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



 
    HEARING ON THE ROLE OF THE POWER MARKETING ADMINISTRATIONS IN A 
                     RESTRUCTURED ELECTRIC INDUSTRY

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON WATER AND POWER

                                 of the

                         COMMITTEE ON RESOURCES
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                     JUNE 24, 1999, WASHINGTON, DC

                               __________

                           Serial No. 106-51

                               __________

           Printed for the use of the Committee on Resources





 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house
                                   or
           Committee address: http://www.house.gov/resources

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
59-318



                         COMMITTEE ON RESOURCES

                      DON YOUNG, Alaska, Chairman
W.J. (BILLY) TAUZIN, Louisiana       GEORGE MILLER, California
JAMES V. HANSEN, Utah                NICK J. RAHALL II, West Virginia
JIM SAXTON, New Jersey               BRUCE F. VENTO, Minnesota
ELTON GALLEGLY, California           DALE E. KILDEE, Michigan
JOHN J. DUNCAN, Jr., Tennessee       PETER A. DeFAZIO, Oregon
JOEL HEFLEY, Colorado                ENI F.H. FALEOMAVAEGA, American 
JOHN T. DOOLITTLE, California            Samoa
WAYNE T. GILCHREST, Maryland         NEIL ABERCROMBIE, Hawaii
KEN CALVERT, California              SOLOMON P. ORTIZ, Texas
RICHARD W. POMBO, California         OWEN B. PICKETT, Virginia
BARBARA CUBIN, Wyoming               FRANK PALLONE, Jr., New Jersey
HELEN CHENOWETH, Idaho               CALVIN M. DOOLEY, California
GEORGE P. RADANOVICH, California     CARLOS A. ROMERO-BARCELO, Puerto 
WALTER B. JONES, Jr., North              Rico
    Carolina                         ROBERT A. UNDERWOOD, Guam
WILLIAM M. (MAC) THORNBERRY, Texas   PATRICK J. KENNEDY, Rhode Island
CHRIS CANNON, Utah                   ADAM SMITH, Washington
KEVIN BRADY, Texas                   WILLIAM D. DELAHUNT, Massachusetts
JOHN PETERSON, Pennsylvania          CHRIS JOHN, Louisiana
RICK HILL, Montana                   DONNA CHRISTIAN-CHRISTENSEN, 
BOB SCHAFFER, Colorado                   Virgin Islands
JIM GIBBONS, Nevada                  RON KIND, Wisconsin
MARK E. SOUDER, Indiana              JAY INSLEE, Washington
GREG WALDEN, Oregon                  GRACE F. NAPOLITANO, California
DON SHERWOOD, Pennsylvania           TOM UDALL, New Mexico
ROBIN HAYES, North Carolina          MARK UDALL, Colorado
MIKE SIMPSON, Idaho                  JOSEPH CROWLEY, New York
THOMAS G. TANCREDO, Colorado         RUSH D. HUNT, New Jersey

                     Lloyd A. Jones, Chief of Staff
                   Elizabeth Megginson, Chief Counsel
              Christine Kennedy, Chief Clerk/Administrator
                John Lawrence, Democratic Staff Director
                                 ------                                

               Subcommittee on Water and Power Resources

                JOHN T. DOOLITTLE, California, Chairman
KEN CALVERT, California              CALVIN M. DOOLEY, California
RICHARD W. POMBO, California         GEORGE MILLER, California
HELEN CHENOWETH, Idaho               PETER A. DeFAZIO, Oregon
GEORGE P. RADANOVICH, California     OWEN B. PICKETT, Virginia
WILLIAM M. (MAC) THORNBERRY, Texas   ADAM SMITH, Washington
GREG WALDEN, Oregon                  DONNA CHRISTIAN-CHRISTENSEN, 
MIKE SIMPSOM, Idaho                      Virgin Islands
                                     GRACE F. NAPOLITANO, California
                  Robert Faber, Staff Director/Counsel
                   Joshua Johnson, Professional Staff
                      Steve Lanich, Minority Staff


                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held June 24, 1999.......................................     1

Statement of Members:
    Doolittle, Hon. John, a Representative in Congress from the 
      State of California........................................     1

Statement of Witnesses:
    Casten, Thomas R., President and CEO, Trigen Energy 
      Corporation................................................    16
        Prepared statement of....................................    19
    Crews, Wayne, Director of Competition and Regulation Policy, 
      Competitive Enterprise Institute...........................    29
        Prepared statement of....................................    32
    English, Glenn, Chief Executive Officer, National Rural 
      Electric Cooperative Association...........................    71
        Prepared statement of....................................    73
    Hauter, Wenonah, Director, Public Citizen's Critical Mass 
      Energy Project.............................................    91
        Prepared statement of....................................    94
    Hoecker, James J., Chairman, Federal Energy Regulatory 
      Commission.................................................     3
        Prepared statement of....................................     5
    Mele, Chris, Legislative Director for Energy, National 
      Association of Regulatory Utility Commissioners............    24
        Prepared statement of....................................    26
    Rezendes, Victor S., Director, Energy, Resources, and Science 
      Issues; Resources, Community and Development Division, U.S. 
      General Accounting Office..................................   104
        Prepared statement of....................................   106
    Richardson, Alan H., Executive Director, American Public 
      Power Association..........................................    61
        Prepared statement of....................................    63
    Santa, Don, Vice President, LG&E Energy Corporation..........    83
        Prepared statement of....................................    85



   THE ROLE OF THE POWER MARKETING ADMINISTRATIONS IN A RESTRUCTURED 
                           ELECTRIC INDUSTRY

                              ----------                              


                        THURSDAY, JUNE 24, 1999

                  House of Representatives,
                   Subcommittee on Water and Power,
                                    Committee on Resources,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:04 p.m., in 
Room 1334, Longworth House Office Building, Hon. John Doolittle 
[chairman of the Subcommittee] presiding.

STATEMENT OF HON. JOHN DOOLITTLE, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF CALIFORNIA

    Mr. Doolittle. The Subcommittee on Water and Power will 
come to order.
    We are meeting today to hear testimony on the role of the 
Federal Power Marketing Administrations in a restructured 
electric industry. The first section of the hearing is devoted 
to issues regarding the overall restructuring, while the second 
half of the hearing discusses the overall restructuring as it 
relates to the Power Marketing Administrations.
    I also want to call everyone's attention--and I'll say this 
again when we get more members here--but for the witnesses, 
through the miracle of technology, everything you say over 
these microphones will be broadcast on the Internet around the 
world. So keep that in mind during the recesses.
    Although the Commerce Committee has the lead on the 
electric industry restructuring initiative, the House Resources 
Committee has legislative responsibility for the generation and 
marketing of electric power from Federal Regional Power 
Marketing Agencies. The Subcommittee on Water and Power 
oversees the Power Marketing Administrations within the 
Department of Energy, which market the electrical power 
produced at Federal water projects. Since the PMA's market more 
than 6 percent of all electric power generated in the United 
States, they play a significant role in any legislation before 
Congress that seeks to restructure the $200 billion-per-year 
electric power industry.
    Over the last four years, this Subcommittee has held 
several hearings to address the efficiency of the PMA's and the 
underlying generation and transmission assets. We have also 
remained deeply involved in the general debate concerning 
restructuring of the electric power industry as well as PMA's 
specific initiatives.
    This hearing is the first hearing in a series that will 
examine the role of the PMA's in restructuring. It will focus 
on the parameters of the broader restructuring debate itself 
rather than the specific issues that arise in the individual 
PMA service areas. It will discuss the Federal legislative and 
regulatory steps that are driving the restructuring. It will 
also look at the responses of the States and the dramatic 
changes in the technology that will affect both restructuring 
generally and management of PMA assets in particular. A number 
of affected groups will testify on the impact and issues 
involved in restructuring and how PMA management and mission 
affect those issues. Finally, there will be consideration of 
how the PMA's in a restructured environment will be able to 
repay the Federal investment in PMA and generating agency 
assets.
    Future hearings will be directed to the issues that are 
unique in each of the PMA service areas. Thereafter, we will 
take up the various legislative options that are under 
consideration. At that time, I know, there are several members 
of the Subcommittee who may have specific provisions that they 
will want to have considered. And I urge members to reserve 
their debate on those issues for those later hearings.
    The overall argument over whether or not the electric 
industry should be restructured has largely been decided. While 
States and the Federal Government are moving at different 
speeds toward restructuring and sometimes in different 
directions, the advantages to consumers resulting from 
competitive markets for electricity services are real and 
warrant fundamental changes in the laws and regulations 
governing the industry.
    Indeed, many of the States, the industry as a whole, and 
the technology itself have moved us rapidly in that direction 
over the last few years. While the need for restructuring is 
easily answered, the challenge remains how we restructure.
    As one of our witnesses will remind us, it is also the 
question of whether we should be restructuring or deregulating 
the marketplace. One of the tough problems facing policy-makers 
at the Federal level is the overlapping jurisdiction with the 
States, respect for the principle of Federalism and States 
rights have led to the establishment of a dual system of 
regulation between the Federal Government and the States.
    We are far from the end of this debate. This set of 
hearings should be very interesting, particularly since the 
assets this Subcommittee must deal with are Federal rather than 
local.
    During the course of this hearing, I am especially 
interested in getting answers to three questions. One, what 
will competitive electricity markets of the future look like? 
Two, how will the management of the PMA's affect electricity 
competition? And three, how do we ensure local benefits and 
open the marketplace and fair competition?
    I look forward to hearing the testimony of today's 
witnesses.
    I don't see that I have a Ranking Member with us at this 
time, and should he wish to offer his opening statement, I will 
yield to him.
    In the meantime, I would like to invite our first panel of 
witnesses to come forward. And if you would, remain standing, 
please, so that I can administer the oath.
    Okay. Would you please raise your right hand?
    [Witnesses sworn.]
    Let the record reflect that each of our witnesses answered 
in the affirmative.
    And, gentlemen, please be seated. We are very pleased to 
have you here.
    The custom of the Committee is to turn on the yellow light 
at the beginning of your fifth minute. Please don't cut off 
your testimony when the red light goes on, but it is an 
indicator that is a guide. Take it for that.
    We are very appreciative of having the expertise available 
to us today, and we would like to begin by introducing the 
Chairman of the Federal Energy Regulatory Commission, Chairman 
Hoecker, James Hoecker.

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

    Mr. Hoecker. Thank you, Mr. Chairman. I appreciate very 
much your invitation to appear today. I am here to outline what 
is being accomplished at the FERC in wholesale power markets, 
which is the focus of its jurisdiction under the Federal Power 
Act.
    In the broadest sense, competition is growing in wholesale 
power markets in response to various factors: the Energy Policy 
Act of 1992 and technological and business developments and the 
Commission's efforts to remove barriers to competition and to 
let markets, not regulators, determine the price of wholesale 
power.
    Wholesale competition will provide substantial benefits to 
industry and to consumers, including innovative services, 
supply options, and the prospect of reduced prices for energy 
end-users. Even where retail choice is unavailable, wholesale 
competition will lower the cost of power purchased by utility 
suppliers for resale in that retail market.
    The Commission is promoting competition in wholesale power 
markets primarily through two key initiatives. The first 
initiative is Order No. 888, which we adopted in 1996. It 
sought to promote competition by increasing the availability of 
transmission services that sellers and buyers depend on in 
order to trade power.
    Order No. 888 required each public utility that owns, 
controls, or operates transmission facilities to file an open-
access, non-discriminatory transmission tariff with us. Order 
No. 888 also allowed a utility to seek recovery of its so-
called stranded costs. These are costs of utility generation 
plants incurred to serve a customer that, in an open-access 
environment, uses the utility's transmission to buy power from 
someone else, even though that utility may have had the 
reasonable expectation of serving that customer indefinitely.
    In the three years since the issuance of Order No. 888, the 
power industry has undergone extensive change. Many electric 
utilities have merged with other electric utilities and even 
gas utilities.
    A large number of new sellers have entered the wholesale 
power market. Traditional utilities have sold 10 percent of the 
Nation's generating capacity to new operators. About two dozen 
States have started or set a date for retail competition.
    And in response to growing wholesale competition, 
transmission access, and State policy decisions, it is more 
important than ever to manage transmission operations 
regionally.
    Because of continuing engineering and economic 
inefficiencies as well as the continuing ability of 
transmission owners to discriminate against others who want to 
use their wires to gain access to markets, the Commission 
recently proposed a second initiative. It strongly encourages 
the voluntary formation of regional transmission organizations 
or RTOs.
    If RTOs meet certain minimum requirements under our 
proposal, such as a sufficient geographic scope and 
independence from any power seller or buyer, they will be able 
to lead us toward a fairer, more efficient, and more reliable 
system for trading bulk power.
    The Commission's proposed rules seek to encourage not only 
public utilities, but also non-public utilities such as Power 
Marketing Administrations to join RTOs. However, the Commission 
can order transmission over PMA facilities in only limited 
circumstances. And the PMAs are not subject to the same Order 
888 open access rules applicable to public utilities.
    Although I am pleased to say that three PMAs voluntarily 
offer transmission service under open access tariffs that are 
on file with us, the differences and applicability of 
competitive open access among owners of transmission should, 
nevertheless, be eliminated. To ensure that transmission 
service is available from the PMAs and other non-public 
utilities, and as readily as it is from public utilities, the 
Congress will have to act.
    Competitive power markets will depend on a transmission 
network that is as open and as accessible as possible. 
Transmission policy in the areas of open access, regional 
operations, and reliability should be crafted to recognize that 
transmission facilities owned by PMAs are integral parts of the 
power grid.
    Mr. Chairman, members of the Committee, I want to thank you 
for the opportunity to share with the Subcommittee the 
Commission's perspective on electric restructuring. And I will 
be pleased to answer your questions.
    [The prepared statement of Mr. Hoecker follows:]

    [GRAPHIC] [TIFF OMITTED] T9318.002
    
    [GRAPHIC] [TIFF OMITTED] T9318.003
    
    [GRAPHIC] [TIFF OMITTED] T9318.004
    
    [GRAPHIC] [TIFF OMITTED] T9318.005
    
    [GRAPHIC] [TIFF OMITTED] T9318.006
    
    [GRAPHIC] [TIFF OMITTED] T9318.007
    
    [GRAPHIC] [TIFF OMITTED] T9318.008
    
    [GRAPHIC] [TIFF OMITTED] T9318.009
    
    [GRAPHIC] [TIFF OMITTED] T9318.010
    
    [GRAPHIC] [TIFF OMITTED] T9318.011
    
    [GRAPHIC] [TIFF OMITTED] T9318.012
    
    Mr. Doolittle. Thank you.
    Our next witness will be Mr. Thomas R. Casten, president 
and CEO of Trigen Energy Corporation. Mr. Casten.

STATEMENT OF THOMAS R. CASTEN, PRESIDENT AND CEO, TRIGEN ENERGY 
                          CORPORATION

    Mr. Casten. Thank you, Mr. Chairman, and members of the 
Subcommittee, for inviting me. I want to compliment you for 
considering the issue of electric deregulation. I believe that 
there is no issue before this Congress of greater importance to 
America's economic strength and the quality of the U.S. in the 
global environment.
    I think that modernizing electric regulation is an issue 
around which the diverse perspectives represented by the 
Resources Committee can come together. This is so because 
electric restructuring, if done right, will create jobs, lower 
energy costs, improve services, and significantly reduce air 
pollution. These public goods will accrue to all Americans.
    I discuss the economic and environmental benefits of 
unleashing electric competition in a book that I authored last 
year called ``Turning Off the Heat,'' copies of which have been 
distributed to all Committee members and your staffs.
    I believe it is possible to discern the future and the 
positive direction of a competition-driven energy industry by 
observing other recently deregulated network industries. 
America's electric industry is woefully inefficient in the way 
it uses raw materials, precisely because of monopoly protection 
and outmoded regulations.
    The U.S. industry wastes two-thirds of all the fuel that it 
burns, and it has shown zero improvement in that efficiency in 
40 years. For the past four decades, the U.S. has been stuck at 
33 percent efficiency. As a result, energy costs all Americans 
too much and there is far too much pollution. My company, by 
contrast, operates 45 power plants in 17 States that capture 
between 65 and 90 percent of the energy in the fuel that we 
burn and that emit half the pollution.
    Competition will force all energy companies to extract more 
value from the fuel that they burn. This will lower the prices 
that consumers pay, and it will cut pollution. Competitive 
energy producers will offer better value, just as the 
deregulated telecommunications has offered cellular phones, 
Internet access, and now global satellite services.
    For example, dispersed generation units are available and 
proven today that do not require more transmission lines and 
are 20 times cleaner than today's aged electric generating 
plants. Competition will cause the U.S. to drop its carbon 
dioxide emissions to well below the targets that were set in 
the Kyoto Protocol while reducing the cost of energy to all 
citizens. It's a win/win.
    Electric restructuring is moving forward, but with 
different parochial rules in each State. Half the States 
represented by members of this Subcommittee and more than a 
third of the States represented by members of the full 
Committee have already chosen to restructure their electricity 
markets. Others will follow quickly.
    Congress now has before it restructuring bills that appear 
to have many of the elements of successful national compromise, 
particularly the version offered by Representatives Largent and 
Markey. I believe it is in the national interest for Congress 
to move quickly to pass legislation that removes Federal 
barriers to open competition in energy markets.
    The Subcommittee's jurisdiction over Federal power programs 
offers its members a particularly complex challenge. You are 
tasked with determining how to integrate capitalist market 
forces into the practices and customer bases of government-
owned or government-affiliated enterprises, including PMA's and 
their customers.
    I know how contentious these matters are. I have no 
interest in wading into the middle of the battles between 
public and private power. Where I pick sides is in the fight 
between government regulation and open markets. I think this 
Subcommittee should focus its inquiry not on the traditional 
positions of the contending electricity camps, but on the 
interest of individual energy consumers and on the broad 
national interest in a strong economy and a clean environment.
    The Subcommittee should concentrate on delivering economic 
and societal benefits of modern energy technology to all 
consumers, including those traditionally served by Federal 
power programs. Whether considering a rural water district, 
Federal military installation, Indian reservation, or municipal 
power authority, the most important question to me is, how can 
that energy customer enjoy the best possible value and cause 
the least damage to the environment today and in the future?
    Federal power programs were instituted earlier in this 
century largely to promote economic development in those parts 
of the country or among those sectors of society not well-
served by private electricity business. At a minimum, it should 
be Federal policy to help those same regions or sectors of 
society obtain still more favorable energy services from the 
private sector, if the private sector makes them available. And 
I assure you, it will.
    This will mean, among other things, assuring that Federal 
transmission policies encourage interconnection of distributed 
generation. If grants and subsidies are to remain part of the 
Federal power program, it would be appropriate to focus those 
grants where the market has failed to provide high-value energy 
services to customers.
    Mr. Chairman, Congress has deregulated five network 
industries since 1970: rail freight, interstate trucking, 
interstate gas, long-distance telephones, and airlines. A 1997 
study found that, 10 years after the regulations were eased in 
each of those industries, real prices dropped between 27 and 58 
percent, service improved, and all classes of customers in each 
of those industries shared the benefit.
    I am convinced that opening competition in the energy 
markets will benefit all energy consumers and all the 
communities in which they live. I am also convinced that the 
power of the market will inevitably reduce energy-related air 
pollution, including CO2, while saving money.
    I urge this Subcommittee to lend its weight to the drive 
toward competition in electric markets.
    Thank you for this opportunity to testify, and I will be 
happy to take your questions.
    [The prepared statement of Mr. Casten follows:]
    [GRAPHIC] [TIFF OMITTED] T9318.014
    
    [GRAPHIC] [TIFF OMITTED] T9318.015
    
    [GRAPHIC] [TIFF OMITTED] T9318.016
    
    [GRAPHIC] [TIFF OMITTED] T9318.017
    
    [GRAPHIC] [TIFF OMITTED] T9318.018
    
    Mr. Doolittle. Thank you.
    Our next witness will be Christopher Mele, legislative 
director for energy with the National Association of Regulatory 
Utility Commissioners.
    Mr. Mele.

