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



 
            THE ELECTRICITY COMPETITION AND RELIABILITY ACT

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

                                HEARINGS

                               before the

                    SUBCOMMITTEE ON ENERGY AND POWER

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                                   on

                               H.R. 2944

                               __________

                         OCTOBER 5 and 6, 1999

                               __________

                           Serial No. 106-66

                               __________

            Printed for the use of the Committee on Commerce



                      U.S. GOVERNMENT PRINTING OFFICE
60-356 CC                     WASHINGTON : 1999




                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    THOMAS C. SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
                                     BILL LUTHER, Minnesota
                                     LOIS CAPPS, California

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

                    Subcommittee on Energy and Power

                      JOE BARTON, Texas, Chairman

MICHAEL BILIRAKIS, Florida           RALPH M. HALL, Texas
CLIFF STEARNS, Florida               KAREN McCARTHY, Missouri
  Vice Chairman                      THOMAS C. SAWYER, Ohio
STEVE LARGENT, Oklahoma              EDWARD J. MARKEY, Massachusetts
RICHARD BURR, North Carolina         RICK BOUCHER, Virginia
ED WHITFIELD, Kentucky               FRANK PALLONE, Jr., New Jersey
CHARLIE NORWOOD, Georgia             SHERROD BROWN, Ohio
TOM A. COBURN, Oklahoma              BART GORDON, Tennessee
JAMES E. ROGAN, California           BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ALBERT R. WYNN, Maryland
HEATHER WILSON, New Mexico           TED STRICKLAND, Ohio
JOHN B. SHADEGG, Arizona             PETER DEUTSCH, Florida
CHARLES W. ``CHIP'' PICKERING,       RON KLINK, Pennsylvania
Mississippi                          JOHN D. DINGELL, Michigan,
VITO FOSSELLA, New York                (Ex Officio)
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearings held:
    October 5, 1999..............................................     1
    October 6, 1999..............................................   161
Testimony of:
    Bailey, Hon. Vicky A., Commissioner, Federal Energy 
      Regulatory Commission......................................    58
    Breathitt, Hon. Linda Key, Commissioner, Federal Energy 
      Regulatory Commission......................................    65
    Brice, Rutherford ``Jack,'' Member, Board of Directors, AARP.   240
    Casten, Thomas R., President and Chief Executive Officer, 
      Trigen Energy Corporation..................................   270
    Church, Lynne H., Executive Director, Electric Power Supply 
      Association................................................   192
    Cooper, Mark N., Director of Research, Consumer Federation of 
      America....................................................   247
    Cowart, Richard H., Director, Regulatory Assistance Project..   255
    English, Glenn, Chief Executive Officer, National Rural 
      Electric Cooperative Association...........................   201
    Glauthier, Hon. T.J., Deputy Secretary of Energy, U.S. 
      Department of Energy.......................................    16
    Hawkins, David G., Director of Air and Energy Programs, 
      Natural Resources Defense Council..........................   211
    Hebert, Hon. Curt L., Jr., Commissioner, Federal Energy 
      Regulatory Commission......................................    69
    Helton, William, New Century Energies, representing Alliance 
      for Competitive Electricity................................   162
    Hoecker, Hon. James J., Chairman, Federal Energy Regulatory 
      Commission.................................................    51
    Kanner, Marty, Coalition Coordinator, Consumers for Fair 
      Competition................................................   251
    Massey, Hon. William L., Commissioner, Federal Energy 
      Regulatory Commission......................................    76
    Mayben, William R., President, Nebraska Public Power 
      District, representing Large Public Power Council..........   196
    Moler, Elizabeth Anne, General Counsel, Americans for 
      Affordable Electricity.....................................   243
    Nevius, David R., Vice President, North American Electric 
      Reliability Council........................................   167
    Owens, David K., Executive Vice President, Edison Electric 
      Institute..................................................   182
    Popowsky, Irwin ``Sonny,'' Pennsylvania Consumer Advocate 
      Office of Consumer Advocate, representing the National 
      Association of State Utility Consumer Advocates............   119
    Rao, Rajeshwar, President, Indiana Municipal Power Agency, 
      representing Transmission Access Policy Study Group........   215
    Richardson, Alan H., Executive Director, American Public 
      Power Association..........................................   169
    Segal, Scott H., on behalf of the National Alliance for Fair 
      Competition................................................   275
    Smith, Marsha H., Commissioner, Idaho Public Utilities 
      Commission, representing the National Association of 
      Regulatory Utility Commissioners...........................   102
    Smith, Tom, Director, Texas Public Citizen...................   268

                                 (iii)

  

                                  (IV)

  
                                                                   Page

Material submitted for the record by:
    Bailey, Hon. Vicky A., Commissioner, Federal Energy 
      Regulatory Commission, responses to questions of Hon. Joe 
      Barton.....................................................   143
    Breathitt, Hon. Linda Key, Commissioner, Federal Energy 
      Regulatory Commission, responses to questions of Hon. Joe 
      Barton.....................................................   147
    Brice, Rutherford ``Jack,'' Member, Board of Directors, AARP, 
      responses to questions of Hon. Joe Barton..................   312
    Church, Lynne H., Executive Director, Electric Power Supply 
      Association, responses to questions of Hon. Joe Barton.....   310
    English, Glenn, Chief Executive Officer, National Rural 
      Electric Cooperative Association, responses to questions of 
      Hon. Joe Barton............................................   309
    Glauthier, Hon. T.J., Deputy Secretary of Energy, U.S. 
      Department of Energy, responses to questions of Hon. Joe 
      Barton.....................................................   155
    Hebert, Hon. Curt L., Jr., Commissioner, Federal Energy 
      Regulatory Commission:
        Responses to questions of Hon. Joe Barton................   140
        Responses to questions of Hon. Vito Fossella.............   142
    Hoecker, Hon. James J., Chairman, Federal Energy Regulatory 
      Commission:
        Responses to questions of Hon. Joe Barton................   132
        Responses to questions of Hon. Vito Fossella.............   138
        Responses to questions of Hon. Ed Bryant.................   140
    Massey, Hon. William L., Commissioner, Federal Energy 
      Regulatory Commission, responses to questions of Hon. Joe 
      Barton.....................................................   146
    Nevius, David, Vice President, North American Electric 
      Reliability Council, responses to questions of Hon. Joe 
      Barton.....................................................   305
    Owens, David, Executive Vice President, Edison Electric 
      Institute, responses to questions of Hon. Joe Barton.......   298
    Popowsky, Irwin ``Sonny,'' Pennsylvania Consumer Advocate 
      Office of Consumer Advocate, representing the National 
      Association of State Utility Consumer Advocates, letter 
      dated October 18, 1999, enclosing response for the record..   153
    Rao, Rajeshwar, President, Indiana Municipal Power Agency, 
      representing Transmission Access Policy Study Group, 
      responses to questions of Hon. Joe Barton..................   313
    Richardson, Alan, Executive Director, American Public Power 
      Association, responses to questions of Hon. Joe Barton.....   300
    Smith, Marsha H., Commissioner, Idaho Public Utilities 
      Commission, representing the National Association of 
      Regulatory Utility Commissioners, responses for the record.   149


            THE ELECTRICITY COMPETITION AND RELIABILITY ACT

                              ----------                              


                        TUESDAY, OCTOBER 5, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Bilirakis, 
Stearns, Largent, Burr, Whitfield, Rogan, Shimkus, Wilson, 
Pickering, Fossella, Bryant, Hall, McCarthy, Sawyer, Markey, 
Pallone, Gordon, Rush, Wynn, Strickland, and Dingell (ex 
officio).
    Staff present: Joe Kelliher, majority counsel; Cathy Van 
Way, majority counsel; Miriam Erickson, majority counsel; 
Ramsen Batfarhad, economic advisor; Sue Sheridan, minority 
counsel; and Rick Kessler, minority professional staff.
    Mr. Barton. The Subcommittee on Energy and Power will 
please come to order.
    Today, we are going to begin the first of 2 days of 
hearings on H.R. 2944, which is a comprehensive piece of 
legislation to restructure the utility industry and the 
generation and transmission of electricity in the United 
States.
    The Chair wishes to inform all members that we are going to 
adhere to regular order. We will recognize the ranking members 
and the subcommittee chairman and the full committee chairman 
for a 5-minute opening statement today. All other members will 
be recognized for 3 minutes. If there are members not present, 
their statements will be put into the record in their entirety. 
Tomorrow, we don't plan to have opening statements other than a 
brief introduction of our witnesses.
    The Chair would like to recognize the distinguished ranking 
member, Mr. Hall, for his opening statement.
    Mr. Hall. Mr. Chairman, thank you, and members of the 
committee. We have reached a milestone in the subcommittee's 
consideration of restructuring legislation with this 
legislative hearing today. This is a hearing that we have 
needed and that we have looked forward to.
    I want to congratulate Chairman Barton. His efforts have 
really been tireless. He has made trips to all parts of this 
country to hear people and to keep an open door and to bring 
this subcommittee to the point we have reached here today, this 
morning.
    And you have shown and extraordinary amount of leadership, 
Mr. Chairman, working with all of us and attempting to move 
this legislation through, to give the committee the right to 
work its will, and regardless of what the final outcome is of 
this legislation, your efforts, Chairman Barton, have advanced 
the public debate and our understanding of these very difficult 
and complex issues. I think you have done us a real service 
already.
    I plan to listen carefully to the witnesses over the next 2 
days to see whether we can find a common ground on which to 
move forward. I have particular concerns over what authority 
FERC should have in determining shape of the bulk power market 
of the future--is my time up already? Your beeper works--and I 
am pleased that you have asked the entire Commission to appear 
before us today.
    I believe their expertise and insights will be particularly 
valuable at this point in our consideration of the legislation. 
They, like us, are of different minds about many of the issues 
before us, but unlike us, they have spent many, probably more, 
waking hours examining and deliberating these issues, and I am 
sure their testimony will be informative and instructive to us.
    Other witnesses represent States and State officials. State 
preemption is a huge issue in this legislation. As a former 
county judge and former State senator, I have a strong bias 
against preemption of State authority. Preemptive provisions in 
this legislation will have to be accompanied by compelling 
reasons for exercising Federal preemptive authority, and that 
is what we will probably hear today.
    By singling out these issues, I by no means intend to 
signal that other issues are not as important and deserve less 
attention. Our time and that of the witnesses is limited here 
today. It is more important that we hear from the witnesses.
    With that, Mr. Chairman, I yield back my time and thank 
you.
    Mr. Barton. We thank the distinguished member from Texas 
and recognize Mr. Stearns for a 3-minute opening statement.
    Mr. Stearns. Five minutes?
    Mr. Barton. Three.
    Mr. Stearns. Mr. Chairman, thank you. I think when we look 
at this restructuring of some of the major issues, I think 
there is a consensus for prospectively repealing the Public 
Utility Regulatory Policy Act and provide for recovery of 
mandated costs, repeal the Public Utility Holding Company Act, 
apply FERC authority over non-jurisdictional entities, ensure 
transmission reliability, retain State authority to order 
competition, and encourage competition through State 
reciprocity.
    You know, I think this bill that we have looks at most of 
these core issues and addresses them. Now, not everybody is 
going to be happy with this bill. When we come to restructure 
an over $200 billion industry, you are not going to strike a 
perfect masterpiece on the first brushstroke.
    I wanted to point out, Mr. Chairman, Michigan has an 
interesting program called Electric Choice. It is a multiphase 
program allowing the States to adopt lessons learned in 
competition. The first bid phase alone brought in 117 requests 
from customers, power marketers, and associations to 
participate as competitive electric providers. In Illinois, 430 
of Comed's business customers have signed up to receive power 
from other registered suppliers. So, competition also affects 
States that haven't deregulated.
    And the States are doing an excellent job. If we are to 
enact Federal legislation on this issue, we have to respect 
their hard work and success. As I said earlier, we don't have a 
perfect bill on the first attempt, but I am sure through the 
hearings like today, we will.
    Our purpose today is to hear everybody, get their input, 
and to go and try to fine tune our efforts and understand what 
it takes to get a more perfect regulatory bill.
    Judging from the people in the audience and the people 
standing out in the line, I can say that this must affect a lot 
of people, Mr. Chairman, so I hope that we move deliberately, 
and, most importantly, we respect some of the States who have 
already started reform in our approach to this bill.
    And I yield back.
    Mr. Barton. We thank the gentleman from Florida.
    I would like to recognize the gentleman from Ohio, Mr. 
Sawyer, for a 3-minute opening statement.
    Mr. Sawyer. Thank you very much, Mr. Chairman. Thank you 
for your conduct of these proceedings throughout this year. It 
has been a long and I think constructive year, and thank you 
also for the introduction of a comprehensive bill to serve as a 
baseline for where we go to from here.
    We really are at a critical juncture. I guess I would agree 
somewhat with the gentleman from Florida. I don't expect to 
find a perfect bill. I do hope that we can find a consensus 
bill, one that perhaps not everyone is happy with but which we 
can share some hope for that will work over time.
    And that is really what is at stake here. Over the past 
century, electricity has powered virtually a second American 
revolution and has defined who we have become in this century. 
Through law and practice and policy, sound regulation has made 
this possible. It has evolved over time. And that century-old 
system, quite to the contrary of some of the rhetoric we heard 
at the beginning of the year, has served us well, I believe. It 
has brought us to the juncture that we are at today.
    I think it is also fair to say that properly arrayed 
competition will bring better service at lower prices to the 
vast majority of Americans. Our job is to develop a regulatory 
framework in such a way that it accommodates changing 
technologies in a dynamic, competitive set of markets. The key 
to success, in my view, will be the adequacy of the 
transmission system. The grid is the backbone and the lifeline 
of competition.
    The structure of the network really exists only as a 
product of evolutionary happenstance over the last century. It 
works. Various transmission components border upon one another, 
and electricity flows between them. But as a system, it was 
never designed as part of coherent regional transmission plans, 
which is what we need to build into the future.
    The legislation that we are working on needs to anticipate 
that to handle the enormous flow of electricity across broad 
geographic areas and to anticipate the variability of the need 
for capacity and at the same time to allow it to grow and be 
fully maintained and physically secure. A grid that lacks 
capacity or that limits growth, limits commerce.
    To encourage the growth of those markets, I believe that 
Federal legislation should promote new investment so that the 
grid can grow responsibly, and the Federal framework must 
embody several basic principles. First, it should encourage the 
formation of RTOs, regional transmission organizations, but not 
mandate the structure of the transmission business. We have all 
said one size does not fit all, but a single template to meet 
the needs of diverse markets is going to be a difficult thing 
to undertake, and we may well all not hit it right the first 
time. We should anticipate the need for it to change.
    We should encourage the expansion of transmission 
investment. We should expressly recognize the importance of 
expansion and the necessity and cost of maintaining and 
improving the reliability of electric service. It seems to me 
that----
    Mr. Barton. The gentleman's time is unfortunately expired. 
By unanimous consent, the gentleman from Ohio is recognized for 
another 1 minute.
    Mr. Sawyer. I would be happy to----
    Mr. Barton. I like what you are saying, so I want you to 
keep going.
    Mr. Sawyer. Okay. I am trying to go as fast as I can. I am 
saying a whole lot less than what I have got down on the paper 
here.
    Mr. Barton. I understand.
    Mr. Sawyer. I appreciate the chairman's flexibility.
    The Congress should set standards for establishing rates to 
cover transmission costs and to provide incentive to encourage 
the expansion of the grid.
    It is also important, it seems to me, that transmission 
systems not be subject to shifting and contradictory regulatory 
jurisdictions and the requirements that come about as a result 
of that. It seems to me that FERC ought to have jurisdiction 
over all transmission. It may not be the same jurisdiction that 
it has today, but it should be broad jurisdiction, including 
unbundled transmission sold at retail. It should be expanded to 
cover all transmission service and interstate commerce; in 
short, to create a classic level playing field. Everybody ought 
to be involved in that regardless of the original genesis of 
their generating business.
    I recognize the chairman has set some more goals. I am 
going to truncate what I have to say--the rest of what I have 
to say and insert it in the record. But just let me suggest 
that Federal legislation ought to ensure that transmission 
networks grow in step with competition. If they can't do that, 
if we can't build a prospective opportunity for this system to 
change, it seems to me that we will have missed the opportunity 
that the competition presents.
    With that, Mr. Chairman, I thank you for your flexibility 
and yield back what small fraction of time I may have left.
    Mr. Barton. We thank the gentleman from Ohio.
    We now recognize one of the most tireless members for 
restructuring, Mr. Largent of Oklahoma.
    Mr. Largent. Thank you, Mr. Chairman. I want to commend 
you, your staff, the committee staff for the professional and 
open manner in which H.R. 2944, the Electricity Competition and 
Reliability Act, has been assembled. To reach the point of 
holding today and tomorrow's much anticipated hearing on the 
bill before us, the subcommittee this year has held 11 hearings 
and received testimony from 92 witnesses examining the myriad 
of issues that constitute electricity restructuring.
    Having worked on comprehensive electricity restructuring 
for over year, it is critical that Congress pass Federal 
legislation in the very near future to compliment the retail 
competition plans that 24 States have already enacted. My own 
State of Oklahoma, a State with relatively low electricity 
costs, has recognized the benefits that will flow from a 
competitive marketplace and has adopted its own restructuring 
legislation. The importance of Oklahoma's own retail 
competition plan, when coupled with Federal legislation 
promoting wholesale competition, should result in what is 
tantamount to a second land rush in terms of the beneficial 
economic impact it will have attracting new business to my 
State.
    At a national level, competition will grant consumers the 
ability to reduce their electricity bills by choosing their 
electric provider. Savings are estimated to be the equivalent 
to a 5 percent income tax cut for a family of four. What about 
the examples of other monopoly industries? Following the 
deregulation of long distance telephone service, airlines, 
trucking, and railroad, the lowest price reduction was 28 
percent.
    Taxpayers will also save money. The National Taxpayers 
Union concluded that electric restructuring could save the 
Federal Government anywhere from $31.4 billion to as much as 
$75.6 billion over the next 5 years.
    Witnesses before this subcommittee have stressed the fact 
that electrons do not distinguish between State or service 
territory boundaries. Electricity is an industry that is 
basically interstate commerce. We need to recognize this 
phenomenon and create a Federal regulatory structure that will 
provide a much more consistent national power grid. By doing 
so, we can design a national reliability standard to prevent 
regional reliability lapses such as those that occur during the 
blackouts in the Midwest this past summer.
    I commend my colleagues on the subcommittee for their 
thoughtful insight and constructive input on this legislation. 
I will remind you that there have always been skeptics when 
Congress tackled complicated deregulatory efforts in the past, 
but Congress has been successful to the surprise of the 
naysayers. Now is the time to move forward.
    I yield back my time, Mr. Chairman.
    Mr. Barton. We thank the gentleman from Oklahoma.
    The gentleman from Massachusetts who has also been tireless 
in his efforts to open up the electricity grid, along with 
Congressman Largent, Mr. Markey is recognized for 3 minutes.
    Mr. Markey. Thank you, Mr. Chairman. Powerless probably 
more than tireless.
    I have watched with growing discomfort over the last 4 
months as what began as an attempt to break down the regulatory 
barriers that have protected electric utility monopolies from 
competition has been transformed into legislation which would 
effectively defend and extend the power of the existing 
monopolies and stifle the emergence of competition. This is an 
astounding and deeply troubling transformation. It is as if the 
majority, having lost sight of the original objective, now has 
resolved simply to redouble its efforts to get a bill.
    What kind of a bill? The product that has emerged from the 
majority's internal discussions might best be called the 
electric futility legislation for it likely will render futile 
the best efforts of competitors to enter into the monopolist's 
closed markets and prevent consumers from getting lower prices 
through real price competition.
    It pains me to reach this conclusion for I strongly support 
Federal legislation to promote competition in the electric 
utility industry. In fact, there may be no one on this side of 
the aisle who more strongly supports the objective of enacting 
Federal restructuring legislation, and I have always felt that 
it is not a partisan issue. I have tried to work closely with 
the gentleman from Oklahoma, Mr. Largent, the majority whip, 
Mr. DeLay, so that we can do it on a bipartisan basis.
    Unfortunately, something seems to have gone very wrong with 
the product before us. This is really not a competition bill 
any longer; it is a monopoly bill. It does not demonopolize the 
utility industry; it deregulates the monopolies in a manner 
which will free them to engage in a wide array of unfair, 
predatory, and manipulative practices; practices which would 
stifle the emergence of competition and leave consumers paying 
more than they should for their electricity.
    Let us look at some of the specific problems with this 
bill. It fails to give FERC authority to monitor, investigate, 
and correct anti-competitive behavior in generation markets. It 
repeals PUHCA 12 months after enactment, before the provisions 
intended to promote competition are in place, before many 
States can enact any new authorities that might be required, 
and without giving FERC and the States the full books and 
records authorities they will need to protect ratepayers 
against cross subsidies. It fails to address the ability of 
utilities to leverage revenues and resources from their 
monopoly functions to subsidize competitive ventures which 
allow the monopolies to unfairly compete against independent 
businesses.
    It would allow for the creation of a two-tiered system of 
transmission use in which utilities could grant themselves 
preference for their own use and competitors would be unable to 
fairly, effectively, and efficiently utilize the transmission 
grid. It would allow utilities to reclassify transmission 
facilities as distribution and thereby evade FERC jurisdiction 
even when such facilities are truly part of the interstate 
network.
    Mr. Barton. I hate to interrupt the gentleman. I am not 
quite as thrilled to hear what he is saying--but he has the 
right to say it. But if he could sum it up in about 1 more 
minute, we would appreciate it.
    Mr. Markey. It is a long list----
    Mr. Barton. I understand.
    Mr. Markey. [continuing] but I will get--I can go to the 
highlights.
    It would allow a closed club of utility monopolists to 
control and dominate regional transmission organizations and 
would not give RTOs the powers needed to assure open and 
efficient operation of the transmission system. It directs the 
utilities to provide competitors with interconnection and then 
fails to expressly preclude utilities from favoring their own 
generation plans over those of competitors in future connection 
requests. It inserts a poison pill into the consensus 
reliability language by allowing States to develop reliability 
standards that may conflict with the national standards. There 
is no effective environmentally sustainable renewable energy 
generation technology or energy efficiency language in the 
bill.
    In whole, this bill heads in just the opposite direction on 
just about every point. I do not believe that this stance 
musters as an anti-monopoly bill which ultimately is what 
competitors and consumers will need if they are to get the full 
benefits of a national electricity marketplace.
    I thank you, Mr. Chairman.
    Mr. Barton. We will put the gentleman from Massachusetts as 
an undecided on the bill, correct?
    The gentleman from Illinois, Mr. Shimkus, is recognized for 
3 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. Now that we have had 
our dose of sunshine for this morning, I want to thank you for 
working together on this draft legislation. I do say draft 
legislation and just want to remind folks here in the audience 
and people to testify that we sat probably for 2 months in a 
working group, which was bipartisan by invitation. Maybe two 
members of the democratic aisle came and attended those 
religiously--Congressman Hall, Congressman Sawyer.
    Then I know the chairman very openly, when we dropped the 
first draft and also the second draft, asked for a bipartisan 
meeting to talk over the individual aspects of the draft 
legislation but was told no by my colleagues and friends on the 
other side, which is frustrating for me to hear all the 
problems with the draft legislation but not the willingness to 
come and sit down at a table to address these issues.
    So, I want to commend my colleague and chairman for doing 
the best he can to work through a lot of these issues. We have 
moved great distances from a date certain aspect of the last 
Congress to a point where that is not even going to be an 
aspect mentioned as far as part of the legislation. I think 
that is positive. In the State of Illinois, we have moved great 
distances based upon an Illinois deregulation bill.
    I plan on asking numerous questions today and tomorrow 
outlining some concerns with the legislation, but I do want to 
thank the chairman for the reciprocity language that has been 
changed based upon the second draft, especially for the State 
of Illinois.
    There are some issues that, again, I will address as far as 
there are some Illinois that still think the grandfather clause 
needs to be strengthened to avoid accidental Federal 
preemption. I am hearing from Commerce Commission that some 
provisions still preempt State authority such as section 702 on 
net metering and section 101(e) on sections designed to give 
FERC authority to determine the function of power lines.
    I am also hearing about fair competition between propane 
dealers and electric coops. Are coops cross subsidizing their 
propane business particularly in States where they are self-
regulated or is that just a perceived threat? I hope we get 
some answers in these 2 days of hearings. I think this should 
be examined.
    There are additional issues which I plan on bringing up, 
but in the interest of time and efficiency, I will yield back 
my time and listen closely to the testimony today.
    Thank you, Chairman Barton.
    Mr. Barton. Thank the gentleman from Illinois.
    And we recognize another distinguished gentleman from 
Illinois, Mr. Rush, for a 3-minute opening statement.
    Mr. Rush. Thank you, Mr. Chairman.
    Mr. Chairman, let me begin by commending you for the work 
that you have done to bring this important and significant 
legislation to the attention of the subcommittee.
    I think all of us will agree it has not been easy, in terms 
of the number of consumers that will be affected. It could be 
easily argued that electricity restructuring is the most 
important work that the Commerce Committee has taken on since 
the deregulation of the telecommunications market. Those that 
were involved in that debate may recall that it was not until 
much work had been completed that legislation was finally 
passed out of the subcommittee and then the full committee, and 
eventually it was passed on the floor.
    Mr. Chairman, I know the work that you have done. We have 
worked together on a number of issues regarding this 
legislation. Let me just say that the legislation before us 
accomplishes many things. It clarifies State and Federal 
jurisdiction under the Federal Power Act. It codifies FERC 
Order 888, and it provides for the formation of the regional 
transmission organizations, just to name a few things.
    That said, Mr. Chairman, I must admit that I am not 
convinced that H.R. 2944 really accomplishes competition and 
reliability. For now, I will reserve judgment. I will listen 
intently to the testimony of the witnesses, and I will attempt 
to ask the appropriate questions. I will do this, Mr. Chairman, 
not to expose what the bill does not do but really to ensure 
that what we do do from this committee really and truly 
benefits our consumers.
    Having said that, I am ready to move forward with the work 
of electricity restructuring but only if we do as the title of 
the bill suggests: Provide electricity reliability and 
electricity competition in addition to enhancing consumer 
service and consumer protection.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Barton. Thank you, Congressman.
    We now recognize the distinguished gentleman from North 
Carolina, Mr. Burr, for a 3-minute opening statement.
    Mr. Burr. Thank you, Mr. Chairman. I thank you for this 
hearing, but, most importantly, and not to slight our other 
panelists, I thank you for the opportunity to have five FERC 
commissioners here to testify.
    Mr. Chairman, it was Thomas Jefferson that said, ``I am not 
an advocate of frequent changes in laws and constitutions, but 
laws and institutions must advance to keep pace with the 
progress of the human mind.'' We have an obligation to our 
Founding Fathers. That was a warning to us all that as the 
human mind progresses, we have a responsibility as legislators 
to make sure that the system changes, the Federal system. We 
did that with the Telecommunications Act earlier this decade, 
and I think that to not accomplish this task would be a failure 
to what our Founding Fathers reminded us of.
    I am extremely complimentary of you, Mr. Chairman, for 
perseverance as we have gone through this process. It has been 
a long road with many hurdles, and I think that we have reached 
a point where I am glad to say that we can move forward, and I 
am optimistic about the outcome. I think that this truly 
reflects the hard work of staff, of members, and of industry.
    It is also refreshing to see that you have reached across 
the aisle as it relates to the participation by Mr. Brown, Mr. 
Wynn, and specifically, Mr. Sawyer, and others. I have 
personally co-sponsored Mr. Sawyer's transmission language, 
because I believe that it is the right language to have in 
place. I also realize that what we have today is not a final 
product, but it is a framework, a framework that all members 
can work within to find the right vehicle that can be created 
out of that.
    Today and tomorrow we will solicit the advice, the 
instructions of our witnesses to try to refine it, to make sure 
that we have the right tools in place, and to discard those 
things that aren't needed. We will remove Federal barriers yet 
to competition, and we will create new incentives for 
competition.
    Mr. Chairman, I am optimistic at the opportunity. I realize 
that there are varying views of what competition is. Some 
believe that competition can only be created when a Federal 
agency has the ability to regulate every step of competition. I 
am on the other end of that spectrum. I believe that without 
the free flow of electricity, not only from companies to 
consumers but without the regulatory burden of a Federal 
agency, will you in fact have true competition.
    So, I encourage my colleagues to work to refine this 
language. I commend the chairman and the ranking member for 
this hearing, and I yield back the balance of my time.
    Mr. Barton. Thank the gentleman from North Carolina.
    I would now like to recognize the distinguished ranking 
member of the full committee, the gentleman from Michigan, for 
a 5-minute opening statement.
    Mr. Dingell. Mr. Chairman, you are most courteous. I will 
try and comply with your wishes.
    First of all, Mr. Chairman, I commend you for holding 
legislative hearings on this bill, H.R. 2944 of which you are 
the sponsor. It is a lengthy and comprehensive proposal dealing 
with issues of utmost importance to this very essential 
industry and its customers, and it warrants our very close 
attention.
    Today and tomorrow, members are going to be hearing some 
severely conflicting testimony on the merits of what has been 
included in the bill, what has been omitted, and how its 
various provisions fit together. This last issue is not 
unimportant since the bill appears to draw on a number of prior 
proposals, and legislation of this significance must be 
internally consistent.
    Mr. Chairman, as you know, I have been concerned that 
members of this committee have a sufficient grasp of the 
complex subject before us as they sift through the different 
arguments to determine what, if any, restructuring legislation 
should be enacted on the Federal level by the Congress. There 
has not been much agreement amongst the different elements of 
the industry, consumer groups, State and Federal regulators, 
and other interested parties.
    I want to commend you for your effort to build the 
consensus necessary for legislation of this magnitude. The road 
to enactment is long, and it is important for members to find 
common and durable ground before reporting the bill. The issue 
is difficult, it is complex, and it is controversial.
    If a consensus does not emerge from these hearings and if 
members on both sides of the aisle are comfortable going 
forward to a markup, then we will address those questions as 
they should be. However, if this is not the case, there will be 
little merit in forcing a markup simply to meet an arbitrary 
deadline. To do that guarantees us a fine fight and little 
opportunity of accomplishment.
    It is not unusual, I would note, for major legislation to 
require many Congresses to mature. Notwithstanding the wishes 
of some of our honored guests, the time for enactment of 
legislation that will serve the broad public interest may not 
yet have arrived.
    I want to thank you for the courtesy for your staff has 
extended to the minority in developing the witness list, and I 
look forward to hearing from the witnesses. It is important 
that we should have a complex piece of legislation heard with 
sufficient witnesses to gather broad cross section of the views 
as a people. I regret consideration of other legislation on the 
floor this week is not going to give me the time to spend at 
these hearings as I would like.
    I would like to note that many questions remain to be 
addressed: reliability, whether or not conservation or 
environmental provisions should be included, consumer concerns, 
stranded costs, State responsibilities, State actions taken, 
State actions pending, job security, antitrust questions, needs 
to address the concerns of different components of the 
industry, including public's, TVA, Bonneville, and many others, 
and to do so in a way that takes care of the concerns and the 
needs of all.
    This is not a simple industry; it is one which is composed 
of many different kinds of components, serving different 
customers in different ways in different parts of the country 
under different regulatory systems. And I would hope that as we 
go forward, we will consider that the impacts of this matter 
may not be simple.
    I do thank you for your courtesy to me, Mr. Chairman, and I 
commend you for that way in which you are proceeding. Thank 
you.
    Mr. Barton. I thank the gentleman for that opening 
statement.
    We would now like to recognize the gentlelady from New 
Mexico, Congresswoman Wilson, for a 3-minute opening statement.
    Ms. Wilson. Thank you, Mr. Chairman, and I won't take 3 
minutes.
    I wanted to commend you for having this hearing and also 
for producing a bill in a way that was very open to input from 
all of the members of this committee and even those outside of 
this committee, and I appreciate that.
    I think all of us recognize that this is an extremely 
complicated issue. There are a number of different facets to 
it, and the intent of all of the members of this committee and 
also the Chair is to get this right, to make sure that a bill 
that eventually merges from this Congress enhances competition 
while protecting consumers and ensuring there is universal 
access to electricity for all Americans, including Americans in 
rural areas.
    I just wanted to thank the chairman for holding this 
hearing and moving this bill forward, and I know there are many 
more things we have yet to work out, but I appreciate his 
leadership.
    Thank you.
    Mr. Barton. I thank the gentlelady from New Mexico. The 
Chair would recognize the gentleman from Kentucky, Mr. 
Whitfield, for a 3-minute opening statement.
    Mr. Whitfield. Mr. Chairman, thank you very much. I 
understand we have already had 11 hearings and 92 witnesses, 
and I want to commend the chairman for being very open in this 
process.
    I am delighted this morning that I have a young woman from 
my hometown of Hopkinsville who is serving as one of the 
commissioners who will be testifying this morning, and I know 
that, along with her, both of us will be looking at this 
legislation and its impact on Kentucky which has some of the 
lowest electricity rates in the Nation. Also, 95 percent of our 
electricity is generated by coal fire processes, and any 
legislation on deregulation that passes obviously we are going 
to be very concerned about its impact on coal and on our rates.
    And, so I look forward to the testimony this morning, and 
thank you for giving me the opportunity to be here.
    Mr. Barton. I thank the gentleman from Kentucky.
    We are prepared to recognize the gentleman from New Jersey 
or we can go to Mr. Bryant and give you a few minutes to get 
settled.
    We recognize the gentleman from Tennessee, Mr. Bryant, for 
a 3-minute opening statement.
    Mr. Bryant. I want to thank you, Chairman Barton, for this 
opportunity today to address this issue. I really do appreciate 
all the work that you have put into making this an open, 
deliberative process, and also I want to specifically thank you 
for honoring your commitment to do those things. You have been 
very kind to all of us, always ready to listen to what we have 
to say, and I especially appreciate your concern with those of 
us from the Tennessee Valley.
    I do believe that the free market and increased competition 
can lead to better service and lower prices for consumers. 
However, I want to ensure that the thousands of residents and 
businesses in the rural areas across the country, not just in 
the Tennessee Valley, but across the country are not forgotten 
in this move to restructure. Our agricultural communities and 
small towns rely on reasonable electricity rates to keep their 
farming, their industries, and their small businesses alive.
    As we work on this legislation, we must safeguard that 
balance between State and Federal Governments and must not 
create an immense Federal bureaucracy, such as FERC, in the 
name of deregulation. We must preserve both private and public 
power and promote diversity in generating sources from coal, 
natural gas, and nuclear to renewables such as hydroelectric 
and solar energy.
    Although this legislation is concentrated on the national 
electricity picture, we must also recognize the differences as 
well as the similarities between regions of our country. I 
believe that we should give primacy to regional solutions. The 
one-size-fits-all Federal legislation would not recognize our 
different needs.
    My home State of Tennessee is unique, because it is the 
only State in the country where wholesale competition cannot 
occur without Federal action, even though the Tennessee Valley 
Association has been very successful over the years in the 
region with helping out on navigation and the environment and 
flood control. I do not view myself as the primary defender of 
the TVA; rather, I believe that it is my role to be the 
defender of the citizens of Tennessee. I believe that we can 
craft legislation which will maintain inexpensive and reliable 
power for the people of our region.
    Again, I want to thank Chairman Barton for his leadership 
on this particular legislation, and I look forward to 
continuing to work with the members of this subcommittee and 
the full committee to craft the right solution for 
restructuring, and I would yield back my time.
    Mr. Barton. I thank the gentleman from Tennessee for those 
words, and also thank him for the work that he has put into the 
TVA section of the bill. He has done yeoman's work in that 
area.
    I now recognize the gentleman from New Jersey, Mr. Pallone, 
for a 3-minute opening statement.
    Mr. Pallone. Thank you, Mr. Chairman. I have many concerns 
regarding this bill, but I heard your 3-minute warning there, 
so I am cutting back some of what I was going to say.
    I did want to say, though, that including my own State 
there are 24 States that have already restructured their 
electric utility sector, and I think we have to be extremely 
careful not to damage these States efforts or cause them to 
redo their legislation. Any grandfathering language must be 
crafted with the utmost care, and I hope our witnesses will 
address the implications of the provisions in the chairman's 
mark on States that have already passed restructuring 
legislation.
    On State Federal jurisdiction, H.R. 2944 appears to 
essentially codify the 8th Circuit Court of Appeals decision 
which held that FERC cannot bar utilities from giving first 
priority in transmission service to their native load before 
providing capacity to other parties. This could jeopardize firm 
transmission service. The decision also could jeopardize 
mergers that depend on a reservation of firm transmission 
service.
    In terms of reliability, the legislation has incorporated 
so-called consensus language. Some utilities believe, however, 
that this language is based on out-of-date models and goals and 
would undermine market efficiency and optimization. Any 
legislation we write should foster true competition and provide 
non-discriminatory access to the Nation's electric grid.
    Overall, this bill does not appear, in my opinion, to be a 
true competition bill, and it seems that many entities and 
groups I have heard from agree that RTOs, regional transmission 
organizations, or ISOs, independent system operators, should 
encompass larger geographic regions to reduce the potential for 
market power abuses and to foster true competition. If market 
power is being exercised, we must examine the process and rules 
under which the system is operating. Over 100 organizations 
have written and/or called me to express their concerns in this 
regard.
    The other issue that is most important to me critical is 
environmental protection, and this bill is clearly lacking in 
environmental protection provisions. We cannot let this sector 
restructure at the cost of polluting our environment and 
endangering people's health. Fourteen Republicans have sent a 
letter to Chairman Barton emphasizing support for and demanding 
inclusion of environmental protections, and I will elaborate 
more upon this tomorrow when we have experts testify on this 
topic.
    But on a related note, though, over 100 groups have written 
supporting the inclusion of a renewable portfolio standard and 
the public benefits trust, but these are not in the chairman's 
mark. These provisions go hand-in-hand to ensure universal 
service and promote the use of clean energy sources. Charges 
for public benefits have long been in consumers' utilities 
bill, and they would not be newly imposed.
    So, I have highlighted, Mr. Chairman, some of the initial 
major issues that concern me with regard to this version of the 
chairman's mark, but clearly we all need time to examine the 
legislation more thoroughly, in my opinion, at both the macro 
and micro levels. I am interested in hearing out witnesses' 
analysis of the bill.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Pallone, and we--the 
Chair shares several of the concerns that you have addressed, 
and we hope this legislative hearing and the time right after 
it we can work together on some of these issues.
    Seeing no other members present who have not yet been given 
an opportunity to give an opening statement, the Chair would 
recognize himself for his 5 minute opening statement.
    The bill before the subcommittee is a very different bill 
than the bills that we have considered earlier in this session. 
This bill has no Federal mandate. This bill does not preempt 
States in areas historically reserved to be regulated by the 
States. This bill does focus on the core Federal issues that 
States have little or no ability to address.
    We held our first hearing on this issue more than 4 years 
ago. Since then we have held 32 hearings, received testimony 
from 331 witnesses. This year we have held 11 hearings and 
heard testimony from 92 witnesses. There was one thing that 
every witness we have heard from this year has agreed upon, and 
that is that the need for the Congress to act in this session 
on electricity legislation.
    There was another clear message from the hearings that we 
have held this year: The States have little or no ability to 
address certain core Federal issues, such as interstate 
commerce, foreign commerce, reliability of the interstate 
transmission grid, open access to the interstate transmission 
grid, the role of the Federal utilities in competitive electric 
markets, Federal and State jurisdiction, and reform of Federal 
electric and tax laws. Only the U.S. Congress can address these 
core Federal issues.
    Some would say that we have deliberated too long. Mr. 
Markey says that he does not want any more seminars on 
electricity, and I agree. He just wants a final exam, and I 
agree with that also. If I were at Indianapolis, I would say, 
``Ladies and gentleman, start your markup pens. The time has 
come to act.''
    The situation is clear: Change is sweeping across the 
electricity industry. States are opening their retail electric 
markets. Some utilities are voluntarily divesting themselves of 
generation; others are merging. New entrants are buying 
utilities. Federal electric laws that were written in most 
cases more than 60 years ago are simply not adequate for 
today's situation. Those Federal laws were based on the premise 
that States would always regulate retail electricity rates. 
That premise is no longer valid.
    There is a cost to inaction. If Congress does nothing, 
problems that exist under the status quo will remain. 
Reliability will be at risk. The transmission system will 
remain subject to four different sets of rules. Transmission 
owners will retain the ability to discriminate against their 
competitors, and incentives to invest in transmission will 
remain inadequate. Consumers will be exposed to slamming and 
cramming by electric marketeers. The privacy of consumer 
information may not be assured, and consumers will not be 
assured access to the information that they need to choose 
among competing retail electric suppliers. The Public Utility 
Holding Act of 1935 will continue to discourage new entrants 
into the electricity industry. The mandatory purchase 
obligations of PURPA will remain in force and may require 
utilities to sign contracts to purchase power at above market 
rates. Disincentives in the Federal tax law will discourage 
State and municipal utilities and rural electric cooperatives 
from opening their transmission systems and retail markets. 
Payment of the Bonneville Power Administration's unrecovered 
power costs will remain taxpayer liabilities. The Tennessee 
Valley will continue to be the only region in the country where 
wholesale competition is prohibited, and distributors in the 
region will continue to be forced to buy their power solely 
from the Tennessee Valley Authority.
    Ladies and gentleman, any one of these reasons is 
sufficient for the Congress to pass electricity legislation in 
this session of Congress. So, once again, I say, ``Ladies and 
gentleman, please start your markup pens.''
    [Additional statements submitted for the record follow:]
   Prepared Statement of Hon. Michael Bilirakis, a Representative in 
                   Congress from the State of Florida
    Thank you, Mr. Chairman.
    First, I would like to thank you for scheduling two legislative 
hearings on your bill, H.R. 2944, the Electricity Competition and 
Reliability Act. There is little doubt that electricity restructuring 
is extremely complex. In 1999 alone, our Subcommittee has held eleven 
hearings and received testimony from 92 witnesses on the broad range of 
issues surrounding electricity restructuring.
    Mr. Chairman, you should be commended for your attempt to draft a 
consensus restructuring bill. This was a truly herculean undertaking, 
and I appreciate your efforts to solicit the views of the Energy and 
Power Subcommittee members before introducing H.R. 2944.
    As we continue to consider the restructuring of our electricity 
industry, it is important for us to have a thorough understanding of 
the impact any restructuring legislation could have on our current 
system. In this regard, I am anxious to hear the testimony of our 
witnesses.
    They have a wide range of expertise, and I am sure their comments 
will provide us with some additional guidance on the complex issue of 
electric utility restructuring. Their analysis of H.R. 2944 should be 
very useful in our Subcommittee's discussions.
    Mr. Chairman, I look forward to our continuing dialogue on H.R. 
2944 and electricity restructuring.
    Thank you, Mr. Chairman.
                                 ______
                                 
