part of one of these large regional
transmission organizations.
Finally, in the area of distribution, unless distributors
opt into customer choice, tariffs, rates and conditions of
service for organizations that distribute electricity from the
TVA transmission system to the end user should be subject to
regulation by the State utility regulatory commission.
Individual States and/or distributors should not be allowed to
delay customer choice for industrial customers.
Thank you, Mr. Chairman, for the opportunity to share these
views with the subcommittee this morning. As you move forward
in the legislative process, we will be glad to provide whatever
assistance you feel is appropriate. I will be happy to try to
respond to any questions you may have.
[The prepared statement of Darrell Anderson follows:]
Prepared Statement of Darrell Anderson
Thank you, Mr. Chairman. My name is Darrell Anderson, and I am here
today in something of a dual role. My primary job is on the World Wide
Facilities Utilities Services Group for General Motors in Detroit,
Michigan--and in that capacity I am involved in the purchase of
electricity for GM facilities in various locations throughout the
United States. I am also here today as a representative of a group
called the Tennessee Valley Industrial Committee, or TVIC. TVIC is a
not-for-profit corporation that is composed of industries that purchase
their electricity directly from TVA, as opposed to going through a
local power distributor like NES here in Nashville. There are currently
35 member companies in TVIC, and these companies have just over 50
plant and other facility locations in the TVA service area, ranging
from western Kentucky to Mississippi to Alabama to Tennessee. From my
GM perspective, I supervise the purchase of electricity for the Saturn
plant in Spring Hill, Tennessee, the Corvette manufacturing plant in
Bowling Green, Kentucky, and for Delphi Saginaw Steering Gear Systems
in Athens, Alabama that manufactures steering gear assemblies and other
products.
From the broader perspective, the direct-served customers of TVA
account for the purchase of about 12 percent of the electricity
generated by TVA on an annual basis, and that amounts to something in
the range of $600 million dollars per year in electric bills. TVIC
members tend to be very large, basic industries in such businesses as
chemicals, paper and forest products, and primary metals such as steel
and aluminum.
All of us are in highly competitive industries, and we are in favor
of electricity being sold in this country on the same basis: with
competition among the suppliers to serve the user needs for
electricity, and fairness in those aspects of the business that will
need regulation.
My testimony today represents General Motors' position, and it is
also in line with discussions of the TVIC membership on this issue.
TVIC is in the process of finalizing its position paper on how TVA
should fit into electricity restructuring legislation, and we will
provide that document to the subcommittee as soon as it is completed. A
one-page summary of this testimony has been provided as was requested.
Let me begin with some general comments on the issue. We believe
that TVA should be included in any national legislation that leads to
the deregulation of the generation segment of the electric industry.
Because of their large service territory and generation capacity, TVA
is too important as a supplier of generation to be left out of the
competitive markets. It is also in the best interests of the nation and
the Tennessee Valley region for TVA to continue as an ongoing and
viable utility, governed by a board appointed by the President and
approved by the Senate. Under deregulation, customers who are now
directly connected to the TVA distribution/transmission system should
retain the right to that direct connection and not be forced to take
service from a distributor.
Let me address timing. If the ``fence'' goes down and TVA is
allowed to sell power beyond its current geographic area as defined by
the TVA act, industry served by TVA should be allowed customer choice
of generation supply as soon as the fence is removed.
In the area of generation, a separate regulatory structure need not
be created for the operation of TVA's generation facilities; the
marketplace will suffice. TVA's ``stranded investment'' is the result
of debt incurred from its nuclear construction program. The 10-year
debt reduction program adequately provides for TVA's requirements for
recovery of stranded investment and no other stranded investment should
be allowed. Customers can currently use options such as cogeneration
and self-generation to minimize their electricity costs. All options
currently available should continue to be available under
deregulation--and not be subject to any transition or stranded
investment charges.
As for transmission, TVA should be required to comply with all FERC
transmission rules and regulations. Specifically, TVA transmission
rates and conditions of service for industries served by TVA should be
non-discriminatory and be no more restrictive in terms of access, rates
or conditions of service than their charges to any other transmission
customer.
Another important goal of deregulation is to create large Regional
Transmission Organizations to create a more efficient transmission
system and prevent ``pancaking'' of rates--in other words, prevent
separate charges from each transmission organization as power is
displaced through multiple grid systems. TVA should be a part of one of
these large ``Regional Transmission Organizations.''
Finally, in the area of distribution, unless distributors opt into
customer choice, tariffs, rates and conditions of service for
organizations that distribute electricity from the TVA transmissions
system to the end-user should be subject to regulation by their State
Utility Regulatory Commission. Individual states and/or distributors
should not be allowed to delay customer choice for industrial
customers.
Thank you, Mr. Chairman, for the opportunity to share these views
with the subcommittee this morning. As you move forward in the
legislative process, we will be glad to provide whatever assistance you
feel is appropriate. I will be happy to try to respond to any questions
you may have.
Mr. Barton. Thank you, Mr. Anderson.
We would now like to hear from Lyle Larson, who is the
counsel for TVA Watch. We will put your statement in the record
in its entirety and recognize you for 7 minutes to summarize
it.
STATEMENT OF LYLE D. LARSON
Mr. Larson. Thank you, Mr. Chairman and members of the
panel. Thank you for inviting TVA Watch to testify today. I am
Lyle Larson and I am from Birmingham and I serve TVA Watch as
its counsel.
TVA Watch is a political and judicial coalition of public
utilities concerned about unfair competition against TVA. Our
members include American Electric Power Corporation, Duke
Energy, Entergy Corporation, Illinova, LG&E Energy and SCANA
Corporation.
TVA Watch sees TVA really as the tale of two companies. In
the best of times, TVA is a partner, a partner in regional
resource and economic development, a partner in environmental
stewardship, flood control and lake recreation and a trading
partner in the bulk power marketplace.
The other TVA is quite a different company. It is a TVA
that has expressed intentions to compete nationally in
deregulated power markets as America's power company. It is a
TVA that we have had to sue three different times over the past
3 years to force it to comply with statutory limits on its
authority. It is a TVA clothed with substantial subsidies which
seeks immunity from meaningful application of the antitrust
laws and is not subject to independent regulation of its power
transmission or sales functions. It is a TVA that is burdened
by $27 billion in debt, $8.5 billion of which is linked to non-
productive assets.
So which is the real TVA? Is it a regional resource
development agency narrowly focused on the welfare of the
Tennessee Valley or is it an aspiring national utility? If it
is the former, then TVA Watch believes that legislation on
electricity restructuring would not need to address TVA. If it
is the latter, then we believe that legislation must tackle the
thorny and complex TVA issue.
By leaving the status quo, TVA would have an opportunity to
continue to pay down its debt and get its financial house in
order. In its 10-year business plan, TVA correctly observed
that getting its debt cut in half by the year 2007 was job one.
The GAO's report both in 1995 and again earlier this year
confirmed that this was essential for TVA's competitive
prospects.
If, after TVA has had an opportunity to get its finances in
shape, there is a need to address the fence again, then the
issue could be addressed then. At that point, TVA would be
financially viable and would not need continued subsidies to
compete. Taking the fence down when there is no compelling
reason to do so and risking both the financial health of TVA
and impairing the proper functioning of emerging markets is
simply doing too much too soon. It is fixing a problem that
does not yet exist and may never exist.
If, however, TVA wants to leave the Tennessee Valley behind
and compete for load anywhere in the country, then Congress
must act. Sound public policy and basic fairness would require
that TVA engage the market on a non-subsidized basis. To
understand why TVA subsidies would have to be addressed, just
look at history. We can see from the historical record that
before the fence was erected and TVA was free to compete
against public utilities, the result was predatory pricing and
the elimination of competition.
Before 1959 when the fence was erected, TVA was responsible
for approximately 20 investor-owned utilities being run out of
the Valley. To quote former Secretary of the Interior Harold
Ickes:
``The private utilities were confronted with the dilemma of
facing competition or selling their properties to TVA. They
could not do the former, so they did the latter. It was the
club, extending the sturdy right arm of TVA that was supplied
by the PWA that brought the private utilities to their knees
and made it possible for TVA to become supreme in its field.''
It was in response to this practice and because of TVA's
subsidies and immunities from antitrust laws that Congress
erected the fence in 1959. The rationale of the 1959 law
continues to apply today.
Mr. Chairman, members of the panel, TVA Watch believes that
the more things change, the more things stay the same. The
debate over TVA today is amazingly similar to what it was 40
years ago. As this committee deliberates restructuring, it must
determine the appropriate role for TVA. In doing so, we hope
you will remain mindful of what the former Senator from West
Virginia and a veteran of the New Deal Congress, Senator
Jennings Randolph, said back in 1959 when the fence was
erected.
He said, ``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.'' We should not forget the lessons of the
past.
In closing, TVA Watch believes the proper course of action
on TVA depends on which TVA is the real TVA. Is it a regional
resource agency narrowly focused on the Tennessee Valley, or is
it an aspiring national utility that still wants to be
America's power company? If it seeks to compete nationally, the
Congress must address the thorny, complex TVA issue. If not,
then we believe you can leave existing laws on TVA alone.
This concludes my remarks. Thank you.
[The prepared statement of Lyle D. Larson follows:]
Prepared Statement of Lyle D. Larson, Counsel, TVA Watch
i. introduction
Mr. Chairman and Members of the Committee: my name is Lyle Larson
and I am a Partner in the law firm of Balch & Bingham LLP, based in
Birmingham, Alabama. I am here today as Counsel to TVA Watch, a
coalition of shareholder-owned utilities that was formed in 1996 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. Members of TVA Watch
include American Electric Power, Duke Power Company, Entergy
Corporation, Illinova Corporation, LG&E/Kentucky Utilities, and SCANA
Corporation.
Over the past few years, TVA Watch's mission has been to maintain
the bargain Congress struck in 1959: to confine TVA from expanding any
further beyond serving the Tennessee Valley residents Congress
originally intended it to serve. TVA should continue to serve that
mission. Congress should not adopt a scheme for TVA expansion that
could put fair competition in the industry at serious risk, not to
mention Tennessee Valley residents, TVA bondholders and federal
taxpayers.
It is our understanding that the purpose of this field hearing is
to raise the profile of electricity restructuring legislation in the
Tennessee Valley and make sure people are aware of what this might mean
for electric customers here and for TVA. We think customers in the
Tennessee Valley should be aware that the rise of customer choice
nationwide, and the possibility of federal restructuring legislation,
necessitates serious discussions about the future role of TVA.
TVA Watch believes that, no matter what happens with the
restructuring of the electricity industry, TVA's power program mission
should remain the same. That mission is to supply power within the
Tennessee Valley region. We believe that TVA's power program mission
and orientation should stay focused exclusively on the Tennessee Valley
region. In this regard, TVA Watch believes TVA's power system is
performing well as was evident by its fine performance during the
recent summer heat wave. TVA Watch believes the TVA power system should
continue to serve its existing service area, but should not be
authorized or encouraged by Congress to expand the scope of its power
program mission to include the supply of power outside of the fence
(where TVA, a governmental corporation in possession of a number of
special advantages and the ability to wreak economic distortion, should
not be permitted to compete against private enterprise on an uneven
playing field).
However, TVA in recent years has embarked on a strategy aimed at
persuading Congress to take down the fence. Among other things, TVA
supports legislation introduced earlier this year by the Clinton
Administration (S. 1047 and H.R. 1828) to remove the fence while
allowing TVA to retain most of its subsidies and other artificial
advantages. If, in fact, Congress considers changing TVA's mission to
include the supply of power in competition with private enterprise
outside the Valley, TVA Watch's members maintain that both basic
fairness and sound economic and public policy require that TVA engage
the market under the same rules and conditions as its private sector
competitors. The public interest is not served and competition cannot
develop if market participants are on an uneven playing field.
In order to chart a course for the future, it is necessary to know
where we have been: to learn from past experiences and to seek to avoid
making the mistakes that would undermine the goal of encouraging fair
and open competition in America's electric power industry. With that in
mind, it is helpful to review the history of TVA and what it is capable
of doing if unrestrained in a competitive environment.
ii. tva competition--past to present
1933-1959: TVA Displaces Shareholder-Owned Utilities
Between enactment of the TVA Act in 1933 and enactment of the TVA
Bond Act in 1959, TVA grew its area of service quite rapidly taking
over service territories served by various shareholder-owned utilities,
including many members of TVA Watch. Following passage of the 1959 Bond
Act and until very recently, competition between TVA and the
shareholder-owned utilities has been virtually nonexistent. Between
1959 and today, TVA and its 159 distributors have operated largely
``within the congressionally mandated fence'' and shareholder-owned
utilities operated outside.
From its outset, TVA was subject to the laws of Congress, but was
not regulated by any other oversight body. It was (and remains) exempt
from federal regulation, including that of the Federal Energy
Regulatory Commission (``FERC''). Moreover, as a federal agency, it is
generally immune from state utility (and other) regulation. The only
effective form of regulation was Congressional oversight over the
capital expenditures of TVA by virtue of the budget process. TVA, as a
government agency, was controlled by congressional purse strings. It
could not expand its asset base or geographic reach without justifying
that expansion to congressional committees. While this proved to be a
cumbersome process, TVA had some degree of accountability for its
strategic direction.
In the 1930's, TVA consolidated its electric sales market by
duplicating the facilities of the electric suppliers that served in the
Tennessee Valley region prior to that time, or, when it could, acquired
the existing facilities of the existing suppliers.
In constructing a federally subsidized network of transmission and
distribution facilities, in testimony before Congress in 1934, then
Chairman of the TVA Board Dr. Arthur E. Morgan confirmed these TVA
practices:
Q. In purchasing these transmission lines, you have come to
an agreement with the companies, that it is really an agreement
under duress, is it not, because if they did not sell to you,
you would duplicate their lines?
A. Yes.1
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\1\ Additional Appropriations for Emergency Purposes, 1934: Hearing
Before the Subcomm. Of House Comm. On Appropriations, 73rd Cong., 2d
Sess. 163 (1934).
---------------------------------------------------------------------------
Over the course of the 1930's, TVA forced over twenty shareholder-
owned utilities out of the Tennessee River Valley.2
Explaining why shareholder-owned utilities were forced to abandon their
services areas, Secretary of the Interior Harold D. Ickes stated:
---------------------------------------------------------------------------
\2\ TVA, 1939 Annual Report, 50-51 (1940).