   STATEMENT OF CHRIS MELE, LEGISLATIVE DIRECTOR FOR ENERGY, 
    NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

    Mr. Mele. Good afternoon, Mr. Chairman, and members of the 
Committee. As you said, my name is Chris Mele, and I am with 
NARUC. NARUC is an organization comprised of State officials 
charged with the duty of regulating the retail rates and 
services of electric, gas, water, and telephone utilities 
operating within their respective jurisdictions.
    Before I go forward, I would like to just point out that my 
background in this issue goes back quite a few years. I was up 
to my eyeballs in it in the State of Pennsylvania when we re-
regulated or de-regulated or restructured our electric industry 
in that State. And that time I was representing the rural 
electric cooperative and the municipals. So for the last four 
or five years of my career have been wading through this hip-
deep most times. In fact, my wife would tell you that I 
probably know this issue better than her in the last five 
years.
    I greatly appreciate the opportunity to appear before your 
Subcommittee on behalf of NARUC. States are, in fact, leading 
the charge to restructure electric markets. And each case, the 
States are putting in place elements that are essential to 
ensure vibrant, safe, and sustainable markets.
    Twenty-two States so far--and the number keeps growing 
rather rapidly--have adopted retail electric restructuring 
programs to enable customers to choose among energy suppliers 
while ensuring the safety, reliability, and quality of electric 
services.
    I guess the key here is do no harm, and I think that is the 
way the States are operating. And I think that when the Federal 
Government is ready to go, that is the way they should operate.
    Some will argue that the level of activity is insufficient, 
that the States should have adopted retail. Yet the States that 
have adopted retail open access electricity programs are home 
to more than 50 percent of the Nation's population. All this 
activity has taken place within the last four years alone. And 
I believe the States will continue to pursue restructuring 
programs that are in the public interest and in the States' 
interest.
    State restructuring initiatives contain many common 
elements, customer choice, functional unbundling, pricing 
reform, stranded cost recovery, protection of public benefits, 
sensitivity to the exercise of market power, and mechanisms to 
support emerging regional markets.
    It should come as no surprise that the timing and 
implementation of such initiatives differ from State to State 
in ways that reflect local customer needs and other market 
realities, including such factors as climate, demographics, 
indigenous resources, environment impacts, past choices of 
technology, current resource preferences, system capacity, 
geography, and form of utility ownership--just to name a few.
    The State's intention, and NARUC's hope, is that we can 
learn from the unfolding State initiatives about what does and 
doesn't work before risking harm to the broader consuming 
public by requiring States to restructure local markets by a 
date certain or a uniform set of Federal standards to take into 
account the unique local circumstances of each State.
    We believe it prudent for Congress not to risk disrupting 
these policies through prescriptive national models, but rather 
consider legislation that facilitates State restructuring 
efforts. There are things Congress can do to help the States by 
removing uncertainty and reducing the prospect of torturous 
litigation.
    NARUC established a broad set of principles that I am going 
to summarize here on how to move forward both from the State 
level and from the Federal level.
    One is enabling customers to choose among electricity 
suppliers through State determinations of appropriate 
restructuring policies.
    Two, maintaining or improving the reliability of the 
electric system.
    Three, ensuring customer access to reasonably priced 
services, including adequate protections for low-income 
customers.
    Four, protecting consumers from anti-competitive behavior, 
undue discrimination, poor service, and unfair billing and 
disconnection policies.
    Five, ensuring the maintenance or improvement of public 
benefits in environmental programs through existing or new 
mechanisms.
    Six, State determinations concerning retail stranded cost 
recovery.
    And, lastly, enhanced State authorities necessary to create 
regional mechanisms to address transmission reliability, market 
power, and other regional concerns.
    As I said, there are areas that the Federal Government 
ought to be involved in, affirming States' authority to order 
and implement retail access or customer-choice programs free 
from the threat of pre-emption under the Commerce Clause or the 
Federal Power Act, affirming States' authority to impose wires 
charges to support the recovery of stranded costs and other 
State-sponsored programs.
    Let me jump to my conclusions and just say a few things we 
think that the Federal Government should leave to the States, 
and I mentioned them briefly before. But one is grandfathering. 
Currently, none of the proposals out there have an in-depth 
grandfathering provision. If you don't grandfather carefully 
and fully, you are going to disrupt what 22 other States have 
already done. And in the best case, you will create confusion; 
in the worst case, you may destroy the markets that are 
forming.
    With that, I would like to end my comments and ask that my 
written testimony be put into the record. And I thank you for 
you attention.
    [The prepared statement of Mr. Mele follows:]
    Summary of Remarks by Christopher Mele, National Association of 
                    Regulatory Utility Commissioners
         States should be left to decide whether, when and how 
        local markets should be opened to greater competition that 
        enables customers to choose among electricity suppliers, while 
        maintaining system reliability, protecting consumers from anti-
        competitive behavior or poor service, and ensuring the 
        continuation of important public benefit programs.
         Federal legislation could greatly enhance 
        restructuring initiatives by:

                --Affirming State authority to order and implement 
                retail access/customer choice programs;
                --Affirming State authority to impose charges to 
                support stranded costs and benefits policies;
                --Affirming State authority to regulate customer bypass 
                of local distribution networks;
                --Reaffirming State jurisdiction over the rates, terms 
                and conditions of retail electric services; and
                --Authorizing voluntary formation of regional 
                regulatory bodies to enable States to address regional 
                transmission and system operation concerns.
                --Providing for ``grandfather'' of existing State 
                restructuring proposals.
         In conjunction with focused legislation, NARUC would 
        also favor reforming PUHCA and repealing prospectively the 
        mandatory purchase requirements contained in PURPA conditioned 
        upon the development of competitive retail electric markets.
         Unlike any of the other regulated industries, 
        conditions in the electric industry vary widely across the 
        country. While the development of retail customer choice is 
        critical, preferably it should be implemented in a manner that 
        respects these differences. In our view, that can only happen 
        if decision-makers closest to these conditions--State 
        commissions and legislatures--enjoy the flexibility to adapt 
        pro-competitive policies to the needs of local retail 
        consumers.
         If Congress reaches a consensus that it needs to 
        accelerate and broaden the transition to greater retail 
        competition, it should do so through legislation that preserves 
        broad State authority to implement policies flexibly in 
        response to the conditions in local retail markets.

    Statement of Christopher Mele, Legislative Director for Energy, 
        National Association of Regulatory Utility Commissioners

    Mr. Chairman and Members of the Subcommittee:
    Good morning. My name is Christopher Mele. I am the 
Legislative Director for Energy for the National Association of 
Regulatory Utility Commissioners, commonly known as NARUC. I 
respectfully request that NARUC's written statement be included 
in today's hearing record.
    NARUC is a quasi-governmental nonprofit organization 
founded in 1889. Within its membership are the governmental 
bodies of the fifty States engaged in the economic and safety 
regulation of carriers and utilities. The mission of the NARUC 
is to serve the public interest by seeking to improve the 
quality and effectiveness of public regulation in America. More 
specifically, NARUC is comprised of those State officials 
charged with the duty of regulating the retail rates and 
services of electric, gas, water and telephone utilities 
operating within their respective jurisdictions. We have the 
obligation under State law to assure the establishment and 
maintenance of such energy utility services as may be required 
by the public convenience and necessity, and to ensure that 
such services are provided at rates and conditions which are 
just, reasonable and nondiscriminatory for all consumers.
    I greatly appreciate the opportunity to appear on behalf of 
NARUC before the Subcommittee on Water and Power of the U.S. 
House of Representatives Committee on Resources. I would also 
like to commend the Chairman for exploring State perspectives 
on the complex issues involved in fostering greater competition 
in the electric industry.
    Before passage of the Energy Policy Act of 1992 (EPAct), 
our system of regulated electric monopoly service providers was 
a model of stability as regulators worked to ensure that 
utilities provided essential services to retail consumers at 
reasonable rate levels. Before and since EPAct, the U.S. has 
enjoyed the most economical electricity rates among those 
Western industrialized nations not heavily dependent on 
hydropower sources of energy. Times and fashions change, of 
course, and now the electric utility industry is one of the 
last of the utility sectors to undergo a transformation from 
monopoly franchise to market participant. States are leading 
the charge to restructure retail electric markets. In each 
case, the States are putting in place elements that are 
essential to ensure vibrant, safe and sustainable markets.
    Twenty-two States have adopted retail electric 
restructuring programs to enable customers to choose among 
energy suppliers while ensuring the safety, reliability and 
quality of electric services. Still others are working through 
their State commissions and/or legislatures to open access to 
retail electricity markets.
    While some argue that this level of activity is 
insufficient, the States that have adopted retail open-access 
electricity programs are home to more than one-half of the 
nation's population. All this activity has taken place within 
the last four years alone, and I believe States will continue 
to pursue restructuring programs that are in the public 
interest and the States' interest.
    The States pursuing retail open-access are acting with 
great care and precision to ensure the continued reliability of 
electric services and universal access to retail services and 
public benefits previously provided by a vertically integrated 
industry. Careful review of these activities discloses that 
State restructuring initiatives contain many common elements: 
customer choice, functional unbundling, pricing reform, 
stranded cost recovery, protection of public benefits, 
sensitivity to the exercise of market power, and mechanisms to 
support emerging regional markets. It should also come as no 
surprise that the timing and implementation of such initiatives 
differ from State to State in ways that reflect local customer 
needs and other market realities including such factors as 
climate, demographics, indigenous resources, environmental 
impacts, past choices of technology, current resource 
preferences, system capacity, geography, and form of utility 
ownership--to name a few.
    The States' intentions, and NARUC's hope, is that we all 
can learn from the unfolding State initiatives about what does 
and doesn't work before risking harm to the broader consuming 
public by requiring States to restructure local markets by a 
date certain through a uniform set of Federal standards that 
fail to take unique local circumstances into account. We 
believe it prudent for Congress to not risk disrupting these 
policies through prescriptive national models, but rather 
consider legislation that facilitates State restructuring 
efforts. There are things Congress can do to help the States by 
removing uncertainty and reducing the prospect of tortuous 
litigation.
    In July 1996, NARUC adopted ``Principles to Guide the 
Restructuring of the Electric Industry.'' The Principles are 
intended to support States' restructuring initiatives to 
provide customer choice while ensuring the continued provision 
of adequate, safe, reliable and efficient energy services at 
fair and reasonable prices at the lowest long-term cost to 
society. In light of the local impact that restructured markets 
will have, our Principles reiterate our view that State 
commissions and legislatures should decide whether, when and 
how local markets should be opened to greater competition.
    In brief, the NARUC Principles support:

         Enabling customers to choose among electricity 
        suppliers through State determinations of appropriate 
        restructuring policies;
         Maintaining or improving the reliability of the 
        electricity system;
         Ensuring customer access to reasonably priced 
        services, including adequate protections for low-income 
        customers;
         Protecting consumers from anti-competitive behavior, 
        undue discrimination, poor service and unfair billing and 
        disconnection policies;
         Ensuring the maintenance or improvement of public 
        benefit and environmental programs through existing or new 
        mechanisms;
         State determinations concerning retail stranded cost 
        recovery; and
         Enhanced State authorities necessary to create 
        regional mechanisms to address transmission, reliability, 
        market power and other regional concerns.
    Based on these basic goals, NARUC believes that in tile following 
areas, Federal legislation could enhance restructuring initiatives by:

         Affirming State authority to order and implement 
        retail access/customer choice programs free from the threat of 
        preemption under the Commerce Clause or the Federal Power Act;
         Affirming States authority to impose wires charges to 
        support the recovery of stranded costs, State-sponsored energy 
        efficiency and/or environmental programs, and universal service 
        programs;
         Affirming States' authority to regulate retail power 
        delivery services regardless of the facilities used, thereby 
        eliminating the threat of customers bypassing the local 
        distribution network;
         Reaffirming States' exclusive jurisdiction over the 
        rates, terms and conditions of retail electric services, 
        including retail transmission services;
         Authorizing the voluntary formation by States of 
        regional regulatory bodies to enable States to address regional 
        transmission and system operation concerns.
    With these issues resolved legislatively, while continuing to 
accord States the discretion to determine whether, when and how to open 
retail electricity markets to competition, States would be confident of 
their legal authority to move forward on restructuring efforts as local 
conditions dictate.
    In conjunction with this type of focused legislation, NARUC would 
also favor reforming the Public Utility Holding Company Act of 1935 
(PUHCA), while continuing to ensure consumer protections against 
abusive multistate utility holding company practices, and repealing 
prospectively the mandatory purchase requirements contained in the 
Public Utility Regulatory Policies Act of 1978 (PURPA). NARUC 
conditions its support for PUHCA reform and PURPA repeal upon the 
development of competitive retail electric markets and as part of 
broader restructuring legislation, not as stand alone initiatives.
    Another issue in this debate, where Federal legislation is 
necessary, is reliability. Any legislation should explicitly confirm 
the public interest in transmission grid reliability, the need for 
mandatory compliance with reliability standards, and a provision of 
explicit authority for the FERC and the states in cooperation to 
enforce the necessary standards. I emphasize the cooperative nature of 
this task. Congress could accomplish this by authorizing voluntary 
formation by States of regional bodies to oversee transmission issues, 
Independent System Operators, system planning issues and reliability.
    One last component that would need to be addressed in Federal 
legislation is the inclusion of language to ``grandfather'' State 
restructuring plans that were in place prior to enactment of any 
Federal legislation. In the States that have moved to provide retail 
open access, there have been delicate compromises reached to produce 
consensus. States have crafted these proposals and plans to meet their 
unique circumstances. In addition, Federal preemption could have 
disastrous effects on those States which already have retail consumers 
participating in burgeoning open access markets. In essence, without a 
grandfather provision Congress would be changing the rules for an 
immature market, causing confusion at best and the collapse of an 
undeveloped market at worse.
    While I have just discussed issues which NARUC believes the Federal 
Government ought to include in legislation should Congress proceed with 
electric restructuring, there are areas where NARUC believes Congress 
ought not take action. NARUC does not support proposals which require 
States to implement customer choice by a date certain. For the reasons 
previously stated, a Federal mandate is unnecessary (given the pace at 
whichState commissions and legislatures are now moving) and unwise 
(given the need for each State to address restructuring issues at a 
pace that makes sense in light of its individual economic, demographic, 
climatic and yes, political circumstances). We appreciate the desire of 
some to get on with the transition as quickly as possible, but if 
implementation of the pioneering State programs proves that the 
benefits of customer choice are as compelling as the proponents of a 
Federal mandate believe, States will embrace pro-competitive policies, 
as many currently are, at a pace that makes sense for their individual 
needs.
    States should also retain jurisdiction to address the recovery of 
costs for power sales and delivery service provided retail customers 
regardless of the facilities used. This means that technical 
definitions as to the character of facilities as transmission or 
distribution investments should not impinge upon the ability of State 
commissions to exercise authority over every retail transaction. This 
issue is of critical importance to ensure that States have the option 
of imposing non-bypassable charges to fund stranded cost and benefit 
programs.

Conclusion

    The States are now performing their historic role as laboratories 
to test how the words ``greater competition for retail consumers'' can 
be turned into real-world services that customers will buy. The State 
commissions and legislatures must be allowed to continue to experiment 
with retail access, including customer choice initiatives. As the 
consequences of competitively-based wholesale markets become clearer, 
States are putting in place complementary retail policies which are 
adapted to regional market conditions. State commissions are developing 
and implementing compatible retail policies which preserve reliability, 
prevent the stranding of ``public goods,'' ensure consistency with 
environmental values, minimize cost shifting, provide for stranded cost 
recovery, and most importantly, improve economic efficiency. Over time, 
States will work together, as some are now doing, to devise and 
implement regional institutions to adapt their regulatory 
responsibilities to the reality of regional power markets.
    If Congress chooses to act in this area, any Federal legislation 
should preserve broad State authority to implement these policies 
flexibly in response to the conditions in local retail markets. The 
development of retail customer choice should be implemented in a manner 
that respects these differences. In our view, that can only happen if 
decisionmakers closest to these conditions--State commissions and 
legislatures--enjoy the flexibility to adapt pro-competitive policies 
to the needs of local retail consumers. In the weeks and months ahead, 
my colleagues and I look forward to continue working with Congress and 
all interested parties to develop workable policies that support an 
efficient and environmentally sound electric services industry that 
meets the needs of all retail consumers.

    Mr. Doolittle. Thank you. And let me assure you that all 
the full set of testimony will be included in the record along 
with your oral statements here.
    Our next witness will be Mr. Wayne Crews, director of 
competition and regulation policy with the Competitive 
Enterprise Institute.
    Mr. Crews.