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    Mr. Chairman, I am happy to be at today's legislative hearing on 
H.R. 2944. As you know, I have been a supporter of comprehensive 
electric utility restructuring since the early days of the 104th 
Congress and supporter of competition in the electric utility industry 
prior to the enactment of the Energy Policy Act of 1992.
    Throughout this debate I have been concerned about one thing, that 
all consumers benefit. I have said many times both publicly and 
privately that consumers, not utilities, should be front and center in 
any restructuring debate.
    As I look at the proposal before us, and listen to the testimony of 
the witnesses I will be concerned about one thing: ``How does it impact 
consumers?'' I want restructuring legislation to work for the 
suppliers, new entrants and incumbent utilities, for the reliability of 
the national grid--and ultimately for consumers. I believe our nation's 
retail customers have been captive ratepayers for too long.
    I am hopeful that the federal government will be able to choose its 
supplier someday soon. The government is a big customer. Taxpayers will 
surely benefit when the Federal government starts to lower its monthly 
bill. Federal savings from restructuring are calculated at billions of 
dollars, so if there are any budgeteers in the room, I hope you are 
paying attention.
    Mr. Chairman, I am happy to see you taking this important step and 
look forward to working with you as this bill moves through the 
Committee process.
    Thank you.
                                 ______
                                 
Prepared Statement of Hon. Albert R. Wynn, a Representative in Congress 
                       from the State of Maryland
    Mr. Chairman, I want to thank you for holding these hearings on 
electricity deregulation. The deregulation of the electricity industry 
is a critical issue that will affect every American. Today most of us 
take for granted the fact that our homes are temperature controlled, 
our lights turn on and off at the flip of a switch, and our appliances, 
fax machines and computers operate at our command. We do not think 
about where our electricity comes from or how it gets to our homes and 
offices. Yet electricity is a fundamental part of our day--without 
which most of us could not easily function.
    A critical issue that we must consider is the role of the federal 
government and the jurisdiction of the states. The federal government 
clearly has a role but we must make sure that this role is limited to 
addressing only the truly federal issues. We should ensure that the 
interstate transmission system is adequate and reliable and remove 
barriers to competition such as PURPA and PUCHA.
    Electricity deregulation legislation should not expand FERC 
jurisdiction into areas current under state jurisdiction or give FERC 
new authority that would undermine a competitive electricity 
marketplace. New regulatory authority given to FERC should be very 
limited and clearly defined. We don't need to ``reregulate'' if the 
underlying goal is to promote free markets and competition.
    Any federal bill should refrain from dictating to states the 
details associated with implementing retail competition. Metering, 
billing, affiliate rules, consumer protection, universal service and a 
host of other issues should be left for resolution at the state level 
by lawmakers and regulators who are familiar with the specific needs of 
their states.
    In Maryland, for example, our legislature passed in April an 
electric restructuring law that is very comprehensive. It will become 
even more detailed as the Public Service Commission provides the rules 
for implementing the legislation. Neither Maryland, nor any of the 
other 23 states that have enacted restructuring laws should be forced 
to go back to the drawing board re-write the rules for electricity 
deregulation issues that clearly fall within their jurisdiction and 
have already been dealt with by their state legislatures.
    Our task is to find just the right balance that will encourage 
competition, yet leave the states with the flexibility they need to 
formulate plans best suited to their citizens.
                                 ______
                                 
 Prepared Statement of Hon. Billy Tauzin, a Representative in Congress 
                      from the State of Louisiana
    Mr. Chairman, the legislation before us today is a good first step 
toward achieving competitive retail electricity markets nationwide. 
However, it proposes the outright repeal of PURPA upon ``date of 
enactment.'' Unfortunately, this has significant negative implications 
for the many PURPA facilities that are in my Congressional district.
    Many companies in my district built PURPA plants because they 
needed the electricity and steam to operate their manufacturing plants. 
They built these QFs (Qualified Facilities) because they could produce 
alternative forms of electricity for less than the price charged by the 
local utility. Low cost energy is essential to their competitiveness in 
domestic and international markets.
    While it is true that QF reliance on ``PURPA contracts'' has 
created an artificial electricity wholesale marketplace, PURPA does 
provide QFs with important protections that should be preserved--at 
least until our electricity markets are competitive.
    These protections include guaranteed access to interconnection, 
standby/back up maintenance power at just and reasonable prices, 
mandatory power purchase requirements and PUHCA exemptions. If we 
choose to abruptly withdraw these safeguards before realizing a 
competitive electricity retail marketplace, then we will have seriously 
compromised QF ability to secure debt financing of their operations. 
Frankly then, PURPA protections are needed now and will continue to be 
necessary until there is a competitive electricity retail market that 
will allow QFs the flexibility and choice that usually accompany 
competition. .
    Don't get me wrong Mr. Chairman, I am in favor of repealing PURPA. 
However, I am inclined to support language which phases out the effect 
of PURPA over time as proof of retail competition across the country 
becomes more evident. Such language, I believe, would be fairer to the 
QFs than a provision repealing PURPA on date of enactment. At the same 
time, it would also make clear that the wholesale market inefficiencies 
created by guaranteed contracts are on the way out.
    I look forward to working with you to reach a satisfactory outcome.

    Mr. Barton. With that, I am going to welcome our first 
witness, but before that, I noticed that we have all five of 
our FERC commissioners, and you all look very uncomfortable all 
scrunched up out there in the front row. We will be very happy 
to let you use the majority lounge. You can hear our first 
witness and hear the questions and answers and make some phone 
calls. You are welcome to continue there in the audience, but 
if you wish to--and I am sure the minority would welcome you 
into their lounge too; this is not a partisan--if some of you 
want to go to the left and some to the right, that is okay. But 
you are welcome, because we will be with the gentleman from the 
Department of Energy for probably the next hour or so. Okay?
    Mr. Glauthier, we want to recognize you as our first 
witness of our legislative hearings. As the distinguished 
member of the Department of Energy and the No. 2 person at the 
Department of Energy, the Deputy Secretary of Energy, you have 
had quite a bit to do with the formulation of the Department's 
comprehensive bill. And although we are somewhat saddened that 
we couldn't have Mr. Richardson, we are delighted that we have 
you. So, we are going to recognize you for such time as you may 
consume, and then we will have some questions for you.
    Welcome to the committee.

 STATEMENT OF HON. T.J. GLAUTHIER, DEPUTY SECRETARY OF ENERGY, 
                   U.S. DEPARTMENT OF ENERGY

    Mr. Glauthier. Thank you, Mr. Chairman, Mr. Hall----
    Mr. Barton. And you need to really put that microphone 
close to you, sir.
    Mr. Glauthier. Thank you, Mr. Chairman, Mr. Hall, Mr. 
Dingell, and other members of the subcommittee. Thank you for 
inviting me here today to present the administration's views on 
H.R. 2944, the Electricity Competition and Reliability Act.
    At the same time the Federal Energy Regulatory Commission 
continues to promote competition in the wholesale markets, 24 
States have now adopted electricity restructuring proposals 
that allow for competition at the retail level. Almost every 
other State has the matter under active consideration. The 
Clinton administration believes that this is a positive 
development. Competition, if structured properly, will be good 
for consumers, good for the economy and good for the 
environment. However, the full benefits promised by competition 
can only be realized within an appropriate Federal statutory 
framework. What we do at the Federal level and when we do it, 
will have a profound impact on the success of State and local 
retail competition programs.
    Mr. Chairman, I want to commend you and the other members 
of this subcommittee for the effort you are putting forth. Many 
of the issues are complex and controversial. Nevertheless, it 
is vitally important to consumers, the economy, and the 
environment that these issues be resolved in an appropriate 
manner.
    I also want to thank you for the courtesy which you and 
your staff have shown to myself, Secretary Richardson and other 
members of the Clinton administration. I believe that working 
together in a bipartisan fashion, the administration and 
members on both sides of the aisle can achieve a result that 
will benefit all Americans.
    Let me begin with three points: First, it is critical that 
Congress pass comprehensive electricity restructuring 
legislation soon; second, restructuring legislation can succeed 
only if it is developed on a bipartisan basis, and, third, 
although the bill includes some encouraging provisions, the 
administration cannot support H.R. 2944 in its current form, 
but we are willing to work together to achieve legislation that 
we can all support.
    As the States continue to move forward, the absence of 
action at the Federal level is creating significant uncertainty 
in the increasingly regionalized power and transmission 
markets. The fact is, if we don't act, the benefits from State 
restructuring programs will be limited.
    At the very least, Congress needs to extend FERC 
jurisdiction to all major transmission owners; it needs to 
clarify FERC's authority with regard to the formation of 
regional transmission organizations; it needs to authorize the 
development and enforcement of mandatory reliability standards 
to enable FERC to prevent incumbent utilities from using market 
power to inhibit competition; to ensure that public benefits 
programs, including renewable energy, low-income assistance, 
and energy conservation are not lost as a result of the 
transition to competition, to eliminate statutory impediments 
to State competition programs, and to enable competition to 
thrive in the regions served by Federal utilities.
    Electricity restructuring is not a partisan issue. Members 
on both sides of the aisle have offered thoughtful and 
meaningful proposals that merit consideration, including a 
bipartisan bill introduced earlier this year by Congressmen 
Largent and Markey. Mr. Chairman, we encourage this 
subcommittee to continue your efforts to develop a bipartisan 
bill that will enable Congress to enact comprehensive 
restructuring legislation that can be supported by the 
administration.
    We commend you for including a number of positive 
provisions in H.R. 2944, such as those intended to enhance 
reliability, protect consumers, and promote aggregation. 
Clearly, your legislation addresses many of the key issues that 
need to be included in a comprehensive electricity 
restructuring bill. However, we believe that H.R. 2994 should 
be modified to establish the necessary ground rules and 
adjustments required for the transition to competition.
    Given the time constraints of this morning, I would like to 
focus my comments on four important issues: First, market 
power; second, FERC jurisdiction over transmission; third, 
regional transmission operators, and, fourth, public benefit 
programs. My written testimony contains a more detailed 
discussion of the administration's views on H.R. 2944.
    First, on market power. The primary goal of Federal 
electricity restructuring legislation must be to aid the 
transition to competition in a manner that allows consumers to 
benefit through lower rates. However, significant rate savings 
cannot be achieved if effective competition fails to develop.
    Open transmission access and the creation of independent 
regional transmission organizations should go a long way toward 
achieving competitive markets. However, access to transmission 
is, by itself, not enough. Utilities that own substantial 
amounts of generation in a region or strategically located 
facilities may be able to influence prices and inhibit the 
entry of new competitors through horizontal market power.
    Mr. Chairman, we are disappointed that H.R. 2944 fails to 
provide FERC with sufficient authority to address market power. 
We recommend that the bill be modified to incorporate the 
market power provisions in the administration's bill.
    The second area I would like to speak to is jurisdiction 
over transmission. FERC Orders No. 888 and 889 have had a 
tremendous positive impact in promoting wholesale competition 
by requiring jurisdictional utilities to provide competitors 
access to transmission facilities under rates and terms 
comparable to those provided to itself. The administration 
supports the provisions in H.R. 2944 which extend FERC's 
authority to the transmission facilities owned by previously 
non-jurisdictional utilities.
    We are concerned, however, that H.R. 2944 can balkanize the 
regulation of transmission in light of a recent 8th Circuit 
Court of Appeals decision. FERC may be unable to prevent a 
utility providing transmission services that are bundled with 
the retail sale and distribution of power from discriminating 
against other electricity suppliers in favor of its own 
generation.
    State regulators, which would have jurisdiction over 
bundled transmission services, may not have sufficient 
incentives to adequately police a utility's use of its 
transmission lines.
    Mr. Chairman, we strongly urge you to reevaluate this 
provision. We are not suggesting that FERC should regulate the 
rates for bundled transactions, but FERC should have the 
ability to ensure that all competitors have equal access to 
transmission resources.
    The third area I would like to speak to is regional 
transmission organizations. Properly sized, independent, 
regional transmission organizations can provide significant 
benefits, including the enhancement of reliability and the 
promotion of more efficient and competitive markets.
    The administration is encouraged that H.R. 2944 would 
require all transmitting utilities to join RTOs and we 
generally support the standards for RTO formation laid out in 
the bill. We are concerned, however, that the legislation 
limits FERC's discretion in approving an RTO. It is important 
that FERC be able to require the formation of an RTO that would 
be optimal for a particular region.
    The fourth area is public benefits. Mr. Chairman, we 
commend you for recognizing the need to address renewable 
energy in restructuring legislation. We support both the 
extension of the Renewable Energy Production Incentive program 
for municipal and cooperative utilities and wind and biomass 
tax credits for investor-owned utilities. However, more does 
need to be done, such as the inclusion of a renewable portfolio 
standard. The progress we have made in renewables could be 
partially lost during the transition to competition because 
these technologies have not yet achieved full cost 
competitiveness.
    In addition, we continue to be concerned that retail 
competition could lead to reduced support for programs that 
provide important public benefits. A public benefits fund, 
which provides matching funds to the States for low-income 
assistance, energy efficiency programs, consumer education, and 
the development and demonstration of emerging, clean 
technologies, should alleviate these concerns.
    In conclusion, Mr. Chairman, while the States are 
proceeding with their restructuring programs, all eyes are on 
Congress to learn what signals the wholesale and retail markets 
will receive. This committee's leadership has been essential 
and will continue to be. Although we cannot support H.R. 2944 
in its current form, the administration's approach to 
comprehensive restructuring legislation has many elements in 
common with your proposed legislation. And I know that several 
members of this subcommittee, on both sides of the aisle, have 
put forth proposals that also merit serious consideration.
    We are confident that a bipartisan bill can be reported out 
of the subcommittee soon. Secretary Richardson and I, as well 
as our staff, and other members of the administration stand 
ready to assist you and the other subcommittee members in this 
vital endeavor. Only by working together can we take the steps 
that are necessary to provide consumers with the full benefits 
of competition.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. T.J. Glauthier follows:]
Prepared Statement of T.J. Glauthier, Deputy Secretary, U.S. Department 
                               of Energy
                              introduction
    Mr. Chairman, thank you for inviting me today to present the 
Administration's views on H.R. 2944, the Electricity Competition and 
Reliability Act. DOE, the Agency responsible for formulating and 
implementing the Clinton Administration's energy policies, is a strong 
proponent of comprehensive Federal electricity restructuring 
legislation. On April 15, Secretary Richardson transmitted to Congress 
the Comprehensive Electricity Competition Act (CECA) 1--the 
Administration's vision for the role the Federal government should play 
in the transition to competition.
---------------------------------------------------------------------------
    \1\ The Administration transmitted CECA to Congress in two separate 
parts. The first part, which was introduced by Congressman Bliley and 
Dingell (upon request) as H.R. 1828 on May 17, includes all of the non 
tax-related provisions in the Administration's proposal. Both parts 
were introduced in the Senate by Senators Murkowski and Bingaman (upon 
request)--S. 1047 and S. 1048--on May 13.
---------------------------------------------------------------------------
    At the same time FERC continues to promote competition in the 
wholesale markets, 24 states have now adopted electricity restructuring 
proposals that allow for competition at the retail level. Almost every 
other state has the matter under active consideration. The Clinton 
Administration believes that this is a positive development. 
Competition, if structured properly, will be good for consumers, good 
for the economy and good for the environment. Companies that had no 
incentive to offer lower prices, better service, or new products will 
now compete for customers. Consumers will save money on their electric 
bills. Lower electric rates will also make businesses more competitive 
by lowering their costs of production. By promoting energy conservation 
and the use of cleaner and more efficient technologies, greenhouse gas 
emissions will be reduced, as will emissions of conventional air 
pollutants. However, the full benefits promised by competition can be 
realized only within an appropriate Federal statutory framework. What 
we do at the Federal level, and when we do it, will have a profound 
impact on the success of state and local retail competition programs.
    Mr. Chairman, I want to commend you and the other members of this 
Subcommittee for the effort you are putting forth in an attempt to 
enact comprehensive electricity restructuring legislation. Many of the 
issues are complex and controversial. Nevertheless, it is vitally 
important to consumers, the economy and the environment that these 
issues be resolved in an appropriate manner.
    I also want to thank you for the courtesy which you and your staff 
have shown to me, Secretary Richardson and other members of the Clinton 
Administration. I believe that working together, in a bipartisan 
fashion, the Administration and members on both sides of the aisle can 
achieve a result that will benefit all Americans.
    Let me begin with three points:

 It is critical that Congress pass comprehensive electricity 
        restructuring legislation sooner, rather than later.
 Restructuring legislation can succeed only if it is developed 
        on a bipartisan basis. And
 Although the bill includes some encouraging provisions, the 
        Administration does not support H.R. 2944 in its current form. 
        We would like to work with you to achieve a version of 
        restructuring legislation that we could all support.
                       federal action is critical
    While some state competition programs are already in effect, tens 
of millions of additional consumers will soon have the ability to 
choose their power in those states implementing retail competition 
programs over the next 2-3 years. As the states continue to move 
forward, the absence of action at the Federal level is creating 
significant uncertainty in the increasingly regionalized power and 
transmission markets. The fact is, if we don't act at the Federal 
level, the benefits from state restructuring programs will be limited.

 First, competition is not going to work if transmission lines 
        operate under different sets of rules and requirements. It is 
        essential that all wholesale and retail power marketers have 
        non-discriminatory access to the wires that transport their 
        product. While the Federal Energy Regulatory Commission (FERC) 
        has jurisdiction over the transmission of electricity in 
        interstate commerce, FERC's authority is somewhat limited. 
        Congress needs to ensure that all major transmission facilities 
        are, to the extent practicable, subject to comparable FERC open 
        access requirements.
 Second, independent regional transmission organizations (RTOs) 
        will help promote efficient, competitive and reliable markets. 
        However, FERC's authority over, and ability to require, RTO 
        formation remains uncertain. Congress must address these 
        uncertainties.
 Third, as we move to a more competitive environment, the 
        reliability of our bulk power systems can no longer be 
        entrusted to voluntary standards. Significant support has 
        developed for a proposal to have an electric reliability 
        organization, overseen by FERC, establish mandatory reliability 
        standards. Congress should authorize the development and 
        enforcement of mandatory reliability standards.
 Fourth, restructuring efforts won't succeed if competitive 
        markets are not developed. While open transmission access and 
        the formation of independent regional transmission 
        organizations should go a long way towards changing the 
        monopoly structure of the electric utility industry to 
        competition, the fact is that some utilities may have 
        horizontal market power as a result of their control over a 
        substantial amount of generating capacity, enabling them to 
        crowd-out potential competitors and keep the price of power 
        artificially high. Congress must empower FERC to prevent 
        incumbent utilities from using market power to inhibit 
        competition.
 Fifth, existing programs that provide support for renewable 
        energy and other important public benefits were designed for a 
        system of regulated markets. Congress should act to ensure that 
        these public benefits are not lost as a result of the 
        transition to competition.
 Sixth, certain Federal statutory provisions may impede the 
        efforts of the states and FERC to promote competition. Congress 
        needs to eliminate these impediments and modernize those 
        statutes which are inconsistent with the development of fully 
        competitive markets.
 Seventh, the statutes governing the operation and regulation 
        of Federal utilities--the Tennessee Valley Authority (TVA) and 
        the Federal Power Marketing Administrations (PMAs)--must be 
        revised to allow for effective competition in the regions they 
        serve.
    Mr. Chairman, the Federal government clearly has an important role 
to play in the transition to competition. While the states are moving 
forward rather briskly, Congress has yet to act. The Federal government 
needs to send the appropriate signals about what the rules of the road 
will be in this new world of competition. Instead, we are sending 
signals of confusion.
    The electricity markets are crying out for the certainty that is 
necessary before essential investments are made. Generating capacity 
reserve margins have significantly tightened. The construction of new 
major transmission facilities has dramatically slowed. Aging 
distribution facilities are beginning to wear out.
    Several regions of the country have experienced major problems in 
recent summers. As the heat and humidity rose, some utilities found it 
increasingly difficult to meet consumer demands. Spot prices for 
electricity rose dramatically. Elected officials and utility executives 
made urgent public appeals for conservation. Factories were forced to 
shut down their operations and send workers home. Some areas 
experienced rolling blackouts. Other areas lost power due to failures 
in overworked and outdated distribution facilities. While it is 
difficult to attribute all of these problems to the uncertainties 
surrounding the transition to competition, they clearly have played a 
significant role. In short, Mr. Chairman, we can't afford to wait until 
the 107th Congress to do what needs to be done now.
                      need for bipartisan approach
    The electricity sector is our nation's most capital-intensive 
industry, holding assets with a book value of approximately $700 
billion. In addition, electricity affects our everyday lives and 
businesses. It is not at all a stretch to point out that access to 
power can sometimes be a matter of life and death. This is a major 
industry that is in the process of a monumental transition.
    Very few major congressional initiatives are accomplished in the 
absence of a bipartisan approach and with cooperation from both ends of 
Pennsylvania Avenue. Mr. Chairman, electricity restructuring is not a 
partisan issue. Members on both sides of the aisle have offered 
thoughtful and meaningful proposals that merit consideration, including 
a bipartisan bill introduced earlier this year by Congressmen Largent 
and Markey. DOE encourages you to continue your efforts to develop a 
bipartisan bill that will enable Congress to enact comprehensive 
restructuring legislation that can be supported by the Administration.
                         comments on h.r. 2944
    Mr. Chairman, we commend you for including a number of positive 
provisions in H.R. 2944, such as those intended to enhance reliability, 
protect consumers and promote aggregation. Clearly, your legislation 
addresses many of the key issues that need to be included in a 
comprehensive electricity restructuring bill. However, we believe H.R. 
2944 should be modified to establish the necessary ground rules and 
adjustments required for the transition to competition.
    I would like to take a few minutes to discuss, in some detail, the 
Department's views on four important issues: (1) market power; (2) FERC 
jurisdiction over transmission; (3) regional transmission operators; 
and (4) public benefits programs. Thereafter, I will briefly comment on 
H.R. 2944's treatment of several other items.
Market Power
    The primary goal of Federal electricity restructuring legislation 
must be to aid the transition to competition in a manner that allows 
consumers to benefit through lower rates. However, significant rate 
savings can't be achieved if effective competition fails to develop.
    Open transmission access and the creation of independent regional 
transmission organizations should go a long way towards achieving 
competitive markets. However, access to transmission is, by itself, not 
enough. Utilities that own substantial amounts of generation in a 
region or strategically located facilities may be able to raise prices 
above competitive levels and inhibit the entry of new competitors 
through horizontal market power. Because electricity markets are 
becoming increasingly regional and multi-regional, state regulators 
cannot adequately address market power issues. As a result, it is 
essential that the Federal government, as the guardian of interstate 
commerce, be able to take aggressive action during the transition 
period to ensure that utilities are unable to use horizontal market 
power to control prices and impede competition.
    The antitrust laws are not, by themselves, sufficient to address 
the market power problems a newly-restructured electricity industry may 
face. The traditional regime of rate-of-return regulation has led to 
high concentrations of ownership of generation facilities regulation. 
As the Department of Justice recently noted in testimony before this 
Subcommittee:
        The antitrust laws do not outlaw the mere possession of 
        monopoly power that is the result of skill, accident, or a 
        previous regulatory regime. Antitrust remedies are thus not 
        well-suited to address problems of market power in the electric 
        power industry that result from existing high levels of 
        concentration in generation or vertical integration.''
    FERC currently has the authority to condition merger applications 
to remedy potential market power. Absent a merger application, FERC's 
only other available tool to address market power is to deny a request 
for market-based rates. However, denying such requests could severely 
impede the Commission's ability to promote wholesale competition.
    To ensure that the development of competition is not hindered by 
the exercise of market power, the Administration's legislation would 
authorize FERC to remedy concentrations of market power in the 
wholesale market, including the authority to order the divestiture of 
assets, if market power is found. In addition, our bill would enable 
FERC to provide backup market power remedies for the retail market, at 
the request of a state. This is important because some states seeking 
to open their markets to retail competition may not have clear 
statutory authority to remedy market power problems in their state or 
have jurisdiction over facilities in other states that may be the cause 
of a market power problem.
    Mr. Chairman, we are disappointed that H.R. 2944 fails to address 
horizontal market power. We recommend that the bill be modified to 
incorporate the market power provisions in the Administration's bill.
Jurisdiction over Transmission
    FERC Orders No. 888 and 889 have had a tremendous positive impact 
in promoting wholesale competition by requiring jurisdictional 
utilities to provide competitors access to transmission facilities 
under rates and terms comparable to those provided to itself. 
Unfortunately, FERC's open access authority does not directly extend to 
non-jurisdictional utilities, such as most cooperative and municipal 
utilities, as well as TVA and the PMAs. The Department supports the 
provisions in H.R. 2944 which extend FERC's regulatory authority to the 
transmission facilities owned by previously non-jurisdictional 
utilities.
    We are concerned, however, about FERC's ability to prevent 
discriminatory transmission access as a result of a recent 8th Circuit 
Court of Appeals decision--Northern States Power v. FERC. In that case, 
the Court essentially ruled that FERC has no authority to prevent a 
utility from denying access to others in favor of its own bundled 
retail sales.
    H.R. 2944 states that FERC would have authority only over the 
unbundled transmission of electricity that is sold at retail, while 
state regulators would have jurisdiction over transmission when it is 
part of a bundled retail sale. It is necessary that all transmission 
owners and all transmission services be subject to similar rules and 
requirements. The distinction in H.R. 2944, in light of the 8th Circuit 
decision, would balkanize the regulation of transmission and could have 
a potentially chaotic impact on the development of competitive markets. 
FERC would be unable to prevent a utility providing transmission 
services that are bundled with the retail sale and distribution of 
power from discriminating against other electricity suppliers in favor 
of its own generation. State regulators, which would have jurisdiction 
over bundled transmission services, may not have sufficient incentives 
to adequately police a utility's use of its transmission lines, 
especially if the competing supplier were seeking access to sell power 
to consumers located in another state.
    Mr. Chairman, we urge you to reevaluate this provision. Whether 
transmission is bundled or unbundled, it is essential to the 
development of competitive markets that all competitors have non-
discriminatory access to the facilities.
Regional Transmission Organizations
    Properly sized, independent, regional transmission organizations 
(RTOs) can provide significant benefits, including the enhancement of 
reliability and the promotion of more efficient and competitive 
markets. FERC's recent Notice of Proposed Rulemaking, which encourages 
transmission-owning utilities to participate in RTOs, is a positive 
step. However, this voluntary approach does not ensure that appropriate 
RTOs will be developed.
    The Department is encouraged that H.R.2944 would require all 
transmitting utilities to join RTOs and we generally support the 
standards for RTO formation laid out in the bill--(1) independence, (2) 
appropriate scope and regional configuration, (3) operational control 
over all transmission facilities comprising the RTO, (4) responsibility 
for planning transmission additions and upgrades, and (5) other 
standards FERC determines are in the public interest.
    We are concerned that the legislation limits FERC's discretion in 
approving an RTO. While an RTO might meet the standards set out in the 
legislation, it might very well not be the optimal RTO for a particular 
region. However, H.R. 2944 would prohibit FERC from disapproving a 
less-than-optimal proposal as long as the proposed RTO met the 
statutory standards. In addition, FERC's hands would be tied with 
regard to RTOs approved prior to the date of enactment. Although a 
previously approved RTO might require alteration due to changes in 
circumstances, FERC would be powerless to alter it. In addition, this 
provision could have a chilling effect on FERC's grants of approvals 
for new RTOs prior to the date of enactment, if FERC knows that it 
could not require changes to an RTO following the date of enactment of 
the legislation.
    Moreover, although we support the concept of incentive pricing 
policies in certain limited situations, it is unclear why FERC should 
be required to establish a pricing policy designed to encourage 
transmitting utilities to form RTOs (and extend the policies to already 
existing RTOs), when the legislation already requires transmitting 
utilities to join RTOs. It is important to remember that transmission 
will continue to be a monopoly function. Any deviation from cost-of-
service ratemaking should be limited to exceptional circumstances.
Public Benefits
    While retail competition has the potential to increase renewable 
energy's share of the electricity market, the inherent uncertainty of 
the transition to competition, the recognition of important 
environmental and energy diversification benefits from renewables, and 
the fact that existing Public Utility Regulatory Policies Act 
requirements are incompatible with competition and ineffective under 
present market conditions suggest that Federal policy towards renewable 
electricity should be revisited in the context of restructuring.
    Mr. Chairman, DOE commends you for recognizing the need to address 
renewable energy in restructuring legislation. We support the extension 
of both the Renewable Energy Production Incentive (REPI) program for 
municipal and cooperative utilities and the wind and biomass tax 
credits. However, more needs to be done; otherwise, the progress we 
have made in renewables could be partially lost during the transition 
to competition because these technologies have not yet achieved cost-
competitiveness. The inclusion of a renewable portfolio standard would 
provide market-based support for the development and deployment of 
renewable energy technologies. Unlike the mandatory purchase provisions 
of PURPA, this approach would be consistent with competitive 
electricity markets.
    In addition, we continue to be concerned that retail competition 
could lead to reduced support for programs that provide important 
public benefits. Under cost-of-service regulation, programs supporting 
and promoting research and development, energy efficiency and low-
income assistance were supported, in part, through utility rate 
structures. As utilities prepare for competition, they will be 
unwilling to include in their rates the cost of programs not included 
in the rates of their competitors. A public benefits fund, which 
provides matching funds to the states for low-income assistance, energy 
efficiency programs, consumer education and the development and 
demonstration of emerging, clean technologies, should alleviate these 
concerns.2
---------------------------------------------------------------------------
    \2\ The Administration's public benefits fund proposal also 
includes a rural safety net in the unlikely event that competition 
adversely impacts rural areas.
---------------------------------------------------------------------------
Other Issues
    Mr. Chairman, while I cannot comment on each and every provision in 
H.R. 2994, I would like to briefly discuss several additional issues.

