[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
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
          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
---------------------------------------------------------------------------
    \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
---------------------------------------------------------------------------
    \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.