     STATEMENT OF WAYNE CREWS, DIRECTOR OF COMPETITION AND 
      REGULATION POLICY, COMPETITIVE ENTERPRISE INSTITUTE

    Mr. Crews. Good afternoon, Mr. Chairman, and members of the 
Subcommittee. My name is Wayne Crews. I direct competition and 
regulation policy at the Competitive Enterprise Institute. I 
appreciate the opportunity to appear today. CEI is non-
partisan, non-profit organization that works to educate opinion 
leaders on market-based alternatives to political programs and 
regulations.
    I am here today to provide an alternative--a little bit of 
an alternative model of achieving the free market, free 
electricity markets, asking the question, does the pursuit of 
Federal retain open access have it wired or tangled? When 
policymakers embark upon restructuring, as opposed to 
deregulating a heavily regulated industry, they risk creating 
more regulation than existed before. This is the dilemma raised 
by today's calls for mandatory retail open access in 
electricity, which is intended to ensure that every commercial, 
residential, and industrial customer shall have the choice of 
any electricity provider while the local utility will be 
required to distribute the new provider's electricity.
    Nearly every network industry now, from electricity and 
telecommunications to railroads and cable TV--and even, 
potentially, the computer operating systems--suffers from the 
threat of open access disease, a regulatory infection caused by 
dual exposure to regulators who assume themselves indispensable 
to competitive markets and economists who cling to the notion 
that capitalism generates natural monopolies apart from a 
government-granted franchise.
    The irredeemable problem with open access and achieving at 
the retail level is its coercive character. The desire of a 
transmission or distribution owner to control its wire isn't 
compatible with the desire of others to hitch an uninvited 
ride, a problem for which there is no stable regulatory 
solution.
    Thus, despite years of effort, electricity reform at the 
Federal level stands a good chance of dying again in Congress 
this year. Every fundamental question--State versus Federal 
jurisdiction, the role of independent system operators, 
reciprocity, the role of rural power, stranded costs--all 
remain hotly debated.
    More substantial and robust electricity competition could 
emerge if more precious years weren't wasted trying to mandate 
it. Competition doesn't require granting everybody with a kite 
and a key the right to dump their electricity into the grid for 
somebody else to manage.
    Instead, the artificial barriers that prohibit voluntary 
competition are the State-granted exclusive local delivery 
franchises that protect incumbent utilities. These should be 
removed. Open access leaves those delivery franchises intact, 
and as the market grows and the deregulated generation aspect 
of the industry moves forward, it is going to contort around 
this still-regulated transmission structure while other network 
industries in the country are moving ahead, even in some cases 
creating redundancy in certain areas.
    If those franchises were ended as opposed to pursuing 
mandatory access, that would grant to entrepreneurs and 
adventurous electric utilities the clout voluntary access deals 
and develop infrastructure by forming consortia, sharing rights 
of way with network industry cousins, like telecommunications, 
Internet, and railroad firms.
    For instance, an independent power producer could team up 
with a baby Bell and real estate developers on the fringes of 
the grid to share costs of providing electricity and 
communications services to residential and business customers. 
That is one type of example.
    Some entrepreneurs could emulate companies like Qwest and 
Level 3; each is financing fiber networks thousands of miles 
long that feature buried redundant empty plastic conduits for 
rapid installation of next-generation fiber. And, on top of 
this, at this point in history, barring a breakthrough in 
wireless data transmission, given the Internet revolution, a 
multibillion-dollar effort to rewire the last mile to household 
consumers may emerge. So sharing costs with power entrepreneurs 
could prove essential, but right now they are prohibited from 
attempting that, given the exclusive franchise.
    Under genuine competition, incumbent utilities threatened 
with such constant entry would be likely to offer open access 
voluntarily. Thus, the aims of the forced open access advocates 
would emerge, but in a market-driven manner. Other competitive 
pressures include lightweight micro-turbines capable of serving 
a 7-Eleven or large homes, which some researchers believe could 
rival the change in computing from mainframe to the desktop in 
significance.
    Other potential avenues for competition include relatively 
new computer-controlled sideways drilling technology that 
allows oil and gas companies to flexibly snake under streets 
without disturbing the above ground. There are new 
technological controls over power flows that make it not quite 
so true anymore that we can't control where the electrons go. 
Other examples are in the handouts.
    But ending exclusive franchise is necessary to ensure that 
firms other than existing utility monopolies can exploit all 
these options. Otherwise, a homeowners' association or a 
business park employing micro-turbines could find itself in 
violation of the local franchise.
    Of course, if we removed the franchises and competition 
doesn't start to emerge in some places, then the States may 
properly consider forced access on a rifle-shot basis. That is 
the way it should be done.
    Forced-access advocates forget that innovation in 
transmission and distribution is as important as any other kind 
of innovation. Forced access could compromise entrepreneurial 
incentives to embrace innovation and enhance reliability 
because their advance remains too dependent on what regulators 
do.
    Consultant Martin Mills points out that today's noisy and 
dirty grid is leading developers to design buildings with 
separate power systems, that second wires are inevitable in a 
lot of cases, and that the grid ultimately will need to emulate 
the architecture of the Internet to obtain the necessary 
liability levels.
    The ability to make and execute such market strategies 
depends crucially on owners and operators who directly profit 
or lose from their decisions. Altering our deregulatory 
approach in the 106th Congress would set in motion a 
restructuring that is as fully efficient and entrepreneurial as 
possible. Years would possibly be saved on the need to revisit 
the industry to have its distortions legislatively ironed out, 
as may occur in telecommunications.
    There is too often a tendency among policymakers to embrace 
technocratic solutions. Under genuine competition, regulators 
disappear. In contrast, mandatory access risks armor-plating 
regulators at a crucial moment in business history. 
Inefficiencies created by actual government monopolization of 
the grid will outweigh any potential, but unlikely, 
monopolistic abuses by the private owners of transmission and 
distribution, if they are subject to threats.
    The answers to questions regarding the shape of tomorrow's 
power markets are not all locked into today's initial 
conditions. Information will be created by entrepreneurs as we 
go along, and we should give them a chance.
    I thank the Subcommittee for its attention.
    [The prepared statement of Mr. Crews follows:]
    [GRAPHIC] [TIFF OMITTED] T9318.019
    