 Target Date/Opt-Out--Mr. Chairman, the Department recognizes 
        that since Chairman Bliley dropped his insistence on Federally-
        mandated competition, the debate over restructuring legislation 
        has shifted to other issues. Nevertheless, we continue to 
        believe that there is substantial merit to establishing a 
        target date for the implementation of retail competition and 
        requiring state utility commissions and non-regulated municipal 
        and cooperative utilities to hold proceedings to examine the 
        benefits or costs of adopting retail competition programs. I 
        know we both share the opinion that competition, if it is 
        structured properly, will benefit all classes of consumers. 
        Most, if not all, state utility commissions and non-regulated 
        utilities would likely come to the same conclusion after a 
        thorough examination.
 Transmission Siting--We are pleased that H.R. 2944 recognizes 
        that regional solutions to transmission siting issues are both 
        appropriate and necessary. In addition, the Administration has 
        no objections to providing FERC with authority to order 
        transmission-owning utilities to expand their facilities, as 
        long as state siting authority is not diminished.
 Reliability--As I discussed earlier, one of the most critical 
        elements of comprehensive electricity restructuring legislation 
        is the need for mandatory reliability standards. The 
        reliability title of H.R. 2944 closely mirrors the language 
        included in the Administration's legislation and language 
        proposed by the North American Electric Reliability Council. We 
        believe the differences between these proposals can be 
        resolved.
 Consumer Protection--H.R. 2944 contains several vitally 
        important consumer protection provisions, including items 
        related to information disclosure, consumer privacy and 
        measures designed to prohibit marketers from engaging in 
        slamming and cramming practices. We fully support these 
        provisions.
 Mergers--We are pleased that H.R. 2944 retains FERC's 
        authority under Section 203 of the Federal Power Act to review 
        utility mergers and extends FERC's jurisdiction over mergers 
        that involve generation-only and utility holding companies. 
        Utility mergers are not necessarily anti-competitive. However, 
        it is vital that FERC-- the regulatory agency with significant 
        experience with and understanding of electricity markets--be 
        able to prohibit or condition a merger that would have a 
        deleterious impact on retail or wholesale 
        competition.3
---------------------------------------------------------------------------
    \3\ To avoid inadvertent impacts on small consumer-owned systems, 
the Administration bill excludes entities with existing loans made or 
guaranteed under the Rural Electrification Act from merger review 
requirements.
---------------------------------------------------------------------------
 Reciprocity--The Administration believes that each state 
        should have the authority to determine whether to prohibit a 
        utility not fully subject to retail competition requirements 
        from participating as a marketer in that state if the state has 
        implemented retail competition. Recognizing that H.R. 2944 
        instead imposes a Federal reciprocity requirement, we believe 
        the requirement would be ineffective. By allowing utilities not 
        subject to retail competition to avoid the reciprocity 
        limitation by simply filing an open access plan with a state 
        utility commission, the legislation could very well allow 
        utilities that file sham proposals to escape the intent of the 
        reciprocity provision. We think this provision should be 
        modified.
 Aggregation--Mr. Chairman, the Administration commends you for 
        including Section 541 in H.R. 2944. This provision will help 
        entities that are interested in aggregating to increase 
        consumers' purchasing power and enable them to reap the full 
        benefits of retail competition.
 Interconnection--We welcome the inclusion of a Federal 
        interconnection standard in H.R. 2944. Distributed power and 
        combined heat and power technologies can enhance both 
        reliability and the environment. We believe a more expansive 
        approach than that included in the bill is required. 
        Interconnection should not be restricted based on ownership or 
        the ability to serve nearby facilities. In addition, we believe 
        that regulatory and tax barriers that inadvertently discourage 
        the use of these technologies should be addressed.
 Federal Utilities--We are pleased to see that the key issues 
        associated with Federal utilities which the Administration 
        believes need to be addressed in restructuring legislation, as 
        well as the general approach to resolving these issues, are 
        included in H.R. 2944. Although Title VI of the legislation 
        differs in certain limited respects from the Administration's 
        proposed restructuring legislation, both bills share the same 
        goal--enabling competition to thrive in the regions served by 
        Federal utilities. We believe the differences between the two 
        approaches can be resolved.
 Private-Use Prohibition--We agree that it is necessary to 
        resolve the issues surrounding the tax treatment of debt issued 
        by municipal utilities to enable them to fully participate in 
        competitive markets. The small differences between the 
        provisions in H.R. 2944 and the Administration's proposed 
        legislation should be easily bridged.
                               conclusion
    Mr. Chairman, while the states are proceeding with their 
restructuring programs, all eyes are on Congress to learn what signals 
the wholesale and retail markets will receive. This Committee's 
leadership has been essential and will continue to be. Although we do 
not support H.R. 2944 in its current form, the Administration's 
approach to comprehensive restructuring legislation has many elements 
in common with your proposed legislation. And I know that several 
members of this Subcommittee, on both sides of the aisle, have put 
forth proposals that merit serious consideration.
    We are confident that a bipartisan bill can be reported out of the 
Subcommittee soon. Secretary Richardson and I, as well as our staff, 
stand ready to assist you and the other Subcommittee members in this 
vital endeavor. Only by working together can we take the steps that are 
necessary to provide consumers with the full benefits of competition.