---------------------------------------------------------------------------
The private utilities were confronted with the dilemma of
facing competition or selling their properties to TVA. They
couldn't do the former so they did the latter. It was the club,
extending the sturdy right arm of TVA that was supplied by the
[Public Works Administration] that brought the private
utilities to their knees and made it possible for TVA to become
supreme in its field.3
---------------------------------------------------------------------------
\3\ Statement of Harold D. Ickes to Northwest Public Ownership
League, as quoted in Sworn Testimony Before the Atomic Energy
Commission (1941) (emphasis added).
---------------------------------------------------------------------------
By 1940, the combined effort of these agencies was successful in
establishing the Tennessee Valley as TVA's recognized ``service area''
and in driving all other power generators from the Tennessee Valley
region.4 After TVA's rapid geographic expansion in the
1930's, TVA's rapid growth had more or less ``stabilized.''
5 During the 1940's, 6 TVA and neighboring
utilities co-existed under an uneasy mutual restraint philosophy
(``gentlemen's agreements'') pursuant to which neither made excursions
into the other's area of operations.
---------------------------------------------------------------------------
\4\ The Public Works Administration provided financial support to
municipalities to establish municipal electric distribution systems
that would duplicate the distribution lines of existing electric
suppliers and become wholesale customers of TVA. Originally this
support consisted of grants to the municipality of 30% of the cost of
building the duplicating facilities with 70% of the cost being provided
to the municipality in the form of a low interest rate loan. Later,
this ratio was changed to 40% grant and 60% loan.
\5\ Kentucky Utilities Co. v. Tennessee Valley Authority, 375 F.2d
403, 410 (6th Cir. 1967), modified sub nom., Hardin v. Kentucky
Utilities Co., 390 U.S. 1 (1968).
\6\ The slow-down in TVA's rapid growth was not of its own
volition. Rather, through control over TVA's funding, Congress was able
to check TVA's continued expansion. As TVA lamented in its 1955 Annual
Report, ``For the second successive year, funds for starting new
generating units were not available.'' TVA, 1955 Annual Report 1
(1956). In 1956, TVA complained: ``TVA must have access to other
sources of funds if power to nourish the present rapid economic growth
is to be provided.'' TVA, 1956 Annual Report 31 (1957).
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In the mid-1950's, TVA was chaffing under the fiscal restraints
resulting from the inability to obtain budget approval for construction
of new generating plant needed to serve customers located within the
Tennessee Valley. The ``Dixon-Yates'' controversy of the 1950's
involved an attempt by shareholder-owned utilities to build an electric
generating plant to serve load in TVA's service area. That effort (a
precursor of today's ``independent power producer'') was vigorously and
successfully opposed by TVA. Yet, having defeated the development of
the independent power producer's service in the Tennessee Valley, TVA
was still without the capability of serving the load in the area
because it still could not get federal approval for its own power plant
construction. That gap was filled with a generating plant built by a
TVA customer, the City of Memphis, using tax-free municipal bond
financing.
This surrogate financing of generating facilities to serve the
Tennessee Valley was not desirable from TVA's standpoint. TVA lobbied
for freedom from the congressional oversight in building power plants
to provide electric service in the area. Neighboring utilities
expressed concern that this freedom could provide unfettered
opportunities for TVA to expand the area in which it served. It was
pointed out at the time that TVA had unnatural tax and financing
advantages that could be decisive in any competitive battle outside the
TVA area with those who both paid taxes and the market cost of money.
The compromise in the 1959 Bond Act provided territorial restrictions
on areas where TVA could sell power, but authorized TVA to borrow up to
an established debt ceiling limit without the necessity for
congressional approval of capital expansion plans. Both the ``fence''
and the debt ceilings established by the 1959 TVA Act Amendments
continue to have a major influence on TVA's scope of operations and its
business and political strategies.
1959-1992: Cooperation Replaces Competition
Historically, as the source of TVA's funding, Congress exercised
significant oversight and control over TVA's geographic growth. In the
1950's, TVA sought to eliminate much of this Congressional oversight
and control through proposed legislation providing for the issuance of
revenue bonds by TVA. In Hardin v. Kentucky Utilities Co., the United
States Supreme Court recounted TVA's efforts and Congress' concerns:
In 1955 TVA began to seek authority to issue bonds to finance
[the cost of new facilities without dependence upon annual
appropriations from Congress]. Although TVA spokesmen assured
Congress that the objective was not territorial expansion but
only improvement of the facilities in TVA's existing service
area, many members of Congress were apprehensive and thought
that if congressional budgetary control was to be weakened,
some substitute to prevent territorial expansion should be
found.7
---------------------------------------------------------------------------
\7\ 390 U.S. at 6.
---------------------------------------------------------------------------
Recognizing that allowing self-financing by TVA would decrease
substantially its ``power over TVA's geographic growth,'' Congress
believed that ``some substitute to prevent territorial expansion should
be found.'' 8 Against this backdrop, Congress amended the
TVA Act in 1959 to permit TVA to issue revenue bonds. The Congressional
quid pro quo for relinquishing control of TVA's purse strings was the
territorial limitation, freezing TVA's service area and halting TVA's
expansion. Both the House and Senate spent much time developing the new
limitation--carefully reworking and revising it at different stages of
the legislative process--with the final provision embodying the
Talmadge-Randolph Amendment that had been adopted by the Senate. As
passed by Congress, the TVA Bond Act added Section 15d to the TVA Act,
which provides:
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\8\ Id. During the 1930s and 1940's, several lawsuits were filed by
investor-owned utilities and their shareholders challenging TVA's
expansion into the electric utility business. While at least one early
decision found unlawful TVA's competition against shareholder-owned
utilities, Ashwander v. Tennessee Valley Authority, 8 F. Supp. 893, 897
(N. D. Ala. 1934), the Supreme Court eventually upheld the legality of
TVA's power business. Ashwander v. Tennessee Valley Authority, 297 U.S.
288 (1935).
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The Corporation [TVA] is authorized to issue and sell bonds,
notes, and other evidences of indebtedness (hereinafter
collectively referred to as ``bonds'') in an amount not
exceeding $750,000,000 9 outstanding at any one time
to assist in financing its power program and to refund such
bonds. [TVA] may, in performing functions authorized by this
chapter, use the proceeds of such bonds for the construction,
acquisition, enlargement, improvement, or replacement of any
plant or other facility used or to be used for the generation
or transmission of electric power (including the portion of any
multiple-purpose structure used or to be used for power
generation); as may be required in connection with the lease,
lease-purchase, or any contract for the power output of any
such plant or other facility; and for other purposes incidental
thereto. Unless otherwise specifically authorized by Act of
Congress [TVA] shall make no contracts for the sale or delivery
of power which would have the effect of making [TVA] or its
distributors, directly or indirectly, a source of power supply
outside the area for which [TVA] or its distributors were the
primary source of power supply on July 1, 1957 . .
.10
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\9\ Through a series of amendments, this figure has increased from
$750 million, to $5 billion in 1970, to $15 billion in 1975, and to $30
billion in 1979. See 16 U.S.C.A. Sec. 831n-4(a) (West 1985).
\10\ 16 U.S.C.A. Sec. 831n-4(a) (West 1985) (emphasis added).
---------------------------------------------------------------------------
The depth and detail of the provision reveals a carefully hammered-out
legislative compromise.11
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\11\ ``But I remind the Senate that the pending bill, in its
present form, is the product of travail and of fierce negotiation . . .
it must contain the language of the Talmadge-Randolph amendment . . .''
said Senator Robert Kerr, Chair of the Senate Committee on Public Works
(the Talmadge-Randolph amendment revised the House version and was
signed into law by President Eisenhower). 105 Cong. Rec. S. 13055
(1959). Legislative history is entitled to judicial notice. Territory
of Alaska v. American Can Co., 358 U.S. 224, 226-27 (1959).
---------------------------------------------------------------------------
The intent of Congress in erecting the Fence was to protect
shareholder-owned utilities from direct or indirect competition against
TVA-generated power.12 In Hardin, the Supreme Court
recognized this fact:
---------------------------------------------------------------------------
\12\ In passing the TVA Bond Act, Congress sought both to empower
and to restrict TVA. TVA was empowered to issue revenue bonds, but was
restricted from using the revenues from those bonds to compete against
neighboring utilities. In erecting the Fence, Congress carved out a
limited exception--the so-called ``Exchange Power Exception.'' In the
Exchange Power Exception to the Fence, Congress permitted the
continuation of a limited number of ``exchange power arrangements''
that TVA had with ``other power-generating organizations . . . on July
1, 1957.''
---------------------------------------------------------------------------
[I]t is clear and undisputed that protection of private
utilities from TVA competition was almost universally regarded
as the primary objective of the limitation.13
---------------------------------------------------------------------------
\13\ 390 U.S. at 6. The strength and lasting durability of the
Fence recently was reaffirmed and used by TVA to successfully insulate
itself from competition within its boundaries. In 1992, Congress passed
the Energy Policy Act, which authorizes the Federal Energy Regulatory
Commission to compel utilities to transmit electricity generated by
others into their service area, in direct competition with power they
otherwise could provide. TVA lobbied for and secured a special
exemption from this ``open access'' legislation. To obtain its
exemption, TVA argued that, because it was not permitted to compete in
any way, shape or form outside its service area, fairness required that
others should not be permitted to compete within its area. See Issues
Within the Jurisdiction of the Subcomm. On Water Resources contained in
the Comprehensive National Energy Policy Act: Hearing Before the
Subcomm. On Water Resources of the Comm. on Public Works and
Transportation, 102d Cong., 2d Sess. 64, 7 (April 9, 1992) (Statement
of Mary S. Hayes, President TVA Customer Group).
---------------------------------------------------------------------------
With passage of the 1959 TVA Bond Act, members of TVA Watch and TVA
entered a period in which cooperation replaced competition and
litigation. Under Section 15d(a) of the Act, the utilities were
protected from direct or indirect competition with TVA. Simultaneously,
Congress identified a limited exception--the so-called ``Exchange Power
Exception''--that could continue despite the general prohibition of
Section 15d(a). In essence, the Exchange Power Exception permitted TVA
and neighboring utilities to exchange power in order to avoid costs,
achieving providing assistance in emergency situations, or coordinating
operating procedures and maintenance schedules for the augmentation of
reliability. For nearly 35 years, TVA and its neighbors enjoyed the
mutual benefits of exchange power arrangements, which did not result in
competition between them.
Seeking to quell congressional fears, former TVA Chairman David
Freeman described in congressional testimony in 1979 the cooperation
between TVA and its neighbors:
Mr. Chairman, for the last 20 years TVA has lived in peaceful
coexistence with its neighboring privately owned power
companies--to the mutual advantage of TVA, those companies, and
the region's consumers. The TVA system is interconnected with
those of private power systems at 30 separate points. Through
common trust, understanding, and cooperation of the operating
personnel and power dispatchers of all these power systems, TVA
and its private utility neighbors are engaged in mutually
beneficial power exchange arrangements that help keep the cost
of power down for customers of all systems. And we bail out
each other in times of emergencies.
The service area concerns of the 1950's were resolved in the
1959 self-financing amendment by putting a fence around TVA, as
specified in section 15d(a) of the TVA Act.
. . .
Since the adoption of those provisions of section 15d(a), TVA
has exercised great care to assure compliance with the
restrictions contained in the Act in entering into power supply
arrangements with municipal and cooperative distributors of TVA
power and with directly served customers, as well as in
participating in interconnection agreements with neighboring
electric power systems.14
---------------------------------------------------------------------------
\14\ Hearings on H.R. 2686 and H.R. 5059 Before the Subcomm. On
Water Resources of the Comm. On Pulic Works and Transportation, 96th
Cong., 1st Sess. (1979) (Testimony of S. David Freeman (emphasis
supplied)).
---------------------------------------------------------------------------
This era of TVA's history was one of quiet expansion. Like other
utilities across the country, TVA was convinced that there were
significant economies of scale in larger generating plants, and it
forecasted unending expansion of customer growth. TVA undertook plans
to build large units to meet the rising demand. All this expansion was
pursued without any regulatory oversight.
During the late 1960's and early 1970's TVA's management became
convinced that nuclear power was the primary solution to the
anticipated growth in the use of electricity. It developed plans for
the construction of 17 nuclear generating units to serve the Tennessee
Valley area (only 5 of which were completed, leaving $6 billion in
unproductive nuclear assets). This ambitious plan was extremely capital
intensive, and TVA was projected to reach the congressionally
established cap on borrowing authority by the early 1980's. In 1979,
TVA approached Congress, proposing to increase the limit on its debt
from $15 billion to $30 billion. At that time, Congress extracted
promises from TVA giving assurances that none of the plants constructed
with this increased borrowing authority would be used to sell power in
areas outside the Tennessee Valley.
Given assurances that TVA had no plans to expand the geographic
reach of its power program, Congress authorized the doubling of TVA's
limit on borrowing from $15 billion to $30 billion. This allowed TVA to
go forward with its nuclear construction program without further
oversight from Congress. That freedom proved unhealthy because TVA had
neither competitive forces nor an independent regulatory organization
forcing it to examine and re-examine the validity of its assumptions.
By the 1980's TVA's plans were in grave danger. Electricity
consumption in the Tennessee Valley had not grown at the rate
projected. The increased regulatory burdens imposed on all developers
of nuclear power facilities by the Nuclear Regulatory Commission added
significant costs to TVA's programs. While other regulated shareholder-
owned utilities were revising and scaling back and abandoning plans for
nuclear plants in response either to economic realities or pressures
from regulators, TVA plowed ahead with its nuclear program. During the
1980s, TVA added substantial debt (tens of billions of dollars) to its
balance sheet but got little out of its nuclear investment.
By the 1990s, many thought that TVA was on the ropes, and only a
period of a few years separated TVA from financial collapse. That
downward spiral was arrested, however, following the appointment in
1986 of Marvin Runyon as Chairman of TVA. He approached the operation
of TVA like a business.
But these efforts were simply band-aids that stopped temporarily
the hemorrhaging that was going on in TVA's finances. Even with
Runyon's efforts and dramatic accomplishments, TVA was not able to
overcome the dramatic financial drain created by its unfinished nuclear
plants. By the end of fiscal year 1993, TVA had approximately $28
billion in debt. Its balance sheet showed the net book value of its
productive assets (that is, those in operation furnishing electric
service) at only $14 billion. The other $14 billion was tied up in $8
billion of plants under construction which may not be placed in
service, and $6 billion in ``deferred nuclear plants.'' TVA's customers
were having to pay rates that would allow TVA to maintain the debt
service on $14 billion in unproductive plant assets--almost $1.1
billion per year. Had TVA been regulated by a state or federal
regulatory authority, it would have had to amortize a major portion of
the $14 billion in unfinished and deferred plants over a reasonable
period of time. TVA would have had to raise its rates substantially to
current customers.
