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