    Mr. Barton. We thank the gentleman from the Department of 
Energy for his testimony.
    The Chair would recognize himself for 5 minutes for 
questions.
    Mr. Secretary, I would like for you, in your own words, to 
define market power.
    Mr. Glauthier. Market power is the ability of an entity to 
set prices, to exercise control of the pricing or terms of 
availability of services in a market.
    Mr. Barton. Okay. I think you are very aware that 24 States 
have done something on electricity restructuring. Haven't most 
of those States addressed market power in their State bills?
    Mr. Glauthier. Our concern is as we move forward, we feel 
we need a Federal consistency, a national consistency, and that 
the Federal Energy Regulatory Commission has some ability to 
assure that market power isn't used in regional markets, which 
cross State boundaries.
    Mr. Barton. Okay. Are you--with the exception of the 
Tennessee Valley Authority and the Bonneville Power 
Administration, which are Federal utilities that are not at all 
regulated now by the States, are there any other situation 
where there is market power concentrated across a region that 
you are aware of?
    I shouldn't let the staff give you the answer, but he is a 
good guy, so we will let him this time.
    Mr. Glauthier. Well, multistate holding companies certainly 
have control of assets across wide regions.
    Mr. Barton. But there is--I have seen no study that is 
interstate that indicates, again, with the exception of the 
Federal utilities, which we do address in our bill, that there 
is a concentration of market power. And I do see that in every 
State that has acted, many but not all of those States have 
addressed market power in some way. So, while I share your 
concern in the abstract for market power, when we look at the 
actual market in the United States for electricity, I see no 
compelling reason to give the Federal Government an authority 
that it has never had before. Would you like to comment on 
that?
    Mr. Glauthier. Well, we are also talking about a situation 
of open competition which has never existed before. And what we 
are asking is that the Federal Energy Regulatory Commission 
have the authority to ensure that market power is not abused. 
But we are not expecting that it is going to have to intervene 
in many cases. This is a question of having the oversight and 
the ability to ensure that markets will operate.
    Mr. Barton. But the very--and I am not going to belabor 
this, because we have got a lot of other testimony and a lot of 
other questioners--but the very intent of the legislation 
before us is to create competition, to put more players into 
the market both in terms of having the opportunity to sell and 
to generate. And you have to assume that there is no public 
utility commission, no Governor, no State legislature in the 
country that says, ``Yes, we want to concentrate market power 
for our customers.''
    I mean, if I didn't think the States and their regulatory 
bodies weren't cognizant of this potential problem, I would be 
right with you, but since I have talked to many of them and 
they are very cognizant of it and very concerned about it, I 
don't think that we need to put in a Federal market power 
provision. But having said that, there is one vote for the bill 
before the committee now, and that is mine, and it takes at 
least 16 to pass.
    Let me go to the RTO provision of the bill pending before 
the subcommittee. You said some very nice things about our RTO 
provisions, and I want to thank you. But you expressed a 
concern that we limit FERC's discretion to force what you call 
the optimal regional transmission organization. I don't think 
this is a surprise to you, but that was intentional. We wanted 
to limit the FERC's discretion, and so my question to you: Why 
would you assume that five commissioners, as well-informed and 
well-intentioned as they may be, would have more perfect 
knowledge than the market participants themselves that are 
creating the RTO? So long as we require the utilities to 
participate in an RTO, what is wrong with setting the 
guidelines? And as long as the participants themselves certify 
and FERC agrees that they meet those guidelines, why not let 
them create in their own way, to use your term, the optimum 
RTO?
    Mr. Glauthier. Transmission access I think is going to be 
one of the greatest keys to success of this program overall. If 
you don't have open access to transmission, then the rest of 
the elements of competition are not going to work. The FERC 
commissioners, while there are five of them, are confirmed by 
the Senate and do represent the informed perspective of the 
community. Their ability to look at the patterns that exist in 
different markets, different regions, we think is important to 
be able to oversee these regional organizations that will 
emerge.
    Mr. Barton. Well, my time has expired. I didn't hear you 
say you thought they would do a better job. So, I ought to quit 
while I am ahead on that.
    We are going to recognize the gentleman from Ohio, Mr. 
Sawyer, for 5 minutes.
    The gentleman from Ohio, Mr. Sawyer, who was here before 
the gentleman from Illinois and the gentleman from Tennessee, 
although the gentleman from Ohio did leave, but he did come 
first.
    Mr. Sawyer. I promised you I would come back, Mr. 
Chairman.kay
    Mr. Barton. Okay, so you are recognized first.
    Mr. Sawyer. Thank you. Thank you very much.
    Thank you very much for your testimony today and for the 
obvious depth of thought that you have put into not only the 
bill that is before us but to a number of the other proposals 
that are with us today.
    If my numbers are right, the current transmission network 
is somewhere in the neighborhood of 150,000 miles, however you 
want to measure that. And my understanding is that NERC is 
anticipating a growth over the next 10 years of some 6,000 
additional miles. It seems to me that that substantially 
understates what likely growth in peak load will be over the 
next 10 years, particularly if we have the kind of competition 
for access to transmission that I think we are talking about 
here. Would you agree that basic assessment?
    Mr. Glauthier. Well, I am not sure whether it is miles that 
will increase or the capacity along many existing routes, but 
there certainly will be a substantial amount of transmission 
utilized in this new competitive market.
    Mr. Sawyer. Well, let me put it another way. Would you 
agree that the transmission grid, as it is currently 
constituted, is constrained?
    Mr. Glauthier. Yes.
    Mr. Sawyer. And would you agree that it is really not 
designed to--it was never designed to perform the tasks that it 
may be called upon to fulfill in a market environment?
    Mr. Glauthier. Yes, that is true.
    Mr. Sawyer. In that sense, is it your belief that it is 
even possible to design an optimal template that would fit 
within what may be determined as existing markets? How would 
you decide what a market is? How would you call upon the 
commissioners to choose what a market is?
    Mr. Glauthier. We would expect them to look at markets in 
regional contexts. We think that there will be broad regional 
patterns, and that is one reason that we encourage the 
formation of planning mechanisms that would allow planning for 
new transmission capacity, for example, to be done on a 
regional basis while still respecting the States' role in 
selecting individual sites and making those decisions.
    Mr. Sawyer. My interest in trying to anticipate what an 
appropriate Commission role might be is to recognize that the 
markets that might have been anticipated even 10 years ago are 
different today from what they would have been 10 years ago had 
we put such a vehicle in place. And it is almost certain that 
they will be substantially different from--in 10 years from 
where they are today.
    And it is for that reason that I have real discomfort in 
talking about putting in place and fixing an optimal design for 
a regional market that may not even exist as a regional market 
10 years from now, particularly as the technology changes to 
make possible the continued rapid expansion of what we think of 
as regions. Would you agree with that?
    Mr. Glauthier. Yes. Yes, we would.
    Mr. Sawyer. In that sense, then let me ask you: When you 
say that you support limited incentive pricing policies; that 
you don't in the sense that you don't understand the need for 
it if in fact the Commission is in a position to order the 
formation of RTOs to serve markets that may change 
substantially even within a span of time as little as 10 years.
    Mr. Glauthier. Well, we think there is a need for FERC to 
have flexibility to oversee this system and to be able to 
adjust as changes take place.
    Mr. Sawyer. Can you tell me why you have more faith in the 
capacity of FERC to see 10 years down the road than the ability 
of pricing policies to change to reflect changed demand and 
changed architecture of a regional market?
    Mr. Glauthier. Well, pricing policies will probably drive 
the proposals that come to FERC. As the planning is taking 
place within a region, the local and State governments have 
very strong roles in making those decisions. We do not envision 
FERC developing a master plan for the country and imposing 
that, but rather trying to set a set of procedures or rules in 
place that will help ensure that there is an active process 
going on everywhere to ensure that this kind of transmission 
develops.
    Mr. Sawyer. Just very briefly, do you see a role for 
pricing policy in nurturing that growth and evolution?
    Mr. Glauthier. We have not built incentives--pricing 
incentives into our proposals. Our sense is that there will be 
a strong incentive for development for competitors that want to 
enter these markets. Whether they need actual pricing 
incentives to develop this, we have not made a decision. We 
haven't come to that as an element that we have supported.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Sawyer.
    We recognize the distinguished vice-chairman, Mr. Stearns 
of Florida, for 5 minutes.
    Mr. Stearns. Thank you, Mr. Chairman.
    The administration bill gives FERC extraordinary powers to 
order divestiture. How many regulatory agencies have the power 
to completely restructure the industries they regulate, 
including the power to order divestiture?
    Mr. Glauthier. I am not sure how many industries have that. 
What we are talking about is----
    Mr. Stearns. I don't think you can name one, and yet the 
administration is giving FERC this extraordinary power. So, I 
need you to justify it.
    Mr. Glauthier. What we are talking about is trying to be 
sure that there is an independence between the generation 
assets of a system and the transmission assets, so that a 
utility not be able to use its position in the transmission 
market to favor its position with generation; that if we are 
going to have open competition, we have got to have the 
transmission system be open to all offers.
    Mr. Stearns. Well, I don't see any precedence for what you 
are doing here, what the administration is doing. Now, I know 
you personally probably don't have a big stake in this, but you 
are here defending the administration's proposal, so I think 
many of us are just sort of a little dumbstruck here that the 
administration give FERC so much extraordinary powers, and 
there is no precedent that I can see to do this. And I don't--I 
missing something. You are not making the case why FERC has to 
have these extraordinary powers.
    Mr. Glauthier. Certainly we have seen divestitures come 
from the court system, from the Judiciary in different markets. 
In this case----
    Mr. Stearns. Yes, but isn't that antitrust law? That is 
antitrust law. That is not coming from a Government agency.
    Mr. Glauthier. Well, in this case what we are dealing with 
is a set of companies and a whole marketplace which has grown 
up over decades under a regulatory environment which we are now 
talking about changing.
    Mr. Stearns. Couldn't the courts do that today?
    Mr. Glauthier. We would rather have a planned transition 
than leave this to the courts. Under today's regulatory 
environment, where there is a monopoly that is governed or 
sanctioned by State law, the market power is legitimate; it is 
appropriate; it has arisen naturally. What we are talking about 
is trying to change this so that there will be free and open 
competition in this market.
    Mr. Stearns. Well, staff has pointed out to me that what 
you are allowing is like if we take, for example, the FAA. They 
could go in and break up United Airlines or they could go in 
and break up U.S. Air, and that is the kind of authority that 
the administration is allowing FERC to have and which you are 
defending here this morning.
    So, we don't see any precedence for it, and we are alarmed 
that you are giving FERC that power when it really should be to 
the courts, and so I think our point today, and which it 
appears we disagree with the administration, is this is an 
extraordinary power to order divestiture, which we are a little 
worried about here.
    Mr. Glauthier. If I could make one point, and that is that 
any authority that FERC would have to take those kinds of 
actions is premised on a determination that there is market 
power in a particular area that does allow a company to 
exercise that kind of pricing control in a market. If in fact 
the utilities take the actions, open up the regions for 
competition, then those conditions will not exist, and there 
will not be any ability for FERC to make those kinds of orders.
    Mr. Stearns. Wouldn't you agree that you are establishing a 
new precedence here? It is like saying the FAA can start to go 
in and break up airlines and that is a new precedent.
    Let me go on here. In your testimony, you have reservations 
concerning the jurisdiction clarification in section 101. FERC 
proscribes similar language in Order 888. Why do you disagree 
with the Commission which has the experience in this area?
    Mr. Glauthier. I am not familiar with the section 
referenced. 101 is----
    Mr. Stearns. Section 101 is to allow FERC to determine all 
transmission.
    Mr. Glauthier. I am sorry, could you repeat the question?
    Mr. Stearns. In your testimony, you have reservations 
concerning the jurisdiction clarification in section 101. FERC 
proscribes similar language in Order 888. Why do you disagree 
with the Commission which has the experience in this area?
    Mr. Glauthier. If this is referring to the 8th Circuit 
Court decision last spring, our legislation was drafted before 
that decision came out, and since the decision we want to 
clarify our position here and be sure that FERC would have the 
authority to guarantee that there is access to the 
transmission.
    As I said in my oral statement, we are not proposing that 
FERC regulate or decide the rates in bundled transactions but 
that it be able to have oversight to assure access to those 
transmission lines.
    Mr. Stearns. Before I give back my time, Mr. Chairman--my 
time is expired--but basically I think that he is criticizing 
something that is really not in your bill.
    Mr. Barton. We thank the gentleman from Florida, and we 
want to thank the distinguished Deputy Secretary for being 
honest. I couldn't--if somebody said, ``What does section 302 
of the bill do,'' I would have to be honest and say I would 
have to look at the summary before I commented on it. So, we 
actually appreciate your being honest enough to say, ``What 
does 101 do,'' although it is the first section in the first 
title.
    The gentleman from Texas, Mr. Hall, is recognized for 5 
minutes.
    Mr. Hall. You know, Mr. Chairman, it seems to me that one 
of your renditions or it may have been in one of your letters 
from the chairman--I am not sure, I saw it somewhere--where you 
had a carrot out there to those States enticing them in. It 
seems like the easiest and the surest way and put some type of 
a structure there that tells them that if they don't take that 
carrot, they darn well better--should. That is a nice way to 
treat the States. I think we may resurrect that.
    And, Mr. Deputy Secretary, we have a long way to go on this 
bill, and we are all sitting here with the hard solemn 
knowledge. The chairman knows it better than anyone that if one 
senator doesn't like one paragraph in this that they can stop 
that bill this year, and we are back here the next year. But 
this is a process we have to move along, and I think the 
gentleman from Florida, though, got us into the question about 
restructuring and what the States had done, how many had done 
it, and how many still need to do it.
    My State passed a bill, the State of Texas--I think you are 
well aware of that--and in the recently passed restructuring 
legislation down there in Austin, the Texas legislature enacted 
a generation market power provision that generally required 
utilities with more than 20 percent of the generation in the 
State to auction the capacity over the 20 percent threshold for 
as long as it exceeded 20 percent. That is a mandate or 
instruction to the State. Do you have an opinion on how that 
applicable--and how workable that approach would be to Federal 
laws?
    Mr. Glauthier. I don't have a specific opinion on whether 
we should have that in the Federal law, but in terms of 
consistency of the Federal statute and that type of a State 
statute, as long as the State is taking actions of that sort, 
then we would not expect FERC would make any finding that there 
will be a market power situation that would require them to 
take any additional action at the Federal level.
    Mr. Hall. So, it doesn't give you any heartburn at all?
    Mr. Glauthier. No, it doesn't.
    Mr. Hall. Well, in the event that this subcommittee does 
not get together--and it is my understanding from the chairman 
that he would like to pass a bill out. It is also my 
understanding that he would like to get it as strong a voice to 
the Chairman Bliley, because he might get another letter back 
from him if it is not the way--wasn't it in Othello, the 
merchant of Venice where they said, ``Oh, that mine enemy would 
write me a letter.''
    Mr. Barton. I don't think that is germane to the witness.
    Mr. Hall. Okay, I will get back.
    But in your testimony, you outlined a number of reasons why 
the Federal Government ought to enact restructuring now, right 
now, and that is what the chairman is trying to do. I don't 
know how much of a stonewall he is up against, because we have 
to navigate the full committee rules of the floor, the Senate, 
and, there, one person, if they just stand up and make an 
inquiry, they almost kill any of the bills that are going get 
over there this late.
    So, I guess we have to think in these terms, whether we 
like to or not. You outlined a number of reasons why we ought 
to do it, but if we are unable to do it on a comprehensive 
package in this Congress, what kind of a bare bones package 
should we enact that probably--that might navigate the Senate? 
You work both sides.
    Mr. Glauthier. The one thing that Secretary Richardson said 
to me this morning before I came up was, ``Urge them to go 
ahead and act quickly; let us move ahead.'' We are not prepared 
to decide where we might fall back. At this point we would like 
to support comprehensive legislation, work with the full 
committee to move that ahead.
    Mr. Hall. That is a good answer, but be thinking about a 
fall-back position, because I think it is going to come around.
    I yield back my time, Mr. Chairman. I have some other 
questions, but I will put them in the record and ask that they 
be--space be left at this structure for my question to go in.
    Mr. Barton. I thank the gentleman from Texas, and I would 
make the point before we recognize Mr. Largent, it goes back to 
something that I said. The Chair, and I think the members of 
the subcommittee, share the administration's concern about 
perceived market power, but we are simply unconvinced that the 
States don't share that concern, and the States that have acted 
in different ways have addressed market power. California 
required divestiture; Texas did not; Pennsylvania did not, but 
they are addressing it.
    So, there is not a need for a Federal one-size-fits-all on 
the States that have yet to act. If the States that have acted 
have addressed it, why do we think that the States that have 
not yet acted but might, if we pass a Federal bill eliminating 
the barriers, would not address it themselves? Before I 
recognize Mr. Largent, do you want to----
    Mr. Glauthier. If I may, if adjacent States, for example, 
have not acted, then even though your own States has taken 
actions, the market there may be impacted; it may not really be 
the opportunity to get the advantages of competition. If the 
States have acted, then the sorts of authorities we are talking 
about for FERC would not have any effect, because there 
wouldn't be any remaining problem for them to have to act 
about.
    Mr. Barton. Okay. The gentleman from Oklahoma, Mr. Largent, 
is recognized for 5 minutes.
    Mr. Largent. Mr. Glauthier, let me ask you a follow-up 
question to the chairman's remarks. What authority would a 
State have to mitigate market power that existed across its 
State border? In other words, generation facilities that are of 
the same company that cross State lines, what ability would one 
State have to mitigate that market power that existed across 
its border?
    Mr. Glauthier. That is an excellent example, and that is 
one of the concerns we have; that it seems the State's 
authority stops at its State border.
    Mr. Largent. But electricity does not stop at the State 
border, is that correct?
    Mr. Glauthier. That is absolutely correct.
    Mr. Largent. Which is why we are here today.
    Let me--in your testimony, on pages--the bottom of page 6 
and the top of page 7, you are talking about ``as a result, it 
is essential that the Federal Government, as the guardian of 
interstate commerce, be able to take aggressive action during 
the transition period to ensure that utilities are unable to 
use horizontal market power to control prices and impede 
competition.'' When you say ``during the transition period,'' 
what kind of period of time are you talking about?
    Mr. Glauthier. We are not sure how long it will take to 
transition into a fully competitive working market. Certainly, 
the first few years we expect there will be some bumps in the 
road, and maybe some transitional actions will be required that 
would not have to be long-term actions. Some of our provisions 
go for 10 to 15 years in our bill. It really will depend, 
whether you are talking about things that require capital 
investments and take some time or whether they are more 
operating changes that can phased in rather quickly.
    Mr. Largent. So, one of the ideas that I floated before the 
hearing--just throw out right now--is that I think most experts 
would say the transition period would be somewhere between 3 
and 5 years to get to a fully competitive market. Is it 
possible to institute some sort of market power tools, placed 
in FERC hands, that would sunset after a certain period of 
time, as we have gotten into a more competitive market?
    Mr. Glauthier. I think the concept is a concept that is 
good that we ought to work with a bit. Whether the exact period 
would differ, for example, for different kinds of actions, such 
as the planning and action process in investing in new 
transmission facilities, which will take some time, might 
differ from those actions that focus on the market and the 
behavior for pricing and offerings in a particular market or 
electricity for retail customers. But I think the idea is a 
good idea, and we ought to take that into consideration.
    Mr. Largent. Well, one of the market power tools that the 
administration proposes, that, frankly, I am not a fan of, is 
the ability to order divestiture. But one comment I would make 
about that, one of my colleagues earlier, Mr. Stearns, 
mentioned, or tried to make the comparison between FAA being 
able to order divestiture of United Airlines or American 
Airlines and trying to compare that with FERC ordering 
divestiture of the Southern Company. That is hardly comparing 
apples to apples since the Southern Company, other IOUs, have 
been granted a monopoly status, whereas American Airlines and 
United have not. So, I don't think that is a fair comparison.
    But I want to go on down on page 7 in your testimony. You 
talk about FERC's only other available tool--this is to address 
market power and wholesale markets--is to deny a request for 
market-based rates. Now, many people, before FERC had Order 
888, suggested that there could be market power existing in the 
wholesale market, and so FERC needed to have a tool at its 
disposal to address market power and wholesale, and one of them 
was to deny market-based rates; in other words, stay with the 
cost-based rates and deny market-based rates. Has the FERC ever 
utilized that tool in its history since Order 888? Have they 
ever denied market-based rates as a result of market power?
    Mr. Glauthier. I don't believe they have since 888, but you 
may have to ask that question again to the next panel----
    Mr. Largent. Okay.
    Mr. Glauthier. [continuing] to get a definite answer.
    Mr. Largent. Thank you.
    My last question, Mr. Chairman, goes back to the Public 
Benefits Fund. You make a case for the administration's 
position on the Public Benefits Fund. Twenty-four States have 
already moved and done something, including Oklahoma, on 
deregulation. Have all 24 States addressed the Public Benefits 
Fund?
    Mr. Glauthier. No, not all of them have, and there has been 
some variety among those who have--different lengths of time, 
for example, that a Public Benefit Fund would exist. So, we 
think it is important to have one that would be consistent and 
applicable across the country.
    Mr. Largent. Okay. Thank you, Mr. Chairman. I yield back.
    Mr. Barton. I am sorry, Mr. Largent. I was engaged in a 
staff conversation. You yielded back your time, all right.
    The gentleman from Illinois, Mr. Rush, is recognized for 5 
minutes.
    Mr. Rush. Thank you, Mr. Chairman.
    Mr. Deputy Secretary, I want to commend you on your 
testimony and answers to the questions this morning. I think 
you have been very forthright and illuminating in terms of the 
administration's position.
    H.R. 2944 repeals PURPA without establishing renewable 
energy portfolio standards. However, the bill does provide for 
tax incentives regarding the use of renewable energy. In your 
opinion, which provision would generate the greatest amount of 
competition while also acting as the greatest incentive for the 
use of renewable energy?
    Mr. Glauthier. We favor a renewable portfolio standard; 
think that that provides the support for these not yet fully 
mature technologies that are going to be increasingly important 
in our electricity sector. We also support the tax incentives 
and would like to see both implemented.
    Mr. Rush. Section 542 of the bill will give FERC 
jurisdiction over distributed generation facilities, which are 
defined as electric power generation facilities of 50 megawatts 
or less. Such FERC authority appears to be a departure from 
previously established jurisdiction boundaries, and they seem 
to be in contradiction to section 101 of the bill. Might this 
provision be seen as a preemption of State authority?
    Mr. Glauthier. I believe the authority for the distributed 
power is really to be sure that there is the ability to look at 
the systems as an integrated system and to incorporate all of 
the power that would be in a market.
    Mr. Rush. Well, let me ask, are there any other areas 
regarding distribution reliability where FERC jurisdiction 
would be appropriate?
    Mr. Glauthier. The local distribution systems are not under 
the authority of FERC. So, FERC's authority would really stop 
when the power ends the transmission--long-term transmission 
system and enters the local distribution utility.
    Mr. Rush. So, in answer to the question then, there aren't 
any areas regarding distribution reliability where FERC 
jurisdiction would be more appropriate or that will allow FERC 
to address issues of reliability.
    Mr. Glauthier. I don't believe there are. I think you are 
right.
    Mr. Rush. Do you think that this is an appropriate----
    Mr. Glauthier. We think that it is important for the States 
to deal with this, so we are having a meeting, a regional 
meeting, in the Midwest, in Chicago, at the end of this week.
    Mr. Rush. Yes, I am supposed to testify. I will be a part 
of that meeting on Friday.
    Mr. Glauthier. So, we are looking forward to try to deal 
with that and to get more ideas developed in that area.
    Mr. Rush. Are you concerned about the epidemic of blackouts 
that occurred over the summer?
    Mr. Glauthier. We are concerned about that, and Secretary 
Richardson this summer announced a six-point plan to try to 
deal with that.
    Mr. Rush. And so you are--the position of DOE right now is 
we still want to leave it at the--leave this issue of 
reliability at the State level without any Federal intervention 
at all, any Federal guidelines or standards?
    Mr. Glauthier. No, I am sorry, I didn't mean to leave that 
impression.
    Mr. Rush. Please don't.
    Mr. Glauthier. Reliability is one of the primary reasons we 
feel there is a need for Federal legislation, and that we need 
to move from what is today a set of voluntary standards on 
reliability to a set of mandatory standards across the country. 
As we see deregulation or increased competition occur, we are 
going to see more and more participants in the market at all 
levels. It is going to be more important to have a uniform and 
enforceable set of reliability standards for the industry.
    Mr. Rush. Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Congressman Rush.
    It seems like we recognize the gentlemen from Illinois in 
conjunction. So, this time we go from the democratic gentleman 
from Illinois to the republican gentleman from Illinois, Mr. 
Shimkus, for 5 minutes.
    Mr. Shimkus. The dynamic duo of the committee, Mr. 
Chairman.
    Mr. Barton. That is right.
    Mr. Shimkus. I am pleased to follow my colleague from 
Chicago.
    It is great to have you here, and I think we are focusing 
on a major concern based on the administration's bill. We know 
that there are no market power provisions in H.R. 2944 other 
than the RTOs, because the hearing record seems to have been 
made that they clearly are not necessary, if you have sat in 
all the hearings that we have had.
    My State addressed market power through a mandatory ISO. 
How would you think my State would feel if a restructuring bill 
was passed, signed into law, that then took away their 
authority based upon FERC's power in determining market power?
    Mr. Glauthier. Well, I think if the State authority has 
acted to really assure that there is competition occurring----
    Mr. Shimkus. Well, wait--really assure? What do you mean by 
``really assure?'' I mean, based--the dilemma we have here is 
you trust the Federal regulators; I trust my public utility 
commission. Now, I guess the question is, is that your 
position? Do you trust the Federal regulators over the State 
public utility commission?
    Mr. Glauthier. We look to the State commissions to act 
first and to try to incorporate the programs that they have 
already decided to put in place, in many cases, or that States 
will be deciding to put in place, and we are looking to FERC to 
have an oversight authority to guarantee that as the States act 
we don't end up with a patchwork of programs that are 
inconsistent or where some----
    Mr. Shimkus. Tell me why the administration's position is 
willing to destroy the deregulation bill in the States of 
Illinois based on superimposing FERC regulation with respect to 
ISOs and market power? Why are you willing to give up a State 
that has moved to address all these concerns addressed in a 
deregulatory bill based upon the assumption that the RTOs, or 
in this case a mandatory ISO, will not address the concern of 
market power?
    Mr. Glauthier. Well, first, I don't agree with the premise 
that we are going to change the State program.
    Mr. Shimkus. Well, it does, though, in Illinois. It will 
cause the players to then claim that the rules have been 
changed, and based upon that rule they can go and have this law 
dismissed.
    Mr. Largent. Would the gentleman yield just for a second?
    Mr. Shimkus. The gentleman will yield.
    Mr. Largent. I don't want to defend the administration's 
position--he can do it himself--but I believe in the 
administration's bill that the only time the FERC would come in 
would be at the request of the State of Illinois. The State of 
Illinois would have to petition the FERC to come in and to look 
at unmitigated market power.
    Mr. Shimkus. Well, we are going to see if that is the 
administration's position.
    Mr. Barton. We appreciate the gentleman from Oklahoma 
defending the administration's position. This is truly 
bipartisan and bicameral process.
    Mr. Shimkus. Well, I don't have an answer, first.
    Mr. Glauthier. Well, part of the answer I wanted to give is 
that----
    Mr. Largent. Well, isn't Mr. Largent correct in defending 
the administration?
    Mr. Glauthier. Yes, he is. Yes, and we appreciate the 
assistance.
    In market power, that is the State would have to make the 
petition.
    Mr. Shimkus. But has the administration addressed--asked my 
public utility commission? I mean, in promoting the Federal--in 
the administration bill, have you raised this to the public 
utility commissions of the various States?
    Mr. Glauthier. There certainly have been conversations with 
the----
    Mr. Shimkus. The State of Illinois?
    Mr. Glauthier. Well, with NARUC. I am not sure that the----
    Mr. Shimkus. Yes, or no; State of Illinois?
    Mr. Glauthier. I can't guarantee that.
    Mr. Shimkus. Okay. I think--okay. Do you have anything else 
that you want to add.
    Mr. Glauthier. I just wanted to make the statement that the 
requirements we are talking about are intended not to replace 
the State actions but to follow on. If the States' actions for 
some reason are not termed sufficient--and I understand the 
concern you have about who makes the decision----
    Mr. Shimkus. And my time is expired. I will just say that 
the State of Illinois went through a very tedious process to 
move to competition, and as people know on this committee that 
I am going to be guarded to make sure that the work done in the 
State of Illinois is not tubed by any interests, either 
interstate or intrastate.
    So, with that, I yield back my time, Mr. Chairman.
    Mr. Barton. All right. They are not called the Fighting 
Illini for nothing, Mr. Secretary. Mr. Shimkus is stalwart in 
his defense of the State of Illinois, just stalwart.
    We would recognize the gentleman from Massachusetts, Mr. 
Markey, for 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    And we are operating obviously in terrain that has been 
trod before--divestiture authority is well established as a 
Federal power. Obviously, the Department of Justice, under 
antitrust laws can force divestiture, and the Federal Trade 
Commission, under antitrust laws, can force divestiture. The 
Nuclear Regulatory Commission, under the Atomic Energy Act, can 
force divestiture. The Securities Exchange Commission, under 
PUHCA, can force divestiture. So, this is--not only is it not 
unprecedented, it is deeply woven into the fabric of the 
relationship between the Federal Government and the States.
    So, Mr. Secretary, I would like to ask you to very 
specifically, looking at the Barton bill on FERC jurisdiction 
over the transmission system, what will happen to the 
transmission system and energy market if section 101 of the 
Barton bill is enacted?
    Mr. Glauthier. Our concern is that the transmission 
systems, the regional systems, may develop in a pattern that is 
not optimal for individual markets, and we want the FERC to 
have the responsibility to oversee that, be sure that in fact 
the open access, that is the objective of full competition, 
will be available.
    Mr. Markey. Are you familiar with the market concentration 
provisions of the Texas law and whether it could serve as a 
model for the Federal law?
    Mr. Glauthier. I am not personally familiar with the 
details of it.
    Mr. Markey. Do you think it makes sense for the Federal law 
to be weaker than the Texas law?
    Mr. Glauthier. No, in principle, I don't.
    Mr. Markey. Do you think that--do you believe that 
transmission owners will form adequate RTOs without clear FERC 
authority?
    Mr. Glauthier. No.
    Mr. Markey. What do you think about incentive transmission 
pricing? Why do transmitting utilities need incentives to join 
RTOs when some already are in RTOs, and the bill already 
requires those that are not in one to join one?
    Mr. Glauthier. We are not sure that there is any incentive 
needed for that. We have not proposed an incentive of that 
sort.
    Mr. Markey. Do you think that--so, you should believe that 
the RTOs should have open membership requirements?
    Mr. Glauthier. Yes, we do.
    Mr. Markey. You do. Are you concerned about the prospects 
for utilities to favor their own generation in interconnection 
to the transmission system?
    Mr. Glauthier. Yes, we are.
    Mr. Markey. Do you think that we need interconnection 
language in the Barton bill in order to ensure that we can 
prevent against such activities by utilities?
    Mr. Glauthier. Yes, similar to what we have in the 
administration bill.
    Mr. Markey. Now, Chairman Hoecker points out in his 
testimony that the Barton bill actually would prevent FERC from 
ordering transmitting utilities in Texas to provide open access 
to their transmission systems. Do you share his concerns about 
this type of exemption?
    Mr. Glauthier. I am, as I said, not specific with the 
details with the Texas one, but we do share his concerns in 
general about this area.
    Mr. Markey. Do you think that we should welcome Texas into 
the Union?
    In terms of the electricity restructuring debate, it is 
understandable that Alaska would argue that it is not one of 
the 48 contiguous States as you try to construct a national 
model. My objective, ultimately, is to make sure that all of 
the lower 48 are included and that this national market too be.
    And, finally, Mr. Chairman--Mr. Secretary, if we were to 
grant FERC market power authority but then sunset that 
authority in 5 years, couldn't the incumbent utility 
monopolists sue to block competition from coming and then run 
the clock out until FERC couldn't use its market power 
authority?
    Mr. Glauthier. I think we would have to look very carefully 
at any possible transition rule so that there isn't potential 
for abuse.
    Mr. Markey. Thank you, Mr. Chairman.
    Mr. Barton. Thank the gentleman.
    We recognize the gentleman from North Carolina, Mr. Burr, 
for 5 minutes.
    Mr. Burr. Thank you, Mr. Chairman. I learned a lot in that 
last exchange out of all the times that we have been through 
debates on electricity.
    I think I finally figured out where my good friend, Mr. 
Markey, is. He is in a touch pinch in New England, because he 
needs lower prices. He just doesn't want to let the marketplace 
do it. He would like it to be mandated that you have lower 
prices regardless of what the cost of generation. Regardless of 
where you get it from, let us just make sure that everybody 
absorbs the cost of the problem in New England. Let us create 
another problem everywhere.
    And there is a real important key to it--you have to have a 
Federal regulator to accomplish it. It does not happen with 
State regulators. You can't link it together, and I am not so 
sure that that is not where the administration is also.
    Let me ask you: Define competition for me.
    Mr. Glauthier. Competition, in my view, is the offering of 
products or services at availabilities and prices where the 
consumers are able to make their selection, where there is an 
opportunity to choose among those competing----
    Mr. Burr. So, choice is a very important thing for 
competition.
    Mr. Glauthier. Yes, sir.
    Mr. Burr. And is more choice better than less choice?
    Mr. Glauthier. Yes.
    Mr. Burr. And is competition good?
    Mr. Glauthier. Yes, it is.
    Mr. Burr. Is choice good?
    Mr. Glauthier. Yes.
    Mr. Burr. Tell me about consumers in Tennessee? Do they 
have choice?
    Mr. Glauthier. Not currently.
    Mr. Burr. Should they?
    Mr. Glauthier. That is a part of our proposal and a part of 
this bill, as well.
    Mr. Burr. And how much choice will they have?
    Mr. Glauthier. Well, it is going to be up to the individual 
municipal utility systems or the coops to decide whether they 
want to participate under our bill.
    Mr. Burr. What would be an abuse of market power? You 
talked about the abuses to market power. Tell me what one of 
those abuses would be?
    Mr. Glauthier. Well, one abuse would be if a utility in a 
region is able to dominate the local systems----
    Mr. Burr. So--and I don't want to interrupt you--but if you 
have competition by your definition, which is choice, you can't 
have abuse of market power, can you?
    Mr. Glauthier. If you are really offering choices, that is 
right; if there is the opportunity for choice. That is what we 
are trying guarantee.
    Mr. Burr. So, the only way to have an abuse of market power 
is if you have an instrument that stands in the way of choice 
in the marketplace.
    Mr. Glauthier. An instrument or an ownership pattern or 
some of other control that does it.
    Mr. Burr. Now, would that control be excessive regulatory 
authority by the FERC?
    Mr. Glauthier. We think that that is a technique to try to 
help assure that we don't have the kind of control that we are 
worried about. We worried about----
    Mr. Burr. Give me an instance where a Federal regulatory 
agency encouraged and created competition versus stymied and 
destroyed competition.
    Mr. Glauthier. The Department of Justice and the Federal 
Trade Commission, of course, are doing this all the time.
    Mr. Burr. Now, would they be a good one to put in charge of 
merger?
    Mr. Glauthier. We think that FERC has a degree of technical 
expertise in understanding this market that puts them in the 
appropriate role here.
    Mr. Burr. So, in every case but this one, they would be the 
correct authority.
    Well, I thank you for your answers. Mr. Chairman, I yield 
back.
    Mr. Barton. The Chair would recognize the gentlelady from 
Missouri, if she is ready, or we can go to another Republican 
and then when you are ready come to you. Are you--do you want 
some time? Okay.
    Then we recognize the gentlelady from New Mexico, 
Congresswoman Wilson, for 5 minutes.
    Ms. Wilson. Thank you, Mr. Chairman.
    I wanted to ask you some questions related, really, to a 
statement in your testimony. You say, ``What we do at the 
Federal level and when we do it will have a profound impact on 
the success of State and local retail competition programs.'' 
And the questions I have really have to do with how we make 
this transition from regulated to market-driven power, and, as 
you know, the Department of Energy not only deals with this as 
a policy issue but as a consumer in my State of New Mexico.
    The Department of Energy is actually one of the largest 
industrial users of power in Albuquerque, New Mexico, because 
you control the contracts for Kirkland Air Force Base. And for 
those of you who aren't aware of it, Kirkland uses about 65 
megawatts of power in New Mexico. It is one of the largest 
industrial users, and that, to put it in context, is the city 
of Santa Fe, our capital city, uses, on average, about 88 
megawatts of power. We are talking about a large industrial 
user.
    The Department of Energy has applied to move to market 
power for Kirkland Air Force Base immediately even though State 
law, passed by the State legislature, says that we are going to 
transition to that starting with retail consumers and small 
businesses and just individual customers in 2001 and industrial 
consumers in 2002 so that we don't shift costs from large 
industrial users to schools and individual users and small 
businesses.
    Is it the Department of Energy's position that you can 
enter a competitive marketplace before every other industrial 
user in the State of New Mexico?
    Mr. Glauthier. My understanding is that the contract you 
are discussing is a wholesale contract, and our application to 
FERC follows the procedures for that. We do want to be sure 
that our actions follow the appropriate actions for all 
entities there.
    Ms. Wilson. There is a Federal law that also says Federal 
agencies must comply with State law and that no Federal 
appropriation, whether through the Department of Defense or the 
Department of Energy, can be used outside of the context of 
State law, which prohibits industrial users from going to 
market power until 2002. Is it the Department of Energy's 
position that this law doesn't apply?
    Mr. Glauthier. No, it is not. It is my understanding that 
that law applies to retail sales again, and we certainly want 
to be sure that we are doing everything within the confines of 
the law and appropriate policy.
    Ms. Wilson. Is it your position then that you are not an 
industrial user?
    Mr. Glauthier. My understanding is this is a wholesale 
contract and not an industrial, retail contract with public 
service in New Mexico.
    Ms. Wilson. And since it is a wholesale contract, what you 
are saying is that the State law passed in 1999 does not apply 
to you.
    Mr. Glauthier. This is a different category than retail 
sales.
    Ms. Wilson. New Mexico is going to competitive market power 
in a phased way--2001 for retail, 2002 for large industrial 
users. Is it your position, then, that the Department of Energy 
is neither of those?
    Mr. Glauthier. That is my understanding; that we are a 
wholesale customer and so do not fall within those groups.
    Ms. Wilson. And, so you don't have to comply with any of 
the State law passed in 1999?
    Mr. Glauthier. What we are trying to do is to move toward 
competition and to do it within the prescriptions that apply to 
wholesale sale. So, that act does not apply.
    Ms. Wilson. So, the circumstance then is that the largest 
industrial user of power in the State of New Mexico is the 
Department of Energy and that you feel you are not covered by 
State law. Is this then going to be the position of the 
Department of Energy or of the administration on every other 
Federal Government user of power as we move to retail 
competition in the States?
    Mr. Glauthier. I think our position will be that we have to 
adhere to all of the appropriate laws and policies that relate 
to whatever categories our contracts fall under. In this case, 
it is a wholesale sale. I don't know what the other categories 
or other situations would be.
    Ms. Wilson. Thank you, Mr. Chairman.
    Mr. Barton. The Chair wants to let the gentlelady know the 
subcommittee's on the side of the schoolchildren and the small 
consumers in the great State of New Mexico, and I bet we will 
get the administration to be on that same side. I just have a 
feeling since Secretary Richardson used to represent New Mexico 
that we can work that problem out. I think we can.
    Does the gentlelady from Missouri wish to be recognized 
now?
    Ms. McCarthy. I thank you, Mr. Chairman, very much for your 
indulgence, and I apologize to the panelist for missing his 
testimony. My State of Missouri's campaign finance law was 
before the Supreme Court, and I, having advocated for campaign 
finance reform while a State legislator and now again in the 
Congress, felt compelled to be there.
    But with 24 States in some stage of deregulation of 
electric energy, including my own, what has DOE seen as a 
successful model of deregulation, and what--would you please 
share with us what you--to what you--what attributes are in a 
success model for any State?
    Mr. Glauthier. I don't believe we have actually pointed to 
any individual State and said ``This is the example.'' What we 
see are elements in the patterns across the country which are 
strong and constructive steps toward competition and toward 
opening up these markets. We like to encourage the States to 
take actions that seem appropriate to them and be sure that the 
overall pattern is moving forward.
    Ms. McCarthy. Then it sounds like you are quite willing to 
let States proceed to devise their own models of deregulation 
and have a kind of a hands-off approach until perhaps all 
States have completed that task, then take a step back and 
decide what role the Federal Government has at all in this 
process, if any.
    Mr. Glauthier. We would like to encourage the States to 
develop their own plans and programs, and what we want to do is 
be sure that there is an appropriate Federal oversight 
authority to step in if needed in those selected cases.
    Ms. McCarthy. And at what date out in the future would you 
want that authority?
    Mr. Glauthier. The way we have introduced our bill it would 
be to ask each State to make a formal decision by 2003----
    Ms. McCarthy. No, no, that is not my question, but perhaps 
you are getting to the answer; I apologize if I interrupted. 
But I don't see a role for you now at all. I think States are 
perking along and doing just fine. Now, there is no one perfect 
model yet, but, as you indicated in your answer to me, 
eventually we would be able to take a look at what works well 
for the States or regions or applications.
    But I guess the real thrust of my question is why do we 
need you involved at all in this? I think that is what I need 
to hear, and if you have already answered that a dozen times 
before I got here, I apologize; just be succinct. And at what 
point do you need to be engaged? I don't believe you need to be 
engaged at this point at all. But is there sometime out there, 
perhaps if the States don't work cooperatively as a region or 
as groups, that you would need to be engaged?
    Mr. Glauthier. I think one example would be the 
transmission access area where if States are moving toward 
competition themselves, but there are inconsistencies among 
States within a region and a concern that some utilities are 
not getting access to the transmission facilities in a 
neighboring State to be able to sell to customers, then that 
kind of action is the sort of thing we think that FERC should 
have the authority to look at to see whether any additional 
steps are needed. That could happen soon. That could happen 
early as some States move ahead to implement their programs.
    Ms. McCarthy. So, at what point, then, do you want FERC 
engaged in this process? Only at the point when States can't 
get along?
    Mr. Glauthier. We would like FERC to have the authority now 
to begin to oversee the way these programs are being 
implemented and think that it will be important to have them 
involved from the beginning.
    Ms. McCarthy. Would you explain what you mean by involved, 
because I think that is where some of this cooperation breaks 
down? I think there is a fear that you--that FERC will come in 
and try to tell States what to do when States are out there 
doing what they know best and think is right. And I don't want 
to be a party to some confrontation that isn't necessary.
    Mr. Glauthier. A couple of examples. One would be in the 
reliability area. We think there is a need for reliability 
standards that would be developed and enforced nationally. That 
ought to start now. It ought to begin as we are seeing this 
market bring in more and more----
    Ms. McCarthy. But haven't we been doing that?
    Mr. Glauthier. We have voluntary standards right now. There 
are no mandatory reliability standards.
    Ms. McCarthy. Why do we need mandatory ones, if the 
voluntary ones are working. Is there a problem?
    Mr. Glauthier. Yes, we think there is a problem. This 
summer, for example, the power outages certainly demonstrated 
some kinds of problems. As we see markets open up, we will have 
more and more entrants, more diversified kinds of companies 
offering services in generation and transmission and then local 
distribution. All of that is going to increase the uncertainty 
of the reliability, and we need to be sure that we have got the 
ability to keep the lights on and make sure everyone is getting 
the services that they deserve.
    Ms. McCarthy. Don't you think that the public service 
commissioners, or whatever they are called in the respective 
States, also feel that way?
    Mr. Glauthier. Yes, and we actually would think they would 
encourage this; that the reliability standards are something I 
believe they support.
    Ms. McCarthy. Why do they need you, if that is the case?
    Mr. Glauthier. A lot of it is on an interstate basis. It is 
not within any single State, and so you really have large 
regions of the country interconnected in a way that has to be 
overseen more broadly.
    Ms. McCarthy. We are doing that now in many parts of this 
great Nation. I live in Missouri; I get my energy from Kansas. 
It seems to work just fine. I guess I am hoping that we engage 
you in a role where you actually are problem-solving but not 
creating problems, because I happen to think it is working very 
well out there. We have got wonderful rates in the Midwest, and 
there aren't a whole lot of people complaining about it.
    Mr. Glauthier. In the reliability area, for example, our 
expectation would be that the organization would grow out of 
what we have now with the National Electric Reliability 
Council; that it would have a strong role of the States; that 
it would not be at war with the States, but rather would be a 
way for States to participate together and help set these 
standards and be sure that they are in place in a way that 
everyone who participates in the market really has to follow.
    Ms. McCarthy. I thank you. I very much appreciate those 
thoughts, and I appreciate what you are saying, and I welcome 
that. I wanted to hear that this was going to be cooperation 
with States that are already out there doing it, not a Federal 
imposition of how to do it, but yet a partner in making sure 
that the customer is well served.
    And, Mr. Chairman, I apologize for going over my time 
limit.
    Mr. Barton. No, ma'am, we were delighted to have you go 
over your time, because you echoed much of what I said. I don't 
want to spook you, but it sounded--it was like gentle rain on 
the plain in the spring to hear your thoughts. So, we 
appreciate that very much. We will be happy to add you as an 
original co-sponsor; in fact, the only co-sponsor of the bill.
    We recognize the gentleman who represents the top 20 
undefeated Mississippi State Bulldogs for 5 minutes for 
questions.
    Mr. Pickering. Thank you, Mr. Chairman, and I want to 
commend your efforts in putting this legislation together and 
having this hearing today. And in a spiritual sense, ``Blessed 
are the peacemakers in the legislative context.'' Too often it 
is ``Blessed are the peacemakers for they have all been shot.'' 
And I hope that is not the case here, as we try to compete--I 
mean, balance a competing interest in the regions and look at 
the issues.
    I am going to take a little bit of a different tack than 
the other members. I am actually going to ask questions as it 
relates to the legislation.
    Mr. Secretary, in H.R 2944, the subcommittee chairman's 
legislation, he amended section 203 of the Federal Power Act to 
expand FERC reviews of sale of power plants and transmission 
facilities by State and municipal utilities, cooperatives, and 
Federal electric utilities. Now, why he expands that authority, 
he also limits the time to 90 days of that review. What is your 
view, your opinion, of that? Is it necessary to expand the 
authority into those other areas? Do you support that? And what 
is your view of limiting the time?
    Mr. Glauthier. We do support the expansion into these other 
utilities that have been non-jurisdictional utilities. On the 
timeframe, I would like to defer to the next panel and ask 
them. We think that it is certainly important to be sure that 
the decisions can be made with enough information in front of 
them, and I don't want to presume that or speak for them.
    Mr. Pickering. Well, why is there a need for Federal review 
of these sales into, for example, cooperatives or municipal 
utilities? Could we not maintain under current jurisdiction 
with the timetable to assure a timely review and decision with 
a certainty of markets as we go into this transition? Why do 
you need to go into these other areas where FERC currently has 
no jurisdiction?
    Mr. Glauthier. Our feeling is that we need to be sure that 
the access and market power issues can be addressed--the ones 
we have been discussing for some time this morning--that all 
utilities in the market really have to be following the same 
guidelines, the same rules. So, having them all a part of the 
same system will be important.
    Mr. Pickering. Do you see the potential for a municipality 
or a cooperative to have market power?
    Mr. Glauthier. In certain areas, there are large coops, 
there are--there is the possibility.
    Mr. Pickering. Another question deals with mandatory RTOs. 
Now, FERC is going forward in its NOPR based on an incentive-
based approach, non-mandatory approach. Do you favor a 
mandatory RTO or incentive-based approach to achieve the type 
of transmission organization necessary to promote competition?
    Mr. Glauthier. We think that the utilities will want to 
join RTOs. I don't believe there is a need to provide strong 
incentives or the type we talked about earlier that is in this 
bill. In terms of mandatory RTOs, I personally doubt that there 
will many occasions where utilities have to be directed to join 
an RTO. I think that it is more important that we have the FERC 
involved in overseeing RTOs to be sure that they are 
appropriately sized for the regions that they are dealing with; 
that there is a rate structure.
    Mr. Pickering. So, are you saying that a mandate is not 
necessary? Incentives would be sufficient with FERC 
participation, cooperation, counsel?
    Mr. Glauthier. I think a mandate is necessary as a fall-
back, but that it will not be operative very often; that, in 
fact, utilities will come forward and join RTOs, but I think 
you need a mandate there as a guarantee for some small 
percentage of systems.
    Mr. Pickering. Let me give you another example of whether 
mandatory--a mandate is necessary or not. In 
telecommunications--which I realize is different, but there are 
some parallels--we gave an incentive approach for local phone 
companies to open their markets and in return if they opened 
their markets, they could get into long distance--a non-
mandatory approach but an incentive-based--if you do this, you 
will receive freedom to go into other markets. Bell Atlantic is 
about to petition to open its market in New York and other 
regional companies are preparing to do that.
    As the market forces and the convergence, as well as the 
consolidation of that market takes place, it seems to be that 
both regulatory incentives and market pressures are achieving 
the objectives without a mandate. Now, if that is the case in 
telecommunications, why would that not be the case in electric 
utilities?
    Mr. Glauthier. Congressman, I am not sure I understand the 
example exactly, because a few years ago with the break-up of 
AT&T, you seemed to have the break between local distribution 
and long distance, which is somewhat similar to our local 
distribution utilities and the transmission.
    Mr. Pickering. So, if you put in the open access 
requirements, if you eliminated the vertical integration issues 
of market power and you gave incentives to do so with 
reliability and transmission organizations that would be 
appropriate, do you need mandates?
    Mr. Glauthier. Well, the mandate I think in this industry 
is the parallel to the court order. The reason that it is a 
mandate we are talking about for the transmission----
    Mr. Pickering. But you are confusing long distance with 
what we did in local. The legislation was different than what 
the AT&T consent decree did.
    Mr. Glauthier. Yes, but I believe what we are talking about 
here is really a requirement to be sure that the transmission 
access is available to everybody; that transmission is not 
being used as a point of leverage with generation assets alike, 
and so to guarantee that transmission assets are independent 
and available to everybody there does need to be some 
requirement.
    Mr. Pickering. Mr. Chairman, I know my time is up. Could I 
have one additional question? And this deals with the 
reciprocity clause and the chairman's legislation. Are you 
familiar with that?
    Mr. Glauthier. Yes, I am.
    Mr. Pickering. And what are your views of the reciprocity 
clause in the proposed legislation? Do you support it, oppose 
it? Is there a way to improve it? And should it be State-
specific rather than broadly based?
    Mr. Glauthier. It is important to have the clause. We do 
support the reciprocity clause, and it needs to be able to be 
used on an interstate basis so that if a utility in one State 
has its market opened up to competition, it is going to be able 
to compete in the markets with those utilities that are trying 
to enter its market. That may cross State bounds.
    Mr. Pickering. But as far as the specific legislation 
proposed, do you support the reciprocity language or would you 
narrow it to make it on a State-by-State basis?
    Mr. Glauthier. The----
    Mr. Pickering. If you understand my question. If I need to 
clarify or ask a better question, I can try.
    Mr. Glauthier. Well, the position in our own legislation is 
that the State would make the decision on reciprocity, and I 
think that that clarifies my response.
    Mr. Pickering. The Barton proposal would require every 
utility, if they have assets in other States that are open, if 
they have a closed State, to submit a petition in support of 
competition in the State that is closed before their facilities 
in other States could participate in an open, competitive 
market. Do you support or oppose that approach?
    Mr. Glauthier. Okay, our approach is to support giving the 
States the discretion and not the Federal Government the 
authority over that.
    Mr. Pickering. I think I understand your position. Thank 
you, sir.
    Mr. Chairman.
    Mr. Barton. We thank you, Congressman Pickering.
    Deputy Secretary Glauthier, we will have other written 
questions for you, but there are no other members present that 
have not had an opportunity to ask at least oral questions. So, 
we are going to excuse you. We appreciate your presence today. 
We want to commend you and the Department--oh, whoa, I didn't 
see Mr. Bryant; I am sorry.
    Mr. Bryant. Well, now that you have recognized me, I will--
--
    Mr. Barton. I am sorry, Congressman Bryant.
    Mr. Bryant. Let me just ask, if I could----
    Mr. Barton. Five minutes.
    Mr. Bryant. [continuing] just a couple of questions in 
regard to some environmental issues. The administration bill 
and the Pallone bill set a Federal renewable portfolio standard 
of 7.5 percent by the year 2010. Is that realistic?
    Mr. Glauthier. Yes, we think it is.
    Mr. Bryant. A number of the States already have established 
their own individual standards in this area. Is there a need to 
clarify State authority to impose renewable portfolio 
standards?
    Mr. Glauthier. We think there is a need for a national 
standard, and what we proposed is one that would have trading 
credits, if you will, so that if a State, one area, can build 
renewable capacity more easily than another, more 
competitively, then it can be done there, and the overall 
requirement can be met. And, so it would not have to met State-
by-State; that is, physically, by assets in each State.
    Mr. Barton. Would the--could the gentleman from Tennessee 
yield?
    Mr. Bryant. I would be happy to yield.
    Mr. Barton. You answered Congressman Bryant that the 7.5 
percent mandated renewable was realistic, but my staff just 
told me in order to meet that target by the year 2010, 50 
percent of all new generation that is built between now and 
then would have to be renewable. Do you really think that we 
can build 50 percent of the expected new generation capacity 
with renewable energy sources in the next 11 years?
    Mr. Glauthier. Maybe we need to share some of our detailed 
projections. The information I have is that 14 percent of the 
new capacity would have to be renewable. So, it may be that 
some of our expectation is also co-firing of existing coal fire 
capacity, for example, with biomass or some other changes that 
would help to meet the target.
    Mr. Barton. Okay. Well, we expect an expanding market. 
Perhaps your projectors expect a contracting market, so that 
might be why you only get at 14 percent. But we will work on 
that.
    I yield back to the gentleman from Tennessee.
    Mr. Bryant. Thank you, Mr. Chairman. I did want to comment 
on that when I ask a couple of more questions, just in a 
summary conclusion.
    But just a couple of other questions. Does the 
administration support the bill introduced by Mr. Waxman to 
amend the Clean Air Act to require older coal power plants in 
the Midwest and the Southeast to meet new performance 
standards?
    Mr. Glauthier. We have not taken a position on that 
legislation yet.
    Mr. Bryant. And do you know when you might?
    Mr. Glauthier. No, I don't have any prediction or estimate.
    Mr. Bryant. Okay. Does the--have you taken a position on 
the Clean Air Act provisions of the Pallone bill, which sets 
national emission standards for nitrogen oxide particulates, 
carbon dioxide, and mercury? In June, Secretary Richardson said 
the administration believed that these clean air amendments 
should not be included in electricity legislation. Is that 
still the position?
    Mr. Glauthier. Yes, the administration's view is it should 
not be included in the electricity restructuring legislation 
but should be dealt with in consideration of the Clean Air Act.
    Mr. Bryant. Well, I appreciate that.
    I just tell you from the standpoint of what I am hearing, 
and again I am focusing on the Southeast, but, you know, I hear 
other things too. In these--the renewable standards, as our 
chairman indicated, just don't appear to be realistic, maybe 
even up here, but certainly from what I am hearing back in my 
area. It is just not reasonable at this point, that number. 
While we are all committed to going that direction, we are 
concerned as this deregulation process unfolds that we not go 
overboard on this with unattainable standards. We are going to 
be asking in particular the TVA to compete again in a 
deregulated world--and Mr. Whitfield is not here--but a good 
part of the power is generated through coal by our plants, and 
we are already dealing with clean air standards and trying to 
go that direction, but I think we are going to need greater 
transition periods and a little bit more flexibility in those 
areas.
    Mr. Glauthier. We are more optimistic. I understand we are 
at about 2.3 percent renewables already, so the next 10 years 
our projection is that we can get to 7.5 percent, although it 
is a bit ambitious. That is why we have built in a cost cap in 
our proposal, as well, so that if it is more expensive than the 
1.5 cents per kilowatt hour that we have built in, that would 
take effect, and we would not see people spending higher 
amounts of money just to meet a target.
    Mr. Bryant. Thank you for your efforts there, and would 
yield back my time.
    Mr. Barton. Thank the gentleman.
    We noticed that we are graced with the presence of the 
distinguished Congressman from Staten Island, New York, the 
Republican parties own Vito Fossella who says he has no 
questions but he has this cryptic note that says, ``Go 
Yankees.''
    I would point out that the Dallas Stars beat the Buffalo 
something-or-anothers in hockey, and the San Antonio Spurs beat 
the something-or-nothing Knickerbockers from New York.
    Mr. Fossella. Go Yankees.
    Mr. Barton. Does the gentleman wish to ask any questions?
    Mr. Fossella. No.
    Mr. Barton. Okay. Mr. Shimkus says he has one question 
before we let this gentleman go.
    Mr. Shimkus. Yes, I want to be the kinder, gentler Shimkus 
and apologize for getting so excited.
    I want to go back to really the same issue, trying to 
understand if they are the RTOs, whether it be ISOs or whether 
they are transcos; ISOs being what Illinois has opted for, in 
fact, made mandatory to ensure against market power. Why is 
that not enough to--two additional questions--what additional 
powers are needed and how does cost-based rates help in this 
discussion?
    Mr. Glauthier. It may be that the provisions there for 
the--in the Illinois statute for transmission will do the job, 
and what we want is for FERC to have the authority just to be 
able to oversee that and be sure that it doesn't--that nothing 
more is needed. There is market power that can exist at the 
generation level or the link between generation and retial 
sales, so it is not all in transmission, but it may be the 
position of the utility in the marketplace that is still 
restricting competitive choice, competitive options. And, so 
that aspect of market power also needs to be addressed.
    Mr. Shimkus. What about cost-based rates? Is that--how do 
you see that being helpful in the market power debate?
    Mr. Glauthier. Well, of course, we all want to move away 
from cost-based rates and really see----
    Mr. Shimkus. But it is being promoted by folks as a 
solution to the market power, at least in the short-term, 
however you define that.
    Mr. Glauthier. It may have a role in a transition period in 
some cases, but it is certainly something we want to move away 
from as an overall pattern. So, I would look at that as a 
potential transition action or step.
    Mr. Shimkus. Thank you, Mr. Chairman. I yield back.
    Mr. Barton. Since we have let a Republican ask one more 
question, we are going to let a Democrat ask one more question. 
Mr. Sawyer. But this will be the last question before we 
release this witness.
    Mr. Sawyer. Thank you, Mr. Chairman.
    With a number of questions, we have been talking about how 
this transmission system can grow and accommodate an uncertain 
future. Can you comment on siting decisions and the 
administration's point of view with regard to decisions, 
particularly in circumstances where a State might not be the 
direct beneficiary of siting decisions that were nonetheless 
needed in order to evolve a transmission system?
    Mr. Glauthier. We think that siting decisions ought to be 
addressed somehow in a regional context. We would hope the 
States would work together to try to deal with those questions. 
Ultimately, the authority rests with each State on the 
individual siting decisions, but we want to encourage the 
planning and cooperation on a regional basis.
    Mr. Sawyer. In that sense, do you think it should be 
different from natural gas pipeline siting decisions?
    Mr. Glauthier. Yes.
    Mr. Sawyer. Why?
    Mr. Glauthier. Really based on the historical patterns that 
over the decades in which the utility industry has grown up, 
the States have had the authority, and so it has never been 
done really on a regional basis.
    Mr. Sawyer. I am really not trying to--do you believe that 
is compatible with regional markets and the growth and 
evolution of the grid needed to serve them?
    Mr. Glauthier. What we would like to do is encourage 
regional cooperation and for regions to work together on the 
questions of new capacity additions, new transmission 
expansions, and those siting decisions naturally will be a part 
of that. But we would like to see it done in a way that still 
respects the States' individual authorities, as well.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Barton. Thank you.
    Now, we do want to release this witness.
    Mr. Markey. Mr. Chairman?
    Mr. Barton. The gentleman from Massachusetts?
    Mr. Markey. Is it possible that I could ask an extra 
question, as well?
    Mr. Barton. Yes. I don't want to let the pandora's box too 
open. We have got two more panels today and a series of votes 
in the next 4 or 5 minutes, but the gentleman from 
Massachusetts has certainly been a positive contributor to the 
dialog. Final exam time is almost here, so if you like--if you 
could just ask 1 or 2, though.
    Mr. Markey. Thank you, Mr. Chairman. I appreciate it.
    Earlier, the gentleman from North Carolina suggested that I 
don't trust markets and I just want more Government regulating, 
because I have higher rates in New England, and therefore want 
to raise rates again down in North Carolina.
    And I would like to respond to that.
    Mr. Barton. Well, let us don't pick a food fight between 
Massachusetts and North Carolina right now, if possible.
    Mr. Markey. I don't think that this will be considered a 
food fight. This will be--you know, my wife always tells me, 
``You have two choices in life: reenactment or 
reconciliation.''
    Mr. Barton. Okay.
    Mr. Markey. And reenactment, very bad--reenactment is very 
bad.
    Reenactment leads to escalation. So, this is an attempt at 
reconciliation, which is good, very good.
    Mr. Barton. Oh, Okay.
    Mr. Markey. We should always be trying to achieve it.
    Mr. Barton. Well, just notice that I am in the middle here.
    Mr. Burr. The gentleman from Massachusetts won't mind if I 
stay seated for this, will he?
    Mr. Markey. That is okay.
    So, first, I do trust markets, but I don't trust 
monopolies. And one thing I have discovered over the years is 
that markets are very inefficient when it comes to eliminating 
Government-granted monopolies. It just doesn't happen. 
Government action is sometimes needed to break up a monopoly 
and create a real market, because----
    Mr. Barton. This is supposed to be a question.
    Mr. Markey. I understand that, but sometimes I find that 
the best questions are in the form of answers.
    Mr. Barton. We will put the gentleman on one of the panels 
if he wishes.
    Mr. Markey. Well, let me ask you this, Mr. Gauthier: Do you 
find it curious that all the organizations representing 
consumers and competitors oppose the Barton bill, while the 
incumbent monopolists like it? That is more pointed than I 
wanted to make it, but----
    Mr. Glauthier. There are elements we think need to be added 
to the bill to provide consumer protection.
    Mr. Markey. But is that an interesting--do you think it is 
accidental that all the competitors and consumers are on one 
side, and the monopolists are on the other side?
    Mr. Glauthier. It is an interesting observation. We think 
there needs to be some perfection of the bill before we can 
support it.
    Mr. Markey. Okay, good. Well, that will be our goal then, 
and I thank you, Mr. Chairman, for allowing me to ask that 
question.
    Mr. Barton. All right. Seeing no other member who wishes to 
ask one more question, we are going to release this witness.
    We want to thank the administration and the Department for 
your cooperation, and we do look forward to working with you. I 
told the Secretary this, and I want to tell you this: We really 
appreciate the staff and their cooperative attitude in working 
with our staffs.
    So, you are released from this subcommittee.
    Now, we have a series of votes. We have 3 to 4 votes. That 
is going to take probably 30 minutes. So, we are going to 
recess for lunch, because we have to, not because we want to, 
and we will reconvene at 1:30. And if nobody else is in the 
room, I want myself, and--which I will be here--and the FERC 
commissioners, okay?
    So, we are recessed until 1:30 Eastern Daylight Savings 
Time.
    [Whereupon, at 12:34 a.m., the subcommittee recessed, to 
reconvene at 1:31 p.m., the same day.]
    Mr. Barton The subcommittee will come to order.
    We actually have all the commissioners here I think. We 
want--well, we have got one more here.
    We want to welcome the distinguished Federal Energy 
Regulatory Commission to the Subcommittee of Energy and Power. 
Today, we are going to start off with the Chairman, the 
distinguished Mr. James Hoecker, then we are going to go from 
the Chairman's left or the committee's right--to Ms. Bailey, 
Ms. Breathitt, Mr. Hebert, and Mr. Massey.
    We are going to recognize each of--your written statements 
are in the record in their entirety, and we are going to 
recognize each of you for such time as you may consume, which I 
am a little bit leery of doing since some of you are from the 
South and talk slowly. But we really do want to hear your 
comments, but I would encourage you to try to limit them to 5 
to 10 minutes so that we can have some time to ask questions.
    So, Mr. Chairman, you are recognized, and then after you we 
will go with Ms. Bailey and then right on down the road.