1992 To The Present: TVA Seeks National Relevance
The 1990s have seen a shift in TVA's traditional policy. TVA's
current management has expressed frustration over TVA's inability to
sell its power outside the fence and declared its desire to revert to
the pre-1959 days when TVA legally could sell power to wholesalers and,
through those wholesalers, indirectly become a source of power supply
outside the fence. Speaking to the Public Power Association in 1995,
TVA's Chairman said:
You all know the complex history of the fence that has
surrounded TVA's service area since 1959. Many of you have
similar territorial boundaries, with equally complex histories.
These boundaries are part of a system of regulation that's
governed our business for more than 30 years.
The fence around TVA's service area was put up at the
insistence of private power companies when the TVA power system
became self-financing. The Fence was intended to be a
bulletproof vest for our competitors. It has become a strait-
jacket for TVA.
. . .
The fence should come down. As we look toward an era of open
market competition, the fence no longer makes sense. And when
it does come down, competition will be a two-way street, and
TVA will once again have the freedom to compete anywhere in the
country.
We had that freedom until 1959. It's time we had it again.
It's time to set TVA free.
TVA's current management has worked hard to emphasize that TVA was
not afraid of change and was making changes to get ready for
restructuring and to win the competition with shareholder-owned
utilities.
As detailed above, TVA has substantial debt associated with
unproductive or under productive generating capacity. The associated
debt service burden has placed upward pressure on its rates charged to
its wholesale distributors. To help it obtain additional revenue, TVA
in late 1995 implemented aggressive programs with various power
marketers to sell TVA generated power for resale by those marketers
into the burgeoning bulk power marketplace. TVA hoped to use these
revenues to pay down part of its outstanding debt and thus to relieve
some of the upward pricing pressure that was being asserted. TVA hoped
also that its sales into the bulk power market would help it to become
established as a reputable bulk power supplier and thus to gain a
foothold for the future when, it believed, the fence would be removed
and it would be free to market its power directly and nationally. This
initiative, however, was illegal and has now halted due to adverse
judicial rulings stemming from claims brought by TVA Watch member
companies. As of the close of 1997, TVA had ceased to be a supplier of
power in the bulk power marketplace, outside of opportunity sales to
neighboring utilities.
Beginning in middle 1995, TVA began speaking publically about the
need for changes to the TVA Act to remove geographic restrictions on
its sale of power. TVA also commissioned and circulated widely a
consultant report (Palmer Bellevue) concluding that TVA was ready to
compete and win, but was hamstrung by the fence. At the same time,
however, TVA advocated that it should continue to be protected from
competition within its historical territory and should be permitted to
retain the benefits it has (financially) as a result of being a
creature of the United States Government. TVA's efforts in this regard
have been effectively countered by TVA Watch and others on the basis
that TVA is heavily subsidized and should not be able to compete
outside its area unless its subsidies are removed, the playing field is
level, and TVA opens itself to competition within the fence.
iii. on the inside looking out: tva's frustrated efforts to sell power
outside the valley without congressional approval
In 1995 the U. S. General Accounting Office 15
chronicled TVA's legislative strategy to tear down the Fence and expand
its market:
---------------------------------------------------------------------------
\15\ United States General Accounting Office, Tennessee Valley
Authority--Financial Problems Raise Questions about Long-term
Viability, GAO/AIMD/RCED--95-134 (August, 1995).
---------------------------------------------------------------------------
[I]n February 1995, TVA's Chairman stated that in recognition
of evolving competitive markets, legislative provisions that
prevent TVA from transmitting and marketing its power outside
of its established service area should be eliminated, so that
TVA can compete on an equal footing with its
neighbors.16 The Chairman added that the ``fence''
should come down, ``unleashing the agency's potential as a
nationally competitive electric utility.''
---------------------------------------------------------------------------
\16\ (footnote in original text) The Chairman's announcement,
however, did not indicate that TVA wished to remove statutory
provisions in the Energy Policy Act of 1992 which generally prohibits
other utilities from transmitting power over TVA's transmission network
and selling the power to TVA's customers.
---------------------------------------------------------------------------
As part of the Chairman's February 1995 announcement, he also
stated that TVA had commissioned a study to examine all aspects
of removing the fence before seeking necessary legislation. The
study's report, released in April 1995, 17
recognized that TVA faces radically different conditions today
because of the realities of the rapidly changing electric
industry. The [Palmer Bellevue] report included the following
findings.
---------------------------------------------------------------------------
\17\ (footnote in original text) The Ties That Bind: TVA in a
Competitive Electric Market, Palmer Bellevue, April 1995.
---------------------------------------------------------------------------
. . .
So that TVA can evolve as a fully competitive enterprise and
assure its current wholesale power customers a wide range of
choices in the future--including supplies from other power
generators--the Board is recommended to undertake a two-phase
effort to remove the ``fence'' and related restrictions. Phase
1 would allow TVA to conduct all conventional types of
wholesale business with utilities bordering TVA and beyond.
During Phase 1, TVA would not be allowed unbalanced access to
traditional nonprofit wholesale customers of neighboring
utilities, with which TVA's relationship has been severely
restricted since 1959 and which cannot serve in the TVA
territory under the TVA Act. Phase 2 would remove the ``fence''
entirely, giving TVA's current wholesale customers free market
access and at the same time permitting TVA to seek markets
outside the Valley on the same basis that competitors could
enter the Valley to provide service.
TVA's transition to a fully competitive posture is not
hindered by an inherent inability to compete on a vigorous and
equal basis with others. Instead, the barriers to TVA's
competitiveness are largely found in ties to the past and the
limitations imposed by unusual and unique provisions in federal
law.
GAO Report at 55-56 (emphasis added). In reaching its own conclusions
about the Palmer Bellevue Report, the GAO found:
The Palmer Bellevue study does not recommend immediately
opening the market to full competition. The study recommends
that TVA be allowed to sell to customers outside its current
service area for an unspecified period while continuing the
restrictions that make it difficult for competitors to enter
TVA's market. An important issue to consider in analyzing the
study's recommendation is the equity of a proposal that solely
benefits TVA to the potential detriment of TVA's competitors.
GAO Report at 56-57 (emphasis added). Chairman Crowell commented on the
Palmer Bellevue Report:
TVA recently commissioned a highly regarded utility
consulting firm to conduct a study of the fence and recommend a
course of action for removing it. The firm--Palmer-Bellevue . .
. concluded that TVA is competitive to compete without the
fence. But rather than seek legislation to remove it
immediately, we have decided on a phased approach, timed to
match the pace at which deregulation proceeds.18
---------------------------------------------------------------------------
\18\ Remarks of Craven Crowell, ``Tailoring the Seamless
Enterprise: An Integrated Approach to the Challenge of Deregulation,''
Conference on Building the Seamless Enterprise, at 7 (Sept. 19, 1995)
(emphasis added).
---------------------------------------------------------------------------
These statements have been followed by specific deeds, all of which
have been fought in the courts by various members of TVA Watch. TVA
Watch members have challenged a number of TVA's acts of aggression
along (or around) the fence. Each challenge (reviewed below) has
resulted in TVA's efforts either being found unlawful, or in TVA's
capitulation.
Alabama Power Company, Georgia Power Company and Mississippi Power
Company v. TVA--In 1996 TVA entered into a set of arrangements with
LG&E Power Marketing (``LPM''), an affiliate of a Louisville Gas &
Electric which was power generating organization authorized to
``exchange'' power with TVA under the TVA Bond Act. Under these
arrangements, LPM would buy power from TVA on paper but never actually
``exchange'' or take physical delivery of that power. Instead, LPM
would resell the paper rights to that power to third parties for use
outside the Fence, sometimes as far away as the Chicago and South
Florida. Because Section 15d(a) of the TVA Act prohibited TVA from
supplying power outside the Fence, and because the ``Exchange Power
Exception'' does not permit TVA to supply power to a neighboring
utility for the purpose of resale in distant markets, Southern Company
Operating Companies sued TVA and LPM in Birmingham, Alabama. The
lawsuit sought an injunction stopping the transactions and a
declaration from the Court stating that the arrangement was unlawful.
Senior United States District Judge Robert Propst found against TVA
and ruled that the arrangement with LPM was illegal.19 He
found that LPM, as a power marketer and not a neighboring utility with
which TVA was truly ``exchanging power'' power generating organization,
was not entitled to engage in power supply transactions with TVA. In
the Court's view, if TVA could supply power for use in South Florida or
Chicago through the devise of channeling the power on paper through a
power marketer, the prohibition on TVA supplying power outside the
fence would mean nothing.
---------------------------------------------------------------------------
\19\ Alabama Power Company, et al v. TVA, 948 F. Supp. 1010 (N.D.
Ala. 1996).
---------------------------------------------------------------------------
Alabama Power, Duke Power and Entergy Mississippi v. TVA--Less than
a year after the Northern District of Alabama found TVA violated the
TVA Act by ``indirectly'' selling power through a power marketer, TVA
was sued again for virtually the same activity. This time, the
plaintiffs included Duke Power and Entergy Mississippi. TVA's
accomplice this time around was East Kentucky Power Cooperative. The
only distinction between the two suits was that TVA channeled its power
through an actual power generating organization authorized to purchase
and consume power generated by TVA rather than a power marketer. After
initially denying the complaint, TVA eventually capitulated and agreed
to a Consent Judgment 20 forbidding TVA from making any more
deals to supply power indirectly in violation of the fence by
``indirect'' means. TVA also agreed to adopt a Policy Statement with
regard to its supply of power to neighboring power generating
organizations under the Exchange Power Exception.
---------------------------------------------------------------------------
\20\ Consent Judgement Entered July 29, 1997, Civil Action No. CV-
97-C-0885-S (N.D. Ala. 1997) (Judge U.W. Clemon).
---------------------------------------------------------------------------
Kentucky Utilities vs. TVA and Powell Valley Electric Cooperative--
In late 1996, TVA entered into a three-way transaction to capture a
large industrial load served by Old Dominion Power Company, a unit of
Kentucky Utilities. The transaction had the following elements: The
customer, a large mining operation, had historically taken service from
Old Dominion. With help from TVA and from a TVA distributor (Powell
Valley Electric Cooperative), the customer built a transmission line
into the service area of Powell Valley. TVA and Powell Valley then
entered into an agreement to supply power to the customer with delivery
inside the Powell Valley service area but for use outside of that area
(and inside the territory of Old Dominion). In response, suit was filed
in both Federal Court and at the Virginia Corporation Commission
(``Virginia Commission'').
In mid-summer 1999, the Virginia Commission rendered its decision
and rules against and Powell Valley.21 The Virginia
Commission proceeding has resulted in a major victory, not just for
Kentucky Utilities, but for state-regulated public utilities in
general. In upholding the primacy of state laws governing electric
service territories over the TVA Act, the Virginia Commission ruled
that: (1) Powell Valley's delivery of power to customers inside the
fence for use outside the fence (and in Old Dominion's state-sanctioned
service area) was unlawful under Virginia state law; (2) the fact that
the TVA Act authorized the supply of TVA power by Powell Valley in the
area in question did not change this result, because the TVA Act does
not preempt state laws governing service territories; and (3) that
distributors of TVA power do not obtain any immunity from state laws
other than retail rate regulation by virtue of their relationship to
TVA. Powell Valley sought rehearing of the Virginia Commission's order.
The petition for rehearing has been denied and the parties (KU and
Powell Valley) have resolved the matter completely by transferring
service of the customer back to KU. In return for Powell Valley's
cooperation in restoring lawful service, KU has agreed not to seek
money damages against Powell Valley for its role in the matter.
However, a damage claim against TVA in the Federal Court in Kentucky
remains pending and a trial on the merits of the matter is anticipated
to produce a judgment against TVA. As can be seen from the above cases,
all of which TVA has lost, under current management TVA has not
hesitated to push the envelope well beyond what is legal. If not for
the resolve of TVA Watch and its members, TVA would have successfully
removed the fence by disregarding the dictates of Congress.
---------------------------------------------------------------------------
\21\ Re Kentucky Utilities Company dba Old Dominion Power Company,
PUR Slip Copy, 1999 WL 288835 (Va. S.C.C., March 31, 1999).
---------------------------------------------------------------------------
iv. legislative changes required if tva allowed to supply power outside
the fence
Under Section 15d(a) of the Tennessee Valley Authority Act of 1933,
as amended, TVA is prohibited from making contracts for the sale or
delivery of power that have the direct or indirect effect of making it
a source of power supply outside a statutorily defined area. As noted
above, this provision of law is generally referred to in the electric
utility industry as the ``fence'' and applies with limited exceptions
to affirmatively prohibit the direct or indirect marketing of TVA
generated power outside the Tennessee Valley region. The Supreme Court
of the United States has recognized that the ``fence'' was erected to
protect utilities from having to compete against TVA power because of
the privileges, benefits and artificial competitive advantages TVA
possesses as a government corporation. If TVA power is to be made
available outside the confines of the fence, a number of changes to
Federal law should be made to ensure fairness and to prevent economic
distortions:
Make Antitrust Laws Applicable to TVA: Courts have recognized
that TVA is immune from liability under the antitrust laws even
though it is engaged in competition in electric service
markets. This immunity has been based on either (1) TVA's
status as an instrumentality of the federal government, or (2)
the implicit structure of the TVA Act. If the fence that
currently prevents TVA from even broader engagement in the
competitive arena is removed, it will become imperative that
the antitrust laws are applied to TVA. To assure parity and
symmetry among competitors, TVA should be subject to the same
rules on competition as all other participants in the market,
and it should be legally prohibited from repeating the
predatory practices used in the past.
No New Subsidized Generation. In response to ongoing
Congressional budget deliberations and the potential that its
debt limit may be reduced to $27,000,000,000, TVA recently has
issued statements that it may need to build one or more new
power plants. TVA should not be permitted to build any new
power plants on a subsidized, tax-exempt basis unless and until
it makes a showing that the capacity is necessary to satisfy
its firm commitments in the Tennessee Valley region only as a
last resort and only after all alternatives (including giving
distributors the option to meet their growth needs through
purchasing power from a supplier other than TVA) have been
exhausted. TVA has undertaken voluntarily to enter into
contracts with its distributors and it has no statutory
obligation or inherent right to take on the responsibility to
meet all the power needs of the region during times such as
these where a wholesale market capable of meeting the growing
demands of the Valley.
Civil Liability. TVA claims generally that it is immune from
any lawsuits for injuries or damages arising out its sale of
power (such as for breach of a power sale contract). TVA also
enjoys exemption from any requirement to pay prejudgment
interest or punitive damages. See 28 U.S.C. Sec. 2674. TVA's
potential competitors in the electric power industry do not
receive such benefits--they can be challenged and penalized for
such indiscretions as overcharging customers.