    [GRAPHIC] [TIFF OMITTED] T9318.020
    
    [GRAPHIC] [TIFF OMITTED] T9318.021
    
    [GRAPHIC] [TIFF OMITTED] T9318.022
    
    [GRAPHIC] [TIFF OMITTED] T9318.023
    
    [GRAPHIC] [TIFF OMITTED] T9318.025
    
    [GRAPHIC] [TIFF OMITTED] T9318.026
    
    [GRAPHIC] [TIFF OMITTED] T9318.027
    
    [GRAPHIC] [TIFF OMITTED] T9318.028
    
    [GRAPHIC] [TIFF OMITTED] T9318.029
    
    [GRAPHIC] [TIFF OMITTED] T9318.030
    
    [GRAPHIC] [TIFF OMITTED] T9318.031
    
    [GRAPHIC] [TIFF OMITTED] T9318.032
    
    [GRAPHIC] [TIFF OMITTED] T9318.033
    
    Mr. Doolittle. Thank you.
    I announced this this at the beginning, but now that some 
of our additional members have shown up, all of the proceedings 
are being broadcast live over the Internet. I wanted to make 
you all aware of that.
    Well, I appreciate the testimony that all of you have 
offered, and, Mr. Crews, let me just begin with you. Is there 
one jurisdiction some place that comes closest to implementing 
what you have advocated here?
    Mr. Crews. I think even at the level of the States, even at 
the State level, distribution franchises are staying intact. I 
think, ultimately, what might make sense is something like was 
done with the intrastate trucking deregulation that Congress 
did a few years ago as part of the FAA reauthorization. 
Congress removed the right or the ability of States to limit 
access of trucking companies and to limit their prices. That is 
the kind of thing that should be investigated. I think even if 
we have full mandatory access put in place at the State level 
and at the Federal level, we are still left with local delivery 
franchises for the next 10 years of so, and we would have to 
revisit that question.
    And I think a lot of potential pain could be avoided by 
addressing those kinds of concerns now. The Supreme Court has 
addressed them recently in the Bell case in terms of--the case 
involved not every service has to be offered to competitors on 
an open-access basis. It was bogging some of those services 
down. So you can run into problems there with innovation.
    I am given to understand that in Colorado there is an 
example where--I don't know the details of it, but it is 
something I could certainly look up and supply to the 
Committee--where a gas company was offering services to 
customers, but was not offering itself as a public utility. And 
therefore, it wasn't subject to the mandatory access 
requirements and things of that sort. So there are things that 
can be picked up.
    Mr. Doolittle. Well, if you could find out something more 
about that and send it along I would appreciate it.
    I saw you nodding your head, Mr. Casten. Did you want to 
comment on that subject?
    Mr. Casten. To your direct question, sir. In 49 States, if 
a private power entrepreneur runs a wire across the road, they 
receive a go-to-jail card.
    In Colorado, there is a law that has been tested for the 
gas companies that allows you to serve a group of private 
people. It hasn't been tested electricity-wise.
    I think the example you are looking for is the United 
Kingdom. In 1989, when the U.K. deregulated, they allowed 
anybody that wanted to to run a wire. There haven't been very 
many wires run, but the cost of distribution and transmission 
has fallen to everybody because the monopoly protection was 
removed.
    Mr. Doolittle. Mr. Hoecker, would you want to comment on 
this subject?
    Mr. Hoecker. Well, I am not familiar with the Colorado law 
that has been mentioned. It sounds to me as if there is some 
form of distributed generation off the grid.
    If we are talking about the transmission system or 
interstate pipeline transportation, we are talking about 
industries that do have characteristics of natural monopoly. 
They are becoming open access. I happen to think open access is 
a very positive development, not simply a job-insurance program 
for regulators.
    We have seen, as Mr. Casten has mentioned, natural gas 
prices drop since well-head prices were deregulated. And we 
have done our part at the FERC to promote access and free 
markets in the interstate pipeline industry. We expect to do 
the same thing for electric transmission as well.
    And it is clear that the Congress, through the Federal 
Power Act, has concluded that these kinds of facilities are 
affected with a public interest, that they have monopoly 
characteristics, and as the DC Circuit has said in another 
context, the Federal Power Act and the Natural Gas Act fairly 
bristle with concern about undue discrimination.
    So as we move toward a free market and entrepreneurship and 
begin to bring the forces of markets to bear on industries that 
have formerly been monopolies, we have to structure a 
reasonable transition and not simply walk away from our public 
interest responsibilities.
    Mr. Doolittle. Mr. Crews believes that this isn't as great 
a problem as some seems. So somebody else runs a separate 
distribution facility, what's the problem with that?
    Mr. Hoecker. I think separate distribution facilities or 
non-utility transmission services, while we haven't seen them, 
are entirely possible, but I also think that investors are 
going to think twice before building essential facilities in 
competition with the local utility franchise, who has had those 
facilities paid for by ratepayers over several generations. 
That is to go in the face of good financial planning in my 
estimation.
    Mr. Doolittle. Do you have an answer to that, Mr. Crews?
    Mr. Crews. Well, I would say, we don't have to argue about 
it. We can do away with the franchises and see what occurs. It 
may be that nothing does happen, prices remain high, and open 
access should be instituted on some kind of an ad hoc basis 
because of that residual monopoly power. But someone may move 
in, and if someone does attempt to move in, and we are seeing 
duplication and redundancy in other network industries, if 
someone does move in, that local utility has a serious problem 
on its hands. Because if someone does take the step of putting 
in new wire and all they have to do is call Pirelli Cable to do 
it, if they make the deals and lay that wire, then that utility 
really has a stranded cost on its hands.
    Mr. Doolittle. Well, my time is up. The Chair recognizes 
Mr. Smith for his questions.
    Mr. Adam Smith. No questions.
    Mr. Doolittle. Mr. Walden is recognized.
    Mr. Walden. Thank you, Mr. Chairman.
    A question for Mr. Hoecker: The Northwest delegation is 
working to develop a regional approach to balancing the role of 
the Bonneville Administration in a competitive environment. 
Similar efforts, I understand, are underway at the TVA. Do you 
support these sort of regional approaches on this issue?
    Mr. Hoecker. Absolutely. I think looking at the electricity 
market on a regional basis is essential as bulk power markets 
and the number of wholesale transactions become more important 
and become more numerous. It is important that we look at 
reliability, transmission planning and expansion, and 
transmission pricing policies on a regional basis so that we 
can have real market forces at work at the generation level.
    Mr. Walden. Given the discussion you and Mr. Crews had a 
moment ago about deregulating the transmission side, do you see 
that there would be a problem in a district like mine that is 
72,000 square miles where we have got one person for every nine 
miles of line, in some cases? Do you think we would see some 
cherry-picking go on in the urban areas and leave the rural 
areas under-served if it is not under monopoly control?
    Mr. Hoecker. I think that is always a concern. I think it 
ought to be the policy of regulators, and of the government 
generally, to ensure that all Americans have fair access to 
electric power. And, clearly, some remote rural customers are 
very expensive to serve. So, you are right, it is not an easy 
answer when it comes to those people.
    Mr. Walden. Mr. Crews, I would entertain a response from 
you on that question.
    Mr. Crews. It is always a concern. You want to be sure that 
rural customers are served. But rural customers don't need just 
electricity. They need cable TV and Internet access, and all 
those kinds of things. And I would think that the best way to 
at least help assure that is to make sure that there is not a 
local monopoly that can't be competed against, to at least have 
the potential for others to figure out a way if they can to 
come in with a wire.
    And if they team up with--for instance, railroads now are 
selling off something called their short-liners. They are 
selling off their short spurs that serve rural areas. It is a 
perfect opportunity for them to sell those to, say, Level 3 and 
Enron, and then those two go in and try to put some 
infrastructure in place.
    So we need lots of things occurring. And plus, if it a 
rural area, it is easier to get the rights to lay wire rather 
than----
    Mr. Walden. Yes, I would suggest that at some point I 
invite you to come to my district. Towns like Fossil and 
Condon, they don't have cable TV, either, or very good access. 
So competition is really not the issue. It is just trying to 
get service at all.
    Mr. Hoecker, I want to go back to you in the limited time I 
have. You have testified in favor of gaining jurisdiction over 
more than 400 transmission-owning electric co-ops. I assume 
this is, presumably, in response to existing problems or lack 
of jurisdiction. In the last years, have you run into those 
kinds of problems? Co-ops? Complaints?
    Mr. Hoecker. I think--let me hearken back to your first 
question, which is the importance of regionalism. In using all 
the high-voltage transmission, which is generally highly 
integrated with the investor-owned transmission, electric co-
ops, transmission-owning municipal utilities, and Power 
Marketing Administrations have important facilities that are 
integral to the operation of the grid. And if we are going to 
have a more efficient, more competitive bulk power market, the 
entire network, it seems to me, needs to be subject to the same 
kinds of open access requirements.
    And that isn't the case now. And whether we like it as a 
regulatory matter or not, transmission that is owned by one set 
of utilities, be they FERC jurisdictional or not, the operation 
of those facilities affects everybody's service.
    Mr. Walden. Okay. Under the administration's bill, FERC 
would gain jurisdiction over more than 400 co-ops, a thousand 
muni's, PMA's, TVA, BPA. How do you plan to handle that 
somewhat increased workload you may find yourself with?
    Mr. Hoecker. Well, I should be clear that what we are 
seeking jurisdiction over is the rates, terms, and conditions 
of high-voltage transmission service. BPA, TVA, those co-ops 
all provide a diverse menu of services to their customers, 
including retail service.
    The Commission has no interest in that. We are not a retail 
regulator. That is the bigger part of the market. And we are 
simply trying to ensure that the bulk power market is inclusive 
and as transparent as possible.
    Mr. Walden. Thank you, Mr. Chairman. I yield back my time.
    Mr. Doolittle. Mrs. Napolitano is recognized.
    Mrs. Napolitano. Thank you, Mr. Chair.
    Mr. Hoecker, there is a specific question I have based on 
California experience. One of the things that was brought to my 
attention is that NEV, the New Energy Ventures, this week 
purchased the AES. One of the news accounts, they have a long-
term contract to buy power from Bonneville, the Federal Power 
Agency's largest single customer outside the Pacific Northwest. 
The contract arrangement shields NEV from Bonneville's decision 
earlier this year to sell its excess capacity at prices set by 
the California Power Exchange.
    As a result, NEV remains able to buy power at below-market 
rates for resale in the California market, which is going to 
undercut, you know, some of my smaller providers. In effect, 
they are going to be pocketing the difference between the 
secret contract price for taxpayer-generated power and the 
higher market price.
    What sort of Federal or the FERC controls would have to be 
in place to address this kind of situation?
    Mr. Doolittle. I would be happy to provide you with a 
fuller answer with that question. I think I would have to take 
a look at the contract arrangements. When Bonneville sells into 
southern California, or into California, into the independent 
system operator of the power exchange, it is subject to the 
same rules as any other seller of electric power.
    I am not sure to what extent the New Energy Ventures 
contract with them would undercut, or the merger that you 
mentioned, would undercut the other providers in terms of 
price, but I would be happy to provide you with a fuller answer 
to that.
    Mrs. Napolitano. I would very much appreciate it.
    Mrs. Napolitano. Second question would be that I am 
wondering what your position would be on H.R. 1486, the bill to 
provide for a transition to market-based rates for the PMA's?
    Mr. Hoecker. Well, the FERC, of course, has provided 
market-based rates for hundreds of energy providers over the 
last decade. And we have for new generation essentially allowed 
wholesale energy suppliers to sell at what the market will 
bear.
    The concern I would have for market sales by a Power 
Marketing Administration is the concern under the statutes that 
they be able to recover their costs and repay their Federal 
obligations. But I haven't looked at this from a competitive 
perspective.
    Certainly, we would like to see generation move to market. 
And I think that that is important for all sources of 
generation.
    Mrs. Napolitano. The other question I think I would have 
for Mr. Casten a--where are you? There you are. One of the 
questions is, what are the assumptions you are making when you 
assert that competition will cause the U.S. to drop its carbon-
dioxide emissions to well below the targets of the Kyoto 
Protocol?
    Mr. Casten. Carbon dioxide is unlike any other pollutant. 
The only way you get rid of it is to burn less fuel. The 
electric industry is horribly inefficient. It burns three units 
of fuel to produce one unit of power. We have demonstrated in 
all of our plants that we can burn one-and-a-quarter units of 
fuel to make a unit of power.
    Mrs. Napolitano. How do you accomplish that?
    Mr. Casten. We localize the generation to where there is a 
requirement for heat, such as the Coors brewery or an 
agricultural processing factory, or chemical plant, hospital--
--
    Mrs. Napolitano. You have recovery?
    Mr. Casten. We then recover the heat that would have 
normally been thrown away and use that to offset other fossil 
energy. We also avoid the losses that are involved in the 
transmission system because the electricity is generated right 
at the user at their local voltage. It doesn't go up through 
the wires.
    And so the overall efficiency of delivery goes up by two-
and-half times. The savings that we create totally come out of 
not burning fuel. So our company as a whole produced 54 percent 
of the CO2 last year that would have been produced had the same 
power been generated conventionally.
    Mrs. Napolitano. Very interesting, and I think it is very 
admirable.
    Thank you, Mr. Chair.
    Mr. Doolittle. Thank you.
    Let me ask and I invite you gentlemen to comment. I have 
read that within 10, or perhaps as long as 20 years, although 
the article seemed to imply it was more likely to be 10 years, 
many, if not most, homes would be generating their own power 
through fuel cells. Would you care to comment on that?
    Yes, Mr. Casten?
    Mr. Casten. The consensus of almost everybody that 
understands the technology is that we have learned that we can 
make power efficiently in smaller units and that the optimal 
power unit, which was moving up year after year, has moved down 
to very small.
    Fuel cells are a wonderful technology because they are 
clean and they don't take any maintenance. And they would be in 
every home today, but they cost too much.
    The argument that I believe I would subscribe to is that 
the automotive industry is probably going to drive the cost of 
fuel cells down via mass production, and that we will get to a 
point where we make most of the electric power locally. Most of 
the transmission system will prove to have been overbuilt, and 
we will greatly improve the competitiveness of the whole 
society by that kind of a move.
    Along the way, though, we are already able to generate 
power on-site in all of our industry, hospitals, high schools, 
medical centers, with technology that exists, is proven and is 
cost-effective. But we are prevented from doing that by all of 
these barriers to efficiency.
    In this rural territory that the Congressman referred to, I 
could put in a plant in a high school and it is maybe not quite 
efficient economically. If I could run some of the power down 
to the local hospital, I might have an economic plant. But in 
49 States, if I run that wire, I go to jail.
    So if Congress removes some of the barriers and lets the 
technology that is already available compete, your constituents 
are going to see lower-priced power and more services. We are 
ready with the technology.
    Mr. Doolittle. So even in the rural areas, in that example, 
it would clearly be a benefit toward doing some of those 
things?
    Mr. Casten. Absolutely.
    Mr. Doolittle. Mr. Hoecker, is it my understanding then 
that you are in support of this idea of asserting your 
jurisdiction over the PMA's?
    Mr. Hoecker. Well, we would have to be given that 
jurisdiction by the Congress.
    Mr. Doolittle. Right, but----
    Mr. Hoecker. Yes. I support that.
    Mr. Doolittle. You do support that. That would then mean 
that the PMA transmission facilities would be subject to the 
same open access requirements as the public utilities?
    Mr. Hoecker. That is our purpose, sole purpose.
    Mr. Doolittle. Do you believe that electric energy produced 
at hydroelectric facilities should be considered renewable for 
the purpose of meeting a renewable generation requirement and 
should the Federal Government seek to impose that?
    Mr. Hoecker. I know what a controversial question that is. 
And I view renewable energy, non-fossil energy, as very 
important. And hydroelectric is absolutely essential to the 
stability of the grid, particularly in the West. And I am happy 
to call it renewable. I am not sure what my opinion means as 
far as legislation is concerned.
    Mr. Doolittle. Well, I, for one, would be grateful, at 
least if you would express the opinion vigorously that it 
should be deemed renewable.
    Mr. Casten, tell me your views about this issue of a 
Federal renewability standard. Do you think there ought to be 
such a thing? And if so, do you think hydropower should be 
counted as renewable?
    Mr. Casten. Mr. Chairman, I think it is incumbent that we 
have leadership to move to a sustainable world. We are going to 
run out of fossil fuel, and before we run out of it, we are 
going to run out of places in the air to park all the carbon. 
Our grandchildren will still find water raining in the 
mountains and able to come down and make electricity. They are 
going to find a lot less fossil fuel than we found.
    So, I think that everything that doesn't burn fossil fuel 
ought to be encouraged. As to the specifics of the renewable 
standard, I think it is an awkward way to achieve the result, 
and that a better way to achieve the result would be for 
Congress to say to anybody that wants to make heat or power, go 
ahead, make heat and power, but here is the amount of fossil 
fuel that you are allowed to burn per megawatt hour you 
produce, and if you use more than that, buy some credits from 
somebody else. If you use less fossil fuel, sell your credits.
    Oh, and another thing, next year, the amount allowed will 
go down. And then, periodically, Congress could set how fast 
that curve goes down, but let the market decide what is the 
best way to get to sustainability. You give us the leadership; 
certainly let hydro play a role in it.
    Mr. Doolittle. Thank you. Mr. Walden.
    Mr. Walden. Thank you, Mr. Chairman.
    I just want to follow up on your comment, Mr. Casten, 
because the example you used sort of strikes at the point I was 
trying to make. You could put in your power-generation facility 
for the high school, but you should know in this county of 
1,700 people there is no hospital.
    And so you might serve something in downtown, but it is the 
rural nature of this very county that I am struggling with on 
how all this works, because if you take the high school and you 
take the mill, and they are no longer on the grid there that 
the co-op is providing for, who is going to reach out? Is your 
company willing, then, to go out and go past the hospital and 
go out a hundred miles in this county and drop line every 9 
miles to a ranch?
    See? That is what I am trying to deal with in my district. 
I know it is unique from some, because it is so large and rural 
and expansive. But this is what the folks there are saying. 
People who have strung that line, maintained that line are 
saying, you take the big users off our system, who is going to 
step up to the plate to provide power to the ranch that is 30 
miles out of town? Are you going to do that?
    Mr. Casten. We originally granted monopolies in order to 
encourage people to invest that money, and that worked. We got 
everything electrified.
    Mr. Walden. It did.
    Mr. Casten. But Congress had to fill in the holes with the 
rural utility systems. The country is now pretty well 
electrified, and the wires are there. And my question is, why 
would the people with the wires there stop providing service if 
they no longer had a monopoly?
    Mr. Walden. Well, what is their cost going to be though to 
do that if you take their big users off. Isn't their cost per 
going to go up to maintain the service?
    Mr. Casten. I am not at all sure.
    I grew up in Windsor, Colorado, which is a pretty rural 
little town served by an RUS. And Kodak moved in there. There 
is an opportunity for Kodak to make 20 megawatts of power about 
one-third cheaper than it comes from Tri-State, the RUS. If 
that power was made at Kodak, you avoid the transmission cost 
of bringing that power over the mountain. And it is not clear 
at all to me that two businesses wouldn't work together. We are 
now starting with the power locally and much cheaper. And it 
can still get out to my father-in-law's farm.
    But I think that the larger issue is to----
    Mr. Walden. Well, we do have Cogen facilities throughout 
this district as well, and the power is purchased and is 
distributed.
    Mr. Casten. Right. But the power can only be sold by the 
Cogen facility to its competitor. He can't run a wire across 
the street. And this tends to distort what is the best economic 
way to get it done.
    I am arguing to take those barriers out of the way and 
trust, by and large, that markets fill every niche in trying to 
provide the service. Then come back if there are problems and 
make the adjustments.
    Mr. Walden. Yes, but I guess I am not willing--I am 
concerned about just saying come back and fix the problem, 
because rural communities in districts like mine get left out 
on every highway that is created. And that's what I struggle 
with as I try and represent this area.
    I mean, I have been in small business for 13 years. I know 
where the profit is in my business, and I know where the loss 
is. I don't go seek the loss. I go seek what is profitable.
    And that is my concern for districts like mine that get 
left off the Internet, that wouldn't have power if it weren't 
for the government stepping in. I mean, I generally approach 
this from a very free-enterprise status, but, on the other 
hand, there is some basic service I am concerned will be lost 
if we are not very careful about how we go down this road. Can 
you help me with that? Because Kodak is not going to locate in 
Fossil or John Day or----
    Mr. Casten. I share the concern with Fossil, but I raise 
another concern. The kinds of technologies that I referred to 
in my answer to the chairman are being held back because you 
can't put them in any place. And those are precisely the kind 
of technologies that would work pretty well on my father-in-
law's farm, which is in Hill Rose, Colorado, which about as 
remote as you get. Those technologies will be developed and 
brought forward and made more cost-effective.
    So I think that the challenge that you have--and I 
appreciate that it is a challenge--is to try to get the 
barriers out of the way, so that these technologies can develop 
and still take care of these remote parts of the market.
    Mr. Walden. And I understand what you are saying. There is 
a company in Bend that has developed a power unit. I am going 
to go visit in the next couple of weeks. That, you know, they 
are trying to get down to microwave-sized thing that will 
produce enough power for a house. We have had generators 
before.
    I literally have places in my district that just this year 
may get the first access to telephone service because they are 
so remote. And so, I mean, I realize I face a little different 
problem, but this is the problem I face, and to the extent we 
can get more power out there, great. I just don't want to leave 
those people off the line.
    Mr. Casten. Just my final comment.
    Mr. Walden. Yes.
    Mr. Casten. I spend some of my time as the president of a 
Boy Scout Council, and we are building cabins in an extremely 
remote area. And the technology has now improved so that it is 
cheaper for us to put in photo-voltaic power than to run the 
transmission line. So the technology is coming.
    Mr. Walden. Well, as a fellow Eagle Scout--and I serve on a 
council, too--I am glad to see you are doing that. Good work.
    Thank you.
    Mr. Doolittle. Mrs. Napolitano.
    Mrs. Napolitano. Thank you.
    Mr. Casten, I asked you the question in regard to the 
assumptions issue. One of the questions that I didn't quite get 
to, and didn't ask really for the answer was, does your 
industry need to take over what percentage, 10, 20, 50, of the 
market to accomplish the emissions reductions to meet the Kyoto 
Protocol?
    Mr. Casten. In the United States, the average power plant 
was built in 1964 using 1959 technology. And I am thankful that 
the Internet and my personal computer came a little bit later 
or we would have a hard time being here today.
    The people worry that, if Congress steps in, there will be 
the premature retirement of some of these assets. I would 
suggest that what we are facing is the post-mature retirement 
of most of the fossil power plants in the United States. It is 
not a matter of taking over the markets, but of generating that 
part of the power that is possible in connection with heat 
loads.
    And I can tell you what that statistic is. We had a peak of 
550,000 megawatts of electricity generated on the peak hours of 
the year last year in the United States. That is our peak.
    The DOE has found that we could put in about 120,000 
megawatts of new combined heat and power serving existing 
thermal loads, breweries, hospitals, universities, packing 
plants, chemical factories, and so forth. That would get us to 
a national average efficiency of 55 to 60 percent. And that 
level, we would be below the Kyoto carbon emissions, and we 
would be saving money.
    Britain deregulated electricity in 1989 and is now 7 
percent below the carbon output that they were at in 1990. All 
of the drop has come from generating efficiency in the electric 
industry. Carbon emissions from industry have gone up slightly. 
Emissions from transportation have gone up a lot. And yet, 
Britain's total CO2 emissions are 7 percent below where they 
were, and their economy is very healthy.
    So what needs to happen is for Congress to change the rules 
so that this kind of efficient power will get built. Am I 
answering your question, ma'am?
    Mrs. Napolitano. You have gone around the way, but you got 
there.
    Mr. Casten. Thank you.
    Mrs. Napolitano. Thank you, Mr. Chair.
    Mr. Doolittle. I am interested in unleashing these exciting 
developments. Sounds like it is your belief, Mr. Casten, that 
the existing regulatory scheme is what is hindering this and 
maintaining these inefficient plants in existence to this day. 
Is that correct?
    Mr. Casten. Yes, it is.
    Mr. Doolittle. If we go to this deregulation, what happens 
to reliability in the system, which has been quite high, I 
believe, heretofore?
    Mr. Casten. I know of no commodity in my lifetime that has 
been in short supply except those that had price regulation by 
the government someplace. Somehow there is bread on the shelf 
every day even though there is not a Federal bread regulatory 
agency.
    [Laughter.]
    I think that when you are in business, if you don't provide 
the reliability that the customer wants, you don't stay in the 
business very long. And I think we will as an industry provide 
reliability, but I make another point. Not every customer wants 
as much reliability as they are presently receiving. Some of 
that reliability costs an awful lot of money. Many of the big 
industries would find it cheaper to shut down a couple of 
megawatts rather than to pay for 20-percent extra power 
generation standing in place. Deregulation will give people 
those choices of how much reliability they buy. The market will 
supply it.
    Mr. Doolittle. Well, what is your reaction to that, Mr. 
Hoecker?
    Mr. Hoecker. Well, I agree with an awful lot of what Mr. 
Casten says. I think these technologies are wonderful, and the 
market needs to test them. And they need to be promoted in an 
environment where these new sources of generation and some of 
the old ones, like hydro, have access to markets. And we want 
them to have access to the wires on a non-discriminatory basis. 
We think that will encourage their development. In those cases 
where they are distributed generation off the grid, I think the 
reliability question is a very poignant one because I think 
many Americans and American businesses would like to have the 
backup that connection to the utility, to the power grid, 
provides even if they self-generate.
    I think that, frankly, reliability is--will be seen 
increasingly, perhaps--as a commodity just like power itself, 
and that a business decision to cycle one's plant offline for 
several hours to save power costs will be an important decision 
to make, and it is being done even today. But it is the 
universal access to power; it is the power at reasonable prices 
that I think Americans regard as almost a right. And I think 
that we tinker with that at our peril. So I am just advocating 
a bit of carefulness in this transition.
    Mr. Doolittle. Although the proponents of deregulation 
would argue that, with some evidence from industries that have 
been deregulated, that the prices would drop, not go up. And 
with respect to that, let me just ask you, talking about 
running the wire across the street and it being a felony or a 
crime in 49 of the 50 States, what do you think of the idea of 
relaxing that so that they could run the wire across the 
street?
    Mr. Hoecker. Well, I am not an expert on retail access laws 
per se, but I think the competition needs to come to the retail 
environment just as we are trying to promote it at the 
wholesale level. I don't think that we ought to criminalize 
that sort of behavior, if in fact that is what is happening.
    There are reliability concerns, safety concerns, pricing 
concerns associated with the kind of situation that has been 
described, but I personally think the government should not 
burden those kinds of transactions unnecessarily if there is no 
public interest involved.
    Mr. Doolittle. I don't know how we got you as Chairman of 
FERC, but I am glad we did. I appreciate your candid response.
    Are there further questions? Oh, yes.
    Mr. Mele. Mr. Chairman, if I could respond? I have heard a 
number of discussions dealing with the wires across the street, 
which is the jurisdiction so far of my members. And one of the 
things that concerns me, and it was brought up in the 
discussion with rural areas--and let me give you a little 
story.
    In Pennsylvania, the co-ops also had to open up their 
systems, just as the investor-owneds did. Nobody wants to sell 
power in the co-op areas.
    These two gentlemen are talking about running wire; they 
are talking about industrial customers. My members care about 
the residential ratepayer. The residential ratepayer isn't 
going to see new wire coming to their houses--maybe 20 years 
from now after the companies have made all of their money on 
the industrial side, and then the residential folks have to 
pick up that cost.
    The other thing I would say, if you are going to allow 
residential distribution open access, if you will, you had 
better change the tort laws and the product-liability laws in 
this country. I would use that as a caution.
    Mr. Doolittle. Well, what is your reaction to the notion, 
if we change those laws that prohibit other people from 
building distribution systems, would that unleash the 
technology that would lead to many of the homes being able to 
generate their own power?
    Mr. Mele. I think the technology is going to happen 
regardless of whether you open the distribution system up or 
not. As was stated before, there is money--if there is money to 
be made there, they will do it. If there is not enough money to 
made there, they won't do it. What they are going to advocate 
is, open up the distribution system--which is, I think everyone 
would agree, a State jurisdictional issue--open up the 
distribution to provide three or four different wires coming 
into a house.
    And it is not going to come into a house. It is going to go 
into industry; it is going to go into large commercial, may 
even go to some small commercial. Residential ratepayers aren't 
going to see it for quite awhile.
    Mr. Doolittle. Well, suppose that were the case, and it 
went mainly to, which I presume probably would be the case 
initially, that it would go to the bigger users, but that is 
not necessarily a problem anyway, is it?
    Mr. Mele. Not necessarily, I wouldn't think. However, the 
distribution system at that--when you are getting down to the 
level of the wires to the meter, the wires that are running 
down streets, I can see many reliability problems, perhaps. I 
can see, in certain instances, residential ratepayers' rates 
going up for their distribution component. I could see--
foresee, rather--when there is a reliability problem, a 
residential ratepayer would pick up the phone and call his 
State legislator or his commissioner, his public utility 
commissioner, they are not going to pick up the phone and call 
the chairman and the clerk. They don't even know they exist.
    I am talking about a residential ratepayer. You are right 
about the industrial and large commercial. That is 100 percent 
correct.
    Mr. Doolittle. I realize my time is up. Let me just ask 
this follow-up question. I think I have read that some power 
companies are now technically able to do other things with 
those wires than just put power through them, like maybe a 
phone service or a cable TV service or something like that. So 
doesn't this all kind of get rearranged, our whole model of 
thinking about this, now that those are sort or 
interchangeable? Any reaction? Mr. Hoecker.
    Mr. Hoecker. We are seeing an incredible trend toward 
diversification in the utility business. There has been a lot 
of consolidation among electric utilities, but also between 
electric utilities and gas companies because they both have 
access to the customer base. There are alliances between 
electric utilities and telephone operations or data--I should 
be more sophisticated and say, data and Internet providers. I 
think that we will see an emergence of energy and data and 
other kinds of services to the home by the same and competing 
providers using the same wires.
    But the essential point I would make is that they are using 
the same wires. They are using an essential facility that 
allows all providers access to customers. And when you have 
essential facilities like that, you have to ensure that access 
is fair and non-discriminatory, whether it is into somebody's 
house or whether it is between two utilities across the State 
line.
    Mr. Doolittle. Are there further questions from our 
members?
    Mr. Walden.
    Mr. Walden. I might just follow up with one statement, Mr. 
Chairman, just to help, not ride this thing into the ground, 
but to give you an example in my district, Harney Electric Co-
op has 348 miles of transmission line that services 1,887 
customers. Now, again, I am concerned you could potentially go 
in and take whatever industrial customers are there, and there 
are a couple off the system, and, you know, the economics 
change dramatically for a small provider like that, just the 
economies of scale could be lost.
    So, as we work through this, I think we have to take these 
situations into account, is what I am saying. Because I don't 
want to leave those people out there paying an enormous rate 
for the power they used to get all in the name of deregulation, 
because I think industrial customers are going to be the first 
ones served and benefited by whatever deregulation comes.
    I also harken back to my days in the legislature in support 
of let the States make these decisions--and Oregon is working 
on a deregulation bill right now--as opposed to us always 
jumping in to decide these things for them.
    So, thank you, Mr. Chairman.
    Mr. Doolittle. Let me just--did you want to respond? Go 
ahead, Mrs. Napolitano.
    Mrs. Napolitano. Thank you, Mr. Chair.
    Just one more statement, and I have had discussions in 
California over this particular issue, and that is that 
utilities have become very cognizant of making money for their 
investors, at least in my area they do. And I was told at one 
point that they had to make a certain amount of earning for 
their ratepayer--for their investors, and I thought, I thought 
you were public utilities. And we got into a little argument 
over that.
    Do you have any comments over that because that bothers me? 
Public utilities were meant to be serving the public, not 
necessarily to make money for their investors.
    Naturally, that is an investment. I am an investor. I may 
lose money on my investment, but I am not guaranteed a good 
return on my investment--and if I put into stock or bonds, or 
whatever. And that bothers me because that changes the flavor, 
if you will, of what utilities were meant to be. Would you 
address that?
    Mr. Hoecker. Well, there is a long history of utilities 
that are affected with a public interest, being regulated by 
agencies like mine and those that Mr. Mele represents. I think 
that it is very important that we protect those public 
interests in reliability and safety and reasonable prices.
    On the other hand, it is important that investor-owned 
companies be able to earn a fair return and attract capital, so 
that they can continue to provide good services. Public 
utilities--electric utilities, in particular--kind of like the 
old Ma Bell, have been staples of the blue chip investment 
portfolio for a long time, and that is because they tend to 
provide a very nice dividend to their investors and are not 
necessarily always plowing their earnings back into the 
business because it hasn't been a competitive environment.
    That may change as they are under pressures to compete. 
That may change their risk profile; that may change the way 
investors look at utilities. But I think it is important for us 
to make sure that they have a fair opportunity to earn their 
costs and a fair return. That's been a staple of the regulatory 
principles for the better part of this century, and I think 
that should continue to be the case.
    But, clearly, when we move beyond cost-of-service 
regulation and into competition, they are at risk. And many of 
them are asking to be placed at risk, so they can provide new 
and innovative services. And we have to weigh those competing 
desires and motivations to make sure that we all have 
electricity service.
    Mr. Casten. Could I comment on that quickly?
    Mrs. Napolitano. Certainly.
    Mr. Casten. Just to put it in perspective, if you look at 
all the investor-owned utilities, they earn between 3 and 5 
percent of their revenue as profits. The kind of changes I am 
talking about will drop costs by 30 to 50 percent. The profit 
portion of it, whether it is there with an IOU or not there 
with a PMA, is rather tiny. It is the 45 to 50 percent of the 
consumer dollar that is buying fuel or that is paying for 
transmission that goes away.
    So profit is a small part of costs. It is about unleashing 
the competition to drive the other costs out of the equation. 
We energy entrepreneurs will all dream about making big profits 
when we do it, and then some guy will come in and offer a lower 
price, and the consumer wins just standing there watching.
    Mrs. Napolitano. I wish there were more of that.
    The other question I have has to do with the fuel cells. 
What is the life of a fuel cell?
    Mr. Casten. The only fuel cells that have been in 
commercial operation have now got over 40,000 hours on the 
stacks and they haven't been replaced. The cost of maintenance 
on a fuel cell is almost completely the replacement of the 
stack part of it. And everybody has sort of had to forecast 
what that is going to be.
    It has surprised everyone in running as long as it has. It 
appears that the technology is going to be able to give us four 
or five years between major overhauls.
    Mrs. Napolitano. And the disposal of such fuel cells?
    Mr. Casten. There is a platinum on the element, and they 
would be almost certainly taken back and recycled.
    Mrs. Napolitano. Recycled?
    Mr. Casten. Yes.
    Mrs. Napolitano. Thank you.
    Mr. Doolittle. Thank you. Would you just care to take a 
minute, maybe, and briefly describe the fuel cell and how it 
might work in the home environment? Yes, if you would, too, Mr. 
Casten?
    Mr. Casten. All of our existing generation with fuel is a 
combustion process that some way or other drives a piston or a 
turbine or whatever else. The fuel cell releases electricity in 
a different fashion. It uses a chemical process.
    The fuel first has to be reformulated to be only hydrogen, 
and then as it moves across the cell, helped by a catalytic 
process, the electricity flows, very tiny electricity, seven-
tenths of a watt. They stack these things up together to give 
you enough electricity.
    The only emissions from the fuel cell are CO2, water and 
some heat. And you can use the heat to make hot water or 
whatever. The technology is marvelous. That's the good news.
    The bad news is that the fuel cells today cost about $3,000 
per kilowatt versus maybe $450 per kilowatt to put in a new 
combined-cycle gas turbine plant. So for fuel cell technology 
to gain acceptance, it is going to have to come down in cost 
with mass production.
    Mr. Doolittle. And that was your point about taking a page 
out of the automaker's book?
    Mr. Casten. General Motors has recently tied up with a 
company, I think, called Plug Power. And there is a lot of 
money going to be invested to bring fuel cell costs down 
because that is about the only way we can think of to make a 
non-polluting car. And if fuel cell technology gets driven by 
the automotive industry, it will end up out in the ranch houses 
as well.
    Mr. Doolittle. Oh, so this would be used in automobiles as 
well, you mean?
    Mr. Casten. Absolutely.
    Mr. Doolittle. Mr. Walden's concern about the rural areas--
I mean, your testimony seems to acknowledge perhaps an 
exception for those areas or a way that even the improving 
technology could benefit those areas in the way of energy 
production, so they would free up dollars for other assistance. 
Is that a correct reflection of what you were saying in your 
testimony?
    Mr. Casten. Yes, sir. I think there is some of the problem 
he alluded to. But I think we do need to separate distribution 
and generation. If there is cheaper power available, the 
companies with the distribution wires should be able to buy it 
and pass it on. But I will acknowledge completely that they get 
a lot of money from the one Kodak, and if Kodak is no longer 
there, there is some adjustment that would have to be taken 
care of.
    Mr. Doolittle. Okay. Further questions?
    [No response.]
    Well, let me just ask this--this raises one issue. I think 
you are describing a high-temperature fuel cell. But there are 
low-temperature fuel cells, too, aren't there?
    Mr. Casten. The fuel cells that I am familiar with have 
heat left over from 500 degrees Fahrenheit up to about 1,000 
degrees Fahrenheit, and all of it is capable of being 
recaptured to make some useful heat, if we put them in the 
right places. They all reject heat.
    Mr. Doolittle. What do you think? What is the timeframe 
that we will actually see these available for homes? What would 
be your best guess?
    Mr. Casten. I think that if we don't deregulate federally, 
we are probably looking in the 2010, 2015 area. If we 
deregulate federally, we are probably looking at 2005.
    The comment that Chris Mele made, I do disagree with. There 
are 15 of these States that make it illegal for you to generate 
power on the site of the customer if you are not the local 
utility. There are so many other barriers. Yes, we would love 
to go deploy these things, and hopefully, make a profit, but 
the barriers that I cited in chapter 8 of my book are so 
stacked up that it is almost a miracle when you are finally 
able to get a power plant in that is not part of the protected 
monopoly.
    And I think Congress does need to say to the States, 
electricity is interstate commerce; you cannot restrict people 
from generating and selling electricity.
    Mr. Doolittle. Well, I would certainly like to thank all of 
you for the testimony you have given us. This has been a very 
interesting discussion. And I think it is indicative of the 
exciting times that we face, and some real opportunities and 
perhaps challenges that will confront us as we move toward it.
    We no doubt will have a few extra questions that we would 
like to pose in writing, and we will hold the record open for 
your response, which we would hope would be as expeditious as 
possible.
    Mr. Doolittle. And with that, we will excuse the members of 
this panel.
    Mr. Hoecker. Thank you, Mr. Chairman.
    Mr. Casten. Thank you.
    Mr. Mele. Thank you.
    Mr. Crews. Thank you, Mr. Chairman.
    Mr. Doolittle. We will invite the members of our second 
panel to come forward and ask you to assemble yourselves and 
remain standing, so we can administer the oath.
    Would you please raise your right hand?
    [Witnesses sworn.]
    Let the record reflect that each answered in the 
affirmative.
    We are very pleased to have you join us and welcome you to 
the hearing.
    Our first witness is Mr. Alan H. Richardson, executive 
director of the American Public Power Association.