 STATEMENTS OF HON. JAMES J. HOECKER, CHAIRMAN, ACCOMPANIED BY 
 HON. VICKY A. BAILEY, COMMISSIONER; HON. LINDA KEY BREATHITT, 
COMMISSIONER; HON. CURT L. HEBERT, JR., COMMISSIONER; AND HON. 
  WILLIAM L. MASSEY, COMMISSIONER, FEDERAL ENERGY REGULATORY 
                           COMMISSION

    Mr. Hoecker. Thank you, Mr. Chairman. Chairman Barton, 
members of the subcommittee, it is again a privilege for me to 
appear before you; this time, in general support of H.R. 2944.
    Mr. Chairman, I recognize the difficulty of sorting through 
the complex facets of electric restructuring to find the 
appropriate combination of forward-looking initiatives that 
will serve the American energy consumer well, doing neither too 
much nor too little, employing Federal authority effectively 
but not excessively. We share with you a faith in the benefits 
of competition and in the ability of public policy to ensure 
that there is an efficient and equitable market structure 
within which competition can flourish. I, therefore, applaud 
your desire to enact legislation, and I pledge to help you do 
so.
    I agree with the Deputy Secretary that electricity markets 
require certainty now more than ever, that demands on the 
system require a boost in generation reserve margins and 
transmission capacity, and that the Congress should now speak 
to how it would have this industry evolve in the future.
    In response to the Energy Policy Act of 1992 and our own 
Order 888, competition is growing in electric generation and 
marketing sectors. New challenges to system reliability are 
more in evidence. The time has therefore arrived to strengthen 
the platform upon which competition and reliability must stand. 
And by that I mean non-discriminatory access to the integrated 
network of high voltage transmission.
    For 2 years, I have testified before both Houses of 
Congress that the newly competitive bulk power market needs 
legislative assistance to do four things: To place all electric 
transmission under the Commission's jurisdiction for purposes 
of ensuring non-discriminatory access to transmission services; 
second, to clarify and reinforce the Commission's authority to 
promote regional transmission organizations; third, to protect 
the integrity of transmission service through mandatory 
reliability rules established by self-regulating organizations 
subject to FERC oversight, and, fourth, to reform the Public 
Utility Holding Company Act.
    Now, although I recognize that the administration and this 
committee have a much broader restructuring agenda than does 
our Commission, I am pleased to say that H.R. 2944 takes these 
four key issues I have mentioned head on, and with some 
reservations, I would say it does a good job.
    In my written testimony, I make several suggestions for 
your further evaluation, but let me highlight a few before I 
close. First, State regulators, appearing on the next panel as 
the National Association of Regulatory Utility Commissioners, 
would give utilities a chance to avail themselves of the 
opportunity to join an RTO voluntarily but would then allow the 
FERC to require a utility to join an RTO if that utility had 
not done so voluntarily.
    Now, that is my position, as well. Our proposed rule 
already sets forth a timetable for voluntary utility actions in 
this connection. However, I view the statute mandate that you 
propose as a very sound alternative.
    Second, three of my colleagues and I asked the Congress to 
help us ensure that all uses of the transmission system are 
treated comparably in the face of a troublesome recent decision 
in the 8th Circuit Court of Appeals. An addition to the bill is 
suggested in my testimony to address this problem.
    And, third, I note that other pending legislation would 
enhance the Commission's authority to address market power 
outside the context of mergers, and I support such measures. As 
the Commission moves toward light-handed regulation, its 
ability to monitor the market and to identify and address 
exercises of residual market power becomes ever more important.
    In conclusion, my objective is to help create a market 
structure that ultimately will allow markets, and not 
regulators, to determine the price of wholesale electric power. 
You will notice, I am sure, that the members of the Commission 
do not entirely agree on how to get to competitive electricity 
markets. We do agree that competition is the goal, however. We 
do agree that RTOs have substantial benefits, that reliability 
must be protected, and that market power must be constrained in 
the context of mergers and elsewhere.
    The question for the subcommittee, and in fact for our 
Commission as well, is how proactive and supportive we should 
be in pursuit of these objectives.
    Mr. Chairman, I thank you for the opportunity to offer my 
views here this afternoon, and I look forward to your 
questions.
    [The prepared statement of Hon. James J. Hoecker follows:]
 Prepared Statement of Hon. James J. Hoecker, Chairman, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Subcommittee: Good morning. My name 
is James J. Hoecker, Chairman of the Federal Energy Regulatory 
Commission. Thank you for the opportunity to appear before you today. 
My testimony will address the need for Federal electricity legislation 
generally and the provisions of H.R. 2944 in particular.
    In prior testimony before this and other subcommittees of the House 
of Representatives, I have recommended that Congress enact legislation 
to address several matters that are critical to achieving fully 
competitive, reliable wholesale electric power markets. These include 
placing all electric transmission in the continental United States 
under the same rules for non-discriminatory open access and comparable 
service; reinforcing the Commission's authority to foster regional 
transmission organizations; establishing mandatory reliability rules to 
protect the integrity of transmission service, relying on a self-
regulating organization with appropriate Federal oversight of rule 
development and enforcement; providing the Commission with appropriate 
authority to remedy market power; and, reforming the Public Utility 
Holding Company Act (PUHCA).
    As discussed below, the provisions of H.R. 2944 advance a number of 
these policy goals. I commend you, Chairman Barton, for developing this 
bill. I will suggest some additions and modifications for your 
consideration.
                            i. introduction
    Traditional regulation of electricity sales for resale in 
interstate commerce--i.e., the wholesale or ``bulk'' power market--has 
been based on the recognition that electric utilities were operating as 
natural monopolies. Consequently, during most of this century, federal 
agencies addressed market power and ratepayer interests, not by 
promoting competition, but by strict oversight of the terms of services 
and cost-of-service rates. In the 1980s and early 1990s, however, 
several developments in the electricity generation sector indicated 
that the interests of utility ratepayers could be better protected by 
competition in wholesale power markets than by cost-based regulation. 
The benefits of replacing traditional regulation with competition 
became evident in other industries, such as trucking, railroads, long-
distance telecommunications and natural gas. In the Energy Policy Act 
of 1992, Congress took important steps toward competition in wholesale 
power markets, by providing the Commission with greater authority to 
order transmission owners to transmit power for other buyers and 
sellers in the wholesale market, and by modifying PUHCA to eliminate a 
key barrier for new generators entering these markets. Electric 
generation units built and operated independently of traditional 
utilities had already proved to be competitive and reliable parts of 
the electric system.
    Consistent with these changes in the industry, the Commission in 
1996, through a major rulemaking called Order No. 888, ordered open, 
non-discriminatory access to the transmission facilities of public 
utilities for wholesale market participants. This open access 
obligation prohibits public utilities from discriminating against 
competitors' transactions in favor of their own wholesale sales of 
power. Order No. 888 has enhanced competition in wholesale power 
markets significantly, although it has not opened the grid to 
competition entirely.
    Today, the promotion of competition and reliable service among 
power suppliers in wholesale markets remains the Commission's primary 
goal in this area. The Commission's fundamental regulatory objectives 
are: (1) to substitute competition for price regulation in wholesale 
power markets to the extent possible; and (2) to ensure that 
transmission service is made available under non-discriminatory terms 
and conditions so as to enable competition among suppliers of 
electricity in these markets. Transmission facilities form an 
integrated, interstate grid that is essential for delivering power, in 
the same way the interstate highway system allows trucks to deliver 
other commodities across state boundaries pursuant to private 
contracts. The transmission grid, however, is owned by individual 
utilities and, absent regulation, these utilities can effectively 
prevent the use of these facilities by their competitors. Thus, 
regulation of transmission is necessary to ensure open access, non-
discrimination and reasonable rates. Effective regulation of the 
relatively small transmission portion of the utility business (it 
accounts for about only three to four percent of the average price of 
energy delivered to the home) enables competition in the much larger 
generation sector to produce sizeable ratepayer benefits.
    The Commission is seeking to use its current authority to promote 
competitive wholesale markets. The Commission has also made a 
determined effort to assist states choosing to pursue retail market 
competition, which ultimately will succeed only if there is a 
competitive wholesale market. However, most of the federal regulatory 
framework dates from before competition became significant in this 
industry and, in some key respects, now impedes these efforts. I 
therefore support Federal legislative reforms that will better enable 
the Commission to promote competition and reliability in wholesale 
markets as well as facilitate retail competition initiatives, as 
appropriate.
                        ii. transmission issues
A. Open Access
    Fair and open access to reliable transmission service is an 
essential predicate to competition in bulk power markets. Congress 
expressly recognized this fact in the Energy Policy Act of 1992, by 
giving the Commission limited new authority under Federal Power Act 
(FPA) section 211 to require utilities to provide transmission service 
to others on a case-by-case basis. The Commission later, in Order No. 
888, relied primarily on its traditional authority to prevent undue 
discrimination when it ordered public utilities to provide generic open 
access to their transmission facilities. The Commission concluded that 
Order No. 888 was necessary to support competition in wholesale power 
markets.
    I view Section 102(a)(1) of H.R. 2944 as a confirmation that the 
open access provisions of Order No. 888 are completely consistent with 
Congressional goals. H.R. 2944 would clarify the Commission's authority 
to require open access transmission services under FPA sections 205 and 
206, and would apply this clarification to any ``rule or order 
promulgated by the Commission before, on, or after'' the bill's 
enactment. I support this provision as eliminating any remaining 
uncertainty about the Commission's authority to adopt the Order No. 888 
open access transmission requirements.
    H.R. 2944 would extend the Commission's open access authority to 
all ``transmitting utilities,'' as defined by the FPA. Under current 
law, the open access obligations of Order No. 888 apply only to 
transmission facilities owned or operated by ``public utilities,'' as 
defined by the FPA. In other words, approximately one-third of the 
transmission grid in the contiguous 48 States is not subject to the 
Commission's open access requirements, even though these facilities are 
generally integrated with, and are integral to the operation of, the 
rest of the network. This portion of the grid is owned primarily by 
federally-owned utilities, electric cooperatives that are financed by 
the Rural Utilities Service, and some municipal utilities. While some 
of these entities have chosen to offer open access transmission service 
voluntarily, many others do not. These gaps in open access to the 
transmission grid inevitably impede the development of fully 
competitive wholesale power markets. Only federal legislation making 
all utilities subject to the same open access requirements can remedy 
this problem.
    I believe that all transmitting utilities should be subject to the 
same transmission rules. Open access to a seamless transmission grid by 
all electricity suppliers is essential if the Congress and the 
Commission intend to guarantee that buyers and sellers of electricity 
have as many choices as possible. I note, however, that H.R. 2944 
narrows the definition of transmitting utilities to exclude certain 
utilities that transact within the Electric Reliability Council of 
Texas (ERCOT). While the Commission does not have authority to regulate 
transmission within ERCOT as it does elsewhere, it has had authority 
since 1978 to order transmitting utilities, including those that 
transmit within ERCOT, to provide transmission services in some 
circumstances under FPA section 211. Although used sparingly, this 
authority has been used to promote competitive access. Central Power & 
Light Co., et al., 17 FERC para. 61,078 (1981); City of College 
Station, Texas, 86 FERC para. 61,165 (1999); Tex-La Electric 
Cooperative of Texas, Inc., 69 FERC para. 61,269 (1994). The proposed 
change in definition would exempt those utilities that transact only 
within ERCOT from the current, limited section 211 authority as well as 
the broader open access authority addressed in H.R. 2944 itself. The 
Congress should leave the Commission with section 211 authority in this 
area.
B. Regional Transmission Organizations
    In Order No. 888, the Commission encouraged, but did not require, 
the formation of independent system operators (ISOs). The Commission 
found that ISOs would promote broader, regional power markets and 
provide greater assurance of non-discrimination. Since 1996, six ISOs 
have been established (in California, the mid-Atlantic states, New 
England, New York, the Midwest, and Texas). Four of these are currently 
operational.
    The Commission is now seeking to address the remaining impediments 
to full competition, which fall largely into two categories. First are 
the engineering and economic inefficiencies inherent in the current 
operation and expansion of the transmission grid. For example, each 
separate transmission operator makes independent decisions about the 
use, limitations, and expansion of its part of the grid, but the 
interconnection of the separate transmission systems causes each such 
action to immediately affect other parts of the grid. With the increase 
in competition, the grid is being stressed by many new entrants and by 
new transactions using two or more systems in a region, presenting 
challenges to the historical approach to maintaining the reliability of 
separate, but interconnected, systems. Also, competitive markets must 
evolve into regional markets if they are to thrive, and the efficiency 
gains of competitive markets will be imperiled unless regional 
solutions are used for pricing transmission services and managing 
regional constraints and expansion needs.
    The second category of impediments are the continuing opportunities 
for transmission owners to unduly discriminate in the operation of 
their transmission systems so as to favor their own or their 
affiliates' power marketing activities. In the wake of Order No. 888, 
many market participants continue to allege, and the Commission has in 
some cases confirmed, that transmission service problems related to 
discriminatory conduct remain.
    To address these impediments, the Commission has proposed new rules 
to promote the voluntary formation of regional transmission 
organizations (RTOs) such as ISOs and independent companies that own 
and operate only transmission facilities (transcos). Such institutions 
are encouraged to form in the near future, under a schedule specified 
in the proposal. Notice of Proposed Rulemaking on Regional Transmission 
Organizations, 64 Fed. Reg. 31,389, FERC Stats. & Regs., para. 32,541 
(1999).
    An RTO is an organization formed to administer the operation of the 
transmission system on behalf of all the participants in the market. It 
may be a for-profit or non-profit institution but it must be 
independent of all other financial interests of power market 
participants. It should cover an appropriately configured region and 
have adequate operational control over the transmission grid. If 
properly designed, an RTO can ensure the non-discriminatory operation 
of the transmission grid, eliminate pancaked transmission charges for 
using transmission systems owned by different utilities, reduce and 
better manage congestion on the transmission lines, and facilitate 
transmission planning on a multi-state basis.
    Section 103 of H.R. 2944 would require each transmitting utility to 
establish or join an RTO by January 1, 2003, and to file an application 
for its proposed action with the Commission by January 1, 2002. I fully 
support the bill's goal of having utilities participate in an RTO.
    However, I offer the following suggestions for improving H.R. 
2944's provisions on RTOs. First, I would advance the deadline for 
participation in RTOs by at least one year, so that consumers can begin 
receiving the substantial benefits of RTOs much sooner. Because 
transmission systems are already regionally integrated, economic 
efficiency gains from the coordinated operation of transmission over a 
broad geographic area are readily attainable. It is therefore 
increasingly difficult to justify delaying such benefits to the public. 
The Commission's RTO proposal calls for RTOs to be operational by 
December 15, 2001.
    Second, let me address proposed FPA section 202(h)(2), which 
addresses the standards RTOs must meet. Although the topics of the four 
standards proposed for FPA section 202(h)(2)--independence, geographic 
scope and configuration, operational authority and expansion--are 
generally consistent with key considerations identified in the 
Commission's proposed rule, I believe the bill should not attempt to 
codify detailed prescriptions for each of the four policy standards. 
The Commission has yet to evaluate all of the comments submitted on its 
proposed rules. As importantly, competitive markets will continue to 
evolve in ways that are difficult to predict. Detailed standards that 
appear appropriate today may be inappropriate in future years. For 
example, the bill ``deems'' the requirement for independence to be met 
when market participants own passive, nonvoting interests or 10 percent 
or less of the voting interests. It is not appropriate to lock the 
details of these standards into statutory text, given the possible need 
to adapt the standards to future changes in the industry before the FPA 
is again modified. I recommend a somewhat different approach; namely, 
that the Congress should preserve the Commission's discretion to adapt 
policy to changing circumstances, especially with respect to 
administering the key policies of independence and regional scope and 
configuration. The Commission as well as the institutions we regulate 
need the ability to adapt to changing market conditions and to changing 
regional needs.
    Third, under Section 103 of H.R. 2944, the Commission must approve 
an application to join or establish an RTO if the RTO meets the 
prescribed standards. It specifically prohibits the Commission from 
requiring a utility to participate in a different RTO. Although I 
believe the Commission must and will apply standards fairly and 
promptly, the language in the bill could be construed as allowing the 
Commission only to approve or disapprove an application, but not to 
modify it. To ensure that RTOs yield their expected benefits as soon as 
possible, and consistent with the Commission's authority under other 
FPA sections, such as sections 203, 205 and 206, the Commission should 
have the procedural flexibility to work with the applicants to modify a 
flawed proposal, instead of simply disapproving a deficient or non-
complying application and thereby imposing the burden of reapplication. 
Further, the concept of RTOs, while sound, is a work in progress and 
the Commission should be able to approve such applications subject to 
conditions when necessary to make them consistent with the public 
interest.
    Finally, Section 103 of H.R. 2944 states that ``[t]he Commission 
shall encourage incentive transmission pricing policies'' for RTOs. 
Section 103 states that such pricing policies include incentives for 
transmitting utilities to form RTOs, as well as incentives for RTOs to 
eliminate rate pancaking, to minimize cost shifting and to encourage 
adequate investment in and expansion of the transmission grid. I 
support these goals. The Commission has already solicited comment on 
whether and how to employ such incentives in the context of the ongoing 
RTO rulemaking.
C. Reliability
    The changes in the industry in recent years have created a need for 
new tools for ensuring the reliability of the transmission grid. In the 
past, reliability was addressed through the voluntary cooperation of 
transmission owners. Today, industry participants increasingly 
recognize that cooperative efforts among transmission-owning utilities 
may not be sufficient in a competitive environment, and that a 
mandatory system for ensuring the reliability of the grid is needed. 
This recognition has caused the industry to begin seeking the 
Commission's involvement on reliability issues, even though the 
Commission has not regulated system reliability historically and it has 
no express authority to do so. For example, while the Commission has 
authority to address discrimination in jurisdictional transmission 
services, it has no explicit statutory role in setting or reviewing 
particular reliability standards or in ensuring the security of the 
electrical system or the adequacy of supply. That was left largely to 
the industry and the States.
    As I have testified previously, Congress should make compliance 
with appropriate reliability standards mandatory. There appears to be 
an industry consensus that it can continue to work collaboratively to 
develop reliability standards, using a process in which all market 
sectors are fairly represented. I believe that, if the standard-setting 
process is representative of all stakeholders, a high degree of self-
regulation is appropriate. However, sufficient Federal oversight will 
be needed to ensure that the standards set by that process are 
adequate, not unduly discriminatory or anticompetitive, and 
enforceable, and to ensure that enforcement of the standards is 
effective and fair.
    Section 201 of H.R. 2944 meets these reliability concerns. Section 
201 also recognizes the role of the States in ensuring the reliability 
of local distribution facilities by preserving existing State authority 
over local distribution facilities unless the exercise of such 
authority would unreasonably impair the reliability of the bulk power 
system. I believe that any Federal legislation should also preserve for 
the States any reliability practices that they have historically 
engaged in with respect to bundled transmission in their jurisdictions, 
provided that such practices are consistent with the applicable 
regional or national standards and such reliability practices do not 
unduly impair competition in bulk power markets.
D. Undue Discrimination and Comparability
    In Order No. 888, the Commission required public utilities to offer 
transmission service to third parties under the same rates, terms and 
conditions as the utilities applied to themselves for their own 
wholesale and retail sales of generation. Further, load-serving 
utilities thereafter were to take transmission service for their 
wholesale sales of generation under the same tariff as everyone else. 
In other words, the Commission required ``comparability'' of 
transmission services for a public utility and its transmission 
customers. Comparability is critical to ensuring that competition in 
power markets is not distorted by preferential or discriminatory 
transmission services.
    A recent court decision may have placed a cloud on the Commission's 
ability to ensure comparability and support competition. The appellate 
court decision in Northern States Power Co., et al., v. FERC, No. 98-
3000 (8th Cir., May 14, 1999, rehearing denied, September 1, 1999), if 
interpreted and applied broadly, may prevent the Commission from 
enforcing rules that provide for comparable terms and conditions of 
service for all users of transmission, including pro rata curtailments 
of transmission service used by a utility for in-state ``native load.'' 
Arguably, this court decision may allow one state to require its 
utilities to establish a preference for in-state uses of the 
transmission grid to the detriment of consumers in other states whose 
utilities depend on comparable access to electricity supplies over the 
same transmission facilities. If states can effectively establish 
preferential transmission services for the utilities they regulate, the 
wholesale power markets will become balkanized and competition in those 
markets could wither.
    I suggest revising Section 101 of H.R. 2944 to address this 
concern. In particular, I suggest adding a provision at the end of FPA 
section 201(a), as modified by section 101(b)(1) of the bill, stating 
that:
          In regulating the transmission of electric energy under any 
        provision of this Part [Part II of the FPA], the Commission 
        shall have exclusive authority to establish rates, terms and 
        conditions of transmission service that are just, reasonable 
        and not unduly discriminatory or preferential, including rates, 
        terms and conditions that prevent or eliminate undue 
        discrimination or preference associated with a public utility's 
        or transmitting utility's own uses of its transmission system 
        to serve its wholesale and retail electric energy customers.
Such a provision would clarify the Commission's authority to ensure 
that transmission services within its exclusive jurisdiction are 
provided on a basis that is comparable to, i.e., no less favorable 
than, other transmission services provided by a transmitting utility, 
and that competition among power suppliers is not distorted.
E. Expansion of the Transmission Grid
    Section 105 of H.R. 2944 would allow the Commission, upon 
application, to order a transmitting utility to enlarge, extend or 
improve its transmission facilities. Before doing so, the Commission 
would be required to refer the matter to a joint board for 
recommendations on the need for, design of, and location of the 
proposed expansion. The provision retains the states' traditional 
siting authority.
    I do not see a current compelling need for the Commission to be 
given the authority specified in section 105 of H.R. 2944. Instead, my 
expectation is that RTOs will help address many issues concerning 
expansion of the transmission grid including the need for new 
facilities and who pays for them. However, even if an RTO were to 
recommend system expansion, nothing could be done without the 
cooperation or acquiescence of state siting authorities. Nothing in 
H.R. 2944 proposes to alter that.
                  iii. merger review and market power
    Under FPA section 203, the Commission must review proposed mergers, 
acquisitions, and dispositions of jurisdictional facilities by public 
utilities, and must approve such transactions if they are consistent 
with the public interest. In evaluating the public interest, the 
Commission considers a transaction's effects on competition, rates, and 
regulation.
    The Commission's jurisdiction over mergers is currently limited in 
certain ways. First, the Commission has no direct jurisdiction over 
transfers of generation facilities. It can review transactions 
involving a public utility only when they involve other facilities that 
are jurisdictional (such as transmission facilities or contracts for 
wholesale sales). Second, the Commission lacks direct jurisdiction over 
mergers of public utility holding companies that have electric utility 
subsidiaries. While the Commission has construed such mergers to 
involve jurisdictional indirect mergers of public utility subsidiaries 
of the holding companies, or changes in control over the jurisdictional 
facilities of the public utility subsidiaries, the FPA is not explicit 
on this point. Section 401 of H.R. 2944 would address both 
circumstances appropriately, clarifying that the Commission has 
jurisdiction over transactions involving only generation facilities and 
mergers of holding companies. I support these amendments.
    Section 401 of H.R. 2944 also would require the Commission to act 
on mergers within five months or, for good cause shown, an additional 
three months. Since the Commission issued its Merger Policy Statement 
in December 1996, the Commission has taken final action on nearly all 
mergers within five months after receipt of a complete application. 
Those actions included review of complex electric and gas-electric 
mergers, some of them quite large and unprecedented. Therefore, I would 
expect the proposed deadlines to be adequate, with one caveat. 
Occasionally a merger raises numerous and genuine issues of material 
fact that necessitate extensive fact-finding in a hearing context. For 
example, out of the 30 merger applications filed since issuance of the 
Commission's Merger Policy Statement, the Commission has acted on 23 of 
them (the other seven having been filed only recently) and needed to 
establish an evidentiary hearing with respect to only three of them 
because there were material facts in dispute. In such cases, the 
Commission needs more time to resolve such factual disputes than H.R. 
2944 would allow. In those infrequent instances when material facts are 
disputed, an artificially short deadline would leave the Commission 
with little recourse other than to reject the application.
    I note that other pending legislation would enhance the 
Commission's authority to address market power outside the context of 
mergers. For example, the Administration's proposed bill, H.R. 1828, 
would allow the Commission to address market power in retail markets, 
if asked to do so by a state lacking adequate authority to address the 
problem. It would also give the Commission explicit authority to 
address market power in wholesale markets by requiring a public utility 
to file and implement a market power mitigation plan. H.R. 2050, 
sponsored by Congressmen Largent and Markey, also contains provisions 
that would allow mitigation of market power, to the benefit of 
competition and consumers. Such provisions are particularly desirable 
in the circumstances where a State lacks adequate authority to address 
market power issues and seeks FERC's assistance. As the Commission 
moves toward light-handed regulation, its ability to monitor the market 
and to identify and address exercises of residual market power becomes 
more important.
                               iv. puhca
    Adopted over 60 years ago to restrain the growth and power of large 
utility holding companies, PUHCA requires some utilities to comply with 
restrictions that are not entirely compatible with today's bulk power 
competition. In some instances, PUHCA encourages the very 
concentrations of generation ownership and control that undermine 
competitive power markets. It discourages asset combinations that could 
be pro-competitive. Thus, PUHCA should be reformed, with one major 
caveat. Reform legislation should ensure that both the Commission and 
States have adequate access to the books and records of utilities and 
their affiliates, to protect against affiliate abuse and ensure that 
captive consumers do not cross-subsidize entrepreneurial ventures. 
Sections 511-524 of H.R. 2944 would satisfy these concerns.
                             v. conclusion
    Competition is growing in the electric generation and marketing 
sectors, in response to the Energy Policy Act of 1992 and the 
Commission's efforts to remove barriers to competition. My objective in 
seeking legislation is to create a market structure that ultimately 
will allow markets--not regulators--to determine the price of wholesale 
electric power. Effective regulation of transmission facilities that 
are essential for delivering power is critical to ensuring that 
consumers continue to receive increasing benefits from competition in 
power markets. Likewise, effective restraints on the exercise of market 
power in these newly competitive electricity markets is essential to 
advancing competition.
    Thank you again for the opportunity to offer my views here this 
morning. I would be pleased to answer any questions you may have.