Equal Application of Regulations: Under current law, TVA is
exempt from regulation of many of the federal authorities that
oversee shareholder-owned utilities. This places TVA above the
law and, if these exemptions are allowed to continue, it will
distort the competition which TVA seeks. Exemption from equal
regulation destroys parity and symmetry with investor-owned
utilities with whom TVA would compete. If TVA is to be allowed
to expand its operations to engage in nation-wide competition,
it should be subject to the same regulation applicable to its
competitors at the federal level. Congress and the courts have
recognized the important interests that states have in the
regulation of the suppliers of electric service. TVA should not
be exempt from application of those regulatory oversights. The
regulation that must be imposed on TVA includes the following:
(1) FERC regulation of rates for electric service and
transmission services in the same manner as shareholder-owned
utilities; and (2) FERC regulation of hydroelectric activities
of TVA.
Payments in Lieu of Federal Income Taxes: State and federal
tax collectors are denied over $500 million annually in income
taxes that would be paid by a comparable-sized investor-owned
utility. In order to achieve parity and symmetry among
competitors, Congress should adopt a provision making TVA
responsible for paying federal income taxes that requires TVA
to pay an amount equal to the federal income taxes that other
potential competitors pay to help bear the cost of the federal
government.
Payments in Lieu of State Income Taxes: TVA's exemption from
state income taxes should also be eliminated. In order for TVA
to pay its fair share of the cost of government that must be
borne by TVA's competitors, Congress should require TVA to pay
the states the otherwise foregone taxes.
State and Local Ad Valorem and Other Taxes: Similar to the
avoided income taxes because of TVA's federal status, it
escapes approximately $461.7 million annually in state and
local ad valorem and other taxes. This lost tax revenue is over
and above the ``payments-in-lieu-of-taxes'' that TVA currently
pays. Requiring such payments would establish parity and
symmetry among all competitors by furnishing to state and local
governments needed revenue that currently is not paid by TVA
and not included in the cost of electric services supplied by
TVA.
Payment to Federal Treasury for Equity Support: Despite its
poor financial condition, TVA has been given an AAA rating on
its bonds by Moody's Investment Service and Standard & Poor.
This rating has nothing to do with its business acumen,
efficiency, or the strength of its balance sheet. Rather, as
explained by Moody's, the rating is due to the implied promise
by the federal government to come to TVA's rescue in times of
fiscal difficulty. TVA has done nothing to dispel the myth that
its debt is backed by the Treasury and, in fact, encourages
this false assumption. The federal government is thus providing
the equity backstop (or implied guarantee) for TVA's credit
rating and its ability to borrow money at ``risk-free-- rates
of interest. Moreover, certain bond issues by TVA are
guaranteed by the U.S. Treasury. See 16 U.S.C. Sec. Sec. 831n
through 831n-3. Under 16 U.S.C. Sec. 831n-4 (the power
operations bond authorization), bonds are not guaranteed by the
U.S. Treasury, but TVA can require the U.S. Treasury to buy its
bonds during times that the market is not receptive to issuance
of bonds by TVA under the terms and conditions needed by TVA.
TVA should pay the federal Treasury for this equity support in
an amount each year equal to the difference between TVA's
annual cost of money and the average cost of money for all
utilities subject to FERC's jurisdiction.
conclusion
In summary, we think TVA should stick to its mission. Congress
should not take the fence down, and it ought to think long and hard
about the competitive and public interest consequences to competition
of doing so. If for some reason Congress decides to remove the fence,
Congress should put TVA on even footing with its competitors so that
all consumers will have the same opportunity to experience the benefits
of truly efficient markets.
Mr. Barton. Thank you, Mr. Larson.
We are going to have 10-minute question rounds for each of
the Congressmen and hopefully we can have only one round of
questions, but if we need more, we are going to have more.
The Chair is going to recognize himself for the first 10
minutes.
I want to start with Mr. Medford. It is my understanding
that under current law, the Tennessee Valley Authority is
subject to no authority except for specific acts of Congress
and the Presidential appointment authority of the board; is
that correct?
Mr. Medford. That is true with respect to rate-setting
authority. I am making a distinction there. There are many
areas, for example, regulation of nuclear power, regulation of
environmental activities----
Mr. Barton. I understand.
Mr. Medford [continuing]. Where TVA is subject to the same
Federal authority that other large utilities are subject to.
Mr. Barton. Now I guess with the exception of Mr. Larson,
if I understood him correctly, there is not any other of the
four members of the panel here that support the continuation of
the status quo, is that correct, including the TVA?
Mr. Fleming. That is correct.
Mr. Barton. Now, it is my understanding that with regards
to transmission, the TVA does--if not support, it does
acknowledge that the Federal Energy Regulatory Commission
should have authority--if we go to a comprehensive competitive
model nationally, should have authority over transmission; is
that correct?
Mr. Medford. That is correct.
Mr. Barton. In terms--I want to get a little bit into this
stranded cost issue. Congress sets a debt limit for the amount
of debt that TVA can issue, is that correct?
Mr. Medford. That is correct.
Mr. Barton. And that statutory ceiling is $30 billion?
Mr. Medford. That is also correct.
Mr. Barton. And currently today, TVA has outstanding debt
of a little over $26 billion?
Mr. Medford. That is also correct.
Mr. Barton. Is it $26.7 billion?
Mr. Medford. That is the best number I have, yes.
Mr. Barton. Okay. Well, that is the best number I have too,
so that is probably the best number.
Of this $26.7 billion, what Mr. Larson referred to as non-
productive, that number is somewhere between $6 and $8 billion;
is that correct?
Mr. Medford. I would want to check that, but that sounds
like a good range.
Mr. Barton. And is that a euphemism for nuclear costs?
Mr. Medford. I would not call it a euphemism, I would say
that the bulk of that is incomplete nuclear construction.
Mr. Barton. Incomplete nuclear construction, okay. Now if
we have a national restructuring bill and there are provisions
in it for stranded cost recovery--and most of the Congressmen
on the subcommittee on both sides of the aisle support an
ability for utilities, as we move to competition, to obtain
stranded cost recovery--in most States, that is a decision that
is going to be made by the public utility commission of that
State. The Federal law would allow stranded cost recovery but
we would leave it up to the States to determine how stranded
costs should be recovered. In the instance of the Tennessee
Valley Authority, since under current law, TVA is not subject
to PUC regulation in any of the States, how would TVA stranded
costs be determined?
Mr. Medford. We think it is appropriate for FERC to
determine stranded costs.
Mr. Barton. So you would give the Federal Energy Regulatory
Commission that authority?
Mr. Medford. That is correct.
Mr. Barton. Okay. Mr. Fleming and Mr. Baker both referred
to the fact that under current law, there is basically a
continuing contract with your customers, it is a 1-year
contract but it is renewed every--you have to give a 10-year
notice every year if you do not want to renew it. So for all
intents and purposes it is a 10-year contract. Both Mr. Fleming
and Mr. Baker said they thought that that notice should be
shortened, but I do not believe either of you gentlemen told us
how short it should be.
Do Mr. Fleming or Mr. Baker want to put a specific
shortened period on the record?
Mr. Baker. There are several contracts actually that are in
effect between TVA and its distributors, I think there are
still some 15-year contracts that are in effect. Probably the
most common contract is what is called a 5 and 5, it is a 10-
year contract that has a 5-year--when it was originally signed,
it had a 5-year delay before you could initiate a termination
procedure. So it was a 5 and 5, as the terminology----
Mr. Barton. Well, how in this grand new world of
competition if we get there--what is your recommendation about
how we handle the existing contracts and what kind of a new
contract requirement would you propose?
Mr. Baker. The distributors have a little range there that
probably ranges from about a year to 2 years up to 3 year
notification under it. We have been in negotiations with TVA,
there should be an adequate period to allow for TVA's planning
horizon for generation under it. So we are in somewhat of a--
not necessarily a disagreement but there are some varying views
on the length, but somewhere in the 1\1/2\, 2, 2\1/2\, 3 year
range, we think is an adequate notification.
Mr. Barton. Mr. Fleming, do you agree with that?
Mr. Fleming. Mr. Chairman, Memphis and Knoxville I believe
have the 10-year notice contracts that are longstanding, and we
have advocated a 1-year termination notice, principally for the
reason of trying to create some leverage with TVA to be able to
negotiate a new contract.
Mr. Barton. So your recommendation is you want a 1-year
contract and a 1-year notice, so you would have a 2-year time
period?
Mr. Fleming. Actually, we have advocated a 1-year from date
of enactment of any legislation.
Mr. Barton. Okay, now Mr. Medford, based on what Mr. Baker
said and Mr. Fleming said, what is TVA's position on that?
Mr. Medford. Mr. Chairman, we believe that given the
requirements of both transmission and generation planning, we
think a 3-year notice period is appropriate.
Mr. Barton. Okay, 3 years. Now are there any special
situations on this 5 and 5 situation that Mr. Baker was
referring to that again in a Federal bill for a transition
period we should have a special one time only provision for
some particular contract, or would TVA be happy if we went to a
generic situation after a date certain, say after 2002 or
something like that? Do you understand what I am saying? I
think we have got agreement here that you are willing to change
your contract terms, but what I am asking is is there some
unusual contract out there, for whatever reason, that needs
special protection even within a transition period?
Mr. Medford. No, Mr. Chairman, there is not.
Mr. Barton. Okay. Now I want to touch on the non-
controversial issue of new generation for TVA. I know that
nobody has thought about that.
Again, let us assume that we get to a competitive model. We
are not there, but let us assume that we could waive our magic
wand. If TVA were allowed to build new generation, in this new
environment, would the bonds be backed by the U.S. taxpayer,
would they be backed by the State taxpayers or would they be
backed by no taxpayers?
Mr. Medford. Well, the bonds are currently backed by no
taxpayer and I would assume that would continue to be the case.
Mr. Barton. Okay, now are they tax exempt bonds or are
they----
Mr. Medford. They are not tax-exempt bonds.
Mr. Barton. So it is a commercial bond?
Mr. Medford. I believe they are exempt from State tax, but
they are not exempt--none of our debt is exempt from Federal
tax.
Mr. Barton. But under current law--I mean this has never
happened because TVA has, I think, done a good job of managing
its bond portfolio, but if the TVA Governors grabbed all the
cash in the safe and headed to South America, to take an
extreme case, and defaulted, who would pick that up? I am led
to believe that ultimately the U.S. taxpayer would be the payer
of last resort because TVA is a Federal agency. Even though
there is no statutory obligation, that learned counselors in
law firms that bill for big dollars have determined that in a
worse case scenario, it still is the U.S. taxpayer that is
liable. Is that true or not true?
Mr. Medford. Well, you are right, Mr. Chairman, I think the
law does not offer an answer to that question. As I mentioned,
all of our debt carries the caveat that it is not backed by the
Federal Government. It is difficult to visualize what would
happen in the eventuality you mentioned, and clearly it is
TVA's intention that we never get to that eventuality.
Mr. Barton. And I--look, that is a very hypothetical
question. I made an extreme case simply to try to clarify the
legal situation, because as I said before I asked the question,
TVA I think has done a good job of managing its debt that is on
the books. So I am not at all trying to imply otherwise.
Mr. Medford. The strict legal answer would be that the
bondholder would be the one who would bear the cost.
Mr. Barton. Mr. Larson or Mr. Anderson or Mr. Fleming or
Mr. Baker, of the panel members here, do your groups support
TVA being allowed to build new generation capacity if it is
explicit that it is a purely commercial bond and there is no
government entity that is liable for the default? If they are
treated like General Motors or IBM or any other entity, Enron
Corporation, that might want to build a merchant plant; are any
of you opposed to that?
Mr. Anderson. Mr. Chairman, in a deregulated environment at
a point where other utilities are able to compete in the
generation market, TVA should be able to compete in that market
and that would require then the opportunity to put in
generation resources if they felt that the market was there to
support it.
Mr. Barton. Mr. Larson.
Mr. Larson. Well, I think it depends on which TVA is the
real TVA. If the fence is staying up or even if TVA is focused
on the Valley----
Mr. Barton. Well, assume the fence comes down. I said a
perfect competitive world, which I do not even think the
Congress is going to be able to do a perfect competitive--but
let us assume we are more perfect than we are today.
Mr. Larson. I would say no, unless all of TVA's subsidies
are addressed and the implicit guarantee of the Federal
Government of TVA's bond is just one of those. But it is not,
by any means, everything. I would point out that----
Mr. Barton. What if we let TVA create a subsidiary, a
wholly owned subsidiary that is subject to the same tax laws
and the same regulatory model, but they do have, you know, TVA
in their name?
Mr. Larson. I would say then we would not oppose TVA coming
out of the fence. As testified to earlier, if TVA wants to
become a national utility and build independent----
Mr. Barton. And this is not anything they have asked, I am
just thinking out loud, so this is not anything that has been
pre-programmed or anything.
Mr. Larson. Right. No, again, TVA Watch believes TVA can
remain subsidized and stay in the fence and that is fine, but
if TVA wants to come out of the fence, if it wants to build a
power plant, a merchant power plant in Houston, Texas right
next to a merchant plant being built by Enron and across the
street from a power plant being built by Dynegy, they ought to
all be on a level playing field. And if TVA is a government
IPP, if you will, that is tantamount to the U.S. Air Force
entering competitive airlines, unless you address, you know,
the complicated issues of addressing the TVA subsidy situation.
I will point out that TVA does not have an absolute
obligation to plan for and meet the needs of the Valley, it
voluntarily entered into full requirements contracts with its
distributors and it can voluntarily amend those contracts.
Mr. Barton. My time has expired.
Mr. Medford. Mr. Chairman, may I make one comment?
Mr. Barton. Sure.
Mr. Medford. I would like to address one of Mr. Larson's
concerns and in doing that I will read to you the entirety of
TVA's vision: ``Generating prosperity in the Valley.'' That is
how TVA sees itself, that is how we focus our efforts. Mr.
Larson described two possible TVAs, I want to assure him that
it is the TVA that focuses on the Valley that we focus our
attention on.
Mr. Barton. Well, my time has expired, but my learned
counsel has asked me to ask one more question.
Would TVA be willing to limit its building of new
generation to the needs of the current territory it serves
within the Tennessee Valley, or does your vision--do you want
to expand your vision to generate prosperity for America as
opposed to for the Valley?
Mr. Medford. Most of the legislation that has been drafted
includes a provision like the one I am going to mention, and I
think this provision adequately addresses the issue of
generation. First, most legislation would limit us to selling
at wholesale outside the Valley. No retail whatsoever--absolute
prohibition.