 STATEMENT OF ALAN H. RICHARDSON, EXECUTIVE DIRECTOR, AMERICAN 
                    PUBLIC POWER ASSOCIATION

    Mr. Richardson. Good afternoon. I am Alan H. Richardson, 
executive director of APPA. I am just returning from seven days 
in Salt Lake City at APPA's annual conference. So while I would 
otherwise say that I am very happy to be here, and in view of 
the fact that I have just taken an oath, I will simply say, 
thank you for the opportunity to testify.
    Public power systems consist of about 2,000 municipally 
owned, State-owned utilities located throughout the country. 
Public power systems truly are public utilities. They are owned 
by units of State and local government. They are directly or 
indirectly governed by elected officials. They are managed by 
public servants. They focus on protecting and promoting the 
needs of the communities they serve.
    As I have listened to what the previous panel has been 
saying, it seems to me that it is more appropriate to talk 
about the role of the power marketing program in the context of 
industry restructuring. We are not really restructured yet. And 
it seems to me that a lot of the comments that you have 
received in the discussion that has occurred really looks at 
timing issues in the implementation of change, not whether or 
not change is going to occur in the industry, because clearly 
it is.
    APPA does support comprehensive Federal legislation 
relating to industry restructuring, but, as always, the devil 
is in the details. The most important detail is that 
legislation advance the interest of all consumers. And I think 
that to me means that it has to address a number of issues and 
it has to be looked at in a longer term perspective than 
immediate and rapid change.
    We are all trying to promote competition in the industry, 
but I think it is also important to bear in mind that 
competition is a means to an end, and that end is benefits for 
consumers. I think it is also important to recognize that in 
every environment, whether it is a natural environment or an 
economic environment, competitors try to monopolize the 
situation that they enjoy. And to me, that means that we need 
to make sure that we have a market structure in place that 
controls the natural tendency of these competitors to engage in 
monopoly practices.
    To paraphrase a comment that was made, and has been several 
times, by FERC Chairman Jim Hoecker, he says that you cannot 
believe in competition and yet be an agnostic in terms of 
market structure. And I think that is absolutely true.
    Now there are a number of issues that are a concern to 
APPA. I have identified them in my statement that I have 
submitted for the record.
    To summarize briefly, we are concerned about Federal tax 
code provisions that deal with the way that we can use 
facilities financed with tax-exempt bonds in a new restructured 
environment. That is a critical issue for us as we move into a 
restructured environment and one that the House Ways and Means 
and Senate Finance committees need to address as quickly as 
possible to remove these impediments for publicly owned 
utilities who legitimately use the instrument of tax exempt 
financing for their own infrastructure facilities in order to 
operate, not simply compete but to operate in a restructured 
environment that is a now a reality in 22 States, and soon to 
be a reality in many more.
    Congress needs to clarify State and Federal jurisdiction to 
make sure that the States can move forward. State and local 
decisionmaking should be preserved. We do oppose a Federal 
date-certain mandate from this Congress for industry 
restructuring.
    Most important, Congress needs to address market power 
issues because, as I said, market structure, we believe, is 
critically important to the realization of the goals of 
competition as the means to the ends of benefiting electric 
consumers. And that, of course, has to be the overarching goal 
for any restructuring activities benefiting all consumers.
    Now we believe that the Federal power marketing programs 
that currently exist do contribute to these goals of promoting 
competition, protecting against market power, and benefiting 
all consumers. We think the allocation of Federal power to 
1,180 publicly-owned and cooperatively-owned utilities keeps 
these institutions in the marketplace as competitors.
    A viable market needs a multitude of buyers and sellers. 
And the preservation of those entities, certainly through this 
transition period in the marketplace, we believe is very 
important for the benefits it provides to enhance competition 
in the market.
    Another function of these utilities is to provide yardstick 
competition at the distribution level, and we think that that 
is also very important. Yardstick competition does work. It is 
important for regulators to be able to compare the activities 
of various competitors in a marketplace, and these publicly 
owned and cooperative systems that operate today do serve that 
function.
    By the same token, yardstick competition in generation, we 
believe, is served by the sale of Federal power at market-based 
rates into the market. Now I think we have seen this in the 
Pacific Northwest, for example, where the price of Bonneville 
power really has set the mark for the price of other power, 
including the price of power that comes out of the Washington 
Public Power Supply System. And I can tell you there is 
significant pressure on that institution to meet the price that 
is set by the Bonneville system.
    So I believe the yardstick function continues to work and 
work to the benefit of consumers, certainly again through the 
transition period. The goal of electric restructuring is lower 
rates for all consumers. The proponents of market-based rates, 
however they might be defined, and I don't think we have come 
up with an adequate definition in the rhetoric, in the debate 
over PMA power, that adequately describes what market rates 
are, or would be higher than today's current rates.
    And it seems rather inconsistent to me to advocate policies 
that increase rates for millions of consumers under the guise 
of industry restructuring intended to benefit consumers through 
lower rates when the exact opposite will occur.
    Mr. Chairman, I thank you for the opportunity to be here 
this afternoon and look forward to questions you might have.
    [The prepared statement of Mr. Richardson follows:]
    [GRAPHIC] [TIFF OMITTED] T9318.034
    
    [GRAPHIC] [TIFF OMITTED] T9318.035
    
    [GRAPHIC] [TIFF OMITTED] T9318.036
    
    [GRAPHIC] [TIFF OMITTED] T9318.037
    
    [GRAPHIC] [TIFF OMITTED] T9318.038
    
    [GRAPHIC] [TIFF OMITTED] T9318.039
    
    [GRAPHIC] [TIFF OMITTED] T9318.040
    
    [GRAPHIC] [TIFF OMITTED] T9318.040
    
    Mr. Doolittle. Thank you.will be Glenn English, chief 
executive officer of the National Rural Electric Cooperative 
Association and a former distinguished member of the House of 
Representatives.
    Mr. English.

 STATEMENT OF GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL 
             RURAL ELECTRIC COOPERATIVE ASSOCIATION

    Mr. English. Thank you very much, Mr. Chairman. I 
appreciate that. I am Glenn English, the chief executive 
officer of the National Rural Electric Cooperative Association. 
I represent some 1,000 electric cooperatives across the 
country. I might point, Mr. Chairman, these are privately-
owned, not-for-profit, consumer-owned organizations.
    And, Mr. Chairman, what I would like to do today is to 
request that my entire written testimony be made a part of the 
record and to speak not from the testimony but respond to the 
questions that you asked at the beginning of the hearing and 
also address some of the testimony that we heard earlier.
    We have a rather unique perspective being electric 
cooperatives because in many States--in fact, most States--the 
46 States that electric cooperative exist, we have some 83 
percent of all the counties across the country in which we have 
electric cooperatives exist. They are not regulated. So that 
wire that you are talking about, those consumers who are part 
of those cooperatives do indeed have the ability to do exactly 
what Mr. Casten was saying that couldn't be done in so many 
areas and I think gives us a rather unique perspective with 
regard to much of what is happening in restructuring.
    The reason that I say that is because I think, from one 
point of view, electric cooperatives are the only people who 
have truly had choice over the past 60 years that they have 
existed. And the reason that I say that is because, at any 
given time that those consumers wished, they could come 
together and vote to sell their electric cooperative, and sell 
it to anyone that they wished to sell it to. So it is a little 
bit different.
    As you all know, certainly the reason our electric 
cooperatives got started in the first place is because of the 
fact that big power companies wouldn't provide electric power 
in many of those rural areas. And also, I think, it should be 
understood that not only would they not provide that power, but 
the only way that these people could get power is to do it 
themselves.
    And what they found was that this mechanism, this form of 
private business, the cooperative mechanism, built on the seven 
cooperative principles, that allowed them to do it themselves. 
And they came together, with a little assistance from the 
Federal Government; through government loans, they were able 
to, in fact, build their own electric utility.
    Now that electric utility has gone to the point now that it 
represents nearly half of all the electric utility 
infrastructure in the entire Nation. So it is a huge 
infrastructure that really only serves about 10 percent of all 
the consumers in the Nation, some 30 million consumers spread 
across those 46 States.
    What we are finding today, though, as we are seeing 
restructuring take place in the States, is that people are 
deciding that they would rather do it themselves. And they are 
once again reaching for that self-reliance, private-business 
approach known as the cooperative.
    And this has recently happened in your home State of 
California, Mr. Chairman, in which we have the California 
Electric Users Cooperative, some 18 agricultural businesses, 
spreading all the way from San Diego to the Oregon border, who 
have decided to do it themselves. And they have formed an 
electric cooperative and are now providing power to those 
businesses.
    And New York City, we have a group of residential consumers 
decided to do it for themselves. And we had the first Rochdale 
Electric Cooperative that was established there.
    And what we are also finding is that, under a restructured 
environment, this gives an awful lot of people the opportunity 
to do it for themselves under this form of business.
    We are developing new technology. You had the previous 
discussion with regard to fuel cells. And certainly the 
electric cooperatives have been very active as far as the 
research and development of fuel cells. We have, we think, a 
great opportunity to provide that for some of the most remote 
regions that are served by electric cooperatives.
    For instance, one now that has been developed and is being 
tried is in the State of Alaska, in some small villages up 
there. And they are using that fuel cell. They have just about 
completed those tests, and they intend to install it 
permanently on an island off the coast of Alaska.
    And, indeed, new technology is coming onboard. I have no 
idea, Mr. Chairman, nor can anyone else tell you from the 
standpoint of what technology will come, be developed in the 
next few years. I know it isn't going to be 10 or 15 years 
before you see fuel cells. As I mention, you already got it 
within probably the next two years that it is being operational 
in Alaska.
    But what I do know is that we have a cost that is involved 
in providing electric power in this country. It is ultimately 
that cost that will decide what form of fuel will be used to 
deliver those electrons to businesses. And we have a huge 
investment in the infrastructure that exists today.
    I suspect that what we will see is new technology coming 
online as it is affordable and as it makes sense to the 
American people. And as this new technology comes online, no 
question, it is going to replace much of the existing 
technology. There is no question; environmentally it is going 
to be more sound. There is no question that it will carry a 
lower price for the American consumer.
    But the bottom line is, it is the economics, the sound 
economic principles that have always guided American business, 
that will determine when it comes online and how it comes 
online. And certainly, as far as the form of business that it 
will be used, I would suggest to you that the cooperative 
mechanism under a restructured environment will have the 
probably the greatest opportunity to lead the way because it is 
the consumers themselves that make the decision in that form of 
business.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. English follows:]
    [GRAPHIC] [TIFF OMITTED] T9318.044
    
    [GRAPHIC] [TIFF OMITTED] T9318.045
    
    [GRAPHIC] [TIFF OMITTED] T9318.046
    
    [GRAPHIC] [TIFF OMITTED] T9318.047
    
    [GRAPHIC] [TIFF OMITTED] T9318.048
    
    [GRAPHIC] [TIFF OMITTED] T9318.049
    
    [GRAPHIC] [TIFF OMITTED] T9318.050
    
    [GRAPHIC] [TIFF OMITTED] T9318.051
    
    [GRAPHIC] [TIFF OMITTED] T9318.052
    
    [GRAPHIC] [TIFF OMITTED] T9318.053
    
    Mr. Doolittle. Thank you.
    Our next witness is Mr. Donald Santa, vice president of 
LG&E Energy Corporation.
    Mr. Santa.