    Mr. Barton. Thank you, Chairman.
    We would now like to hear from Commissioner Bailey.

                STATEMENT OF HON. VICKY A. BAILEY

    Ms. Bailey. Good morning, Mr. Chairman and members of the 
subcommittee. I thank you for inviting me, along with all of my 
colleagues, to testify this morning on H.R. 2944, the 
Electricity Competition and Reliability Act of 1999.
    Having joined the Commission 6\1/2\ years ago, the electric 
utility industry the Commission regulates today bears little 
resemblance to the industry I first encountered as a Federal 
regulator in 1993.
    Competition in the marketplace is now clearly the driving 
force. Electric utilities can no longer afford to be stodgy, 
conservative enterprises of earlier years. Management is 
increasingly entrepreneurial in spirit and action. Shareholders 
as well as ratepayers increasingly are demanding decisive 
action to promote transaction-related revenues and to cut 
costs.
    I have been reluctant to call for sweeping Federal energy 
restructuring legislation, and I have been reluctant to 
champion prescriptive, industry-wide action by the Commission. 
My concern is that any such overreaching action will stifle the 
type of industry innovation and flexibility that has marked the 
last few years. I am extremely hesitant to support any major 
piece of legislation or rulemaking that would lock into place a 
1999-vintage vision for the industry when that vision might 
very well be overtaken by technological as well as other 
advances in future years.
    Competition requires that industry participants enjoy the 
opportunity to take chances and possibly to make mistakes. But 
while I encourage risk-taking, and generally favor fewer layers 
of regulatory review rather than more, I remain mindful of the 
vital role that utility services provide in the everyday lives 
of the people of this Nation. America's consumers and 
industries must remain confident that electric service will 
remain as reliable as ever. And all of the pro-competitive 
rhetoric of enlightened commentators and Government officials 
will amount to nothing if the benefits of competition, through 
lower prices or increased product offerings, ultimately do not 
work their way down to all consumers.
    In my judgment, H.R. 2944, taken as a whole, does a very 
good job of threading the needle, allowing utilities to develop 
their own competitive business strategies, while ensuring that 
competitive miscalculations do not impair the reliable 
operation of the grid or limit the availability of low-cost 
energy services. I commend the subcommittee for its thoughtful 
and comprehensive review of the issues confronting the many 
participants in the marketplace, and its crafting of compromise 
legislation that represents a careful balance of various 
concerns and positions.
    Let me comment briefly on four of the specific elements of 
the bill.
    One, mergers. The recent trend of consolidation in the 
increasingly competitive electric utility industry will not 
abate and probably will accelerate. I also expect new and 
different kinds of merger proposals, involving different kinds 
of business combinations, to be presented to the Commission.
    I am concerned about the pace of Commission review of the 
merger applications filed with us. I believe it is inconsistent 
for the Commission to promote competition on the one hand, 
while on the other hand failing to respond in a timely and more 
predictable manner to the efforts of regulated utilities to 
restructure themselves in a manner that, in their judgment, is 
best able to respond and adapt to competitive realities. I hope 
that the possibility of delay or uncertainty in the review of 
merger applications does not act to inhibit corporate 
initiatives and innovation.
    I sense this same concern in the language of section 401 of 
H.R. 2944 that limits the time for Commission review to, at 
most, 240 days from the date of filing. At present, the 
Commission already is acting on the vast majority of merger 
applications within that timeframe. Nevertheless, a 
legislatively mandated 240-day time cap for Commission decision 
could affect the Commission's processing of harder cases 
involving the proposed combination of larger utilities.
    It effectively eliminates all but the most abbreviated of 
evidentiary hearings in merger cases. Many commentators 
undoubtedly will criticize the loss of procedural options 
currently available to the Commission; I, however, will not. 
Contested issues of policy and fact can, in almost all merger 
circumstances, be decided on the basis of the written pleadings 
filed for the Commission's consideration. And while I am not 
attached to any single duration of any limitation, I do not 
find it unreasonable to expect the Commission to act in a 
timeframe consistent with Congress' view as to the need for 
timely and predictable action.
    As to the rest of section 401, which expands the 
Commission's merger authority in certain respects, I add my 
skepticism as to the need for Commission authority to consider 
the effect of any proposed merger on retail markets. In recent 
years, State commissions have refrained from asking the 
Commission to intercede in this area, and have demonstrated 
that they are quite competent to address the retail 
implications of proposed utility mergers. I see no reason to 
add an additional layer of regulatory review.
    On the issue of regional transmission organizations, I 
appreciate section 103 of H.R. 2944, in its reference to 
encouraging utility innovation and individual design in the 
formation of RTOs. But I am deeply concerned by a mandate that 
compels filing by all utilities by January 1, 2002 and RTO 
participation by January 1, 2003.
    I believe that the Commission already possesses sufficient 
authority under existing law to encourage transmission-owning 
utilities to cooperate voluntarily with their neighbors to 
advance regional solutions to lingering competitive and 
operational problems in wholesale power markets. I would much 
prefer to allow utilities to continue the rapid pace of utility 
restructuring and to work out among themselves and with their 
customers, with encouragement from the Commission or Congress 
rather than a legal directive, how best to design regional 
markets that serve all interests in an efficient and 
competitive manner.
    The vast majority of transmission-owning utilities already 
are members of regional transmission institutions--i.e. in 
California, New England, New York, the Mid-Atlantic, the 
Midwest and most of Texas--or are actively engaged in 
discussions to form some such type of institution. I support 
congressional and Commission action that works to encourage 
this type of regional cooperation, especially with 
transmission-owning utilities that currently are not public 
utilities subject to the Commission's regulation and oversight.
    I suspect that transmission-owning utilities increasingly 
will find it difficult, from many different perspectives to 
refrain from such cooperation. But I do not support 
congressional or Commission action that, whether phrased 
subtlety or more overtly, makes the decision for utilities to 
turn over operational control of the transmission facilities 
they own to someone else.
    For all of these reasons, I believe that a mandate to join 
a RTO by a date certain is unnecessary and ill-advised. In my 
judgment, the other provisions of section 103 give 
transmission-owning utilities all of the incentive they need to 
participate in an RTO of their choosing.
    On the issue of reliability, competition cannot be at the 
expense of reliability. I have been very impressed with the 
efforts of the North American Electric Reliability Council and 
the regional councils that NERC administers to ensure the 
continued integrity and reliability of the electrical grid. The 
electric utility industry and the customers it serves are in a 
much better position to assess and ensure the continued 
reliability of electric service.
    I have refrained from calling out for additional regulatory 
authority over reliability. Nevertheless, as wholesale power 
markets become increasingly competitive, and strains are 
imposed on the continuing reliability of the electrical grid 
planned and designed for a less competitive, more vertically 
integrated environment, close cooperation with reliability 
organizations and State and local authorities become 
imperative.
    For this reason, I have no objection to the language found 
in section 201 that would clarify the Commission's oversight 
role by directing it to approve the formation and governance of 
a self-regulating electric reliability organization. Nor do I 
object to the Commission's review of mandatory reliability 
standards and its appellate-type review of implementation and 
enforcement disputes.
    My only hesitation with respect to the reliability 
provisions of H.R. 2944 would be the Commission's ability to 
entertain a much larger share of reliability-based issues and 
disputes, which might have to be decided in close to real-time. 
My hope is that the need for Commission intervention will be 
lessened by increasing respect for and adherence to mandatory 
reliability rules and additional incentives to invest in and 
expand badly needed transmission capacity.
    Finally, I am pleased to see legislative language in 
section 101 of H.R. 2944 that clarifies the boundaries between 
Federal and State jurisdiction over different aspects of 
electricity supply and delivery. The clarifying language, for 
the most part, adopts the jurisdictional dividing lines adopted 
by the Commission in its Order Number 888 rulemaking. Those 
lines, for the most part, have been accepted by industry 
participants and State regulatory commissions. This is 
important in order to eliminate the jurisdictional turf battles 
and protracted court disputes over ambiguous congressional 
delegations, in order to ensure that the benefits of increased 
competition flow through to consumers as quickly and 
comprehensively as possible.
    With that, thank you for the opportunity to present my 
views on this important piece of Federal legislation, and I 
would be happy to answer any questions you may have.
    [The prepared statement of Vicky A. Bailey follows:]
  Prepared Statement of Vicky A. Bailey, Commissioner, Federal Energy 
                         Regulatory Commission
Introduction
    Good morning Mr. Chairman and Members of the Subcommittee. I thank 
you for inviting me along with all of my fellow Commissioners to 
testify this morning on H.R. 2944, the Electricity Competition and 
Reliability Act of 1999.
    I joined the Commission six and one-half years ago. The electric 
utility industry the Commission regulates in 1999 bears little 
resemblance to the industry I first encountered as a federal regulator 
in 1993.
    Competition is now clearly the driving force leading the utility 
industry to restructure. Electric utilities are no longer the stodgy, 
conservative enterprises of earlier years, favored primarily by widows 
and orphans. Open access transmission and negotiated, market-based 
rates are in. Preferential and discriminatory access, and years'-long 
hearings to assess cost structures and cost allocations, are on their 
way out. Utility executives are increasingly entrepreneurial in spirit 
and action; shareholders and ratepayers increasingly are demanding 
decisive action to promote transaction-related revenues and to cut 
costs.
    Utilities have responded to the advent of competition in a number 
of different ways. One business strategy is to concentrate on core, 
niche services. A number of utilities have reached the conclusion that 
they can best respond to competitive forces by concentrating on their 
``wires'' business; i.e., focusing on electrical transmission and 
distribution. These utilities have decided to sell off their generating 
assets--sometimes at a price far in excess of book value, with the 
proceeds often going to reduce or eliminate their exposure to 
uneconomic or ``stranded'' generation investment. Other utilities have 
decided to focus their efforts on power generation and marketing.
    Another business strategy is to remain vertically integrated and to 
offer an array of different utility products and services. Some 
utilities have reached the conclusion that they can best flourish in a 
competitive environment by getting larger and developing economies of 
scale. For this reason, the Commission has received numerous 
applications in recent years from utilities proposing classic 
``horizontal'' combinations at the same level of the market 
(generation, transmission). Other merger applications reflect a recent 
trend toward ``convergence'' or ``vertical'' combinations between 
electric and natural gas utilities. I expect these trends to continue--
indeed, accelerate--and I would not be surprised to see future 
convergences between electric utilities and other types of industries, 
such as telecommunications and Internet providers.
    Finally, electric utilities are increasingly finding that it is in 
their best interest to cooperate voluntarily with their neighbors to 
develop regional institutions that promote reliable operation of, and 
non-discriminatory access to, the grid.
    Who can best claim credit for these dramatic developments? To some 
extent, we regulators and legislators can. Congress can be quite proud 
of its legislative accomplishments, such as the Public Utility 
Regulatory Policies Act of 1978, that (despite unfortunate side-
effects) introduced competition into the wholesale power supply market 
by encouraging the entry of non-traditional, independent power 
producers. Moreover, the Energy Policy Act of 1992 greatly accelerated 
the development of competitive markets by offering power suppliers 
additional ways to reach willing buyers. This Commission can be proud 
of its efforts in recent years--such as the promotion of non-
discriminatory, open access transmission service--to ensure that the 
benefits of increased competition are not confined to only a few of the 
largest industry participants.
    But, in my judgment, industry participants themselves deserve most 
of the credit for the restructuring of the industry and the competitive 
evolution of the market. Despite a reputation for conservatism, 
electric utilities have not been hesitant to adopt bold new strategies 
to take advantage of the opportunities that competition has to offer. 
Frankly, I have seen little industry resistance to the pro-competitive, 
open access policies initiated by federal and state legislators and 
regulators. To the contrary, I have been impressed by the degree of 
sophistication and innovation adopted by different utilities in 
different regions of the country to respond in different ways to 
competitive pressures and opportunities.
    For this reason, I have been reluctant to call for sweeping federal 
energy restructuring legislation. And I have been reluctant to champion 
prescriptive, industry-wide action by the Commission. My concern is 
that any such overreaching action will stifle the type of industry 
innovation and flexibility that has marked the last few years. New 
ideas and concepts for utility governance and operation are being 
brought to my attention every week. Some of them will flourish, and 
others will undoubtedly prove unacceptable. I have no grand design for 
the utility industry of the next millennium. I am extremely hesitant to 
support any major piece of legislation or rulemaking that would lock 
into place a 1999-vintage vision for the industry, when that vision 
might very well be overtaken by technological or other advances in 
future years.
    Competition requires that industry participants enjoy the 
opportunity to take chances and, possibly, to make mistakes. But while 
I encourage risk-taking, and generally favor fewer layers of regulatory 
review rather than more, I remain mindful of the vital role that 
utility services provide in the everyday lives of the people of this 
nation. America's consumers and industries must remain confident that 
electric service will remain as reliable as ever. And all of the pro-
competitive rhetoric of enlightened commentators and governmental 
officials will amount to nothing if the benefits of competition--
through lower prices or increased product offerings--ultimately do not 
work their way down to all consumers.
    In my judgment, H.R. 2944, taken as whole, does a very good job of 
threading the needle--allowing utilities to develop their own 
competitive business strategies, while ensuring that competitive 
miscalculations do not impair the reliable operation of the grid or 
limit the availability of low-cost energy service. I commend the 
Subcommittee for its thoughtful and comprehensive review of the issues 
confronting the many participants in the marketplace, and its crafting 
of compromise legislation that represents a careful balance of various 
concerns and positions.
    I continue to comment briefly on a few of the specific elements of 
the bill.
Mergers
    I have already explained my belief that the pace of merger activity 
in the electric utility industry will not abate and, probably, will 
accelerate. I also expect new and different kinds of merger proposals, 
involving different kinds of business combinations, to be presented to 
the Commission.
    I have expressed my concern on numerous occasions as to the pace of 
Commission review of the merger applications filed with us. I believe 
it would be inconsistent for the Commission to promote competition on 
the one hand, while on the other hand failing to respond in a timely 
and more predictable manner to the efforts of regulated utilities to 
restructure themselves in a manner that, in their judgment, is best 
able to respond and adapt to competitive realities. I hope that the 
possibility of delay or uncertainty in the review of merger 
applications does not act to inhibit corporate initiative and 
innovation.
    I sense this same concern in the language of section 401 of H.R. 
2944 that limits the time for Commission review to, at most, 240 days 
from the date of filing. At present, the Commission already is acting 
on the vast majority of merger applications within that time frame. 
Legislative language imposing a time cap will not affect in any 
significant manner the Commission's processing of the ``easy'' merger 
cases it receives for review.
    It will, however, affect the Commission's review of harder cases. I 
suspect that the industry is increasingly exhausting the limited scope 
of potential mergers that present little concern for their effect on 
competition, rates and regulation, and will increasingly present to us 
mergers of larger utilities that will attract a significantly higher 
degree of opposition and analytical scrutiny. The Commission already 
has set two such merger applications--involving American Electric Power 
and Central and South West in one case, and Western Resources and 
Kansas City Power & Light in another--for hearing; those cases are 
awaiting decision by the administrative law judges and, ultimately, by 
the full Commission. The Commission will face similar pressure to set 
other large mergers--such as those recently proposed by Northern States 
and New Century in one recent announcement, and PECO and Commonwealth 
Edison in another--for lengthy, trial-type hearings.
    A legislatively-mandated 240-day time cap for Commission decision 
effectively eliminates all but the most abbreviated of evidentiary 
hearings in merger cases. Many commentators undoubtedly will criticize 
the loss of procedural options currently available to the Commission; 
I, however, will not. Contested issues of policy and fact can, in 
almost all merger circumstances, be decided on the basis of the written 
pleadings filed for the Commission's consideration. While I am not 
attached to any single duration (180 days? 240? 365?) of any 
limitation, I do not find it unreasonable to expect the Commission to 
act in a time frame consistent with Congress' view as to the need for 
timely and predictable action.
    As to the rest of section 401, which expands the Commission's 
merger authority in certain respects, I add my skepticism as to the 
need for Commission authority to consider the effect of any proposed 
merger on retail markets. This extension of authority appears to be 
counterproductive to the goal of more expeditious action on merger 
applications. The Commission has made it clear that it will consider 
the effect of a merger on retail competition if the applicable state 
commission articulates that it is without jurisdiction or lacks the 
ability to consider such retail competitive effects. In recent years, 
however, state commissions have refrained from asking the Commission to 
intercede in this area, and have demonstrated that they are quite 
competent to address the retail implications of proposed utility 
mergers. I see no reason to add an additional layer of regulatory 
review.
Regional Transmission Organizations
    I find much to appreciate in section 103 of H.R. 2944, dealing with 
regional transmission organizations. Specifically, I appreciate its 
reference to encouraging utility innovation and individual design in 
the formation of RTOs. But I am deeply concerned by a mandate that 
compels filings by all utilities by January 1, 2002 and RTO 
participation by January 1, 2003.
    I believe that the Commission already possesses sufficient 
authority under existing law to encourage transmission-owning utilities 
to cooperate voluntarily with their neighbors to advance regional 
solutions to lingering competitive and operational problems in 
wholesale power markets. I would much prefer to allow utilities to 
continue the rapid pace of utility restructuring, and to work out among 
themselves and with their customers--with encouragement from the 
Commission or Congress rather than a legal directive--how best to 
design regional markets that serve all interests in an efficient and 
competitive manner.
    The vast majority of transmission-owning utilities already are 
members of regional transmission institutions (in California, New 
England, New York, the Mid-Atlantic, the Midwest and most of Texas) or 
are actively engaged in discussions to form some such type of 
institution. These developing regional institutions are taking several 
different forms (most notably, for-profit transcos that own and operate 
transmission facilities, or not-for-profit independent system operators 
that do not own the facilities under their operational control). I 
support Congressional and Commission action that works to encourage 
this type of regional cooperation--especially with transmission-owning 
utilities that currently are not ``public utilities'' subject to the 
Commission's regulation and oversight. I suspect that transmission-
owning utilities increasingly will find it difficult, from many 
different perspectives (reliability, business, etc.), to refrain from 
such cooperation. But I do not support Congressional or Commission 
action that, whether phrased subtlely or more overtly, makes the 
decision for utilities to turn over operational control of the 
transmission facilities they own to someone else.
    For all of these reasons, I believe that a mandate to join a RTO by 
a date certain is unnecessary and ill-advised. In my judgment, the 
other provisions of section 103 give transmission-owning utilities all 
of the incentive they need to participate in a RTO of their choosing. 
For example, the section on RTO independence (revised FPA section 
202(h)(2)(A)) would afford utilities the discretion to design 
organizational structures that would allow market participants to 
retain passive, non-voting interests in the RTO, or own up to 10 
percent of the voting interests in the RTO. This provision would allow 
for a great deal of innovation and flexibility among different types of 
RTOs in different regions of the country.
    Moreover, I support initiatives of the type found in revised FPA 
section 202(h)(6), which would encourage the Commission to confer 
``incentive transmission pricing policies'' on transmission-owning 
utilities which decide to participate in RTOs. If Commission-designed 
encouragement is sufficient, I doubt many utilities would be able to 
resist the type of incentive-based pricing policies that would operate 
as a lure to RTO entry.
Reliability
    As I have already explained, competition cannot be at the expense 
of reliability. Historically, the critical matter of protecting the 
integrity of the electrical grid has been left in the first instance to 
the industry itself. The Commission has interceded when necessary to 
``keep the lights on'' or, in recent years, to ensure that reliability-
based operating practices do not interfere with the availability or 
quality of non-discriminatory open access transmission service.
    I have been very impressed with the efforts of the North American 
Electric Reliability Council and the regional councils NERC administers 
to ensure the continued integrity and reliability of the electrical 
grid. The electric utility industry and the customers it serves are in 
a much better position to assess and ensure the continued reliability 
of electric service than federal regulators lacking intimate 
familiarity with the details and complexities of remote transmission 
paths.
    I have refrained from calling out for additional regulatory 
authority over reliability. Nevertheless, as wholesale power markets 
become increasingly competitive, and strains are imposed on the 
continuing reliability of the electrical grid planned and designed for 
a less competitive, more vertically-integrated environment, close 
cooperation with reliability organizations becomes imperative. For this 
reason, I have no objection to the language found in section 201 of 
H.R. 2944 that would clarify the Commission's oversight role by 
directing it to approve the formation and governance of a ``self-
regulating electric reliability organization'' (ERO). Nor do I object 
to the Commission's review of mandatory reliability standards and its 
appellate-type review of implementation and enforcement disputes.
    In addition, as electricity markets become increasingly 
competitive, close cooperation with state and local regulatory 
authorities with oversight over the reliability of local distribution 
facilities become imperative. For this reason, I have no objection to 
the language found in section 201 that would clarify the authority of 
states and local authorities to ensure the reliability of local 
distribution facilities. Because I am generally wary of additional 
layers of regulatory review that may add to uncertainty, I am very 
appreciative of the language of revised section 217(n) of the FPA that 
ensures that such authority would not be exercised in a manner that 
could impair the reliability of bulk power systems.
    My only hesitation with respect to the reliability provisions of 
H.R. 2944 would be the Commission's ability to entertain a much larger 
share of reliability-based issues and disputes, as envisioned in 
section 201, in light of its limited resources and general 
unfamiliarity with these issues (which might have to be decided in 
close to ``real-time''). My hope is that the need for Commission 
intervention will be lessened by increasing respect for the mandatory 
rules of the EROs the Commission approves. And the availability of 
``incentive transmission pricing policies'', referenced in section 103 
of H.R. 2944, limited to transmission-owning participants in RTOs that 
act to promote reliable transmissions operations and encourage 
investment in and expansion of transmission facilities, should act as a 
significant incentive to minimize any reliability-based disputes.
Federal/State Jurisdiction
    Finally, I am pleased to see legislative language in section 101 of 
H.R. 2944 that clarifies the now-murky boundaries between federal and 
state jurisdiction over different aspects of electricity supply and 
delivery. The clarifying language, for the most part, adopts the 
jurisdictional dividing lines adopted by the Commission in its Order 
No. 888 rulemaking; those lines, for the most part, have been accepted 
by industry participants and state regulatory commissions. I believe it 
is important, whenever possible, to eliminate jurisdictional turf 
battles and protracted court disputes over ambiguous congressional 
delegations, in order to ensure that the benefits of increased 
competition flow through to consumers as quickly and comprehensively as 
possible.
    In light of recent litigation on the subject of comparability of 
service, I would add one more clarification. That addition would 
clarify that the Commission's jurisdiction over unbundled transmission 
service is exclusive, and that the Commission retains the authority to 
protect against undue discrimination or preference in the provision of 
transmission service to all transmission users. Such clarification 
would codify existing Commission policy by allowing it to require that 
a transmission-owning utility offer transmission service to others that 
is comparable to (i.e., no worse than) the service it provides to 
itself.
    Thank you for the opportunity to present my views on this important 
piece of federal legislation. I am happy to answer any questions you 
now may have.

    Mr. Barton. Thank you, Commissioner.
    Before we recognize Commissioner Breathitt, I want to 
remind the other commissioners we do have all your statements 
in their entirety in the record, and I think most of the 
subcommittee have read them.
    The Chairman did an excellent job of summarizing within a 
reasonable time. Commissioner Bailey's remarks were well taken, 
but they took about 15 minutes. So, the other three 
commissioners, we don't want to constrain you, but we hope that 
you could summarize in 5 to 10 minutes.
    Ms. Breathitt.