Mr. Barton. But you would have to build the capacity within
the Valley to sell at wholesale outside the Valley.
Mr. Medford. Well, and let me talk about wholesale outside
the valley. Most of this legislation also contains a provision
which indicates that we would only sell excess capability.
Certainly from time to time--I mean you build generation in
rather large chunks, if you are going to do it economically.
Mr. Barton. Right.
Mr. Medford. From time to time, we will have some excess
generation. Certainly on an energy basis during the course of a
year, you will have periods where you have substantial excess
energy.
Mr. Barton. Right.
Mr. Medford. We endorse, by the way, both of those
restrictions. Both of those restrictions are in the
administration's title, to name one, and we have endorsed that
title. I think that is the only limitation that is really
needed on TVA's ability to build generation.
Mr. Barton. Thank you. Mr. Hall is recognized for 10
minutes.
Mr. Hall. Thank you. And I think this very able bits of
testimony here cries out one thing to us and that is that we do
have a daunting decision to make and I guess all of us are
parochial, you want something that is best for your Valley, we
want to represent our districts and our States and yet, we know
what the word deregulation means. Deregulation means
deregulation with no benefit for anyone and opportunity for
everyone. We start off with a real problem. I think all five of
you gentlemen are concerned about the consumer because the
consumer makes our wheels turn, and our goal is competition
that will drive down costs and keep quality.
But I have concern about the littlest consumer here in this
city and this State, the poorest, littlest consumer that lives
at the end of the poorest street. I am not naive enough to
think that they can cope with the Enrons or others that can bid
for better prices, it is just not--does not happen in the
marketplace. But our goal is to try to lower the rates for
everybody accordingly, I guess is the way to put it. And while
that may not be what Jeremy Benson called for in the greatest
good for the greatest number, it still gives that littlest
person some representation through this committee.
But I am sorry for this Tennessee group because they want
to--I will not say bring home the bacon, they want to keep the
bacon, they want to represent the people that sent them up
there and they are doing a good job of that, but you know, they
are in a pretty tough position defending some of the things
that I have heard here today.
During the time I have been in Congress, we have had
thrusts--the Clinch River problem, for example, I think we made
a mistake there when we left the billions of dollars on the
table and killed that program, because we might have had some
benefit from it by this time. But Mrs. Clinton's health bill
was good for everybody, but those that she had to have to make
it work, they did not include the administrators, the insurance
companies, the other people in the health facilities, in the
bill, they were not inside the tent--had to have that
absolutely to make it work. And when we deregulated airlines,
Mr. Chairman, did Harding Lawrence of Braniff Airlines ask for
five new routes, 10 new routes or 20 new routes? He asked for
500 and something new routes.
So it is a partnership thing. And I would say in behalf of
these men and the women that represent you at the State,
Federal and local level in Congress and in the other areas of
public service, that you ought to get together if you possibly
can. I think Mr. Larson and Mr. Medford are poles apart right
now, but you all represent the business area and if you want a
business decision, you ought to have some give to you and get
together and work out something to bring to these men on this
committee to try to help sell this Chairman and sell our
committee on what is really best for you. And I think you had
better get ready to make some concessions, just like all of us
are going to have to.
I am pleased--I do not note any problem about stranded
costs. Do any of you have any problems with the fact that
stranded costs ought to be received? You know, at first, there
was a large segment that said no stranded cost, let them eat
those because they were bad decisions when they made them and
bad decisions now. Well, that was not true. We have come along
now to where everybody expects that we ought to have stranded
costs, you just want that to be fair.
One of you mentioned stranded costs. Was it you, Mr.
Fleming?
Mr. Fleming. Yes, I did.
Mr. Hall. But you are around the fact to where you believe
that stranded costs have to be a part of any bill that we have?
Mr. Fleming. Yes, sir, I do. I would just simply say that
it should be done by way of a third party determination as
opposed to unilaterally being decided by TVA or anyone else.
Mr. Barton. Yeah, However they do it, fairness is fairness.
And I think that is what we seek here.
Mr. Larson, what is wrong with what Mr. Baker has proposed?
Just generally, if you can for the record.
Mr. Larson. As I understand it, Mr. Baker has proposed
lowering the fence both ways so that his members and their
customers can benefit from retail deregulation. And we agree
that his customers should benefit from deregulation. The
question is whether or not as a part of that the fence comes
down to permit TVA to sell--seek load, sell capacity and energy
outside the Valley in Birmingham, Alabama or elsewhere. We
believe that if TVA does that or is authorized to do that, then
it is competing against investor-owned utilities and others,
power marketers, and should engage them on a fair basis, level
playing field.
Mr. Hall. What give and take agreement do you envision that
could put aside that problem?
Mr. Larson. I think we are actually very close.
Mr. Hall. Well, that is good news.
Mr. Larson. Really if you are assuming the fence goes down
both ways, what is missing from the TVPPA's platform, if you
will, is having damages apply under antitrust laws, for
example. They propose that antitrust laws apply but only with
injunctions. Well, antitrust laws are extremely expensive to
prosecute, very lengthy. And if someone made the investment to
pay lawyers all that money to get an injunction against TVA,
while the only remedy is prospective relief, well by then the
harm is done. So we believe that there should be a deterrent
mechanism and treble damages.
Now TVA raises the fact that well local governments are
immune from damages. We say well that is because local
governments serve only their constituents and there is an
internal democracy function there that would prevent
municipalities from raping and pillaging its customers, but if
TVA is selling in the market in general, it is not serving its
constituents.
Mr. Hall. We need additional market power provisions, is
that your opinion?
Mr. Larson. I believe that is true, yes, for TVA.
Mr. Hall. Mr. Baker, what is wrong with what Mr. Larson has
said. I noticed, Mr. Larson, a lot of people winced behind you
a time or so when you mentioned triple damages.
Mr. Baker. The basis for antitrust damages is against a
corporation that has stockholders and is out to make a profit.
TVA does not have that. Any damages that would be assessed
against TVA would automatically transfer directly to the
ratepayers of the Valley. There are no stockholders to absorb
triple damages or whatever damages comes out of antitrust
action. That is the reason we have settled on the issue of TVA
could be stopped from antitrust actions under it, because they
have little or no incentive to engage in an antitrust entity
anyway, since they are not a profit-making entity. So that is
the reason we have settled on the fact that if they are guilty
or do cross the line into an antitrust situation, they should
be stopped, we would hate to see our ratepayers penalized for
that.
Mr. Hall. Mr. Larson.
Mr. Larson. If I might, TVA's ratepayers would not have to
pay. The investors in TVA would have to pay. Just like the
investors in shareholder-owned utilities have to pay. That
would be the investors that buy TVA's bonds. Also, with regard
to the motive to commit an antitrust violation, the United
States Supreme Court in Louisiana Power and Light versus city
of Lafayette recognized that governmental entities indeed can
have the intent to suppress competition and I would observe in
general that the profit motive is surpassed in its intensity by
the survival instinct.
Mr. Baker. Congressman Hall, I would not get into a debate
because I am in water over my head probably on the legal
issues, but I know of no way and Mr. Medford confirms that,
that any antitrust damages could be transferred to the
bondholders of TVA bonds. They hold a bond on it that draws
interest and that is it. And I know of no way that that could
be transferred. I think everything that we have looked at at
the TVPPA level is that the ratepayers would have to pick up
that cost.
Mr. Hall. Mr. Medford.
Mr. Medford. I agree with that.
Mr. Hall. Mr. Medford, in your testimony on page 6, you
state there is overwhelming support for TVA to continue to
maintain its role as a low-cost, integrated electric supplier
for the Valley. But here today, you have two of your biggest
customers, Knoxville and Memphis, who have some major concerns
with your future role as a power supplier in the Valley.
What is your view of their concerns and what is the
likelihood that you are going to be able to reach an agreement
to bring to these members from Tennessee who will bring it to
the chairman here, to take it to the rest of the subcommittee,
the committee and the Congress?
Mr. Medford. Well, first of all, Congressman, I will point
out we are in substantial agreement on many of the deregulation
issues with all of our customers including Memphis and
Knoxville. Yes, there are some specific issues that we have
discussed with those two customers and not resolved their
concerns. I will point out to you though that both of those
large customers have indicated to me they do not visualize a
scenario in which they are not taking power from TVA. They want
more flexibility under their contracts, they would like shorter
notices and they would like at least the ability to take
partial requirements. But both of them have indicated an
intention to be customers of TVA into the indefinite future.
Mr. Hall. You are making some headway, because I think you
all would really like to be out from under your sole-source
contract and you talked about a 10-year option; you want one,
maybe two, and they suggested three. That looks like a major
compromise and effort to compromise there. Are you that close
together on most of the other issues that you are going to ask
these Members of Congress to support you on?
Mr. Medford. Congressman Hall, that is a hard one to
answer.
Mr. Hall. Well, it is a necessary one if you want a
business bill rather than a political bill, because Congress
can give you a political bill that you probably will not like,
my State may not like it. But our goal I think is to get a
business bill that you can live with because you have to be our
partners and make it work after we write this bill. Otherwise,
we are going to be in the terrible position--and none of us
here, nobody in Congress wants to be in a position if they are
among those 10 States that produce energy and the 40 who use
it, we do not want to be among those that have low rates and
raise ours where they can lower them up there in New Jersey and
New York and other places north of the line. If you know what I
mean.
Mr. Medford. I know what you mean. Given the complexities
of deregulation, I think we are amazingly close to our
customers.
Mr. Hall. I hope so because you have good members
representing you that are in really a tough, tough situation.
And it is through their imploring to the chairman to come here
and listen to you that we are here. And what I hear is some
major differences still, but I see some efforts to work it out.
I hope you can.
Mr. Chairman, I yield back my time.
Mr. Barton. Thank you. Mr. Bryant for 10 minutes.
Mr. Bryant. Thank you, Mr. Chairman. Let me just begin this
by saying again thank you for this very qualified and competent
panel. And I think we have got a fairly large audience of
people here today, and I know all of you have an interest in
this issue one way or the other, or you would not be here.
But I think you can tell from the testimony that we have
had presented and certainly by the line of questioning that we
have had thus far that this is a very complex issue. There are
lots of things we do not see eye-to-eye on right now, and
particularly those of us that represent areas of the TVA
Valley, what we call the TVA Caucus in Washington, those
members are in a position where we are trying to bring together
something in the nature of a consensus among those in the
Valley, and then we can go out and compete against those
outside the Valley with our ideas on how this restructuring
should look. But again, from what we can tell so far today and
what we knew before we got into this, there are still
differences within the Valley.
But let me say to those in the audience too, I think there
are some things that I would like you to take away from this
hearing at a minimum, and those are a couple of things that we
agree on. I think we all agree here that competition is coming,
we already know it is coming at the retail level throughout a
number of States and that with it coming, we cannot any longer
remain an island out there among the competitive waters. And we
see members, purchasers of large chunks of power sitting before
us today, who not only see competition coming, but they want to
be a part of that competition. TVA sees that inevitability of
this issue. It may not be this year, may not be next year, we
do not know when it will be. Certainly this process is
beginning to move though, as our chairman has indicated.
So, competition is coming, and I think that is one thing we
agree on. We have to get out and be a part of that--status quo
is not going to work.
And the second thing I would like us to take away from this
is that if it is coming, if it is inevitable, then we in the
Valley and those of us that represent those in the Valley have
to be at the table, have to be a part of this process of
helping to design what this bill will look like, what TVA will
look like when this is all said and done.
And those are two very important factors that we have to
come to grips with, and that is certainly one of the reasons I
wanted to have a hearing here in Nashville, so that we could
air some of these views, because, as I have said before, we
have been very spoiled in this area. We have good low rates,
and we have very reliable power, and TVA stands ready and
willing to continue that, even in a competitive environment.
But we have got, I think, to begin to come together within the
Valley because we have got a very big fight ahead of us outside
the Valley. Mr. Larson is here, he is a good man, there is
nothing wrong with him, he represents some good people. They
have a different view on things and that is just an example of
what we are up against, not only with groups like the one he
represents but others, particularly in the northeast and areas
that, as Mr. Hall said, they have higher power rates than we do
right now. And somehow, that is going to come into play, I know
in the end it will come into play.
So I, like Mr. Hall and Chairman Barton, encourage us all
to get together within the Valley and try to work out some of
these differences.
Mr. Fleming, I know from the standpoint of Knoxville--and I
have talked in detail with Memphis and those positions mirror
each other--can you pay stranded costs and still, in some
instances, you think, for your customers, beat the TVA price on
electricity?
Mr. Fleming. Congressman, obviously a very difficult
question to answer, but essentially what we want, Memphis and
Knoxville, is a day in court in order to determine what
stranded costs are. And we think that competition generally is
good. We will certainly have to weigh the facts and the
circumstances at that point in time to decide whether or not we
are going to leave TVA in any substantive way at all. Mr.
Medford, I think is correct, it is hard for us to envision not
having a successful and strong TVA which we will be able to buy
at least a portion of our power from.
Mr. Bryant. Mr. Baker, I know you represent a number of the
co-ops and distributors. How are our rural customers going to
fare in a new world of competition? Are there going to be
people out there that are not going to be able to get power
because they are at the end of the line? Are there going to be
people out there that are not going to be able to afford power
because it may be more than what they are paying? Is that what
a deregulated world is going to bring to the rural customers?
Mr. Baker. I doubt that no one will be able to get power, I
have serious problems, and that is one of the things that we
have wrestled with in TVPPA, how to deregulate the electric
utility industry, which in effect now is a postage stamp rate
across the country, basically it is a cost of service rate that
has been used for years in determining electric rates, either
here in the Valley or outside the Valley. What does it cost to
serve customers.
In a market-oriented rate, that is not necessarily what it
amounts to as much. And if you get on an airplane you figure
that out real quick, that the plane flies you from here to
there and somebody beside you may have an entirely different
ticket than you do. That is one of the real concerns that we
have and we think that is the reason in this area especially
where we do have very reliable power and very competitive
electric rates, we have to be extremely careful in the
deregulation process. There are parts of the country that have
got nothing to lose. I mean when you are paying 14-16 cents a
kilowatt hour for electricity at the residential rate, as some
areas are, it is like Jerry Clower said, ``shoot up here among
us, one of us has got to have some relief.''
Mr. Bryant. What, for example, do you pay here in Tennessee
per hour, compared to 14 cents?
Mr. Baker. Between 5 and 6, depending on where----
Mr. Bryant. Mr. Medford--Mr. Baker, let me jump over to Mr.
Medford, my time is running out.