STATEMENT OF DON SANTA, VICE PRESIDENT, LG&E ENERGY CORPORATION

    Mr. Santa. Good afternoon, Mr. Chairman, and Mr. Walden. On 
behalf of LG&E Energy Corp., thank you for the opportunity to 
testify today regarding the role of Federal Power Marketing 
Administrations in a restructured electric industry.
    LG&E Energy is a diversified energy services holding 
company headquartered in Louisville, Kentucky. LG&E has been a 
leader in the competitive transformation on the electric 
industry and was among the earliest investor-owned utilities to 
support comprehensive Federal restructuring legislation.
    LG&E's two regulated subsidiaries, Louisville Gas and 
Electric Company and Kentucky Utilities Company are within the 
Southeastern Power Administration's service territory. And the 
company has experience dealing with public power and Federal 
utilities in a variety of contexts.
    In some cases, the LG&E companies supply public power with 
both generation and transmission services, and in other cases, 
the roles are reversed. In some cases, LG&E is a partner with 
public power, and in other cases, we are competitors. This is 
quite typical of how IOU's interact with public power. In my 
comments today, I will offer certain comments addressing both 
public power and the PMA's and then focus on PMA-specific 
issues.
    The legal framework governing IOU's and public power 
affects each of these relationships I just referenced. Electric 
restructuring and the public policy promoting competition in 
the electric industry necessitate re-examining this legal 
framework. In particular, does this legal framework distort the 
market and frustrate the goal of competitive industry 
restructuring?
    I will discuss this issue in three contexts. First, the 
rules governing access to transmission facilities owned and 
operated by public power and Federal utilities. Second, the 
rules governing public power and Federal utilities when they 
participate in competitive segments of the electric industry. 
And third, the fundamental question of the role of the Federal 
Government as a generator and marketer of electricity.
    With respect to the first issue, public power and Federal 
utilities should be required to provide access to their 
transmission facilities under the same terms and conditions of 
service as investor-owned utilities. Transmission is the 
interstate highway system for commerce in electricity. 
Regardless of whether the transmission is owned by an IOU, 
public power, or a Federal utility, it is a monopoly function. 
And the detriments to competition from the exercise of market 
power in transmission are the same regardless of the ownership.
    As Chairman Hoecker noted, the Energy Policy Act authorized 
the Commission to order non-jurisdictional utilities to provide 
transmission access on a case-specific basis. And in response 
to Order 888 reciprocity conditions, a number of publicly-owned 
utilities have voluntarily filed open-access tariffs.
    Still there is no effective substitute for the full scope 
of the Commission's Federal Power Act authority to regulate the 
rates and terms and conditions of transmission service under a 
common set of standards. To paraphrase Betsy Moler, the former 
chair of the FERC, open access does not work well on Swiss-
cheese basis.
    Admittedly, it is not as simple as just amending the 
Federal Power Act. In fairness to public power, the Internal 
Revenue Code must be amended to address the tax consequences of 
providing private parties with access to transmission 
facilities constructed using tax-exempt financing. There is no 
dispute regarding this basic point. The devil is in the 
details, however, and, as always, the level playing field is in 
the eye of the beholder.
    Next, to the extent that public power and Federal utilities 
choose to compete in competitive segments of the electric 
market, they also should be subject to the same legal 
requirements as investor-owned utilities competing in the same 
markets. With regard to such activities, they should be subject 
to the same regulatory obligations, the antitrust laws should 
apply with equal force, and the tax-exempt status should not be 
permitted to distort the outcomes in competitive markets.
    With respect to the Power Marketing Administrations, the 
fundamental question of the role of the Federal Government as a 
generator and marketer of electricity must be revisited. This 
necessarily raises the issue of whether the PMA's and Federal 
Power projects should either be privatized or fundamentally 
restructured.
    Admittedly, this is a complicated and divisive issue 
fraught with political peril. Still, at a time when the 
electric power industry is undergoing a fundamental 
restructuring, and the New Deal era statutes that served as the 
basis for Federal regulation of that industry are being re-
examined, the role of the Federal Government as a generator and 
marketer of electricity should be re-examined as well.
    While I am not an expert in the laws governing the PMA's 
and the particulars of the public policy issues affecting the 
PMA's constituencies, I offer the following observations based 
on my experience with analogous issues in other contexts:

    First, the facts about Federal power must be separated from 
the myths about Federal power. For example, Federal power's 
proponents frequently cite its role as a competitive benchmark 
or yardstick for investor-owned utilities. What are the facts?
    GAO points out that the PMA's historic position as a low-
cost power provider stems from a number of factors. These 
include the inherent low-cost of hydro-power relative to other 
generating resources, Federal financing at low interest rates, 
flexibility in the repayment of principal on the treasury 
portion of PMA's debt, the PMA's tax-exempt status, and 
operating budgets that seek to break even rather than earn a 
profit or return on investment. Few, if any, of these factors 
are grounded in sound management and efficient operation.
    The validity of any benchmark comparison is further 
undermined by the fact that the PMA's rates do not cover all 
costs associated with the production, transmission, and sale of 
power. For example, GAO has reported that SEPA's, SWAPA's, and 
WAPA's net cost to the treasury for the years 1992 through 1996 
totaled about $1.5 billion because these PMA's rates did not 
recover all power-related costs.
    Finally, even if one concedes that the benchmark concept 
for IOU's may have served some purpose in the past, one must 
question whether this concept has become an anachronism in an 
increasingly competitive market for the generation and sale of 
power.
    My second observation is that the role of the Federal 
Government should be no greater than is needed to address 
legitimate needs that cannot be met adequately by the 
marketplace. To the extent there is a legitimate Federal 
interest to be served by intervening in the market, that 
intervention should be no greater than is necessary to address 
the problem. The fact that an extensive Federal intervention in 
the market for electricity may have been justified a half-
century ago does not necessarily justify that same level of 
intervention today.
    The goal of rural electrification has already been 
accomplished. And to the extent there remains a need to protect 
the rates of rural electric customers, it is hardly clear that 
the current program is very effective at achieving that goal.
    For example, many of the current end-user recipients of PMA 
power are not rural customers. In fact, most rural customers 
are served by IOUs, and not by the PMAs and other preference 
customers. Therefore, I think as a threshold matter, the 
Committee should ask, is there still a legitimate Federal 
interest in protecting rural electric customers?
    And even if the answer is yes, the Subcommittee should ask, 
is there a better way to target the Federal response to those 
who truly are in need and not just those who by the accident of 
history are within a preference customer-service territory?
    Admittedly, because of the non-power uses of Federal water 
power projects and the legal obligations that attach to those 
uses, resolving the transition issues associated with Federal 
power will be daunting. This should not, however, deter the 
Subcommittee from asking and answering the threshold question 
of whether the Federal Government's historic role as a 
generator and marketer of electricity can be justified going 
forward.
    In conclusion, let me commend the chairman and the 
Subcommittee for their interest in the role of PMA's in a 
restructured electric industry. As you no doubt appreciate, 
these are not easy issues. Still, they are important and timely 
questions in connection with providing a legal framework that 
encourages competitive electric markets.
    Thank you for the opportunity to testify, and I am happy to 
respond to any questions the Subcommittee may have.
    [The prepared statement of Mr. Santa follows:]

   Statement of Donald F. Santa, Jr., Senior Vice President, Deputy 
                   General Counsel, LG&E Energy Corp.

    Good afternoon, Mr. Chainnan and Members of the 
Subcommittee. My name is Donald Santa, and I am the Senior Vice 
President, Deputy General Counsel of LG&E Energy Corp. Thank 
you for providing LG&E Energy Corp. with the opportunity to 
testify today regarding the role of Federal power marketing 
administrations (``PMAs'') in a restructured electric industry.
    I have been asked to address today, from the perspective of 
an investor-owned utility, the issues that restructuring 
creates for the electric power industry. More particularly, I 
have been asked to address the role of public power, and 
especially the PMAs, in a restructured industry and the public 
policy issues related to this segment of the industry.

LG&E Energy Corp.'s Perspective.

    Let me begin by telling the Subcommittee about LG&E Energy 
Corp. and its perspective on electric restructuring. LG&E 
Energy is a diversified energy services holding company 
headquartered in Louisville, Kentucky. The company has 
businesses in power generation and project development, retail 
gas and electric utility services, and asset-based energy 
marketing. The company owns and operates two regulated utility 
companies, Louisville Gas and Electric Company and Kentucky 
Utilities Company. Together, these companies serve retail 
customers in the Commonwealth of Kentucky and in a five-county 
portion of the Commonwealth of Virginia. LG&E Energy owns 
equity in and operates non-utility powerplants in six states as 
well as Spain and owns interests in natural gas distribution 
companies in Argentina.
    Over the past decade, LG&E Energy has transformed itself 
from a small, locally focused regulated utility company into a 
diversified energy services company. This transformation 
mirrors the changes that have occurred in the electric power 
industry over that same period.
    LG&E Energy Corp. has been a leader in the competitive 
transformation of the electric power industry. LG&E was among 
the first companies to form an unregulated energy marketing 
affiliate and to open its transmission system to non-
discriminatory third-party access. LG&E also was among the 
first investor-owned utilities to support comprehensive Federal 
restructuring legislation.
    LG&E's two regulated utility subsidiaries are within the 
Southeastern Power Administration's service area, and the 
company has experience dealing with public power entities in a 
variety of contexts. For example, Kentucky Utilities Company is 
a wholesale requirements supplier to 11 municipal systems and 
one college in Kentucky. (As part of doing business with these 
customers, KU has dealt with issues concerning their 
entitlements to SEPA power.) Louisville Gas and Electric 
Company is a partner with the Indiana Municipal Energy Agency 
and the Illinois Municipal Power Agency in its Trimble County 
generating station. LG&E's Western Kentucky Energy Corp. 
subsidiary is leasing and operating the generating assets of 
Big Rivers Electric Corporation, a generation and transmission 
cooperative, and is selling power under contract to Big Rivers' 
four member distribution cooperatives. And, given the proximity 
of the Tennessee Valley Authority, the LG&E companies have 
experience in dealing with TVA as a power supplier and as a 
competitor in off-system sales markets, as a transmission 
provider, and in the context of territorial disputes with TVA 
and its member cooperatives.
    Finally, let me add a note about my personal perspective. 
Prior to joining LG&E in 1997, I served for four years as a 
member of the Federal Energy Regulatory Commission. During that 
period, the Commission implemented Title VII (the electricity 
Title) of the Energy Policy Act of 1992, issued its landmark 
Order No. 888 open access rule and dealt with many issues of 
first impression in connection with electric restructuring.

A Sea Change in Industry Structure.

    The domestic electric power industry has undergone a sea 
change in less than a decade. The combination of the market, 
technological innovation and the catalyst provided by Title VII 
of the Energy Policy Act have compelled an irreversible 
restructuring of the Nation's electric power industry. This 
restructuring currently is incomplete and has not occurred at a 
uniform pace across all regions and all segments of the 
industry. Still, there is no denying that the competition genie 
is out of the bottle.
    While Title VII of the Energy Policy Act addressed only the 
wholesale power market, the message that Federal energy policy 
endorsed competition in the generation and sale of 
electricity--and non-discriminatory transmission access as a 
means to promote that competition--profoundly affected the 
mindset of the electric power industry. Once unleashed, market 
forces do not respect the line between Federal and state 
jurisdiction and the distinction between wholesale and retail 
customers. Beginning first in California and New England--and 
now spreading to other regions--individual states have begun 
opening their retail electricity markets to competition. At 
last count, a total of 21 states have authorized consumer 
choice for electricity. Not surprisingly, retail restructuring 
generally has occurred fastest in the states with high 
electricity rates and slowest in the states with low rates. 
Still, it is not a stretch to predict that within the 
foreseeable future most, if not all, states will have made the 
transition to retail electric competition.
    While many refer to the ``deregulation'' of the electric 
industry, in fact only some segments of the industry are being 
``deregulated'' while other segments are being ``reregulated.'' 
What is being ``deregulated'' are the segments and functions of 
the industry that are competitive. In particular, the 
generation and sale of electricity are being freed from 
traditional monopoly regulation. Also, functions such as 
metering and billing are being considered for deregulation. 
Meanwhile, the transmission and distribution segments of the 
industry--that is, the wires used to deliver electricity from 
the generator to the consumer--still exhibit the attributes of 
natural monopolies and are being ``reregulated'' on a stand-
alone basis.
    Retail restructuring is breaking down the longstanding 
vertically integrated, monopoly structure for electric 
utilities. As a result, there is no longer such a thing as a 
typical electric utility or even a typical model for an energy 
services company. Some companies, especially those in states 
that have not yet restructured their retail power markets, 
remain vertically integrated--that is, a single corporate 
entity provides generation, transmission and distribution 
services within a monopoly franchise service territory. Still, 
vertical integration is no longer the predominant model.
    Increasingly, energy services companies are making 
strategic decisions regarding which segment--or segments--of 
the energy business they wish to focus their resources. Some 
companies, in many cases with the incentive to recover stranded 
costs, have sold their electric generating assets. The Edison 
Electric Institute estimates that by next year, approximately 
25 percent of all fossil fuel and hydroelectric generation 
owned by investor-owned utilities will have been offered for 
sale.
    These divesting companies are focusing their resources on 
other aspects of the business. Some will be pure ``wires'' 
companies operating the transmission and distribution networks 
within their service territories and perhaps consolidating with 
other such companies to realize efficiencies of scope and 
scale. Others will focus on marketing products directly to 
consumers. This can range from marketing the energy commodity, 
to providing energy services, to marketing non-energy network 
services such as telecommunications, Internet and home 
security.
    For every seller of generating plants, there is, of course, 
a buyer. Some companies are acquiring the divested generating 
plants as part of a strategy to become regional, and in some 
cases national, generating companies. In addition, open access 
and competition have created tremendous interest in the 
construction of new, merchant generating plants. Merchant 
plants are powerplants constructed (or acquired) solely for the 
purpose of selling power into the competitive market. The 
companies acquiring divested generation and constructing 
merchant plants are putting shareholder dollars at risk. There 
is no guarantee that the cost of owning and operating such 
powerplants will be recovered in the competitive market. This 
is in stark contrast to the traditional regulated, cost-of-
service model for the recovery of utility powerplant 
investment.
    Furthermore, a whole new segment of the electric industry 
has emerged as part of restructuring. This is the energy 
marketer segment. The growth of this segment has been 
astounding. For example, in 1998 energy marketers sold 2.3 
billion megawatt hours of electricity, compared to only 7.1 
million megawatt hours in 1994. This explosion in power 
marketer volumes is solid evidence of the liquidity that is 
developing in electric power markets.
    As has been widely reported, restructuring has resulted in 
a wave of consolidation within the energy industry. This 
consolidation began with a series of mergers between 
neighboring, vertically integrated utilities. It now, however, 
has spread to combinations that cut across industry segments 
and that have brought a series of new players to the industry. 
In two cases now pending before the regulators, utilities from 
the United Kingdom have applied for authorization to acquire 
domestic utilities. There also has been a whole series of 
``convergence'' mergers where electric companies have acquired 
natural gas pipelines and local distribution companies. There 
also are several instances where energy marketing companies 
have begun to acquire established utility companies. In other 
words, the new entrants have begun acquiring some of the 
industry's traditional players. To use an analogy to some of 
the toys we used as children, it is as if the ``tinker toys'' 
or the ``erector set'' that comprised the traditional industry 
structure is being taken apart and re-assembled into a variety 
of interesting new strategic structures.
    We also are seeing the beginnings of regional structures 
for the operation and management of the transmission grid. 
Given the physics of electric transmission, the regional scope 
of wholesale power markets, and the advantages in terms of 
efficiency and reliability, a compelling case can be made for 
regional operation and management of the grid. Beginning first 
with its Regional Transmission Group policy statement and 
continuing with the Independent System Operator (or ``ISO'') 
principles adopted as part of the Order No. 888 open access 
rule, the FERC has encouraged voluntary efforts to establish 
regional structures for transmission. Most recently, the 
Commission issued a notice of proposed rulemaking providing 
even stronger impetus for regional transmission organizations 
(or ``RTOs''). In the three years since Order No. 888, the 
Commission has authorized five ISOs. A competing regional 
structure, the independent transmission company (or 
``transco'') has gained favor in some quarters, and the 
Commission currently has pending before it applications to 
authorize two transcos.

Completing the Legal Framework for Restructuring.

    While the Energy Policy Act and subsequent actions by the 
FERC and the states have spurred electric restructuring, there 
remains a need for follow-up action by the Congress to remove 
impediments to a complete restructuring of the electric power 
industry. As noted earlier, LG&E Energy was an early proponent 
for comprehensive Federal restructuring legislation. Our 
preference would be a nationwide date certain for retail 
competition as the centerpiece of a Federal restructuring bill.
    Still, should this not be possible, LG&E believes that 
there are a number of other positive steps that the Congress 
could take to promote an efficient restructuring of the 
electric power industry. Importantly, these steps address areas 
of Federal law that are beyond the authority of the states. 
Only action by the Congress can remove these impediments. In 
particular, Federal legislation should be enacted to enhance 
the competitiveness and efficiency of wholesale power markets 
and to ensure the reliability of the transmission grid.
    First, the transition to competitive electric markets is 
being impeded by Federal laws that burden the industry with 
outdated legal obligations. The Public Utility Holding Company 
Act of 1935 should be repealed. The Congress also should repeal 
prospectively the mandatory purchase obligations under the 
Public Utility Regulatory Policies Act.
    Second, FERC's authority to regulate interstate 
transmission should be enhanced. The Commission should be 
authorized to regulate all owners of interstate transmission 
facilities (i.e., municipals, cooperatives and Federal 
utilities, in addition to the investor-owned utilities 
currently regulated). It also should be authorized to order the 
owners of interstate transmission facilities to participate in 
RTOs and to establish mechanisms for enforcing national 
reliability standards.

The Role of Public Power and the Power Marketing 
Administrations.

    As exemplified by my earlier comments about LG&E's 
experience with public power, investor-owned utilities interact 
with public power in a variety of contexts. In some cases, IOUs 
supply public power with both generation and transmission 
services and, in other cases, the roles are reversed. In some 
cases, IOUs are partners with public power and, in other cases, 
the two are competitors. The legal framework governing IOUs and 
public power affects each of these relationships.
    Electric restructuring and the public policy promoting 
competition in the electric industry necessitate a re-
examination of this legal framework. In particular, it must be 
asked whether this legal framework distorts the market and 
frustrates the goal of competitive industry restructuring. For 
purposes of discussion, this examination of the legal framework 
can be subdivided as follows:

         First, the rules governing access to transmission 
        facilities owned and operated by public power and the Federal 
        utilities;
         Second, the rules governing public power and Federal 
        utilities when they participate in the competitive segments of 
        the electric industry; and,
         Third, the fundamental question of the role of the 
        Federal Government as a generator and marketer of electricity.

Transmission Access.