             STATEMENT OF HON. LINDA KEY BREATHITT

    Ms. Breathitt. Thank you, Mr. Barton. I do admit that I am 
a Southerner, and I might talk a little slower, but I do have a 
summary of my testimony, and it is four double-spaced pages.
    Good afternoon, and I do sincerely thank you for inviting 
me and my colleagues to appear before you today to discuss the 
need for Federal electricity legislation and the provisions of 
H.R. 2944.
    Let me begin by commending you, Mr. Chairman, and other 
members of the subcommittee and your staffs, for crafting what 
I consider to be a comprehensive and important piece of 
legislation that certainly has gotten the attention of 
virtually everyone in the electric industry, including the 
administration and State and Federal regulators. The efforts of 
this committee have advanced the level of electricity 
discussion, and that is a good thing.
    I believe that Federal electricity legislation, such as 
H.R. 2944, is needed to address the uncertainty that seems to 
exist in the industry. Much of the uncertainty surrounds issues 
such as statutory authority, jurisdiction, and the need for and 
effect of wholesale and retail competition. The guidance and 
clarification offered by the legislation will enable the 
Commission to further its goals of achieving a fair, open, and 
competitive bulk power market.
    My written testimony addresses 5 specific aspects of the 
legislation, and this afternoon I would like to briefly 
summarize these.
    The first is open access transmission. The Commission has 
worked diligently for several years to open the Nation's 
electric transmission system for the provision of non-
discriminatory transmission service to all wholesale buyers and 
sellers. However, certain impediments to full open access 
remain, and I believe that section 102 of the bill addresses 
one of those impediments by providing the Commission authority 
to require open access transmission on the part of State and 
municipal utilities and rural electric cooperatives. Many of 
these entities have already filed open access reciprocity 
tariffs with FERC, and I believe this provision would result in 
a more cohesive transmission grid and will greatly facilitate 
open access.
    The second issue is regional transmission organizations, 
which we have come to call RTOs. On May 13, in a unanimous 
decision, the Commission issued its Notice of Proposed 
Rulemaking on RTOs. The Commission found that RTOs would 
beneficially address many of the operational and reliability 
issues now confronting the industry. In the NOPR, the 
Commission sought to accomplish its objective of forming RTOs 
by strongly encouraging voluntary participation by public 
utilities.
    The voluntary approach for RTO formation outlined in the 
NOPR was, in my opinion, a fundamental aspect of our proposal. 
Section 103 of the bill would require all utilities to join an 
RTO by a certain date. I continue to prefer the voluntary 
approach at this time and believe there is considerable support 
among stakeholders for a voluntary approach. And, as Chairman 
Hoecker just said, we do agree that RTOs can bring many 
benefits to competitive markets.
    The third issue is expansion of the interstate transmission 
facilities. One of the most important issues facing the 
electric industry is the need to enhance or expand the 
transmission grid. Section 105 of the bill proposes to address 
this by authorizing the Commission to rule on applications 
filed by transmitting utilities to expand facilities after 
consultation with regional joint boards comprised of effective 
State and Federal agencies. Because certificate authority does 
reside with the States, I believe a FERC role would be 
confusing, although I support regional cooperative efforts.
    The fourth issue is electric reliability. Section 102 of 
the bill would provide the Commission with authority pertaining 
to the formation of a self-regulating electric reliability 
organization and the development of enforceable reliability 
standards. I believe that emerging competition in the electric 
industry necessitates a change in the manner in which the 
reliability of the grid is overseen and managed, and I believe 
that the current system should be replaced by a model similar 
to that proposed in the bill.
    And the final issue that I address in more detail in my 
written testimony is merger authority. Section 401 of your bill 
authorizes the Commission to review proposed mergers of 
facilities of all electric utilities, including State and 
municipal utilities, rural cooperatives, and Federal electric 
utilities. This section also extends the Commission's merger 
authority to include generation companies.
    I support the provisions of this section. I believe the 
Commission is uniquely situated and eminently qualified to 
perform this important task. Given the changing nature of the 
industry, I believe it is essential that the Commission 
continues to evaluate utility mergers and that the scope of our 
merger authority be extended as you have proposed.
    Furthermore, I believe the proposed time limit proposed in 
the bill is reasonable but should be modified to allow the 
Commission additional time to review in a public hearing 
context the occasional merger application that raises issues of 
material fact.
    In conclusion, let me again commend this subcommittee for 
crafting an important bill. I appreciate this opportunity to 
share my thoughts, and I will look forward to your questions.
    [The prepared statement of Hon. Linda Breathitt follows:]
  Prepared Statement of Linda Breathitt, Commissioner, Federal Energy 
                         Regulatory Commission
    Chairman Barton and Members of the Subcommittee: Good morning. My 
name is Linda Breathitt and I am a Commissioner of the Federal Energy 
Regulatory Commission. Thank you for inviting me and my colleagues to 
appear before you today to discuss the need for Federal electricity 
legislation and the provisions of H.R. 2944, the Electricity 
Competition and Reliability Act of 1999.
    Let me begin by commending you, Mr. Chairman, and other Members of 
the Subcommittee for crafting what I consider to be a comprehensive and 
important piece of legislation that will certainly advance the 
development of competitive wholesale and retail electricity markets in 
this country.
    I believe that Federal electricity legislation, such as H.R. 2944, 
is needed to address the uncertainty that seems to exist in the 
industry. Much of the uncertainty surrounds issues such as statutory 
authority, jurisdiction, and the need for and affect of wholesale and 
retail restructuring. I believe H.R. 2944 will, in large part, allay 
the uncertainty. Furthermore, the guidance and clarification offered by 
the legislation will enable the Commission to further its goals of 
achieving a fair, open, and competitive bulk power market.
    I am unable today to address each provision of H.R. 2944. 
Therefore, I would like to comment briefly on five specific aspects of 
the proposed bill: (1) open transmission access; (2) regional 
transmission organizations; (3) expansion of interstate transmission 
facilities; (4) electric reliability; and (5) merger authority.
Open Transmission Access
    The cornerstone of the Commission's efforts to create an open, non-
discriminatory electric transmission system is the requirement that all 
public utilities that own, operate, or control interstate transmission 
facilities provide transmission service over their facilities to all 
wholesale buyers and sellers on a non-preferential basis. Such non-
discriminatory open access to transmission services is essential to the 
development of competitive wholesale bulk power markets. Despite the 
Commission's efforts, however, certain impediments to full open access 
remain. One such impediment is that a significant portion of the 
Nation's transmission grid is owned and operated by utilities not 
subject to Commission open access requirements. Section 102(b) of H.R. 
2944 amends the definition of ``public utility'' in section 201(e) of 
the Federal Power Act (FPA) to include transmitting utilities, other 
than Federal power marketing administrations and the Tennessee Valley 
Authority, for purposes of regulating transmission rates, terms, and 
conditions. I believe this provision would result in a more cohesive 
transmission grid and will greatly facilitate open transmission access.
Regional Transmission Organizations
    On May 13, 1999, in a unanimous decision, the Commission issued its 
Notice of Proposed Rulemaking (NOPR) on Regional Transmission 
Organizations (RTOs). In the NOPR, the Commission found that 
appropriate regional transmission institutions can address many of the 
operational and reliability issues now confronting the electric 
industry. Specifically, we found that such institutions could: (1) 
improve efficiencies in transmission grid management; (2) improve grid 
reliability; (3) remove the remaining opportunities for discriminatory 
transmission practices; (4) improve market performance; and (5) 
facilitate lighter handed regulation.
    The Commission proposed, among other things, to establish 
fundamental characteristics and functions that RTOs must satisfy. 
Furthermore, we proposed that all public utilities that own, operate, 
or control interstate transmission facilities make certain filings 
pertaining to participation in an RTO. Specifically, utilities not 
already participating in an approved Independent System Operator (ISO) 
would make one of two alternative filings with the Commission by 
October 15, 2000. First, a utility may propose to participate in an RTO 
that satisfies the minimum characteristics and functions and that will 
be operational no later than December 15, 2001. Alternatively, a 
utility may make a filing that describes its efforts to participate in 
an RTO, any existing obstacles to RTO participation, and any plans and 
timetables for future efforts to participate in an RTO. A public 
utility that is already a member of an existing ISO would make a filing 
no later than January 15, 2001 that explains, among other things, the 
extent to which the ISO in which it participates meets the minimum 
characteristics and functions for an RTO.
    In the NOPR, the Commission sought to accomplish its objective of 
forming RTOs by encouraging voluntary participation by public 
utilities. In this light, as indicated above, the Commission proposed, 
as part of its filing requirements, a process for a utility to describe 
in an alternative filing any efforts to participate in an RTO, reasons 
it has not participated in an RTO, any obstacles to RTO participation, 
and any plans the public utility has for further work toward 
participation in an RTO.
    The voluntary approach for RTO formation outlined in the NOPR is, 
in my opinion, a fundamental and crucial aspect of our proposal. I 
believe that a certain amount of flexibility is necessary on the part 
of the Commission as utilities move toward forming RTOs. Therefore, it 
is important to me that public utilities have an opportunity to 
identify and explain any obstacles or restrictions they face in joining 
an RTO.
    Section 103 of H.R. 2944 would require all transmitting utilities 
to establish or join an RTO by January 1, 2003. I believe that Congress 
should not impose, at this time, a mandate for utilities to join an 
RTO, but rather should encourage voluntary participation. There is 
considerable support among stakeholders for a voluntary approach.
    Section 103 of H.R. 2944 also proposes certain standards that RTOs 
must meet. In his testimony to the Subcommittee today, Commission 
Chairman James J. Hoecker recommends that Congress take a somewhat 
different approach. Given that the Commission has yet to evaluate all 
of the comments submitted on its RTO NOPR, Chairman Hoecker suggests 
that Congress should not lock the details of these standards into 
statutory text given the possible need to adapt the standards to future 
changes in the industry before the FPA is again modified. I agree with 
Chairman Hoecker that Congress should preserve the Commission's 
discretion to reflect changing circumstances in specific RTO 
requirements and standards.
Expansion of Interstate Transmission Facilities
    One of the most important issues now facing the electric industry 
is the need to enhance or expand the transmission grid. The success of 
the Commission's goals of transmission open access and wholesale 
competition depends on an adequate and reliable supply of transmission 
capacity. Since the issuance of Order No. 888 in 1996, there has been a 
tremendous increase in the amount of wholesale electric power being 
traded. Open access and industry restructuring, both at the wholesale 
and the retail levels, have caused demand for transmission capacity to 
soar. As a result, the Nation's transmission grid is struggling to keep 
pace with the industry's rapid growth. The increased usage is imposing 
tremendous strain on the system. The Commission must take deliberate 
action to encourage the industry to address this situation.
    Section 105 of H.R. 2944 proposes to address grid expansion by 
authorizing the Commission to order a transmitting utility to expand 
its transmission facilities, upon application of an electric utility or 
transmitting utility. Furthermore, this section would create joint 
boards consisting of State and Federal agencies to make recommendations 
to the Commission pertaining to transmission system expansion. In his 
testimony, Chairman Hoecker states that he sees no compelling need for 
the Commission to be given the authority specified in Section 105 of 
H.R. 2944. I agree with Chairman Hoecker on this point. It is my belief 
that RTOs will play a significant role in system expansion.
    In my opinion, the transmission system is not keeping pace with 
growing demand in the bulk power market. The reason for this is that 
the industry is increasingly unwilling to make transmission-related 
investments given the uncertainties that exist in an industry still in 
the midst of restructuring and the risk of earning inadequate returns 
on new transmission investments. I believe the Commission must address 
this problem in two ways. First, the Commission must ensure that its 
transmission pricing policies conform to the changing electricity 
marketplace and that transmission owners or operators are encouraged to 
file innovative pricing proposals. Second, the Commission must adopt 
policies that will provide proper incentives to market participants and 
other investors to expand and enhance transmission facilities. Both of 
these objectives will be addressed, as they pertain to RTOs, at least, 
in the new FPA section 202(h)(6) as proposed in section 103 of H.R. 
2944. This would be a reasonable starting point for the Commission to 
consider the effect its current transmission pricing policies have on 
the evolving electric industry and the need for a more incentive-based 
approach.
Electric Reliability
    Section 201 of H.R. 2944 amends the FPA to provide the Commission 
with specific authority pertaining to the formation of a self-
regulating electric reliability organization and the development of 
enforceable reliability standards. Many in the industry, including the 
North American Electric Reliability Council (NERC), recognize the lack 
of clear Federal authority for establishing or enforcing reliability 
standards for the electric industry and the importance that electric 
reliability be maintained as the industry is restructured. I believe 
that emerging competition in the electric industry necessitates a 
change in the manner in which the reliability of the interconnected 
electric system is overseen and managed. The present model of voluntary 
compliance by electric utilities of regulatory rules and criteria 
established by NERC and its member Regional Reliability Councils has 
worked effectively for over three decades. However, given the profound 
changes taking place in the industry, I believe this voluntary system 
should be replaced by a model similar to that proposed in Title II of 
H.R. 2944. Such a model would retain many of the features of the 
current system that has been so effective in the past, while adding 
necessary oversight and enforcement mechanisms. There is a compelling 
need for such Federal authority and I support the provisions of this 
section.
Merger Authority
    Section 401 of H.R. 2944 amends the FPA to authorize the Commission 
to review proposed mergers and disposition of facilities of all 
electric utilities and transmitting utilities, including State and 
municipal utilities, most rural electric cooperatives, and Federal 
electric utilities. This section extends the Commission's merger 
authority to include generation companies and clarifies the 
Commission's merger authority over holding companies. Furthermore, the 
section establishes time limits for the Commission to review merger 
applications.
    I support the provisions of this section. The Commission is charged 
under Section 203 of the FPA to evaluate public utility mergers and 
dispositions to determine whether such actions are consistent with the 
public interest. I believe the Commission is uniquely situated and 
eminently qualified to perform this important task. The Commission and 
its Staff possess extensive knowledge of and expertise in the electric 
industry. Given the changing nature of the electric industry, I believe 
it is essential that the Commission continues to evaluate public 
utility mergers and that the scope of our merger authority be extended 
as proposed in this section.
    As for the time line proposed in section 401(a)(4) of H.R. 2944, I 
believe the Commission has shown repeatedly that it processes merger 
applications within the prescribed 150-day period. However, I agree 
with Chairman Hoecker that occasionally a proposed merger raises issues 
of material fact that must be resolved in a public hearing context. In 
these instances, I believe the Commission would need additional time in 
which to process the application.
Conclusion
    In conclusion, I believe that Federal legislation is needed to 
address uncertainty that exists in the industry. For the most part, I 
believe that H.R. 2944 accomplishes this objective. However, there are 
certain provisions of the proposed legislation that should be revised. 
I have identified a few such instances.
    Congress has a considerable opportunity in this session to pass 
meaningful legislation that will expand competition in the wholesale 
and retail electric markets. I urge Congress to avail itself of this 
opportunity. I look forward to continuing the dialogue with the 
Subcommittee on this important legislation.

    Mr. Barton. Thank you, Commissioner.
    We would now like to hear from Commissioner Hebert.

             STATEMENT OF HON. CURT L. HEBERT, JR.

    Mr. Hebert. Thank you for the opportunity to appear before 
you today. Chairman Barton's invitation specifically asked me 
to address whether there is a need for Federal electricity 
legislation, and, if so, why?
    In the interest of time, I have modified my comments, and I 
ask and answer a more narrow question: Does FERC need Federal 
electricity legislation? Not necessarily.
    For investor-owned utilities, FERC has adequate existing 
authority to create a competitive market; more accurately, I 
should say allow a competitive market to form. One area 
Congress could speak to involves the Federal power marketing 
agencies--the Bonneville Power Administration and the Tennessee 
Valley Authority. The effort involves untangling the 
transmission from the generation and the financial and legal 
commitments these agencies may have made. Change also involves 
the matter of tax exempt financing and the problem of 
preference customers and the so-called fence within which 
bodies, such as TVA, operate. Therefore, it will take time to 
sort out. I would prefer selling off their transmission assets 
instead of additional jurisdiction.
    For the investor-owned side, the economics of the industry 
already push companies into restructuring. Generation now 
operates as a true business. FERC has extended market-based 
rates from merchant generators to services traditionally 
provided by utilities. In Order Number 888, the Commission 
declared new entry into generation will receive market-based 
rates for all practical purposes. Transmission, the highway of 
electricity, will remain regulated and will operate as a 
utility.
    The next step must come from Federal Energy Regulatory 
Commission. Our rate setting encourages utilities to sit still 
and do nothing. We all but prohibit companies from engaging in 
the transmission business. We also keep new investors out. In 
allowing utilities to recover original cost, less depreciation 
on facilities about 30 years old, FERC says to a potential 
entrant, ``You cannot afford to buy these facilities for their 
value.'' It also tells integrated utilities, ``You won't get 
anything for your assets, so if you sell, you will be asking 
for shareholder opposition.''
    To cure that, FERC must grant an acquisition adjustment 
that reflects the economic benefits transmission facilities 
will bring to the table. On the other hand, policies that force 
sellers to return ratepayers any and all gains from a sale 
negate the good in the acquisition adjustment. FERC and the 
states must allow shareholders to reap at least half the 
profits of the sale of transmission. FERC can do this.
    Higher rates of return to reflect greater risk of 
transmission would encourage restructuring for existing 
facilities, as would shorter depreciation to account for the 
likelihood of distributed generation and other technological 
changes that may render facilities obsolete before the end of 
their physical life. FERC can do this.
    Most important for the future, restructuring, competition, 
and innovation come down to expansion. Business has a simple 
way of handling new facilities--incremental pricing. Arbitrary 
as it might seem from a theoretical point of view, making the 
new customer pay the cost of the interconnection brings 
certainty at the least cost. Existing customers can rest 
assured, once they have paid their freight, that a new customer 
would not saddle them with more.
    All of this and more FERC can accomplish by exercising its 
authority under Section 205 of the Federal Power Act. Since the 
1940's, the Supreme Court has held that nothing in the act 
binds the Commission to any particular formula, as long as we 
balance the interests of consumers with that of the utilities. 
Were we to do that here, we would institute the kinds of 
incentives and performance-based rates that will allow a 
separate transmission business to form and thrive. A separate 
transmission business, a clean break, in the words of the 
Federal Trade Commission staff's comments in the RTO NOPR, 
forms the best foundation for competition in generation and low 
prices to the customer.
    Other impediments to restructuring exist, some of which you 
correctly blame FERC for, even apart from rates. For example, 
utilities complain that FERC takes too long to rule on 
applications to dispose of facilities, of the type that 
utilities will have to file in order to form RTOs. Congress, in 
theory, can legislate an end to delay. Better yet, FERC itself 
can and should accelerate the process.
    I think we should put a provision into the Final RTO Rule 
that we will act on those applications within 6 months. FERC 
should use its existing discretion. FERC's review of mergers 
could delay formation of RTOs.
    The current draft of the Barton bill in front of us today, 
that we are speaking about, expands FERC's jurisdiction over 
mergers by including generating facilities. The August 4 draft 
would have eliminated FERC review of mergers. FERC should get 
out of the merger business. I have always said good mergers 
should be approved in 6 months, and bad mergers should never 
happen. Utilities are not exempt from the antitrust laws of 
this great Nation. DOJ, FTC, the SEC all take a look--FERC is 
not an antitrust agency.
    We hear clamor in another area: reliability. The argument 
goes that competition, meaning cost shifting--or cost cutting, 
excuse me, will slight the long-term investment in reliability. 
Therefore, critics caution, Congress must step in. I disagree 
completely, that the two considerations must pull in different 
directions. Here, again, FERC has authority to act.
    We can supplement performance-based rates to include 
reliability, another word for quality. When I served as 
commissioner and chairman in Mississippi, we included the 
minimum reliability as one measure of performance on which the 
utilities can earn profit. We at the FERC could adopt the same 
measure as part of the rate plans under section 205 of the 
Federal Power Act. Adding reliability to performance-based 
plans means quicker action than having a self-regulating 
organization establish standards with appeals to FERC, because 
we would make the utility's economic interest coincide with the 
public interest. Here, again, FERC has the existing authority 
to act.
    I noted with approval of the reports that this draft of the 
bill rejects FERC's mandates and favors incentives. When I read 
the draft, I saw that in fact the authority for FERC to mandate 
RTOs fell away, and the bill directs FERC to offer incentives. 
So far, so good.
    I pause, however. Under the draft bill, Congress, not FERC, 
mandates RTOs. For the industry, a mandate robs companies of 
the initiative, whether the compulsion comes from a law or from 
an administrative rule. Moreover, the draft requires FERC to 
consider existing transmission organizations in certifying 
RTOs. This prevents progress. The most ardent advocates of 
existing ISOs concede that these organizations represent, at 
best, a step toward the ultimate goal of true independence. In 
short, everyone agrees ISOs must evolve. This bill freezes the 
status quo with existing ISOs. I would allow ISOs to exist, 
though I find them falling short of the RTO criteria of 
independence. Instead, I would clear the way toward the goal: 
truly independent transmission companies.
    This leads to my next topic, incentives. Everyone knows I 
favor them. To work effectively, however, incentives must 
induce, not sugar coat compulsion. If Congress mandates RTOs, 
at best, you turn precisely designed economic measures that 
proponents must tie to specific results into rewards for 
obeying the law. At worst, you rob incentives of their meaning. 
We must ask ourselves: Does the seller to a distress sale 
really negotiate the price?
    Companies deserve no reward for obeying the law. I wonder 
how we would design proper incentives for past or even existing 
conduct. Since ISOs must evolve into better organizations, we 
should provide the incentive only for the better organizations. 
You could solve the problem by inserting a sunset date for ISOs 
to become truly independent. Once we freeze ISOs as the 
preferred institutions, we have stopped in its tracks the 
evolution of the industry.
    I did want to comment on something that Deputy Secretary 
Glauthier said in regard to incentives and RTOs. He said--and I 
am pretty sure it was within one sentence--that we don't need 
incentives and that utilities will join RTOs on their own and 
that mandates are needed. Well, those are three different 
things, and they can't all be true, because you either need 
incentives or you need mandates or everyone joins voluntarily.
    And let us not forget how we did solve some of our Clean 
Air Act problems. The SOX and NOX credit 
showed incentives worked gracefully and wonderfully are working 
today, and I insist we rethink that in the electricity area.
    We must treat transmission as a business. Regulation treats 
transmission as politics with committees, debates, and 
compromises, and as law with complaints, litigation, and 
appeals. Treating transmission as a business means rescinding 
regulations that prevent business people from operating 
transmission as a viable enterprise. Your predecessors gave 
FERC broad authority to establish just and reasonable rates. 
The courts have given deference to our expertise. Let us use 
that tool, and let competition flourish. In short, let FERC let 
go.
    Over the last 2 years we have changed the debate from 
historical regulatory prescription and mandate to that of 
empowerment through economic persuasion. Since you are seeking 
my counsel, I will be a bit more bold than usual. I do need the 
help of Congress. I have made it clear to the members of this 
committee on the occasion I have had to speak with them that 
your intentions are not clear at the Federal Energy Regulatory 
Commission. I have invited oversight and believe this to be a 
step in the right direction. You and your predecessors have 
given us the right tools. I need you to ensure they are being 
used properly.
    Thank you, and, Mr. Chairman, I do apologize if I went a 
little longer than expected. Myself and Commissioner Bailey are 
not accustomed to being in the majority.
    [The prepared statement of Hon. Curt L. Hebert, Jr. 
follows:]
 Prepared Statement of Hon. Curt L. Hebert, Jr., Commissioner, Federal 
                      Energy Regulatory Commission
    Thank you for the opportunity to appear before you. Chairman 
Barton's invitation specifically asked my colleagues and me to address 
``whether there is a need for Federal electricity legislation, and if 
so, why . . .''. The letter also requested comment on specific 
provisions of the Barton Bill and solicited alternate language, if 
possible.
    I have publicly stated on many occasions that I will comment on the 
need for legislation only if asked. Since, Mr. Chairman, you have done 
so, I will give you my views to the full extent of my thinking, as it 
pertains to FERC. I will comment in general on certain provisions in 
the Bill and will not presume to propose alternate language, as I have 
had but a few days to read this massive Bill. I will, of course, gladly 
go into detail in response to questions.
    Does FERC need Federal electricity legislation? Not necessarily. 
For investor owned utilities, FERC has adequate existing authority to 
create a competitive market. More accurately, I should say allow a 
competitive market to form. Enough authority at the state level exists 
to allow competition to spread there and to include publicly owned 
utilities.
    The one area Congress could speak to involves the Federal power 
marketing agencies, the Bonneville Power Administration and the 
Tennessee Valley Authority. While I think it desirable to cover that 
part of the picture, I think Congress can wait until the rest of the 
country sorts out its restructuring and the affected regions, the 
Northwest, Southwest and Southeast, have an opportunity to consider the 
complex issues. The effort involves untangling the transmission from 
the generation and the financial and legal commitments these agencies 
may have made. Change also involves the matter of tax exempt financing 
and the problem of preference customers and the so-called ``fence'' 
within which bodies, such as TVA, operate.
    For the investor owned side, the economics of the industry already 
push companies into restructuring. Generation now operates as a true 
business. FERC has extended market based rates from merchant generators 
to services traditionally provided by utilities. In Order No. 888, the 
Commission declared new entry into generation will receive market based 
rates, for all practical purposes. Transmission, the highway of 
electricity, will remain regulated and will operate as a utility.
    As we saw in other industries, beginning with the airlines, a 
business and a utility use opposite approaches. A CEO of a business 
looks at value, innovation and opportunity; a CEO of a utility looks at 
cost, rate base and rate of return. In visits to my office, officials 
of integrated utilities have expressed the desire to tackle one or the 
other--looking for profits in generation or engaging in strategically 
important transmission. Witness as well some utilities, such as Duke 
Energy and the Southern Company, buying generation that others, such as 
New England Power Company and Consolidated Edison Company, sell off. As 
I wrote in an article in the Public Utilities Fortnightly last year, 
``The fruit of divestiture has ripened.''
    The next step must come from FERC. Our rate setting encourages 
utilities to sit still. We all but prohibit companies from engaging in 
the transmission business. We also keep new investors out. In allowing 
utilities to recover original cost, less depreciation on facilities 
about 30 years old, FERC says to a potential entrant, ``You cannot 
afford to buy these facilities for their value.'' It also tells 
integrated utilities, ``You won't get anything for your assets, so if 
you sell, you will be asking for shareholder opposition.'' To cure 
that, FERC must grant an acquisition adjustment that reflects the 
economic benefits transmission facilities will bring to the table. On 
the other side, policies that force sellers to return to ratepayers any 
gains from a sale negate the good in the acquisition adjustment. FERC 
and the states must allow shareholders to reap at least half the 
profits from sale of transmission.
    Higher rates of return to reflect greater risk of transmission 
would encourage restructuring for existing facilities, as would shorter 
depreciation to account for the likelihood of distributed generation 
and other technological changes that may render facilities obsolete 
before the end of their physical life.
    Most important, for the future, restructuring, competition and 
innovation come down to expansion. We have all seen statistics showing 
transmission investment has declined to a trickle (if not less). 
Primarily, a pricing scheme that requires all customers to pay for all 
facilities creates arguments. It leads to controversies. Why should I, 
an existing customer, pay for a new line, when I have all I need? On 
the other side, I, as a new customer, want everyone else to supplement 
my costs, so of course, everyone should contribute to my line!
    Business has a simple way of handling new facilities: incremental 
pricing. Arbitrary as it might seem from a theoretical point of view, 
making the new customer pay the entire cost of interconnection brings 
certainty at the least cost. Existing customers can rest assured, once 
they paid their freight, that a new customer would not saddle them with 
more. New customers will have to calculate the full cost of their 
ventures and will plan accordingly. Once they commit to a price, they 
will see the transaction through. I add here, parenthetically, that 
incremental pricing will still leave some controversy, when opposition 
to construction or upgrade stems from other considerations.
    All of this, and more, FERC can accomplish by exercising its 
authority under Section 205 of the Federal Power Act. Since the 1940's, 
the Supreme Court has held that nothing in the Act binds the Commission 
to any particular formula, as long as we balance the interests of 
consumers and utilities. Were we to do that here, we would institute 
the kinds of incentives and performance based rates that will allow a 
separate transmission business to form and thrive. A separate 
transmission business, a ``clean break,'' in the words of the Federal 
Trade Commission Staff's comments in the RTO NOPR, forms the best 
foundation for competition in generation and low prices to the 
customer.
    Other impediments to restructuring exist, some of which you 
correctly blame FERC for, even apart from rates. For example, utilities 
complain that FERC takes too long to rule on applications to dispose of 
facilities, of the type that utilities will have to file in order to 
form RTOs. Congress, in theory, can legislate an end to delay. Better 
yet, FERC itself can and should accelerate the process. I think we 
should put a provision into the Final RTO Rule that we will act on 
those applications within six months. FERC should use its existing 
discretion. Moreover, the August 4th draft would have eliminated FERC 
review of mergers. Currently, FERC's review of mergers could delay 
formation of RTOs. The August 4th draft had a good idea.
    We hear clamor in another area: reliability. The argument goes that 
competition, meaning cost cutting, will slight the long-term investment 
in reliability. Therefore, critics caution, Congress must step in. I 
disagree completely that the two considerations must pull in different 
directions. I also disagree completely that Congress must take the 
lead. Here, again, FERC has authority to act.
    Remember, in a business, the management looks at profit margins, 
not low cost. Earning a profit entails quality service; or, more 
accurately, several layers of quality service, depending on how much 
the consumer wants to pay. In any event, entrepreneurs must meet 
minimum criteria. In most instances, take electric appliances, for 
example, a close relative to the electric industry, Underwriters 
Laboratory, a private group, sets standards that companies adhere to 
without the need for one word of legislation. Why? Society makes it in 
the interest of appliance manufacturers to do so.
     We can supplement performance based rates to include reliability, 
another word for quality. When I served as a Commissioner and Chairman 
in Mississippi, we included the minimum reliability as one measure of 
performance on which the utilities earned profit. We at the FERC could 
adopt the same measure as part of rate plans under section 205 of the 
Federal Power Act. Adding reliability to performance based plans means 
quicker action than having a self-regulating organization establish 
standards with appeals to FERC because we would make the utility's 
economic interest coincide with the public interest. Here, again, FERC 
has existing authority to act.
    Furthermore, taking the regulatory approach makes meeting the goal 
more difficult. Coercion means utilities would resist, at the 
Commission and in the courts of appeals. If we compensate companies for 
their additional risk taking and bold action, we align the economic 
interest and the public interest. We would not need to discuss 
authority for FERC or legal issues of the type this hearing will 
debate. Again, as I wrote in my article, ``FERC must let [the ripe 
fruit] fall from the tree.''
    I said at the outset of this testimony that existing institutions 
can deal with municipal utilities and cooperatives. Having served in 
the Mississippi Legislature, I know that cities, counties and districts 
exist as creatures of the state. Under the Mississippi Constitution, as 
in other states, the Legislature exercises tight control over the 
affairs of political bodies within its boundaries. The Legislature must 
authorize taxes and expansion of municipalities into new areas. With 
that leverage, state legislatures can enact laws to place public 
transmission agencies on the same track as investor owned. FERC, of 
course, might think it can do it too, and, under the Barton Bill, we 
would have the jurisdiction. I think, however, that the elected 
legislatures, closer and more accountable to the people, know better 
than FERC, how to accomplish restructuring in their areas. The August 
4th draft directed the FERC to give ``maximum practicable deference'' 
to state commissions, which would be preferable to mere deference. 
After all, we all agree that low prices to the customer remains the 
paramount end. Restructuring forms but a means to that end.
    I see no need for legislating on the cooperatives. The strong 
economy and changes in the law give cooperatives incentives to pay off 
their debts to the Rural Utilities Service. If this trend continues, as 
we have seen at FERC, many will become public utilities under FERC 
regulation. If FERC enacts incentives for transmission, more will 
volunteer. In this market of deregulated generation, cooperatives and 
municipals, with their local roots, will see their niche as serving the 
people's need for transmission. I do not think that they could compete 
nationally as generators with the large investor owned companies. As I 
have said repeatedly, if FERC incents, they will come. I think the 
municipals and cooperatives will, too.
    Now I will turn what, to me, form the major features of the Bill: 
incentives and flexibility. The approach the proposed legislation takes 
holds great interest to me. From the beginning of my tenure at FERC, I 
have spoken out forcefully in favor of encouragement and incentives and 
against mandates. Even with my vision of an independent transmission 
company as the model for RTOs, I favor allowing other forms of 
organizations to exist. I would just give incentives to RTOs that 
exhibit true independence.
    I noted with approval the reports that this draft of the Bill 
rejects FERC mandates and favors incentives. When I read the draft I 
saw that, in fact, the authority for FERC to mandate RTOs fell away, 
and the Bill directs FERC to offer incentives. So far, so good.
    The fine, print, however, makes me wonder about the direction the 
Bill is heading. Section 103 requires all transmitting utilities to 
establish or join an RTO, albeit of their own design by 2003. Paragraph 
(2) establishes criteria and wisely says that independence encompasses 
separation of control, but could include passive ownership and 10% 
voting control or lower. I agree with the idea that independence 
requires separation of legal control and tolerate passive ownership and 
10% voting control. I acknowledge that 2003 extends by almost one year 
the deadline the RTO NOPR has for voluntary RTOs to begin operation.
    I pause, however. Under the draft Bill, Congress, not FERC, 
mandates RTOs. For the industry, a mandate robs initiative, whether the 
compulsion comes from a law or from an administrative rule. Moreover, 
the draft requires FERC to consider existing transmission organizations 
in certifying RTOs. This prevents progress. The most ardent advocates 
of existing ISOs concede that these organizations represent, at best, a 
step toward the ultimate goal of true independence. In short, everyone 
agrees ISOs must evolve. This Bill freezes the status quo with existing 
ISOs. As I said at the outset, I would allow ISOs to exist, though I 
find them falling short of the RTO criterion of independence. Instead, 
I would clear the way toward the goal: truly independent transmission 
companies.
    This leads to my next topic, incentives. Everyone knows I favor 
them. To work effectively, however, incentives must induce, not sugar 
coat compulsion. If Congress mandates RTOs, at best, you turn precisely 
designed economic measures that proponents must tie to specific results 
into rewards for obeying the law. At worst, you rob incentives of their 
meaning. We must ask ourselves, does the seller to a distress sale 
really negotiate the price?
    Although I support incentives as providing proper direction and 
motive, I oppose an indiscriminate application of incentives. The draft 
Bill requires incentives for existing ISOs, rewards they do not need 
and that I would deny them. I said earlier exiting ISOs fail the 
independence test. Besides that, why increase rates for past conduct 
that occurred anyway? Some of the past conduct occurred under the 
compulsion of law. Companies deserve no reward for obeying the law. I 
wonder how to design proper incentives for past conduct. As with 
grandfather provisions for existing ISOs as RTOs, giving the same 
incentives to ISOs defeats the purpose of restructuring. Since ISOs 
must evolve into better organizations, we should provide the incentive 
only for the better organizations. Once we freeze ISOs, we have stopped 
in its tracks the evolution of the industry.
    You could solve the problem by inserting a sunset date for ISOs to 
become truly independent. The draft Bill has nothing in it. If you 
wanted to enact something and chose a date (without being arbitrary), 
you should save the incentives for organizations that get to the end 
state earlier. On that score, I note that this Bill removed the date 
for retail competition, a step that I applaud.
    If I may, please let me conclude with a discussion of one more 
provision that I think illustrates the distinction between my approach 
and that of the draft Bill. I agree with the goal, I raise questions 
about the means.
    The draft Bill enmeshes the government in reliability to a greater 
extent than now, or necessary. FERC will have to certificate a 
reliability organization, hear appeals of controversies over 
reliability and establish mandatory rules. The model for this comes 
from the Securities and Exchange Commission with self-regulating stock 
exchanges. I dare say I am not an expert in stocks, but I can see 
something like that for a market in which unsophisticated and 
unsuspecting investors may lose their life savings.
    Here, however, we have a better solution. We deal with 
sophisticated businesses. This reality allows for performance based 
rates as the insurer of reliable operations. Reliability has two 
components: safety and adequate capacity. Both of these, or the lack of 
them, affect the bottom line of a business. My suggestion then is to 
create a climate in which that occurs in transmission. Specifically, 
tie profits to performance--safe performance and an adequate number of 
transactions. Give transmission companies business plans to meet. 
Favorable earnings result from good results, losses from poor 
management. Clearly, we don't need legislation to do that. FERC has the 
authority to institute performance based rates. We did it in 
Mississippi. The Public Service Commission put three criteria into the 
final plans. Two of them fall directly under the category of 
reliability, and one indirectly. Earnings depended on the number and 
duration of interruptions, customer satisfaction (using actual 
complaints) and price into which we factored sales transactions. The 
companies figured out how to set and meet reserve margins, safety 
standards and capacity goals. We aligned the private economic interest 
with the public interest. FERC can do that now. We said in the RTO NOPR 
that we would consider it. Why enmesh FERC in details that it has no 
expertise or resources to devote? Instead of engaging in proceedings 
lasting years and years debating reserve margins and capacity needs, 
FERC, every few years, would review performance plans and fine tune 
them.
    Congress should leave it up to FERC to get restructuring right. I 
think we must treat transmission as a business. Regulation treats 
transmission as politics, with committees, debates and compromises and 
as law with complaints, litigation and appeals. Treating transmission 
as a business means rescinding regulations that prevent business people 
from operating transmission as a viable enterprise. Your predecessors 
gave FERC broad authority to establish just and reasonable rates. The 
courts have given deference to our expertise. Let us use that tool and 
let competition flourish. In short, let FERC let go.
    Thank you.

    Mr. Barton. Well, I am sure you wrote it for 5 minutes, but 
you spoke it for about 12 minutes. That is just--but I listen 
at about the 12-minute speed, so that is okay.
    Last but not least, the Honorable Commissioner Massey, and 
you are recognized for such time as you may consume.