I think one of the things that we have to come to deal with
here in Washington as we deal with TVA is to try to determine
what is TVA and what will TVA look like in a deregulated,
restructured environment. And I think Mr. Larson points out
some of these things where there are differences.
I know one of our charters to TVA is that you sell your
power to the Valley at the lowest possible rate. Now the people
that he represents and other private sector power companies in
the northeast do not have that requirement to sell at the
lowest possible rate. They are out there to make a buck, make a
profit, although there is nothing wrong with that.
And when we start talking about trying to level the playing
field between those apples and oranges, that is where it
becomes rather difficult. He talks about the government
subsidies that TVA receives, but yet we know that in other
instances where there are private power companies involved,
that they do not have to pay money out of their own profits to
take care of the waters, the flood control, the navigable
waters, the economic development in all cases that TVA has to
now pay because Congress is not paying that non-power subsidy
it used to pay.
And we know that when they talk about the fact that they
pay taxes andd TVA does not, but TVA makes payments in lieu of
taxes. So, while we can make claims against each other and I do
not know where we get in the end, you are very different than
the people that Mr. Larson represents or some of the
northeastern power companies, but yet we are going to try to
put you in one mixture and say you are going to compete
together against each other and that is just one of the
problems I see that we have to deal with here.
Do you have any response to any of those statements?
Mr. Medford. First, Congressman Bryant, I agree with all of
what you just said. One observation, the folks that talk about
leveling the playing field always want to work on the perceived
advantages that the other person has, when in fact, private
power--and I spent 14 years of my life working for a large
private power company--enjoys certain advantages that TVA does
not; TVA and public power entities, yes, we enjoy some benefits
that private power does not. The two are different.
I mentioned in my opening statement this country has
benefited from a diversity of suppliers, about 25 percent of
the electricity sold in this country today is sold by public
and cooperatively owned power companies. I think that has
worked well for us, I think it will work well for us going into
deregulation. Beyond that I cannot comment.
Mr. Bryant. In terms of the issue of reliability,
particularly Mr. Baker, Mr. Fleming or Mr. Anderson who
generally are the customers, do any of you foresee problems in
a deregulated world with reliability? In other words, every
time we are used to turning that power switch on and the lights
coming on, they come on. Is this going to work? Mr. Baker?
Mr. Baker. Well, all we can go on is the little bit of
experience that we have had. And last year in the midwest there
were considerable problems in suppliers who had contracted for
power supply who failed to deliver it. You know, you are
dealing with an industry that has zero elasticity between
supply and demand. If an airline overbooks, they put you on the
next flight. If we overbook, somebody's lights goes out. I mean
that is just the way it is. There is no elasticity between
supply and demand. So it will be a very tricky arrangement to
go to a deregulated industry and still enjoy the benefits that
we have had on franchised system arrangements because there is
a lot that goes into making those lights come on when you flip
the switch.
Mr. Anderson. I guess we have a slightly different view in
that we do not believe that the reliability is going to suffer.
The generation component will be there, there will be much more
incentive for additional generation to be installed. As far as
flipping on the switch, the real problems would be in the
transmission or distribution and those areas are not going to
change from the way that they are today. So we think that the
overall reliability is going to stay the same.
One area that may actually improve, we keep hearing that
you cannot store electricity, which you cannot, but in the
future you may have people putting in combustion turbines in
areas where they have gas storage. So in effect gas can become
the storage commodity for electricity and in the future I think
it is going to be an improved reliability.
Mr. Fleming. Congressman, Memphis and Knoxville believe
similarly to Mr. Anderson, that actually reliability will not
be an issue. We are obviously concerned about that, we think
appropriate safeguards ought to be taken, but in terms of
having any substantial problem, we do not believe that will be
the case.
Mr. Barton. Before we recognize Mr. Whitfield, I assume
that TVA does have some interruptible contracts.
Mr. Medford. Yes, we do.
Mr. Barton. So there are occasions that--it may be a big
industrial user like Mr. Anderson that if you have got a peak
demand in the summer, you would keep your residential customers
happy, but there would be an interruptible contract that your
commercial customer might curtail for a period of time. That is
how we do it in Texas and I assume that information has spread
its way east to Tennessee.
Mr. Fleming. We have similar arrangements here.
Mr. Barton. Mr. Whitfield for 10 minutes.
Mr. Whitfield. Thank you, Mr. Chairman.
I think all of us have heard today an admonition that it
would be beneficial if all the groups would sit down and work
it out. And we have heard testimony this morning that would
indicate that people are not too far apart on a lot of
different issues. But I think all of us recognize that even
though you may not be far apart, if you really do not want to
do something, you can think of reasons why you should not do
it. And if you really want to do something, you can think of
reasons why you should do it.
As a Member of Congress, I have attended a lot of annual
meetings of co-ops in my district. I do not get any sense that
anybody is really enthusiastic about deregulation, at least in
my district. As a result, I have not been out in the forefront
pushing this issue. I also know that some people are being
pulled in because they feel like they really have no choice.
But Mr. Medford, speaking for yourself personally or if you
have the right to speak for TVA, do you prefer to support
deregulation now if you could obtain those things that you have
indicated you would like to have in the bill?
Mr. Medford. Congressman Whitfield, I am not sure I am
smart enough to know when is just the right time for
deregulation in this country. I personally have some concerns.
I think deregulation--Congressman Bryant mentioned that he
believes deregulation is inevitable, I agree with that, I think
that it is.
However, I think there are some things well beyond the
Tennessee Valley that we have not figured out in this country
how to deal with and one of them is what to do with the
transmission system. We all agree that there needs to be--that
the transmission system needs to be available to all, available
to all on an equal basis, but we have not yet figured out how
to regulate it, how to manage it in a way that would provide
that availability and at the same time maintain the kind of
reliability that we have historically seen in this country.
I acknowledge I am ducking your question, I am going to
tell you I prefer to focus my thoughts on what should Federal
legislation look like when it comes, as opposed to being the
one to designate the appropriate time for it to come.
Mr. Whitfield. Mr. Baker, what about you?
Mr. Baker. I suppose I share Mark's sentiments to a great
extent on that. I think it is something that in this area
especially the economics of the situation need to be studied
very carefully. We have a reliable power supply and a very
competitive power supply. We are not under the gun, if you
will, to do something in this particular area.
We think that essentially deregulation will happen. The
speed will be probably paced by Congress and the economic
conditions of the country that allow that to happen under it.
You will have to determine that speed as much as anyone under
it. But we would urge extreme caution, speaking from the
Tennessee Valley area under it because of the fact that we do
enjoy reliable power at a competitive price at the present
time.
Mr. Barton. Will the gentleman yield?
Mr. Whitfield. Sure.
Mr. Barton. But all your testimony is that you want some
changes and the reason that you are here to be able to get some
changes is because all these scalawags around the country have
been pressing for competition and we have got about half the
States that are open. I know we have got great leadership in
TVA but my guess is if there were not all these competitive
forces out in the country, our good friends at TVA would not be
quite as amenable to some of these changes that you all have
put on the table. Would you not agree with that?
Mr. Baker. Yes, I would. Competition is something that
neither TVA nor the distributors in the Valley should attempt
to duck or whatever. When that becomes something that can be
introduced in the Valley under it, we should be able to meet
it. We have no economic right to life if we cannot meet the
competition.
Mr. Barton. You just want to be treated, as you all have
repeatedly said, fairly and do not want them, if I could coin a
phrase, damn yankees coming down and getting another advantage
of you. Is that not kind of a fair way to say it?
Mr. Baker. That is pretty good. To my grandfather, they
were all one word.
You are right, we quit raising cotton when we found out
they were easier to pick.
Mr. Whitfield. Mr. Fleming, in your testimony, I think you
indicated that there had to be changes at TVA regardless of
what happened, and I guess I did not come up with a conclusion
whether or not you would prefer changes at TVA as a priority or
deregulation as a priority.
Mr. Fleming. Let me I guess clarify that issue for you.
This is probably the issue that probably separates us, Memphis
and Knoxville, from the rest of the distributor ranks. We
believe that competition is good for our customers, we think it
should be introduced as quickly as possible. We believe that
the introduction of competition will make a strong TVA even
better. We believe that is healthy for our customers and choice
is good.
Mr. Whitfield. So you think a good deregulation bill would
end up benefiting your customers.
Mr. Fleming. Absolutely.
Mr. Whitfield. Okay. And then Mr. Anderson, you support
deregulation as well, correct?
Mr. Anderson. Very definitely, it is one of the top
priorities for General Motors. The TVIC Industrial Group has
been working on it for some time. All of our companies--most of
our companies have locations outside of TVA territory as well
as inside and we do not believe, from our experience, that TVA
prices currently are quite as competitive as what TVA believes
they are.
Mr. Whitfield. Mr. Larson, you had mentioned that you had
filed three lawsuits against TVA. Could you briefly just touch
on what those were, and what the issue was?
Mr. Larson. Sure. Two of those related to the so-called
exchange power exception. Under the TVA Act, we have the fence
and the fence says TVA is not authorized to supply power
outside of the area where it and its distributors for the
primary source of power supply were on July 1, 1957. But there
is an exception to that, it says TVA may engage in exchange
power arrangements with neighboring utilities. That is an
authorization that gives TVA a lot of flexibility in times of
surplus to get outside of the fence, but it does so in a
cooperative fashion, not a competitive fashion, by mutually
engaging in coordination with neighbors. That is why we support
the fence staying up, we believe that it provides sufficient
flexibility for TVA even if there is some attrition of load.
Two of those TVA lawsuits related to the contours of that
exemption and addressed the issue of whether or not a utility
who is allowed to receive power from TVA, members of TVA Watch
included, are allowed to then sort of resell the rights to that
power to a distant market, and not take delivery of that power
themselves, just have TVA ship it off to the customer. We were
victorious in the first litigation by a judgment of the court
in Alabama Power Company versus TVA and then in the next
litigation there was a settlement and TVA agreed to adopt
principles where it would agree to limit its sale of power to
neighboring utilities only to the authorized companies and only
if those companies take it on for resale within their statutory
franchised area.
The third lawsuit related to more of a States right
question. TVA and one of its distributors entered into a three-
way transaction where TVA supplied power to the distributor,
the distributor resold the power to a customer who took
delivery of that power inside the fence but because it was a
coal mining company, had a lot of land and it had built its own
transmission facilities and was using that power in an area, in
a very substantial area that was within the service territory
of Old Dominion Power Company, which is a unit of Kentucky
Utilities. The question there was whether or not that
transaction was lawful or not, and the Virginia Corporation
Commission ruled that the TVA Act does not preempt State law
with regard to service territories and therefore, Virginia law
in that case applied and made the transaction unlawful.
Mr. Whitfield. Okay, thank you.
Now on the regulation of wholesale rates, and Mr. Medford
supports FERC having that responsibility and Mr. Baker, you all
are asking for an arbitration panel to make those kinds of
decisions; do you all feel like you are very close on being
able to come to some agreement on that?
Mr. Medford. Congressman Whitfield, let me comment. We
support FERC regulation of transmission rates, we do not
support FERC regulation of power rates.
Mr. Whitfield. Okay.
Mr. Medford. For the reason that the TVA Board, as has been
mentioned earlier, is charged with responsibility of providing
electricity at the lowest possible cost within the Valley. We
do not think it is appropriate to impose on TVA a second set of
Presidentially appointed directors who are responsible for
establishing rates, perhaps with a different mission. FERC--the
FERC charge, to my knowledge, does not contain anything about
providing power at the lowest possible rates. We think that it
is appropriate for the TVA Board to continue with the
responsibility for establishing the price of electricity within
the Valley.
Mr. Barton. Would the gentleman yield?
Mr. Whitfield. Yes.
Mr. Barton. Do you have any children, Mr. Medford?
Mr. Medford. Yes, I do.
Mr. Barton. Are any of them daughters?
Mr. Medford. Yes, one of them is.
Mr. Barton. Have they ever gone out to buy a dress----
Mr. Medford. Yes, she has.
Mr. Barton [continuing]. And come back and you said is that
the lowest possible price you could buy that dress for? And
they said yes, dad, it is; but you know in your heart that if
you had went with her, you might could have gotten that less a
little bit less expensively?
Mr. Medford. With all due respect, Mr. Chairman, my
daughter is not a Presidential appointee.
Mr. Barton. I guess it is possible that Tennessee is just
the State of statesmen and everything is always done totally
altruistically, but in Texas we have had a lot of Presidential
appointees and gubernatorial appointees that did the best they
could, but we have always had the State public utility
commission looking over their shoulder to make sure that what
they thought was the best really was the best. So, you know, I
understand what you are saying, but in the Bonneville Power
Administration, they too have the same charter but their rates
are reviewed by the Federal Energy Regulatory Commission.
I am not casting any aspersions on the good people that
have been appointed by the President on the TVA Board, but it
may be that we want to give you a little additional oversight
to just make sure you stay as altruistic as you have for the
last 60 years.
Mr. Whitfield. Mr. Chairman, my time has expired but if Mr.
Baker would like to make a brief comment on just how important
he views this arbitration panel as a recommendation.
Mr. Baker. Well, we feel that, summing up, that trust
everybody but cut the cards. And without real aspersions toward
TVA, we just feel that a competitive industry--going back
quickly, TVA and the distributors have had a hand-in-glove
relationship for 60 years, probably more so than anywhere else
in the country. It has been a good relationship and we both
evidently liked it because that is where we were for 60 years.
We are in the process of taking the hand out of the glove a
little bit at this time. Essentially, we feel like that in a
competitive industry, whether it either is real or perceived,
we think we need the ability to have a third party review TVA's
wholesale rate proceedings. They may come to the same
conclusion that TVA had, that this is the rate, this is the way
it ought to be. It would make us feel better if a third party
reviewed it.
Mr. Barton. Mr. Whitfield, do you have any other questions?
Mr. Whitfield. No.
Mr. Barton. Mr. Pickering for 10 minutes.
Mr. Pickering. Mr. Medford, just to follow up on the last
question by Mr. Bryant. That seems very reasonable, why would
arbitration or third party resolution not work from TVA's
perspective?
Mr. Medford. I will not say it will not work, or that it
cannot work. We are not convinced it adds any value to the
process. There are varying titles by which this activity we are
talking about here today goes, some would call it
restructuring, which I am coming to believe is probably the
more accurate. A lot of us would prefer to think of it as
deregulation. We would like to see deregulation for TVA not
mean more regulation.
Mr. Barton. Would the gentleman yield, just real quickly?
Mr. Pickering. Yes, please.