    With respect to the first issue, public power should be 
required to provide access to its transmission facilities under 
that same terms and conditions of service as investor-owned 
utilities. Transmission is the interstate highway system for 
commerce in electricity. Regardless of whether transmission is 
owned by an IOU, public power or a Federal utility, it is a 
monopoly function. And the detriments to competition from the 
exercise of market power in transmission are the same 
regardless of ownership.
    If the goal of Federal energy policy is greater competition 
in the generation and sale of electricity, open access to all 
parts of the highway system should be provided under the same 
terms and conditions. This becomes even more important as 
policy begins to focus on regional markets and the advantages 
of regional management and operation of the transmission grid. 
To paraphrase Betsy Moler, the former chair of the FERC, open 
access does not work well on a ``swiss cheese'' basis.
    The Energy Policy Act authorized the Commission to order 
non-jurisdictional utilities to provide transmission access on 
a case-specific basis. And, in response to the Order No. 888 
reciprocity conditions, a number of publicly-owned utilities 
have voluntarily filed open access tariffs with the FERC. 
Still, there is no effective substitute for the full scope of 
the Commission's Federal Power Act authority to regulate the 
rates, and terms and conditions of transmission service under a 
common set of standards.
    Admittedly, it is not as simple as just amending the 
Federal Power Act. In fairness to public power, the Internal 
Revenue Code must be amended to address the tax consequences of 
providing private parties with access to transmission 
facilities constructed using tax exempt financing. There is no 
dispute regarding this basic point. The devil is in the 
details, however. And, as always, the ``level playing field'' 
is in the eye of the beholder.

Competitive Ventures.

    Next, to the extent that public power chooses to compete in 
competitive segments of the electric power market, it also 
should be subject to the same legal requirements as investor-
owned utilities competing in the same markets. With regard to 
such activities, public power should be subject to the same set 
of regulatory obligations; the antitrust laws should apply with 
equal force; and public power's tax-exempt status should not be 
permitted to distort the outcomes in competitive markets.

The Federal Government as a Generator and Marketer of 
Electricity.

    With respect to the Power Marketing Administrations, the 
fundamental question of the role of the Federal Government as a 
generator and marketer of electricity must be re-examined. This 
necessarily raises the issue of whether the PMAs and Federal 
power projects either should be privatized or be fundamentally 
restructured.
    Admittedly, this is a divisive issue fraught with political 
peril. I readily acknowledge the complications arising from the 
multiple purposes served by Federal water power projects, the 
potential rate implications for preference power customers and 
the concerns of the various constituencies with a stake in the 
PMAs as part of their regional economies. Still, at a time when 
the electric power industry is undergoing a fundamental 
restructuring and the New Deal era statutes that have served as 
the basis for Federal regulation of the industry are being re-
examined, the role of the Federal Government as a generator and 
marketer of electricity should be re-examined as well.
    While I am not an expert in the laws governing the PMAs and 
the particulars of the public policy issues affecting the PMAs' 
constituencies, I offer the following observations based on my 
experience in dealing with analogous issues in other contexts:

    First, the facts about Federal power must be separated from 
the myths about Federal power. Already, the Subcommittee's 
record of hearings on this issue and the work done by the 
General Accounting Office at the Chairman's request have done 
much in this regard.
    For example, Federal power's proponents frequently cite its 
role as a competitive ``benchmark'' or ``yardstick'' for 
investor-owned utilities. What are the facts?
    GAO points out that the PMAs' historic position as low-cost 
power providers stems from a number of factors, few of which 
are grounded in sound management and efficient operation. These 
factors include ``the inherent low cost of hydropower relative 
to other generating sources, Federal financing at relatively 
low interest rates, flexibility in repayment of principal on 
the Treasury portion of the PMAs' debt, the PMAs' tax exempt 
status, and operating budgets that seek to break even rather 
than earn a profit or return on investment.'' \1\
---------------------------------------------------------------------------
    \1\ Federal Electric Power: Operating and Financial Status of DOE's 
Power Marketing Administrations (GAO/RCED/AIMD-96-9FS, October 13, 
1995).
---------------------------------------------------------------------------
    Even the PMAs question the validity of any comparison. In a 
prepared statement submitted to this Subcommittee in connection 
with its September 19, 1996, oversight hearing, J.M. Shafer, 
the Administrator of the Western Area Power Administration, 
stated: ``I question the usefulness of comparing the PMAs 
against other, nonfederal utilities for the purposes of 
determining why PMA power costs are lower.'' \2\
---------------------------------------------------------------------------
    \2\ Oversight Hearing on Accounting Practices for Federal Power 
Marketing Administrations Before the Subcomm. on Water and Power 
Resources of the House Committee on Resources, 104th Cong. 104-101 
(1996) (statement of J.M. Schaefer, Administrator, Western Area Power 
Administration).
---------------------------------------------------------------------------
    The validity of any ``benchmark'' comparison is further 
undermined by the fact that the PMAs' power rates do not 
recover all of the costs associated with the production, 
transmission and sale of power. GAO has reported that SEPA's, 
SWAPA's and WAPA's net cost to the Treasury for the years 1992 
through 1996 totaled about $1.5 billion, because the PMAs' 
rates did not recover all power-related costs. While the PMAs 
generally were following applicable laws and regulations for 
the recovery of their costs, the fact that such costs were not 
recovered in their rates calls into question the worth of any 
comparison to the rates charged by investor-owned utilities.
    Finally, even if one concedes that the concept of the PMAs 
as a ``benchmark'' or ``yardstick'' for IOUs may have served 
some purpose in the past, one must question whether this 
concept has become an anachronism in an increasingly 
competitive market for the generation and sale of power.
    Another example of separating the facts from the myths 
about Federal power is the role of the PMAs in serving rural 
customers. The laudable goal of a Federal program to ensure 
that rural and small-town America received electric service has 
been accomplished. Furthermore, in many cases, the demographics 
and the economies of the areas served by the PMAs have changed 
dramatically over the intervening years. For example, GAO 
reports that over one half of the towns that preference 
customers reported serving are urban. Furthermore, PMA power is 
used to serve very affluent areas, including Aspen, Colorado 
and parts of Orange County, California.\3\
---------------------------------------------------------------------------
    \3\ Federal Power: Regional Effects of Changes in PMAs' Rates (GAO/
RCED-99-15, November 16, 1998).
---------------------------------------------------------------------------
    Yes, PMA power is used to serve many rural customers. PMA 
power is not used, however, to serve the majority of rural 
customers. The majority of rural customers are served by 
investor-owned utilities. According to data compiled by the 
Edison Electric Institute, almost 60 percent of Americans 
living in rural areas with fewer than 1,500 people are served 
by IOUs. Furthermore, IOUs serve almost 80 percent of Americans 
living in areas with populations between 1,500 and 2,500 people 
(i.e., small-town America).
    My second observation is that the role of the Federal 
Government should be no greater than is needed to address 
legitimate needs that cannot be met adequately by the 
marketplace. To the extent there is a legitimate Federal 
interest to be served by intervening in the market, the 
intervention should be no greater than is necessary to address 
the problem. The fact that an extensive Federal intervention in 
the market for electricity may have been justified a half 
century ago does not necessarily justify that same level of 
intervention today. And, if it is decided that such an 
intervention cannot be justified going forward, the needs of 
stakeholders that have relied on the historic policy should be 
dealt with as a transition issue rather than as a basis for 
preserving the status quo.
    As already noted, the goal of rural electrification has 
been accomplished. And, to the extent there remains a need to 
protect the rates of rural electric customers, it is hardly 
clear that the current program is very effective at achieving 
that goal. As mentioned earlier, many of the current end-user 
recipients of PMA power are not rural customers. In fact, most 
rural customers are served by IOUs. Therefore, as a threshold 
matter, the Subcommittee should ask: Is there still a 
legitimate Federal interest in protecting rural electric 
customers? And, even if this question can be answered 
affirmatively, the Subcommittee should ask: Is there a better 
way to target the Federal response to those who truly are in 
need and not just those who by the accident of history are 
within a preference customer's service territory?
    Clearly, if the Federal Government chooses to privatize or 
otherwise fundamentally restructure the PMAs, there will be 
legitimate stakeholder interests and transition issues that 
must be addressed. In this regard, the experience of the states 
in dealing with retail electric power restructuring is 
instructive. In each and every state that has chosen to 
restructure its retail power markets, there have been important 
transition issues. And, as part of the consensus building 
process that was necessary to forge broad support for 
restructuring, solutions were found for each of these issues.
    For example, preference customers express concern that 
eliminating the PMAs will subject them to dramatically higher 
market rates for purchased power. While in some cases that 
might be true, it is not necessarily true across the board. In 
looking at this issue, GAO concluded that the results vary 
widely depending on the particular PMA and customer in 
question.\4\ For the customers with a legitimate need, this can 
be addressed as a transition issue.
---------------------------------------------------------------------------
    \4\ Federal Power: PMA Rate Impacts, by Service Area (GAO/RCED-99-
55, January 28, 1999).
---------------------------------------------------------------------------
    Admittedly, because of the non-power uses of Federal water 
power projects and the legal obligations that attach to such 
uses, resolving the transition issues associated with Federal 
power will be daunting. Still, the mere presence of such issues 
should not deter the Subcommittee from asking and answering the 
threshold question of whether the Federal Government's historic 
role as a generator and marketer can be justified going 
forward.
    In conclusion, let me commend the Chairman and the 
Subcommittee for their interest in the role of the PMAs in a 
restructured electric industry. As you no doubt appreciate, 
these are not easy issues. Still, these are important and 
timely questions in connection with providing a legal framework 
that encourages competitive electricity markets.
    Thank you for the opportunity to testify today on behalf of 
LG&E Energy Corp. I am happy to respond to any questions from 
the Subcommittee.

                        Supplemental Information

Donald F. Santa, Jr.
Senior Vice President,
Deputy General Counsel
LG&E Energy Corp.
Louisville, KY 40202

    Mr. Santa's statement addresses the issue of the role of 
public power, and especially the Power Marketing 
Administrations, in a restructured electric industry from the 
perspective of an investor-owned utility. The statement first 
describes electric industry restructuring in general and the 
steps needed to complete the legal framework for restructuring. 
The statement then focuses on how electric restructuring and 
the public policy goal of promoting competition in the electric 
industry necessitate re-examining the legal framework governing 
public power and the PMAs. The statement identifies three areas 
for re-examination: (1) the rules governing access to 
transmission facilities owned and operated by public power and 
Federal utilities; (2) the rules governing public power and 
Federal utilities when they participate in the competitive 
segments of the electric industry; and (3) the fundamental 
question of the role of the Federal Government as a generator 
and marketer of electricity.

    Mr. Doolittle. Thank you.
    Our next witness is Wenona Hauter, director of Public 
Citizen's Critical Mass Energy Project.
    Ms. Hauter.

    STATEMENT OF WENONAH HAUTER, DIRECTOR, PUBLIC CITIZEN'S 
                  CRITICAL MASS ENERGY PROJECT

    Ms. Hauter. Mr. Chairman and members of the Subcommittee, I 
am Wenona Hauter, director of Public Citizen's Critical Mass 
Energy Project. And thank you for the opportunity to testify on 
behalf of Public Citizen.
    Public Citizen was founded by Ralph Nader in 1971. It is a 
non-profit research, lobbying, and litigation organization 
located in Washington, DC. We advocate for consumer protection 
and for government and for corporate accountability.
    As the rules governing the electric industry are rewritten 
State by State, the debate over the role of the PMA's 
dramatizes the larger debate over deregulation. Who should 
really benefit? Is it residential consumers and rural 
consumers? Or should all the benefits flow to large industrial 
customers, investor-owned utilities, and Wall Street financial 
firms. Should the air and water that is so important for our 
families' health and well-being be an important consideration? 
To answer questions in relation to the PMA's, it is important 
to understand how utility regulation is unfolding across the 
Nation.
    Ohio became the 23rd State to send a bill to the Governor 
yesterday. But only a handful of bills are actually being 
implemented. Unfortunately, while the stated goal of the 
changes to the electric industry is to break up the monopolies 
an create competition, that is something we all support, the 
outcome of rewriting the laws governing the electric industry 
is turning out to be something quite different.
    The process has been gamed at the State level as the 
incumbent utilities use their enormous power at State 
legislatures to rewrite the rules for their benefit. In many 
cases, the result will be in the long term the creation of 
unregulated monopolies.
    These monopolies have even been granted billions of dollars 
in a bailout to pay them back for their uneconomic investments, 
leaving them in the enviable position of having free capital 
that is fueling the consolidation in the industry.
    At the same time, the large industrial customers are 
getting their special deals, and the power marketers are 
winning the right to sell to them. Meanwhile, the residential 
and small-business consumers have been left unprotected from 
large price increases in the future after the legislated rate 
reductions have been sunset. With 60 percent of American 
families having an income of below $30,000, the price of fuel 
cells is going to have to come way down before everyone has a 
fuel cell in their basement.
    There is no competition for residential customers in States 
that have begun implementing their bills, California, 
Massachusetts, and Rhode Island. At the same time, we see 
unprecedented consolidation in the industry and we see air 
emissions already beginning to rise because coal-power is 
becoming the cheapest option.
    Utilities are purchasing coal plants at above book value. 
While no supports fuel cells more than we do at Public Citizen, 
we think it is going to be a long time before these utilities 
close down these coal plants that they are purchasing today.
    The PMA's have the opportunity to play a unique role in 
protecting consumers in a deregulated marketplace. Because the 
deregulated electricity market is likely to have insufficient 
competition, the PMA's and the consumer-owned utilities, both 
the municipals and rural electric cooperatives, will provide 
yardstick for the fair price of electricity.
    Restraining the sale of PMA electricity would remove this 
benchmark function of the PMA's and their preferred customers. 
This would be especially damaging to consumers at a time when 
their strong influence is needed to prevent cartel-like 
behavior and other forms of market domination and abuse within 
regional power pools.
    The PMA's and consumer-owned utilities provide for 
corporate diversity among the many players who sell and buy 
electricity. They emphasize customer service rather than 
corporate profit.
    Transmission is another area where the PMA's can play a 
valuable role in the future. Three of the four PMA's own a 
significant amount of transmission lines and facilities. These 
Federal PMA's could serve as the backbone for three non-profit, 
publicly-owned transmission companies. This would ensure fair 
electricity markets, increase reliability, increase 
transmission access, reduce regulation, reduce bureaucracy, 
eliminate cross subsidies, and eliminate affiliate abuses at 
the hands of the investor-owned utility companies. At the very 
least, the PMA's, with their large network of transmission 
lines and substations provide stabilization to the volatility 
that we already see in some markets where auctions of wholesale 
electricity are taking place.
    Now, because we believe that the PMA's do serve an 
important function, especially for the future, we are pleased 
to see that the attempts to privatize them or to sell 
federally-owned dams have subsided, but we also oppose backdoor 
privatization efforts. We view the provisions in the Franks-
Meehan legislation, which forced the PMA's to sell electricity 
at so-called market-based prices, as being unfair to millions 
of consumers living in the 33 States that the PMA's serve. It 
is also a sly way of forcing the PMA's to charge a higher price 
for electricity in an attempt to bring on their demise.
    The term ``market-based'' is not defined in the 
legislation, and in this case, it is being used pejoratively to 
imply that some undefined subsidy exists. Now there are some 
utility plants that generate power below current market rates, 
including FERC-licensed hydro-power projects owned by private 
utilities in the Northeast and elsewhere.
    Forcing any power plant to sell at some undefined rates 
could needlessly raise costs for consumers. The PMA's should 
continue providing cost-based power. This will be especially 
important in the deregulated environment where we can already 
see the vast advantages large consumers are having over 
residential and small-business consumers. It is going to be 
especially true of rural and inner-city consumers, who there 
will be little competition to serve.
    We do not believe that the provision in H.R. 1486 mandating 
that revenues from electricity sales be diverted to the 
treasury for deficit reduction is reasonable, either. It is 
inappropriate to tax power users to reduce our Federal deficit, 
when far more money could be saved by closing loopholes and 
giveaways and other forms of corporate welfare.
    However, we do believe that it is appropriate for PMA's to 
include in the cost of power mitigation strategies that deal 
with damage to fish, wildlife, and rivers. The PMA's--and, for 
that matter, the investor-owned utilities--must become 
responsible stewards of our natural environment. Dams are a 
major culprit of the degradation of our Nation's fresh-water 
resources. Their effects are far-reaching and ecologically 
complex.
    Dams are concrete and impenetrable, the antithesis of a 
river's dynamic and fluid nature. Dams turn rivers into quiet 
stagnant reservoirs. They reduce or regulate water flows, while 
changing temperature levels that wildlife have evolved to 
depend on. Through diversion for power production, dams block 
water needed for healthy river systems and wreak havoc on the 
river's biological life. The most widely-recognized 
environmental effect of dams is their effect on fish; for 
instance, bringing those Northwest salmon runs to the brink of 
extinction.
    Deregulation is putting added stress on rivers that have 
hydro facilities because the demand for low-priced power places 
a higher value on peak-hour electricity. And hydro facilities 
can stop or start generation in a matter of minutes to respond 
to demand. This is one of the reasons for the pressures from 
IOU's to privatize dams and the PMA's: Access to cheap, peak 
power means large profit.
    Obviously, this is one of the reasons we oppose privatizing 
dams or PMA's. Rivers are owned by no one, nor should they be. 
They are a public resource. Private companies are driven by 
growth needs, and they are not economically rewarded for being 
good environmental stewards.
    On the other hand, the PMA's should be responsive to the 
residents of their region and be good stewards. There are 
practical, affordable measures based on sound science that can 
bring back fish and restore the health of rivers. The costs of 
these measures should be included in the cost-based services 
provided to the residents of the regions.
    In conclusion, the PMA's should play an important role in 
the future as the electric industry continues to go through 
changes, from providing a yardstick on how consumers are doing 
in the deregulated market and contributing to the diversity of 
utility ownership through creating an example for environmental 
stewardship.
    Thank you very much.
    [The prepared statement of Ms. Hauter follows:]

 Statement of Wenonah Hauter, Director, Public Citizen's Critical Mass 
                             Energy Project

Summary
    Public Citizen, founded by Ralph Nader in 1971, is a non-
profit research, lobbying, and litigation organization based in 
Washington, DC. Public Citizen advocates for consumer 
protection and for government and corporate accountability, and 
is supported by over 150,000 members throughout the United 
States. The Critical Mass Energy Project, of which I am 
director, is Public Citizen's energy policy arm, working to 
decrease reliance on nuclear and fossil fuels and to promote 
safe, affordable and environmentally-sound energy alternatives.
    As the rules governing the electric industry are rewritten, 
the debate over the role of the Federal power marketing 
administrations (PMAs) dramatizes the larger debate over 
deregulation of the industry. Who should really benefit? Should 
it be residential consumers? What about rural consumers? What 
about the environment? Or, will all the benefits flow to 
investor-owned utilities (IOUs), Wall Street firms, and large 
industrial customers?
    To answer these questions in relation to the PMAs, it is 
necessary to understand: (1) how electric utility deregulation 
is unfolding across the nation; (2) the unique role PMAs play 
in providing a yardstick for the cost of electricity for 
consumers in the changing electricity market; (3) the benefits 
and costs to consumers in the regions served by the PMAs; (4) 
the appropriate role for transmission systems owned by the 
PMAs; (5) and the serious threat to the environment of 
privatizing or changing the role of the PMAs.
    Public Citizen is pleased that attempts to privatize the 
PMAs or to sell federally-owned dams have subsided. For the 
record, we do not favor the privatization of the PMAs, the 
attempts to force PMAs to sell electricity at so-called market-
based prices, or the related attempt to sell federally-owned 
dams. The Federal hydro plants and the PMAs that sell their 
power are part of projects that serve many other purposes, 
including irrigation, flood control, navigation, municipal 
water supply, recreation, and fish recovery and protection. 
Turning over dams or PMAs to utilities and others whose sole 
interest is to maximize power revenues threatens these other 
purposes.
    The dramatic changes in the electric industry provide an 
opportunity for the PMAs to continue serving their historic 
roles of providing low-cost power to rural areas of the United 
States as well as serving as a yardstick for measuring how and 
if consumers are benefiting from deregulation.
[GRAPHIC] [TIFF OMITTED] T9318.054

[GRAPHIC] [TIFF OMITTED] T9318.055

[GRAPHIC] [TIFF OMITTED] T9318.056

[GRAPHIC] [TIFF OMITTED] T9318.057

[GRAPHIC] [TIFF OMITTED] T9318.058

[GRAPHIC] [TIFF OMITTED] T9318.059

[GRAPHIC] [TIFF OMITTED] T9318.060

[GRAPHIC] [TIFF OMITTED] T9318.061

[GRAPHIC] [TIFF OMITTED] T9318.062

    Mr. Doolittle. Thank you.
    Our final witness is Victor S. Rezendes, director of energy 
and resources and science issues with the U.S. General 
Accounting Office.
    Mr. Rezendes, welcome again.