Mr. Barton. Assume that we are going to subject TVA to some
oversight for rates. You do not have to agree with that
assumption but for debating. Do you want it to be third party
arbitration like Mr. Baker recommends, FERC like Mr. Fleming
recommends, or something that nobody has yet recommended but I
think might work would be State PUCs? If you did not have the
option of no oversight for rate regulation or rate review, I
should say, which of those three is least objectionable?
Mr. Medford. Let me give two answers. TVA's answer would be
none of the above.
Mr. Barton. I understand that.
Mr. Medford. I will give my answer, and I have had some
experience. As I mentioned I used to work for a private utility
and I dealt with the California Public Utility Commission and
with FERC. My choice would be FERC regulation.
Mr. Barton. FERC, Okay.
Mr. Pickering. Thank you, Mr. Chairman. Let me step back
just a second and put where we are----
Mr. Barton. I think Mr. Hall wanted to say something.
Mr. Pickering. Oh, excuse me. Mr. Hall.
Mr. Hall. If you would yield for just a moment on that.
Mr. Pickering. I will be glad to yield.
Mr. Hall. On any type tribunal or group that would get
together and negotiate the amount of the stranded costs or the
terms of the stranded costs, would that include a final
decision by that board that would be appealable to the courts
by either side that was not interested in it, did not like the
outcome?
Mr. Medford. Congressman Hall, I am not expert on the law,
but my belief is that FERC decisions--most of us have agreed on
the issue of stranded costs that the appropriate tribunal would
be FERC--are appealable in Federal court.
Mr. Hall. Yes. Well, I do not agree with you that FERC
ought to be the final analysis or final determiner there, but--
or anything else at the Federal level, but I think if I were
you, other than Mr. Anderson, I would be a little like the old
country store keeper on this issue. He said he ignored the
impossible and cooperated with the inevitable. And that is what
you are doing, you all are for deregulation if your provisions
are put in it. That is a good statement, is it not?
Mr. Medford. Yes, sir.
Mr. Hall. And I think you have to be parochial there
because you represent the people you represent. And your goal
is your goal and you are called upon to carry it out. So I
understand that. And Mr. Larson, do you agree with his--I will
get my time back, I will let Mr. Pickering go ahead.
Mr. Pickering. Mr. Hall, I do not mind yielding to the
distinguished gentleman from Texas.
Mr. Hall. No, I am all right.
Mr. Barton. We are just going to restart your clock. You
basically got no question asked before you were interrupted.
Mr. Pickering. Let me step back just a second to say where
we are in this process and the substance of it.
As you who have followed the debate know, when this was
originally proposed in the House, most of the proposals focused
on a date certain mandate at the Federal level. Well that now
has been removed, Chairman Bliley has said with 23 States
moving, that is no longer necessary, so the Federal mandate has
been removed. And so that leaves us with getting--it is a
little bit more than this, but for our focus today, three
things right--reliability, and there are pretty basic consensus
on the reliability provisions, there are a few things that may
need to be modified but from a fundamental perspective,
reliability has been addressed in a way that has the public
power, the co-ops, the registered and investor-owned utilities,
the manufacturers, everyone in basic agreement on the
reliability provisions at which we are looking in the
administration bill and the other bills that have been
introduced in Congress.
So the question before us, can we get the transmission
elements right, and how to either establish or provide
incentives to get the transmission organizations correct.
And the third thing would be to get the public power
provision title, TVA title, correct.
So let me ask a couple of questions that would hopefully
address that third element that has some overlap in the second
and third. Mr. Barton had asked Mr. Larson earlier, and let me
follow up on his question to Mr. Medford concerning your
bonding authority and who is ultimately responsible if there is
default, would it be the U.S. taxpayer. If you were to take
down the fence and allow TVA to sell wholesale, any generation
investment that you would engage in to accomplish that, would
you support explicitly saying that the U.S. taxpayer has no
liability with any such bonding authority to finance that
generation capability?
Mr. Medford. Any generation that we would contemplate would
be for the purpose of serving the people of the Valley, let me
first say that. As I mentioned earlier, Congressman Pickering,
the debt that we issue today carries the explicit statement
that it is not backed by the full faith and credit of the
Federal Government.
Mr. Pickering. So if we put something explicit in there,
you would have no problem with that.
Mr. Medford. That is correct.
Mr. Pickering. Okay, that would only be reaffirming what
you believe is the status quo.
Mr. Medford. That is correct.
Mr. Pickering. A follow up question again getting to basic
agreement. And I realize--awhile ago my first question was
would you support a dispute resolution process or mediation or
arbitration. You had said that we do not want to see re-
regulation versus deregulation. Our dilemma is, Mr. Anderson, I
imagine that you do not deal with any 10-year contracts on your
power supply, is that correct?
Mr. Anderson. None--well, I should not say none. We have in
the past had some. In TVA, the contracts that we have are 10-
year contracts I believe with 1-year termination.
Mr. Pickering. But in a competitive world, you would look
on a very short-term whatever is the lowest cost power from
whatever source that you could obtain it, is that correct?
Mr. Anderson. Normally a 2 to 3 year would be as long as we
would ever want to entertain.
Mr. Pickering. And the dilemma is as we try to go from a
non-open to a competitive process for the distributors, that
they have that same ability to move as the market moves. And so
I would hope that we could reach some type of resolution on
that issue as to arbitration or some type of process on the
contract so the distributors do have the ability and the
flexibility to move as the market moves.
Let me--there was a discussion on what limitations, if any,
should apply to TVA on the generation. You had talked in the
proposals now before Congress, there are already several. One,
it would be restricted only to wholesale, it would not include
retail. Two, it would only be excess power that would not be
used in the Valley. Are there any other limitations? For
example, Mr. Larson gave an example of a TVA generating
facility going into Houston, Texas, outside of the Valley to
compete with Enron. Would you support a geographic limitation
that any generation facility would be within the Valley?
Mr. Medford. I see no problem with that.
Mr. Pickering. So that the example Mr. Larson used would
never occur?
Mr. Medford. That is correct.
Mr. Pickering. Would there be any other limitation that
could address Mr. Larson's concerns about TVA being a national
competitor with, in their view, these unfair advantages or
subsidies? If you do use any of your generation facility to
sell wholesale outside of the Valley, should that fall under
different rules than your other lines of operation?
Mr. Medford. I do not see any advantage to be gained from
that. I think the two restrictions on sales that I mentioned
and the one restriction on physical location and generation
that you mentioned provide a more than adequate response to Mr.
Larson's concerns.
Mr. Barton. Will the gentleman yield?
Mr. Pickering. Yes.
Mr. Barton. What about restrictions on the selling of
existing generation capacity? Should TVA be restricted to
selling existing generating plant to anybody, or should they be
able, if the Governors wanted to, to sell to Enron or Southern
Company an existing plant within the Valley?
Mr. Medford. I guess Mr. Chairman, I do not see any huge
advantage to be gained from such restriction. I will first say
to my knowledge we do not currently contemplate selling any
existing generation.
Let me pose a hypothetical in response. Let us assume--
reference was made earlier to incomplete nuclear capacity. The
biggest part of the investment in that is the Bellefonte plant.
Let us assume an entity, a private entity, concluded that they
could derive more economic benefit from that facility than TVA
could and could afford to complete Bellefonte as a nuclear unit
or in some other form, and that it was economically beneficial
to TVA to sell them that capacity; I would hate to see a
restriction in place that foreclosed that.
Mr. Pickering. Mr. Medford, TVA has a 10-year debt plan.
What would your 10-year plan be if we take down the fence to
allow TVA to sell wholesale, what percentage--as you look at
demographic, as you look at growth, as you look at your
projections of what your currently have as far as your
generating capacity versus your proposed generation investment,
5, 10 years from now what do you see if we take the fence down
of TVA selling wholesale outside of the Valley. What would your
ratio of in-Valley versus outside of the Valley be?
Mr. Medford. My challenge in answering that is that there
are so many unknowns. You have given me a few facts. We have
not done planning for specific scenarios of one gets this
specific Federal legislation in this specific year with these
specific provisions. You would have to know that to be able to
answer that question.
Clearly I mentioned a very conservative estimate based on
the current environment continuing is that by 2004 we would
need 3000 more megawatts. And I will say that is very
conservative, it could be substantially more than that.
Mr. Pickering. To meet the Valley demand.
Mr. Medford. The Valley demand. If deregulation were to go
into play, I think it is quite conceivable that we would lose
some of our existing load, but without knowing what that
legislation looks like, it is very difficult to say here
exactly how much of the Valley load we should plan for. I have
a hard time answering your question.
Mr. Pickering. Well, I guess my question is this, if you
were to plan for a world where the fence is down, would you be
in a defensive or a proactive position of meeting your
competitive challenges? Would you be hoping to respond to the
possible wholesale competition coming into the Valley and
displacing some of your current load that you now supply or
would you be wanting to market outside to offset any loss as
well?
Mr. Medford. We would see our primary mission as serving
the Valley. We would not be building new generation for sales
outside the Valley. Yes, if we were to lose a substantial
portion of our load within the Valley, for a variety of
reasons, including mitigating stranded costs, we would want to
be able to market that power outside the Valley.
Mr. Pickering. Mr. Chairman, if I could just 2 more
minutes. And again, I ask these questions not with opposition
to TVA being able to invest in new generation. As a matter of
fact, I think it advances the objectives we have here, the more
generation we have in a competitive place, in a competitive
market, hopefully the lower the cost and the greater the
benefit to the distributors, to the members, to the consumers.
And so we just need to find a way that it is done fairly so
that there are not competitive advantages or disadvantages, but
I think more generation, whether it is in the Valley or outside
of the Valley is a positive thing for everyone.
Let me close just with one question. In 1991 and 1992 when
the Energy Act was passed, if I remember correctly, TVA and the
distributors supported keeping the fence up and supported not
going into wholesale competition; is that correct?
Mr. Medford. I was not involved--I was with TVA at that
time, I was not involved in those discussions. I can answer for
TVA, TVA strongly supported that position.
Mr. Pickering. Now in 1999, looking back on that, would you
say that was a mistake?
Mr. Medford. I do not think that was a mistake, I think the
provisions of the 1992 Energy Policy Act that addressed TVA, I
think were appropriate then, I do not look at them as any kind
of mistake.
Mr. Pickering. But now you are in a situation where you
want to get into wholesale, so would it not have been better to
have had some type of permissive flexibility?
Mr. Medford. One of the issues that we raised at that time
is if you look at the typical private entity, very often 95
percent of their sales are at retail and 5 percent of their
sales are at wholesale. TVA is the reverse of that; on the
order of 85 percent of our sales are at wholesale and 15
percent at retail. What we pointed out at the time is that
there is not that active a wholesale market outside the fence
for us to compete with. We see that to bring down the fence and
remove the anti-cherry-picking amendment, that should be done
at the same time that there is retail--Federal retail
competition legislation, which will lead to a much more active
wholesale market.
Mr. Pickering. So you are saying in this context it is the
right thing to do and in that context it was not.
Mr. Medford. That is correct.
Mr. Pickering. Okay. Thank you very much, Mr. Chairman.
Mr. Barton. The gentleman from Texas wish----
Mr. Hall. Mr. Chairman, I have a unanimous consent request
that Congressman Clement, who is not a member of this
subcommittee and all of the other members of the subcommittee
have a right to submit questions--have 2 weeks to submit
questions and ask for a reasonable time so that they may be
answered.
Mr. Barton. Would you amend that to 1 week?
Mr. Hall. No--yes, sir, since you are chairman.
That was what I really wanted to start with.
Mr. Barton. Amend it to 1 week and there will be no
objection.
Mr. Hall. I so amend it.
Mr. Barton. Does Mr. Whitfield or Mr. Bryant have one
question that they are just burning to ask before we conclude?
Mr. Bryant. I would like to make a comment if I could.
As I sat here and--and I have sat in hearings like this in
Washington and heard much similar testimony before, and sat in
numbers of meetings that not only the chairman of this
committee has set up, but the full committee has set up, in
talking about this very important issue; and so many times I
just keep circling around and coming back to the same issues.
We have got an entity here, TVA, that has represented this
district well, this region well, over the years. But yet within
the Valley, we have got customers of the TVA who want choice,
which those are not unreasonable issues here. Competition is
coming, competition should bring low prices, reliability, new
technology, innovation, things that competition always brings,
and it is coming all around us. And as I said earlier, we
cannot remain in a status quo, we cannot for the long term be
an island. I think it is inevitable, although it may not be
inevitable this year. Politically, you have got the Senate and
you have got the House and you have got the President and all
these things, but from a competitive market force, it is.
But I want to urge my colleagues, and particularly those in
the TVA Caucus and the delegation, that oftentimes I can recall
trying cases and picking a jury and it was a process like this,
where we had rounds of picking jurors and people would be
challenged off of that and you thought it was going along very
well and then, when that last round occurred and you sat back
and looked at the final panel of 12, you wondered what in the
world happened, this is terrible. And you wanted to get sick at
that point.
But I want to urge us not to allow this to happen here,
because I see that as a possibility. There are those out
there--and Mr. Larson, I do not believe is one of those, but
there are people out there that would like to see the TVA stay
within the fence in an ideal world for them but they be allowed
to come in there and sell to people like Mr. Anderson and Mr.
Fleming and Mr. Baker, and they would like to see TVA stretched
out sort of on a line and hung out to dry with no ability to
build new facilities to produce new generation, even though the
Valley is growing dynamically. And just look at this past
summer and how we had power basically in our homes, sustained
throughout even though we had record-setting demand--TVA met
that burden.
And again, as we go through this, I appreciate everything
that is being said here, but we are talking about apples and
oranges. And to try to get an equal playing field and to try to
hamstring TVA in the interest of a so-called level playing
field when you are talking about apples and oranges, I do not
know how we get there, I really do not, and I have struggled
with this, and I know everybody on this panel has struggled
with this, and I just again appreciate the courtesy and the
leniency and the sympathies that this Chairman and ranking
member and others have given us all in this area as we struggle
through this process of what is TVA going to look like, all in
the interest ultimately of your customers and our constituents.
And I thank the chairman.
Mr. Barton. Thank you, Congressman.
I want to thank the panel for your testimony. I want to
thank the great State of Tennessee for allowing us into the
hearing room here in the State Capitol, and the Speaker, Mr.
Naifeh, for his courtesy.
I want to let the witnesses and the audience know that this
is not just another hearing. I am going to sit down with the
members that are here today and others that are not. The
current draft that is out for discussion has no TVA title, the
next draft, it is my intention to put it out late this week, it
will have a TVA title, and a lot of what has been said here, we
are going to try to assimilate into that title.
It is my goal at the request and the suggestion of
Congressman Bliley, the full committee chairman, to try to put
together a bipartisan consensus draft within the next 2 weeks,
schedule a legislative hearing on it if not next week, the week
after, move to markup and report the bill to full committee
sometime no later than mid-October.
So I know that you all have been talking about this for a
long time and as Congressman Bryant has pointed out, Congress
is a complex situation, we have got to go subcommittee, full
committee, floor and you have got to go subcommittee, full
committee, floor in the Senate and you have got to go to the
conference between the House and the Senate and then you have
got to have the President sign off on it. So there is
absolutely no guarantee that we are going to move a Federal
bill this year or early next year, but it is my intention to
move a bill and I am going to exercise every bit of influence
that I have to move a comprehensive bill on a bipartisan
fashion that is fair. And I cannot see a way to move a bill if
there is not a TVA section. TVA is too big, it is too dynamic a
region, there are too many Congressmen and Senators that are
influential, including the majority leader in the Senate,
Senator Lott. So it is absolutely incumbent that if you can get
together, you get together, and you do it sooner rather than
later.
I heard the same testimony that everybody else did and I
read the testimony last evening, and I do not see anything
irreconcilable in these positions. I mean you have got a little
bit about who arbitrates, you have third party or FERC or
nobody, and you have got the basic question of let the fence
stay up or let the fence go down, but I think the market has
almost dictated that the fence is going to come down. And I say
almost because it is theoretical that you could keep it up.
So I really encourage you folks to put your thinking caps
on and give the Congressmen from the region the best part of
your wisdom this week or next week because at least in the
House, at least at my subcommittee, we are going to try to move
this train.
And with that, this hearing is adjourned.
[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of James E. Ferrell, Chairman, Coalition for Fair
Competition in Rural Markets
Mr. Chairman, on behalf of The Coalition for Fair Competition in
Rural Markets (the ``Coalition''), an organization comprised of private
companies in the retail propane industry and of national and state
propane trade associations, I appreciate the opportunity to submit
written testimony as part of the record of the hearing on the role of
the Tennessee Valley Authority that the Energy and Power Subcommittee
of the House Commerce Committee conducted on September 13, 1999. I am
grateful for the opportunity to discuss an issue that threatens the
very existence of the nearly 8,000 small business owners who comprise
our propane industry.
On behalf of the thousands of propane business owners across the
United States, the Coalition submits for this committee's consideration
information which demonstrates that Rural Electric Cooperatives (RECs),
established for the sole purpose of generating and providing
electricity to rural areas of the nation, are now taking advantage of
their special status as federally subsidized, tax exempt organizations
to enter retail propane gas distribution and other lines of business
wholly unrelated to electricity. In doing so, RECs are leveraging the
tremendous economic advantages that they alone enjoy as federally
subsidized, tax exempt businesses to compete against private sector,
mostly small, businesses which do not enjoy the same federal benefits.
The unfairness and difficulty our industry faces is obvious. No
business, small or large, can survive in the long-run competing against
federally-subsidized, tax exempt operations.
From the outset, I must stress that while the Coalition believes
there are significant questions about whether RECs can in fact legally
enter new lines of business, we are not seeking Congressional action to
prohibit RECs from entering the highly competitive propane market. Nor
are we challenging the subsidies and tax benefits that RECs receive for
their electric operations.
Rather, we are focused on the very narrow issue of ensuring that,
if RECs are permitted to enter new lines of business, Congress act to
require that such entry be on exactly the same basis as any private
sector competitor--without the benefit of federal subsidies and tax
exempt status. As Congress considers utility restructuring legislation
in the coming weeks, this issue is the top priority of the nation's
propane industry and is a fundamental ``life or death'' concern we urge
you to address.
I. The Purpose of Rural Electric Cooperatives
RECs are independent, electric utility businesses whose primary
purpose is to provide at-cost electric service to their customer/
owners. RECs first received significant federal benefits in 1923 when
section 231(10) of the Revenue Act of 1916, which provided exemption
from federal income tax, to certain insurers, ditch/irrigation
cooperatives, and telephone cooperatives was interpreted to also apply
to Electric Cooperatives (That provision is now section 501(c)(12) of
the Internal Revenue Code). The exemption from federal income tax
remains one of the RECs' most valuable federal benefits. RECs received
the other major component of their federal benefits advantage pursuant
to enactment of the Rural Electrification Act (REA) in 1936. Beginning
in the late 1930s, RECs became eligible for loans whose interest rates
were subsidized by the federal government.
These federal benefits were granted to RECs not to foster
competition with the private sector, but rather to encourage
electrification of rural regions of the country which the private
sector had avoided because it was not profitable. To the extent tax
exemption and loan subsidy promote the original intent of the REA,
which was the electrification of rural America, the Coalition perceives
no issue requiring this committee's attention. However, to the extent
the tax exemption and loan subsidy promote an anticompetitive advantage
to RECs as they enter into the propane market and other sectors of the
economy where robust private sector competition already exists, the
Coalition perceives a profound threat to the fundamental values of a
free-market economy and we urge Congressional action to correct this
situation.
II. Anti-Competitive Advantage
Because of our industry's serious concern about the REC problem, we
commissioned National Economic Research Associates (NERA), a nationally
known economic consulting firm, to conduct an economic analysis of the
problem. NERA's study, entitled ``Why Entry by Rural Electric
Cooperatives into Propane Distribution is Anticompetitive,'' included
some findings that were startling and sobering for our industry.
For example, NERA documented that dozens of RECs across the country
have already entered the retail propane business. Undoubtedly, more
will do so in the future. Most notably, however, the report found that
REC entry into retail propane markets actually threatened competition
(because subsidized, tax-exempt RECs drive out private sector
competitors) and hurt consumers who in the long-run will suffer from a
less competitive marketplace and higher prices. We have included a
portion of the executive summary of the NERA report with our testimony.
Multiple propane retailers in most communities across the country
are evidence of a vitally competitive retail propane industry. It is
widely agreed that REC entry into the retail propane markets is not
essential to reduce propane prices, to benefit rural economies or to
serve unmet needs. In the absence of any compelling reason for the
federal government to subsidize activity in the retail propane
industry, REC entry only serves to distort free-market competition.
RECs can threaten to skew standard competitive forces in three primary
ways: anticompetitive cost-shifting, anticompetitive cross-
subsidization, and misinformation to consumers.
Cost-shifting occurs if the costs incurred by a REC's propane
affiliate migrate to the books of its core electricity business. These
costs are subsequently recouped in higher electricity prices. Consumers
are ultimately harmed in two ways: electricity prices are higher than
they otherwise would be, and efficient independent propane distributors
lose market share to the REC's propane affiliate, whose costs are
artificially reduced by the cost-shifting. If the REC's propane
affiliate then increases its share of the market significantly, the
reduction in competition would provide it the opportunity to increase
prices above competitive levels.
Cross subsidization occurs when the REC's parent electricity
business supplies services to its affiliate but the affiliate does not
compensate the parent for the true costs of these services, if at all.
The most apparent example of cross-subsidization arises if the propane
affiliate obtains access to low-interest loans that would not be
available but for the special tax-exempt, government subsidized status
of the parent REC. Such artificial interest-savings could significantly
distort competition between REC propane affiliates and independent
propane retailers who obviously lack access to discount capital. Cross-
subsidization also occurs if the propane affiliate uses the REC's
corporate logo and trademark--assets built up over many years with the
benefit of tax-exempt status and federally subsidized loans. RECs also
cross-subsidize their affiliate if the propane affiliate benefits from
market intelligence that could only be obtained by the parent REC, such
as Coop meter readers identifying which Coop customers have propane
tanks on their property.
Finally, co-marketing and joint branding of electricity and propane
by an REC and its propane affiliate may result in consumer confusion.
Consumers may be falsely led to believe that propane services are
regulated by state authorities; they might attribute a level of
reliability or superior quality to the propane service; or they might
question whether or not they are obliged to purchase their propane, as
they are required to purchase their electricity, from the REC. To the
extent consumers are misled on any of these issues, they may be willing
to pay higher prices or accept lower quality for REC propane when, in
fact, alternative suppliers provide cheaper and/or higher quality
services.
Mr. Chairman, the anticompetitive harms just enumerated are not
merely the hypothetical musings of an economist; they are real harms
that are beginning to wreak havoc on the retail propane industry. To
combat this threat to the open and fair competition that is so vital to
our economy, the Coalition recommends immediate and decisive action by
this committee so that RECs already active in, or contemplating entry
into, the propane market will henceforth compete for market share
without the unfair benefit of federal loan subsidy and exemption from
federal income tax.
III. Examples of REC Activity in the Propane Business
To appreciate the great danger that federally subsidized, tax
exempt Rural Electric Cooperatives present to the small business owners
who comprise the retail propane industry, consider information
regarding RECs operating in Alabama, Michigan, Kentucky, and Texas.
These examples are representative of the anticompetitive activities
engaged in by RECs nationwide:
Coosa Valley. In September 1996, Coosa Valley Electric Cooperative
(Coosa Electric), a federally subsidized, tax exempt REC located in
Taledega, Alabama, purchased a 100 percent interest in an existing
propane distributor (DeKalb), which retained its name and became the
sole operating unit in a for profit subsidiary of Coosa Electric, known
as Coosa Valley Propane Services (Coosa Propane). Information obtained
through various public records indicate that Coosa Propane appears to
have been financed with federally subsidized, below market loans not
available to private businesses in the local retail propane industry.
Based on Coosa Propane's 1996 financial statements, Coosa Propane
appears to have obtained the nearly $3,000,000 required to purchase
DeKalb and establish itself in the propane market by borrowing funds
from the National Cooperative Services Corporation (NCSC), a subsidiary
of the Cooperative Finance Corporation (CFC), which is a tax exempt,
cooperative bank for RECs built on the subsidized, tax exempt earnings
of Cooperative members. It also appears that Coosa Electric engaged in
short-term borrowing of below market funds from CFC and then provided
Coosa Propane with over $250,000 in uncollateralized, non interest
bearing loans to help meet Coosa Propane's start-up costs.
Moreover, Coosa Propane may have engaged in predatory pricing to
obtain market share. Although it has not been possible to obtain a
detailed account of Coosa Propane's finances, Coosa Electric's income
statement for 1997 raises the real possibility that its subsidiary
Coosa Propane, engaged in predatory pricing to gain local market share.
The Coosa Electric income statement appears to show a loss of $403,538
from its propane operations, based on propane sales of $2,181,434 and
propane expense of $2,584,972.
Finally, unfair competitive advantage appears to have fueled
explosive growth in DeKalb/Coosa Propane sales. In the first nine
months following the acquisition of DeKalb, Coosa Propane increased
DeKalb's annualized propane sales from roughly 1.75 million gallons to
over 3 million gallons, an increase of over 70 percent. As one local
propane businessman testified in a suit against Coosa Electric, ``the
growth of the propane industry is so small, the only way [Coosa
Propane] can survive is by taking my customers.''
Great Lakes Energy Cooperative. Great Lakes Energy Cooperative
(GLEC) is a Michigan REC that vigorously promotes the idea of ``one-
stop shopping'' for all of a customer's energy needs, including propane
service. Materials obtained through public sources indicate that GLEC's
for profit propane subsidiary is unfairly advantaged by combining
business operations with GLEC, and by capitalizing on GLEC's reputation
and trademarks, valuable business assets developed over many federally
subsidized, tax exempt years. Also, GLEC customers have the option of
receiving a single bill for both propane and electricity, and deal with
both products at the same customer service centers and on the same
world-wide-web site. Moreover, GLEC's logo is prominently displayed on
the propane subsidiary's trucks and advertisements, providing the
propane subsidiary the instant and commercially valuable assets of name
recognition, reputation for reliability, and presumption of state
regulation, attributes which adhere to the parent REC.
Additionally, federally subsidized, tax exempt GLEC use of meter-
readers provides unfair competitive advantage over private, tax paying,
non-subsidized propane retailers if the full cost of the meter-reader
work for the propane subsidiary is not paid by GLEC. Public information
indicates that GLEC meter-readers identify propane consumers for
marketing campaigns and door-drop propane flyers, and enable GLEC's
propane subsidiary to provide value added (e.g. ``metered'') propane
service.
Kentucky RECs. Four RECs entered into for profit joint ventures
with one of the nation's largest propane concerns and appears to have
capitalized on the RECs' federally subsidized, tax exempt good will and
customer lists to gain unfair advantage in the local retail propane
markets.
Hilco Electric. In 1997, federally subsidized, tax exempt Hilco
Electric Cooperative, located in Itasca, Texas, entered the propane
market through a subsidiary and appears to have unfairly bolstered it's
subsidiary's competitive advantage by entering into a management
contract to provide the propane subsidiary administrative and equipment
services at below cost. Also, by making substantial capital investments
on behalf of the subsidiary, investments later reimbursed by the
subsidiary, Hilco appears to have conferred on the subsidiary the
significant advantage of avoiding state sales tax.
Mr. Chairman, this anecdotal information represents only the tip of
the iceberg, and is shared with the committee to illustrate the serious
harm which can befall a small propane business when federal benefits
skew competition in local markets. Short of Congressional action to bar
RECs from the retail propane industry altogether, establishing a
statutory regime that will ensure that neither federal subsidies nor
tax benefits favor REC activity is an absolute necessity to ensure the
continued viability of the nation's retail propane industry.
IV. Recommendation
Mr. Chairman, we believe a fair and equitable solution to this
problem exists. In short, we believe the solution is to simply draw a
clear and unambiguous line which prevents RECs from using their federal
subsidies or tax-advantaged status to compete in lines of business
outside of electricity and to provide for public disclosure of REC
finances and operations to ensure that anticompetitive cost-shifting
and cross-subsidization are not occurring.
More specifically, we urge the committee to include a provision in
the upcoming utility restructuring legislation that would:
Unequivocally prohibit the use, directly or indirectly, of any
asset or resource developed with federal subsidies or tax
advantaged status, to compete in any line of business not
directly related to the generation or sale of electricity;
Require public disclosure from all RECs that engage in
businesses unrelated to their core electrical service business
of their business dealings in these lines of business. This
disclosure must include details about the financing and
operations of any subsidiary companies. The REC's finances must
be transparent to ensure that anticompetitive cost-shifting and
anticompetitive cross-subsidization do not occur; and,
Include a private cause of action against an REC and/or its
affiliate for violation of these provisions. Only by providing
a credible policing mechanism can the committee ensure viable
deterrence.
Mr. Chairman, we thank you for this opportunity to submit written
testimony and to make you and this subcommittee aware of the serious
situation the propane industry now faces. Utility restructuring
legislation offers an excellent opportunity and vehicle for addressing
and correcting the problem we face. We look forward to working with you
and members of the Committee to address our concerns.