 STATEMENT OF VICTOR S. REZENDES, DIRECTOR, ENERGY, RESOURCES, 
   AND SCIENCE ISSUES; RESOURCES, COMMUNITY AND DEVELOPMENT 
            DIVISION, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Rezendes. Thank you, Mr. Chairman. It is a pleasure to 
be here today to discuss the PMAs' role in the restructured 
electricity industry.
    I have identified five broad goals of the electricity 
restructuring that we think have impact on the PMAs. The first 
major goal of deregulation is encouraging price competition, 
including removing practices that treat potential competitors 
inconsistently and providing customers with lower electricity 
prices. As the market moves from a regulated to a more 
deregulated retail environment, it may be necessary to 
determine whether more consistent treatment of power providers 
is warranted.
    For example, we have reported that, although PMAs are 
generally required to recover all costs, favorable financing 
terms, the lack of specific requirements to recover certain 
costs, have resulted in the net cost to the Federal Government 
of over a half a billion dollars each year. In part, because 
the PMAs sell power generated almost exclusively from 
hydropower, are not required to earn a profit and do not fully 
recover the government's costs in their rates, they are 
generally able to sell power more cheaply than other providers. 
Also, some electricity suppliers, such as investor-owned 
utilities, are required to pay Federal, State, and local taxes, 
but PMAs do not.
    The second broad goal relates to protecting the 
environment. Because the electric industry is a major source of 
air pollution, a relevant question is whether the existing body 
of environmental law can accommodate change or whether 
restructuring legislation should have an environmental 
component to ensure compatibility with environmental values.
    Some are concerned that competitive markets may result in 
increased emissions of pollutants because lower prices 
resultant from restructuring would increase electricity 
purchases and, therefore, increase generation an emissions. 
And, as a result, older polluting coal-fired generating 
facilities, which are generally exempt from the Clean Air's Act 
New Source Emission Standards, would be used more extensively. 
While the generation mix is likely to change, currently less 
than 2 percent of the PMAs' power comes from coal-fired plants. 
However, over 50 percent of TVA's power comes from these 
plants.
    PMA hydropower is a clean, domestic, renewable source of 
electricity. However, hydropower facilities have significant 
impacts on surrounding areas, especially fish and wildlife.
    The third goal relates to balancing the equity among 
stakeholders. As the industry moves to restructured 
environment, some costs that were included in the traditional 
regulated structure may not be recoverable in competitive 
rates.
    Similarly, in terms of equity, concerns the issue whether 
PMA rates should be at market rates. If PMAs were authorized to 
charge market rates for power, slightly more than two-thirds of 
the present customers would experience a relatively small or no 
rate increase, increases of less than one-half of 1 percent per 
kilowatt.
    Another issue affecting future price of PMA power is the 
reliability of Federal generating assets. In March, we reported 
that the Bureau's and the Corps' hydro-power plants are 
generally less reliable in generating electricity than non-
Federal hydro-plants. We concluded that these agencies were 
unable to obtain funding for maintenance and repairs as needed, 
and, therefore, delayed repairs. These delays caused frequent 
extended outages and inconsistent plant performances.
    The fourth broad goal of restructuring is maintaining the 
reliability of the interstate transmission grid. An issue that 
directly relates to the PMAs is the maintenance of reserves 
that may be called upon to meet planned or unforeseen outages 
by power providers. As we recently reported, hydro-power's 
inherent flexibility in meeting different levels of demand 
creates an opportunity for hydro-power to play a significant 
role in meeting demand during peak periods.
    Finally, the last broad goal is promoting deregulation by 
redefined Federal roles, such as the Federal regulatory 
agencies. While restructuring has focused largely on 
deregulating the retained markets, some segments of the 
electric industry may face new or increased regulation.
    Recent transmission policies have dealt with the concerns 
of market power and ownership and control of transmission 
facilities. For example, the PMAs transmission rates and 
facilities may have to come under new Federal regulation.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Rezendes follows:]
    [GRAPHIC] [TIFF OMITTED] T9318.063
    
    [GRAPHIC] [TIFF OMITTED] T9318.064
    
    [GRAPHIC] [TIFF OMITTED] T9318.065
    
    [GRAPHIC] [TIFF OMITTED] T9318.066
    
    [GRAPHIC] [TIFF OMITTED] T9318.067
    
    [GRAPHIC] [TIFF OMITTED] T9318.068
    
    [GRAPHIC] [TIFF OMITTED] T9318.069
    
    [GRAPHIC] [TIFF OMITTED] T9318.070
    
    [GRAPHIC] [TIFF OMITTED] T9318.071
    
    [GRAPHIC] [TIFF OMITTED] T9318.072
    
    [GRAPHIC] [TIFF OMITTED] T9318.073
    
    [GRAPHIC] [TIFF OMITTED] T9318.074
    
    [GRAPHIC] [TIFF OMITTED] T9318.075
    
    [GRAPHIC] [TIFF OMITTED] T9318.076
    
    [GRAPHIC] [TIFF OMITTED] T9318.077
    
    [GRAPHIC] [TIFF OMITTED] T9318.078
    
    [GRAPHIC] [TIFF OMITTED] T9318.079
    
    [GRAPHIC] [TIFF OMITTED] T9318.080
    
    Mr. Doolittle. Thank you.
    Mr. Richardson, there seems to be some dispute as to what 
the effect of competition in the electric sector will have on 
reliability. In other words, some have formed a conclusion that 
competition will enhance reliability, and other maintain that 
it will harm reliability.
    I am unclear, I guess, where APPA is because I think they 
have supported an ad which indicates it will harm reliability. 
And that is contrast to the NERC and the Department of Energy, 
which have come to the opposite conclusion. Could you tell us 
what you think about that and what the basis for you belief it?
    Mr. Richardson. Well, yes, I would be happy to do that, Mr. 
Chairman. The ad and our concern relates to advertisements of 
others urging the very rapid deregulation of the industry on 
the assumption that such action will encourage or promote 
greater reliability. In fact, we think that is not the case, 
that rapid action today will simply enhance the power of those 
who are able to manipulate the marketplace to their own 
advantage and to the detriment of reliability.
    There was a report that was released within the last couple 
of days by the Consumer Federation of America and Consumers 
Union regarding the price spikes of last summer that came to a 
number of conclusions, including the fact that in the opinion 
of those two organizations what had occurred in the price 
spikes in the Midwest was more a question of market 
manipulation than it was the natural occurrences of outages and 
other problems that we are experiencing with the system.
    Now to the broader point, will restructuring promote 
reliability or will it disadvantage or place reliability at 
issue, I think there are a couple of responses to that, and 
they have to do again with the timing that I referred to. It 
seems to me that the very rapid restructuring that is being 
proposed by some of a very quick date-certain Federal mandate 
could well place reliability in jeopardy; particularly at this 
point, since we do not have mandatory reliability standards.
    The American Public Power Association, along with my 
colleague's association, National Rural Electric Cooperative 
Association, the Edison Electric Institute, and others have 
developed consensus legislation, which, for the most part, is 
included in the administration's proposal on restructuring, and 
we strongly support that. We think that is appropriate because 
reliability is a very serious issue.
    In the longer term, I think a very good case can be made 
that as we bring in new technologies, we have distributed 
generation, which is something the APPA has long supported, and 
we begin to move away from the large, central-station power 
plants, there are some reliability, some positive reliability 
consequences that can occur.
    So I say, I think we are back to the point that I made at 
the very outset that in terms of timing and how soon this 
transition to these new technologies will occur and the 
benefits that they might hold over the longer term for a more 
reliable electric system.
    Mr. Doolittle. I am not clear in my own mind as to what 
their timeframe is, those who are promoting a very rapid change 
in this area. But, I mean, what timeframe do you think would be 
reasonable?
    Mr. Richardson. Well, we are on a pretty fast track right 
now in terms of State legislation. Twenty-two is, I believe 
Wenona Hauter said, 23 States now, with Ohio having sent 
legislation to the governor, it seems to me highly likely that 
within the next four to five years most other States will have 
tackled this issue and come to some conclusions.
    What has been of concern to us is Federal mandates 
requiring the complete customer access by--for all States, for 
all customers--by the end of 1999 or the beginning of the year 
2000. Each State needs to move at its own pace, and the 
utilities within those States, particularly the self-regulated 
utilities such as the public power systems that I represent, 
need to be able to govern their own affairs and structure their 
activities to move into a more competitive environment.
    Mr. Doolittle. But let me ask you and Mr. English both--if 
your reaction to the GAO's findings about the lower reliability 
of the PMA's, the lack of money for the proper maintenance of 
the generation equipment, and so forth, is that a concern to 
your organizations?
    Mr. Richardson. I think we are concerned that the money 
that is going into the Federal Government, paid by the rates of 
the customers of those systems, is not getting back out and 
being used for the purposes intended. Funds are included in the 
rates that are being paid by the customers of the Power 
Marketing Administrations, and yet, through the appropriations 
process, problems with budget and accounting matters, it is not 
getting back to the intended, beneficiary, which is those 
facilities that do need to be repaired.
    Mr. Doolittle. Mr. English.
    Mr. English. Mr. Chairman, if I could just pick up on that? 
I wholeheartedly agree. Let me also say, though, that I think 
there are a number of issues that we would have with what the 
GAO has reported with regard to the PMA's. I think, again, 
putting this into government terms versus real-world terms--and 
I think most citizens of this country would have a very 
difficult time in understanding the calibrations of the GAO and 
how they came to the conclusions that they did with regard to 
this issue of cost to the government--it is my understanding, 
in the calibrations that they have used, for instance, that 
most of what they are talking about has to do with interest.
    Now, when most people borrow money, they go down and borrow 
the money, and on the day that they receive the money, it is 
what the interest rate is that day, and that is what they 
normally pay. It is my understanding, as far as what the GAO 
does, they ignore that reality, and then, in fact, what they 
have done is taken a period of time when the interest rates 
were at the highest, and saying, even though the money was 
borrowed at that time from the government when the rates were 
that low, that doesn't matter; we need to take an average rate, 
which I believe is 8 percent. That is the number they used, 
even though the money may cost the government much, much less 
at the time that it was actually borrowed.
    I think there is a second issue that comes into play here, 
and that is the reality of what has taken place through the 
developments of the PMA's through the years. The reality is 
that many of the dams were constructed and agreements were 
signed with regard to preference of power at a particular time, 
when power may even have been cheaper from other sources. But, 
again, you found people in the area, and we are talking about 
many times small towns, electric cooperatives have, in fact, 
reached an agreement with the government at that time to make a 
commitment that they would, in fact, buy power and that they 
would in fact pay for--let's make sure we understand that--pay 
for the construction of the dams.
    Now what we have also seen happen, Mr. Chairman, through 
the years is that it isn't just good enough to pay for the dam; 
it isn't good enough just to pay for the cost of producing the 
power. But, instead, these PMA's have become something of a 
cash cow for various causes that may exist in the local area, 
and I wholeheartedly agree that many of them are very 
worthwhile.
    Recreation, for instance, for people in the local area, 
that is certainly beneficial. Irrigation for many farmers in 
the local area, that is certainly beneficial--and certainly in 
assisting in the environmental causes in these areas, and that 
is certainly beneficial.
    And we have talked about the question of fish, and 
certainly, particularly in the Bonneville area, we have seen 
enormous sums of money that are being spent by the ratepayers 
and those who buy power from Bonneville for dealing with the 
issue of salmon.
    Now those are issues far beyond what we talk about simple 
costs and the payment of the construction of the facilities and 
the payment for the generation of power.
    So I take great issue with that. And I think that it is 
something that we have really got to put in real-world terms in 
order for us to make certain we understand exactly what is 
being calculated in the way of the cost and what those costs 
were. Are they truly the cost to the Federal Government or are 
they just come calculation as to what the government should 
have received in the way of interest rates over some long-term 
average?
    So the issue now of the question of whether the PMA's are 
operating as efficiently as they should, my colleague is 
absolutely right; there is no question about it that money that 
has been paid by the ratepayers many times is not being used 
for the purpose of continuing to make sure that those operation 
are at the peak efficiency, but are for other purposes. And I 
think that is wrong, Mr. Chairman.
    Mr. Doolittle. Would you and Mr. Richardson and your 
organizations support efforts to make sure that the money that 
is collected for those purposes is spent for those purposes?
    Mr. English. I can't speak for my colleague here, Mr. 
Chairman, but I would say the NRECA has long supported the fact 
that we will do just about anything to make sure that the money 
that is collected from the ratepayers for the purpose of 
maintaining those generating facilities is used for that 
purpose. We have even volunteered to collect money from the 
people in the local area to maintain that over and above what 
the rates are. But, you know, it is extremely important and 
extremely frustrating, Mr. Chairman.
    Mr. Richardson. We agree with that, Mr. Chairman.
    Mr. Doolittle. Thank you.
    Mr. Rezendes, did you wish to comment on, or to respond to, 
Mr. English's observations on the GAO findings?
    Mr. Rezendes. Yes. First, I would like to mention on the 
deferred maintenance fees, that it is the difficulty of the 
appropriation process, with the long lead time and competing 
priorities within an appropriation account that makes doing the 
maintenance and the kinds of business kinds of things that a 
private sector would do very difficult for the Federal 
Government to do, because whether you do maintenance on a 
generator or whether you are going to provide relief for 
hurricane victims is not a difficult choice for the Federal 
Government to make, one that, obviously, the private sector is 
not confronted with.
    Getting back to the financing issue, that is only one of 
numerous things that the PMAs aren't recovering costs from. We 
also mention some retirement benefits, post-retirement health 
insurance issues. There's some construction cost.
    But the big issue, I think, Mr. English is exactly correct, 
is the financing. We used a method--and I don't want to get too 
heavy into this in terms of what the average government 
portfolio is versus what the portfolio is of the various PMAs--
that is a half a billion dollars a year. However, no matter 
what methodology you use--I don't care if you go loan by loan, 
which we did, and that came out even higher--no matter which 
methodology, no matter how you look at it, the Federal 
Government is not recovering the interest cost that it is 
incurring that the PMAs have the benefit of the money from.
    In addition, PMAs, as you know, borrow money routinely over 
the years at various interest rates based on what they are at 
the time. However, they do have the option of paying back the 
high, and do pay back the high interest rates first and leave 
the low interest rates on the books, which means that only 
increases the amount of subsidy the Federal Government has to 
sustain to maintain that.
    Mr. English. Mr. Chairman, could I respond to that?
    Mr. Doolittle. Well, I want to follow up with another 
question because we are going to have a vote here in a minute.
    You mentioned, Mr. Rezendes, the dams and hydroelectric 
power has an impact on rivers and fish, which it obviously 
does. Did your statement contemplate positive impacts as well 
as negative, or was it just negative?
    Mr. Rezendes. No, it was a negative impact. And the fish 
mitigation costs, as you know, for just Bonneville is really a 
big number. I think Bonneville expects in the not-too-distant 
future they could be spending a billion dollars on this.
    Mr. Doolittle. Well, with nothing to show for all of that 
money, I might point out. Well, that perhaps could the subject 
of another GAO study.
    Well, I am aware of situations--and I will direct this to 
Ms. Hauter, who expressed her negative view of dams--many 
occasions I am aware of, those dams are what create the 
adequate supplies of cold water to make sure there is water 
downstream for the fisheries. Is that not the case?
    Ms. Hauter. Overall, the effect on our waterways of dams is 
negative. Many problems. Dams restrict the flow of water 
downstream. The stagnant water that sits has effects on both 
fish and wildlife in the area.
    And, generally, we think that dams--there needs to be 
mitigation. Many of the programs have failed. For instance, in 
the Pacific Northwest, where we would want to see the phasing-
out of barging and trucking of fish and the use of spill as the 
primary means for juvenile fish passage, things need to be done 
in a better way. And there is a whole set of scientific 
evaluations in this area, and it can be done, and it can be 
done cost-effectively.
    Mr. Doolittle. Well, I would just observe that to only 
comment upon the negative aspects of dams is to ignore clear 
facts that they have positive, many positive benefits, not to 
mention the adequate water supply and the flood control, but 
just even looking at the environment, and of course the 
recreation that they provide. But I know, at least in our 
California situation, it is the presence of the dams that 
ensures the water available for the endangered fish. Now, yes, 
I am not saying there aren't negative consequences, too, but I 
think there are pluses and minuses, and I just want to get that 
plug in.
    And with that, I am afraid, since I am the only one here, I 
am going to have to bring this hearing to a close.
    I really appreciate the testimony that we have heard today 
from you, and I hope that you will answer further questions 
that we may have, which we will submit in writing and ask you 
to respond. We will hold the record open for that purpose.
    [The information follows:]
    Mr. Doolittle. We thank you for coming.
    And with that, the hearing is adjourned.
    [Whereupon, at 4:25 p.m., the Subcommittee was adjourned.]