               STATEMENT OF HON. WILLIAM L. MASSEY

    Mr. Massey. Thank you, Mr. Chairman. I will try to be 
brief, because I am going to endorse in large part many 
provisions of your bill.
    It is my view that the enactment of this legislation with 
certain amendments can ensure an open, seamless, and highly 
reliable interstate transmission grid that will in turn 
facilitate vibrantly competitive power markets.
    Why should Congress act now? Simply stated, legislation is 
necessary to facilitate the removal of barriers that undercut 
the economic promise of competition. Market and grid access 
uncertainties that flow from such barriers can stifle 
investment in necessary generation and exacerbate price 
volatility. Residual market power, a patchwork of grid rules, 
or rules followed merely on a voluntary basis, can smother 
embryonic competitive markets.
    Legislation can resolve these uncertainties, and since all 
power sold at wholesale is ultimately consumed at retail, it is 
important to understand that efficient wholesale markets are a 
necessary predicate to efficient retail markets.
    Thus it is my view that H.R. 2944's provisions subjecting 
all transmitting utilities to one set of rules should be 
enacted. Provisions requiring transmission owners to join RTOs 
by a date certain, in my judgment, are in the public interest. 
However, detailed legislative standards for such institutions 
that may need to evolve over time are unnecessary.
    Provisions authorizing the private reliability standards 
organization to promulgate mandatory rules should be enacted. 
Under the legislation, the Commission would certify that 
organization and rely substantially on its expertise. The 
Commission would not develop the rules but would rely upon the 
private organization to do so. This is in the public interest.
    Market power can smother embryonic competitive markets. I 
would suggest that H.R. 2944 be amended with language from H.R. 
1828 and H.R. 2050 authorizing the Commission to examine and 
address market power in wholesale and retail markets in certain 
circumstances.
    A recent 8th Circuit Court of Appeals decision sanctions a 
state policy granting a preference for in-state uses of the 
interstate grid. It is roughly analogous to a State reserving 
the interstate highway system exclusively for vehicles licensed 
in that State. It allows discrimination against interstate 
transactions. If broadly applied, this decision could balkanize 
the grid. I recommend that Congress ensure that there is no 
discrimination against interstate users of the grid. Chairman 
Hoecker has suggested language in his testimony to fix this 
problem which I heartily endorse.
    In summary, I suggest that any legislative reforms focus on 
facilitating policy choices that will lead to large and robust 
competitive markets. Open access rules followed by all grid 
owners will help. Regional transmission organizations will 
facilitate large regional markets, and mandatory reliability 
rules will ensure that power is delivered reliably to 
consumers.
    I thank you for your attention this afternoon, and I would 
recommend the enactment of H.R. 2944 with the modifications 
noted in my testimony.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. William L. Massey follows:]
 Prepared Statement of William L. Massey, Commissioner, Federal Energy 
                         Regulatory Commission
    Mr. Chairman and Members of the Energy and Power Subcommittee: My 
name is William L. Massey. I have served as a Commissioner of the 
Federal Energy Regulatory Commission since 1993. I welcome this 
opportunity to testify with respect to H.R. 2944, the Electricity and 
Competition Act of 1999. I congratulate Chairman Barton for introducing 
this important legislation.
                            i. introduction
    At this juncture in the transition to competition initiated by the 
Energy Policy Act of 1992 and Order No. 888, Congress can take the 
steps necessary to ensure an open, seamless and highly reliable 
transmission grid that will in turn facilitate vibrantly competitive 
power markets.
    By making the entire interstate transmission grid, regardless of 
ownership, subject to open access rules, legislative reform can ensure 
nondiscriminatory access on a nationwide basis. Congress can ensure 
grid reliability by authorizing a private reliability standards 
organization that will promulgate mandatory reliability rules. By 
requiring all grid owners to form appropriately configured regional 
transmission organizations (RTOs), legislation can help mitigate 
residual vertical market power, capture for consumers the operational 
efficiencies created by grid regionalization, and promote large and 
robust power markets. By authorizing the Commission to mitigate 
horizontal market power in wholesale or retail markets that may arise 
from pockets of generation concentration, Congress can ensure that the 
price for power is determined by the forces of competition rather than 
by market manipulation.
    Why should Congress act now? Simply stated, legislation is 
necessary to facilitate the removal of barriers that undercut the 
economic promise of competition. Market and grid access uncertainties 
that flow from such barriers can stifle investment in necessary 
generation and exacerbate price volatility. Residual market power, a 
patchwork of grid rules, or rules followed merely on a voluntary basis, 
can smother embryonic competitive markets.
    Although the prospect of mandatory grid reliability rules appears 
to enjoy broad industry support, under current law there is no clear 
path to achieve this goal. Moreover, roughly one third of interstate 
grid facilities are by law not subject directly to the Commission's 
pro-competitive policies and standards prohibiting discrimination.
    In addition, existing jurisdictional uncertainties may make it 
difficult to ensure full industry participation in RTOs. Without full 
participation, the substantial pro-competitive benefits such 
institutions can facilitate will be available only on a patchwork 
basis.
    Legislation can resolve these uncertainties that now hamper efforts 
to facilitate competitive wholesale markets and ensure a reliable 
national grid. And since all power sold at wholesale is ultimately 
consumed at retail, it is important to understand that efficient 
wholesale markets are a necessary predicate to efficient retail 
markets.
                       ii. comments on h.r. 2944
    At the outset, let me generally associate myself with the testimony 
of Chairman Hoecker. He and I appear to be generally of a common mind 
on appropriate legislative reforms.
    H.R. 2944 effectively addresses most of the issues mentioned in my 
introductory comments. The issues it resolves are complex and 
challenging ones, and I commend Chairman Barton for placing this bill 
before the House of Representatives.
    Although my testimony will focus primarily on legislative reforms 
that will facilitate wholesale competition, I would like to note 
briefly for the record that I support retail competition as well. 
Although wholesale competition is beneficial for consumers in any 
event, its full promise will not be achieved in the absence of retail 
customer choice.
A. One Rule for All Transmitting Utilities (Section 102)
    This legislation extends the Commission's authority to the grid 
facilities of all transmitting utilities, including federally-owned 
utilities, electric cooperatives and municipal utilities. This 
provision will ensure the benefits of the Commission's open access 
rules to the users of these facilities. I support this important 
provision.
    Although state regulators in Texas have done a commendable job 
promoting competition within Texas, I would not further limit federal 
jurisdiction over ERCOT facilities. Accordingly, I would not recommend 
the enactment of the bill's language eliminating the Commission's 
section 211 jurisdiction over ERCOT.
B. Mandatory Reliability Rules (Section 201)
    A strong industry consensus appears to support legislation to 
facilitate mandatory reliability rules. Such rules would provide a firm 
grid foundation for competitive markets. Section 201 provides that a 
private standards organization, composed of a broad and balanced cross-
section of industry representatives and other experts, would promulgate 
mandatory rules subject to federal oversight. The North American 
Electric Reliability Council (NERC) has impressive expertise in this 
area, and it is my assumption that it will make the internal 
organizational structural changes, if any, that are necessary to 
qualify as the private standards organization envisioned by this bill.
    It is my view that enactment of this provision is essential to 
maintaining grid reliability in a competitive era.
C. Regional Transmission Organizations (Section 103)
    I strongly support this section's imperative that all transmitting 
utilities participate in RTOs, and I highly commend Chairman Barton's 
foresight in recognizing the value of such institutions and requiring 
universal participation. There is, however, little justification in my 
view for delaying mandatory RTO participation until 2003. Utilities are 
already aware that the Commission through its RTO Notice of Proposed 
Rulemaking has sent an unmistakable signal that the Commission intends 
for an RTO to form in every region of the country by December 15, 2001.
    I am confident that the Commission would promulgate rules that meet 
the legislation's goals with respect to independence, scope and 
configuration, corporate form (for-profit and not-for-profit 
institutions), operational authority and efficiency. I see no reason 
for Congress to be prescriptive about such issues, or to provide 
detailed legislative standards for institutions that may need to evolve 
over time. I would, therefore, suggest the elimination of detailed 
legislative provisions describing RTO standards and features.
    Given the legislation's mandate for RTO participation, I do not 
understand its rationale for financial incentives for utilities to form 
RTOs. The need to comply with federal law should be incentive enough, 
and joining bonuses would appear to be unnecessary. In addition, they 
are not free, and are paid for by grid users in the form of higher 
rates. I do, however, support incentives for good performance, measured 
by reliability, sound congestion management, solid plans for necessary 
grid expansion, customer satisfaction and similar standards. Well 
designed performance-based rate incentives would be good public policy.
    With regard to determining appropriate RTO scope and configuration, 
I would prefer that the legislation rely upon the Commission's 
expertise to determine and apply appropriate factors. If, however, 
factors are to be specified in legislation, I would add a provision 
allowing the Commission to apply ``any other factor that the Commission 
determines will promote competitive bulk power markets, reliability and 
efficiency.''
    Moreover, I am assuming that transmission owners must join an RTO 
of appropriate scope and configuration, as determined by the 
Commission, in order to be in compliance with the legislation. Thus, I 
do not fully understand the legislative admonition that the Commission 
shall have no authority to point the utility toward a particular RTO. 
Absent circumstances I cannot envision, if a utility proposes to 
participate in an RTO in an inappropriate region (e.g., geographically 
separate from its operations), the Commission should have the authority 
to require participation in an appropriate RTO region. I would suggest 
that the legislation be clarified in this respect.
D. Mergers and Market Power Issues (Section 401)
    The amendments to the Commission's authority to review mergers of 
generation facilities and holding companies are excellent and should be 
enacted.
    For the bulk of mergers that raise no serious market power 
concerns, the specified deadlines for Commission action would be 
reasonable. Indeed, the Commission has moved expediently on mergers 
since issuance of our 1996 Merger Policy Statement. For mergers that do 
appear to raise market power concerns, however, a hearing before an 
administrative law judge is sometimes required to resolve factual 
issues. For such cases, I do not believe that legislative deadlines are 
appropriate. The Commission is always under pressure to move merger 
cases through the process as quickly as possible, consistent with 
thorough review. In such cases, a tight statutory deadline may lead to 
an ill-considered and hasty approval of an anti-competitive merger, or 
the unreasonable rejection of a merger that might otherwise be 
reasonably approved after more thorough review.
    Like Chairman Hoecker, I note favorably that both H.R. 1828 and 
H.R. 2050 would authorize the Commission to examine and address market 
power in both wholesale and retail markets under certain circumstances. 
Retail markets will be regional markets that do not respect state 
boundaries, and it may be difficult for some states to evaluate retail 
market power in regional markets without federal assistance. Thus, 
these are important provisions. For robust competitive markets to 
develop and thrive, any residual market power should be recognized and 
appropriately mitigated.
E. Discrimination Against Interstate Transactions
    Imagine you are driving around I-495, the Washington beltway, and a 
severe constraint develops due to a traffic accident. Let's assume that 
the State of Virginia has a policy that favors Virginia motorists. 
Virginia troopers require all vehicles without Virginia tags to exit 
immediately so that only Virginia-licensed drivers can travel on the 
beltway. Maryland applies the same discriminatory policy on the beltway 
to favor Maryland-licensed motorists. This would impede commerce and 
would be completely chaotic and unacceptable on interstate highways.
    Unfortunately, a recent decision of the 8th Circuit Court of 
Appeals, Northern States Power Co., et al. v. FERC, sanctions this same 
discriminatory scenario on the interstate electron highway. The court 
sanctions a preference for in-state uses of the interstate grid. During 
a constraint, wholesale transactions can be cut so that the local 
utility can favor its own in-state customers.
    Power markets are regional, and do not respect state boundaries. A 
state-by-state balkanization of the interstate grid would be chaotic 
and unworkable, just like the hypothetical scenario on the beltway.
    Congress should clarify the Federal Power Act to guarantee that all 
grid users are subject to the same rules, and cannot be bumped off the 
interstate electron highway by an in-state preference. Chairman Hoecker 
has suggested clarifying legislative language, which I heartily 
endorse, in his written testimony.
F. Miscellaneous Issues
    Let me in closing comment briefly on three other issues addressed 
by H.R. 2944:

 I agree with the thrust of the provisions promoting renewably 
        energy, and would endorse virtually any approach that does not 
        distort the competitive marketplace. A portfolio approach is 
        also a reasonable concept.
 I agree with H.R. 2944 that PUHCA should be repealed, while 
        strengthening the ``books and records'' authorities of FERC and 
        state regulators.
 Regional approaches for the siting of transmission wires are 
        an excellent idea, and appear to track the bill's mandate for 
        regional transmission operations.
                            iii. conclusion
    I appreciate this opportunity to comment on H.R. 2944, and will be 
pleased to answer any questions.

    Mr. Barton. Thank you, Commissioner. I am glad we saved you 
for last. That is a good way to end the FERC testimony, because 
I agree with you--we ought to enact H.R. 2944 with 
modifications, as long as I agree with the modifications.
    We are going to recognize Mr. Burr of North Carolina first, 
because he has a pending engagement at 2:30, for 5 minutes for 
questions.
    Mr. Burr. Thank you, Mr. Chairman, and it is with our 
Governor as it relates to the disaster in North Carolina, so I 
appreciate the chairman's indulgence.
    I wish I could say that this panel is different than any 
that we have had before on electricity deregulation, but it is 
not. There are differing opinions, differing views, and the 
reality is that we can't all be right. Somebody is right, 
somebody is wrong, and it is somewhere in between or maybe that 
is where the process is supposed to send us.
    Commissioner Bailey, let me ask you, your supportive of the 
240-day merger language. Let me ask you, if we were to modify 
the bill to say at the end of 240 days the lack of any FERC 
decision then automatically approved the merger, would you 
still be supportive of that language?
    Ms. Bailey. The lack of a decision by FERC would 
automatically accrue----
    Mr. Burr. Approve.
    Ms. Bailey. Approve.
    Mr. Burr. Because the current language says at the end of 
240 days if FERC has done nothing, the merger is denied. How 
about if we say the merger is approved?
    Ms. Bailey. Well, I think either case is a little difficult 
to agree with. I wouldn't dispense with the role as far as FERC 
is concerned in our merger analysis. My issue is just that it 
takes entirely too long, whether the issue--whether the merger 
is approved or disapproved.
    To actually say--I have never said that I was in favor of 
such a decisionmaking process where anything would be 
automatic. I think that is very difficult to do with these 
kinds of cases. So, I guess I would say I would probably not be 
in favor of such a remedy other than to say that I think 
whatever duration this Congress would put on FERC, I think they 
would be willing to follow and willing to do, and the resulting 
decision will be what it will be.
    Mr. Burr. Let me ask Commissioner Bailey, because I think 
you asked specifically that there be flexibility at the end of 
that 240 days for the tough cases--excuse me, I am sorry, 
Breathitt. I apologize, Commissioner. Let me ask you, how many 
mergers has FERC approved in 240 days?
    Ms. Breathitt. At the last Commission meeting, Commissioner 
Massey actually announced the tally. We have had 30 mergers--
isn't it, Bill--since we have--in the last--well, since we have 
had----
    Mr. Massey. For mergers that have been filed since the 1996 
merger policy statement, 22 out of 25 have been processed 
within roughly 150 days. The 3 that were not processed within 
150 days were set for hearing and have taken longer than that. 
But that is 88 percent that have been processed within 150 
days.
    Ms. Breathitt. So, the few that, since I have been at the 
Commission, which is 2 years, we have only set several for 
hearing, and those are the instances that I said in my 
testimony, I would ask the committee to amend their language to 
give us that extra time that we would need for those mergers 
that we felt presented specific facts, material facts that 
required extra time for us to consider.
    Mr. Burr. So, with the exception of Commissioner Hebert, 
240 days to make a decision is acceptable to you.
    Ms. Breathitt. Yes, I think that is doable.
    Mr. Burr. I would tell you that the financial markets work 
on a much smaller timeframe, and that it is the 
unpredictableness of 240 days which goes to the heart of what 
you said one of the objectives that FERC oversight should be to 
stimulate the development and use of technology. If I 
understood you correctly, Commissioner Bailey, you said that 
oversight was needed to stimulate the development and use of 
technology. Am I correct?
    Ms. Bailey. I made reference to technology from the 
standpoint of trying to hold back from locking in a 1999 
vintage vision because of technological and other advances.
    Mr. Burr. Let me just ask all of you to comment, and that 
will be my last question, Mr. Chairman. How does current FERC 
oversight stimulate the development of and the use of 
technology in the marketplace?
    Mr. Hoecker. Well, Congressman, I would offer this answer. 
I think that competition will stimulate technology. I think 
competition is what we are all after, and I think, to the 
extent that distributed generation or fuel cell technology, 
microturbines, or other kinds of gas-based technologies for 
electric generation want to come into the market, they need to 
be supplied with markets.
    How do they get to those markets? They get there through 
open access transmission, and without that, without access to 
markets, those technologies are not going to be as economically 
supportable----
    Mr. Burr. So, in an open marketplace, in retail 
competition, that does not stimulate the use of new technology? 
Only FERC can stimulate the use of new technology? Only FERC 
oversight?
    Mr. Hoecker. No, I don't think that is what I said. I said 
our goal was promoting competition. It is competition. It is 
the market. And I think you and I agree on this, that it is the 
market that will stimulate technological developments.
    Mr. Burr. And the last comment, Mr. Chairman. Everybody has 
mentioned reliability, and I think that that is at the heart of 
every member of this committee. I would ask you, is there a 
greater degree of reliability with more competition or less 
competition?
    Mr. Hoecker. Congressman, my answer would be competition 
means a greater degree, and we have had that experience on the 
gas side with open access to gas, interstate gas 
transportation. We have a much higher level of reliability, and 
I expect similar developments on the electric side, as well.
    Mr. Barton. Gentleman's time has expired.
    The gentleman from Texas, Mr. Hall, is recognized for 5 
minutes.
    Mr. Hall. Thank you, Mr. Chairman.
    Chairman Massey, I agree with you in saying that you have 
support for this bill with several amendments, and there is 
little I could add in the paper. I watch the ads in the paper 
for cars that are for sale, particularly antique cars, but I am 
always concerned when they say, ``1958 Buick, restorable.''
    Mr. Massey. I am too, Mr. Hall.
    Mr. Hall. We can restore it if they give us enough money 
and a good enough body, right?
    Mr. Massey. Right.
    Mr. Hall. And the chairman's been generous with his time on 
that. So, let me--Mr. Chairman, you note in your testimony 
about transmission pricing incentives; that the Commission has 
asked for comments on the RTO rulemaking on incentives, and 
starting with you, Mr. Chairman, give me just a snapshot view 
of where you are in your thinking on this issue.
    Mr. Hoecker. Our proposal in the RTO rulemaking is to 
explore various kinds of incentives that will stimulate more 
efficient economic behavior by utility transmission owners in 
the context of RTOs. We mention performance-based rates, 
congestion pricing, various kinds of things like risk-adjusted 
rates of returns, things that would encourage better use of 
transmission and make utilities more willing to access the 
capital markets to expand the grid where necessary and so 
forth.
    We are in the process of analyzing our comments now, and I 
expect to have a protracted conversation with my colleagues 
about where we go from here on that issue, but it is an 
important one.
    Mr. Hall. Ms. Bailey, on pages 8 and 9 of your testimony, 
you seem to disagree with the chairman on the need for a 
deadline of the utilities to join an RTO, and you say you 
believe utilities need the time and flexibility to innovate. If 
you have a different vision, and apparently you do, from the 
chairman, of what a restructured bulk power market should look 
like or just a different way of getting there, which is it? Or 
is it both?
    Ms. Bailey. My disagreement with the chairman may be just 
in how to get there. I agree with him wholeheartedly as to the 
efforts that this Commission has put forward to move toward a 
competitive bulk power market. To the extent that you have 
mentioned the mandate issue, I just believe that there is the 
ability to have more flexibility and innovation as a result of 
technology and ideas, how that might advance things as opposed 
to being prescriptive and making a generic timeframe.
    Mr. Hall. Mr. Hebert, do you want to add to that or you 
have any different view? I would be surprised if you didn't.
    Mr. Hebert. Congressman Hall, I do, and I appreciate you 
giving me the opportunity to answer it.
    I think it is ultimately important that we provide 
incentives, whether it be accelerated depreciation, increased 
rates of return based on risk, acquisition adjustment, or other 
incentives, quite frankly, that we haven't even thought of at 
this point. And it does go back to Congressman Burr's question 
to a certain degree, too, because he was asking about 
technology and how do we provide for technological advances?
    Well, we do that through competition, but he had a very 
good question in asking whether or not FERC can provide it. 
Well, no, sir; FERC cannot provide it. Competition can provide 
it. I know someone earlier was looking for a definition of 
competition, which is where supply and demand can meet, but 
when they start to meet that is exactly when you get the 
investment necessary to try create technological advances much 
like we have seen after the Green decision in 
telecommunications. But FERC has to take the initiative and 
provide the economic incentive to do so.
    Mr. Hall. You used the, I think, your view of separate 
transmission business on page 4 of your testimony, and when you 
use the FTC's word, quote a ``clean break,'' unquote, do you 
mean the total separation of transmission from generation, 
including ownership and control?
    Mr. Hebert. Yes, sir; that is what it means.
    Mr. Hall. Full go.
    Mr. Hebert. Absolutely. That would make it truly 
independent.
    Mr. Hall. And on page 5, is it your view that FERC should 
no longer review mergers?
    Mr. Hebert. Yes, sir; it is.
    Mr. Hall. Time limitation on FERC mergers--I think the 
gentleman from North Carolina got into that--resolve any of 
your concerns?
    Mr. Hebert. It does in the sense that I think it is better 
than what we currently have, although I will have to step back 
one moment and commend the Chair and the Commission for doing a 
good job here in the recent past on mergers.
    My point is this though: Utilities are not exempt. They 
have no immunity from antitrust laws, and I have yet to be 
convinced by anyone that there is anything in market power 
concerns that they can't be taken care of otherwise, through 
the DOJ or the FTC, or under the Public Utility Holding Company 
Act and the SEC. So, my point is, why duplicate this service if 
indeed it is not necessary? We are not an antitrust agency, but 
we do have some in the United States.
    Mr. Hall. I think my time is up or I would ask the chairman 
if he would like to answer that.
    Mr. Chairman, would you like to make comment on Mr. 
Hebert's----
    Mr. Hoecker. Well, I of course appreciate----
    Mr. Hall. I thought he was pretty generous in acknowledging 
that in some things you had done a good job.
    Mr. Hoecker. Well, I think that is one for our side, but I 
am----
    Mr. Hall. It still 3 to 2, isn't it?
    Go ahead.
    Mr. Hoecker. That is the story, isn't it?
    I am very anxious that this Commission continue to process 
merger applications responsibly and quickly to the maximum 
extent we can. We have lived up to our promise to the public in 
our policy statement 3 years ago, but I do think that whereas 
the antitrust agencies look periodically at the electricity 
market, the bulk power markets, and the consequences of mergers 
for competition, we do it systematically.
    We are experts in that area. We understand how those 
industries and those companies work, and we think we are much 
more capable of conditioning mergers in a way that will allow 
them to go forward with some fine-tuning rather than the kind 
of more dramatic antitrust type solutions that you get from 
antitrust agencies.
    And I would add that I take exception to Commissioner 
Hebert's characterization. It is very clear in our case law 
that we are responsible for looking after antitrust type 
concerns in the context of our regulation.
    Mr. Hall. Thank you, Mr. Chairman.
    Mr. Barton. Thank you.
    The gentleman from Florida, Mr. Bilirakis, is recognized 
for 5 minutes.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    I wasn't here for an opening statement, and I would just 
merely add to all of the others that may have been commending 
and congratulating the chairman to the effect that he has been 
just about as fair as anybody could possibly be up here and 
always open-minded and listen to all of us. There are some 
areas that have not been satisfactorily as far as some of us 
are concerned, but it hasn't been because he had closed mind to 
those ideas.
    One of the areas that greatly concerns me, and I am just 
not clear on, is section 102, the open access for all 
transmitting utilities. It seems that under those provisions 
FERC will be able to order electricity be delivered to retail 
customers even if a State has not elected to have retail 
competition.
    We worked awfully hard on the date certain idea and we 
thought we had that issue resolved, and then this language pops 
up. So, I guess I would ask all of you your opinion. Should I, 
from my view point or from the view point of those who are 
concerned, been concerned about the date certain concept and 
open access? Should I be concerned? Do you feel that that 
provision gives FERC the authority, to order retail competition 
in closed States? Mr. Chairman?
    Mr. Hoecker. Congressman Bilirakis, I don't think that that 
provision is designed to do that. I view 102 as an endorsement 
of the Commission's initiative in Order 888, which requires 
open access to bulk power facilities, i.e., high voltage 
transmission. Sometimes high voltage transmission is delivered 
directly off the grid to what would arguably be a retail-type 
customer. Order 888 is very clear that we would presume a 
distribution function in those instances so that States would 
maintain jurisdiction and be able to do such things as recover 
retail transition costs.
    So, I think that it is clear, and it is certainly our 
intention, and it is the way I read the bill, that we leave 
regulation of the distribution function and access to the 
retail markets to the States.
    Mr. Bilirakis. Well, but subparagraph 2, notwithstanding 
paragraph 1, ``The Commission may issue an order that requires 
the transmission of electric energy directly or indirectly to 
retail electric consumers who are served by local distribution 
facilities that are subject to open access.'' And I will admit 
I am not quite clear on those last three or four words. I mean, 
it seems to be pretty direct.
    Mr. Hoecker. If the transaction is going directly to a 
retail customer, we can ensure that the transmission is 
available to complete that transaction.
    Mr. Barton. Would the chairman yield?
    Mr. Hoecker. Yes, sir.
    Mr. Barton. If Mr. Largent can answer a question for the 
Deputy Secretary, I think I can answer a question for the 
Chairman of the FERC Commission. The key phrase there is 
``subject to open access.'' So, in a closed State, you are not 
subject to open access, and that is the key phrase. So, to pick 
a State out of the air--Florida--which is not subject to open 
access at the State level, FERC would not have jurisdiction, if 
that eases the gentleman's mind.
    Mr. Bilirakis. Well, it would ease it I think if we took 
another look at the language and change it in such a way so 
that this concern is addressed.
    And if FERC orders the utility to expand its transmission 
capabilities, who should pay for that expansion, Mr. Chairman?
    Mr. Hoecker. Well, that is a good question.
    Mr. Bilirakis. I gather the previous one was not.
    Mr. Hoecker. Your questions just keep getting better.
    The bill provides for authority for the Commission to order 
expansions subject to State siting authority. I believe I said 
in my written testimony we didn't believe, or I didn't believe, 
that that was necessary for us to have. But if the grid is 
expanded, usually the ratepayers or the wholesale customers in 
the locale of--in the service territory of--the utility that is 
either expanding or in whose territory the expansion occurs 
will pick up the tab, which is a problem if the expansion is 
made for the benefit of ratepayers in another jurisdiction or 
another service territory.
    So, you raise a very, very difficult question. And it is 
one reason why we think that regional institutions, like RTOs, 
where utilities can work these kinds of problems out and 
allocate those costs on an equitable basis is very important.
    Mr. Bilirakis. Well, I guess my time is up. It amazing that 
5 minutes went that quickly, but that is what it is.
    All right. Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Chairman Bilirakis.
    Recognize the gentleman from Ohio, Mr. Sawyer.
    Mr. Sawyer. Thank you, Mr. Chairman.
    I am struck by the last comment in light of the final 
question that I asked before we broke for lunch. I remember the 
Deputy Secretary, when I asked him about siting decisions, 
suggesting that we could get all the States together and they 
could sort of work it out. That was my reaction too. I was 
tempted to ask him if that would work sort of like the multi-
State, low-level, nuclear waste compact, but I didn't have the 
heart to do it.
    How do you envision resolving precisely the kind of siting 
difficulties that clearly are a part of this business? You have 
authority in terms of natural gas; that is difficult enough. Do 
you see the need for similar kinds of authority with regard to 
electric transmission?
    Mr. Hoecker. Well, I believe the Secretary's response was 
that there wasn't a history of Federal siting authority on the 
electric side, and I think that one could certainly make an 
argument that in a competitive market, where the interstate 
traffic and electrons are so much more important than they used 
to be, that some regional or Federal authority to site 
transmission might be very helpful.
    Rather than recommend that, however, I have put my eggs in 
the RTO basket or in some equivalent regional organization or 
compact that will be able to bring together the people with the 
most identifiable and likely common needs in a region in terms 
of getting to loads, getting generation to market, and let them 
decide what the appropriate expansion of the system is.
    Mr. Sawyer. Are there other comments from other 
commissioners?
    Ms. Breathitt. I will add from my prior experience as a 
State commissioner that siting is held near and dear to the 
hearts of State commissions. If we did it at FERC, it would 
require changing the Federal Power Act, and I agree with the 
chairman that I am not advocating doing that.
    You will probably hear from the next panel, from NARUC, how 
they feel about siting, and I know that some have called for a 
comparable siting authority with respect to electricity that we 
have in gas, but I think regional consultation with RTOs, with 
State commissions in the region where the power lines may need 
to go through, could be an answer to facilitate expansion.
    Mr. Sawyer. Let me ask another question. When we talk--the 
chairman used the term expansion with the service territory of 
the utility making the expansion. In a competitive environment 
what do we mean by ``service territory?''
    Mr. Hoecker. That is a good question--I am sorry. In a 
classic sense, of course, a service territory is----
    Mr. Sawyer. I know what it was. I am trying to figure out 
what it is going to be and how some of these old structures 
that worked well in a rate of return, obligation to serve 
environment will work in a competitive market.
    Mr. Hoecker. There will continue to be utilities who are 
load-serving entities who have distribution and are obligated 
by State or local law to serve all the customers in that area.
    Mr. Sawyer. So, you are talking about a distribution 
definition.
    Mr. Hoecker. Right. At the bulk power level, you are 
absolutely right. You have merchant generators who can sell 
anywhere in the marketplace under whatever contracts they can 
get, and that does tend to change the concept of a service 
territory.
    Mr. Sawyer. Let me ask one more question. Well, I will tell 
you what, I will wait for a second round. We are starting to--
--
    Mr. Bilirakis [presiding]. I don't know whether there is 
going to be a second round or not; it is up to the chairman. 
So, without objection, you are recognized for an additional 
minute.
    Mr. Sawyer. We have talked a great deal about the formation 
of RTOs and the mandate that appears to depart from the where 
the NOPR was heading. I am concerned about once formed are they 
presumed to serve a useful purpose in the same configuration 
for all time or are there--do you anticipate vehicles for 
shifting the design, and if that is the case, why not allow a 
much more voluntary formation than the one that I have heard 
several people talk about here today? How do you envision that 
changing?
    Mr. Massey. Well, my view is we need to get them up and 
going in every region of the country, and our policy provides 
that they should not build in any features that would prohibit 
their evolution over time. They may very well evolve. They may 
change shape; they may get larger; they may move from an ISO 
structure to a transco structure, and it is the Commission's 
official policy that the RTO itself not build into its 
structure any features that would inhibit its evolution to a 
more efficient structure over time.
    Mr. Bilirakis. Very, very briefly, please, Tom.
    Mr. Sawyer. I will pause, thank you.
    Mr. Bilirakis. All right, good. Thank you.
    Mr. Rogan.
    Mr. Rogan. Mr. Chairman, I do have a couple of questions, 
but I am pleased to yield to my friend from Ohio for a follow-
up.
    Mr. Sawyer. I appreciate the gentleman's generosity, but I 
wanted to pose a question. I don't think we are going to get a 
much more involved answer at this point, but I think it is a 
question that deserves an answer as we move in building 
consensus legislation. So, I thank the gentleman.
    Mr. Rogan. Thank you, Mr. Chairman, and, Mr. Chairman, I 
also echo your comments earlier and wish to associate myself 
with them in commending Chairman Barton for the yeoman's work 
that he has put into this particular effort. I welcome all of 
the witnesses.
    I would like to get the opinion of each of the 
commissioners as to how we should--or how you anticipate FERC 
would deal with transmission over non-interstate commerce 
lines; in other words, non-contiguous States? Maybe I can just 
start at the end.
    Ms. Bailey. When you say non-contiguous, how FERC would 
deal with transmission?
    Mr. Rogan. Yes.
    Ms. Bailey. That is the crux of our open access; our Order 
888 is open access. I am not quite sure where your question 
is----
    Mr. Rogan. Well, I am really asking, under the terms of 
this bill, if this bill were to become law, how would FERC, in 
your opinion, deal with regulating transmission that would be 
not over interstate commerce, traditional interstate commerce?
    Ms. Bailey. To the extent you are talking about PMAs or 
TVA, BPA, those kinds of entities----
    Mr. Rogan. Yes.
    Ms. Bailey. [continuing] that we have not--okay. I 
previously probably have not taken a stand myself on that 
position, but to the extent that we are trying to move toward 
what you would call superhighway in electricity, I think there 
I would have to say, yes, they need to be brought into the 
fold.
    So, to the extent that I am sure you have probably already 
been in discussions, and this bill is probably a consensus, and 
these entities are aware, I am supportive of what you have in 
there. So, I think to the extent that we want to avoid the 
swiss cheese factor and the patchwork of access, I think it is 
key that we probably move in this direction.
    Ms. Breathitt. I had mentioned earlier that a lot of the 
non-jurisdictional entities, such as the Federal PMAs and 
coops, that transmit electricity have filed reciprocity, open 
access tariffs with us, but I agree with my colleague, 
Commissioner Bailey, that to have what we call, when we talk 
about a seamless grid, that 30 percent of the--roughly the 30 
percent of transmission that is not included in our tariffs 
eventually should be and probably sooner rather than later.
    Mr. Rogan. Mr. Chairman?
    Mr. Hoecker. Congressman, I think my colleagues have hit 
the nail on the head. The nubs of it, I think, are that it is 
hard to imagine transmission that isn't in interstate commerce. 
There is a lot of transmission that isn't jurisdictional to the 
FERC for legal reasons, but almost all of it is part of an 
integrated grid over which electrons flow in and out of States, 
in and out of power marketing agencies, in and out of municipal 
systems, and what we are suggesting is that we provide a 
uniform standard of comparable service and access to all that 
transmission, and without exception, and that is the way we 
will get to a workable market.
    Mr. Rogan. Thank you.
    Mr. Hebert. Thank you, Congressman Rogan. When I take the 
approach looking at BPA and TVA, I take a little different 
thought process and try to come up with a business solution, 
and it is my thought that we can resolve it without having 
additional jurisdiction coming to FERC, and that would be to 
get them to sell of their transmission assets to a 
jurisdictional utility, and therefore we would--it would 
accomplish the same end but through a different means. So, that 
would be my preference, and I have made that clear.
    I know you, as a former State legislator, understand when 
it comes to munis that you have got other tax issues of local 
and State concern that come up.
    Mr. Rogan. Thank you.
    Mr. Massey. My thinking, Congressman, is that they would be 
just like the interstate grid, interstate transmission, and 
would be subject to the provisions of Order 888, which requires 
open access service, unless the Congress specifies a different 
way for us to regulate those systems.
    The idea is creating the largest markets possible all 
across the country, and that is a function regulators of 
interstate commerce, which is what we are, can facilitate. A 
State can open its borders to competition, but it is very hard 
for that single State to ensure grid access in the surrounding 
States. Only federal regulators can do that and eliminate any 
swiss cheese effects.
    Mr. Rogan. Mr. Chairman, thank you. I yield back.
    Mr. Barton I thank the gentleman from California.
    We recognize the gentlelady from Missouri for 5 minutes for 
questions.
    Ms. McCarthy. Thank you very much, Mr. Chairman.
    I wanted to ask some clarification on how the regional 
transmission organizations that utilities join work with the 
transmission agencies that States join. Are they the same? 
Because if a utility regional--utilities join a former regional 
transmission organization, is it States that have to belong to 
that? I am a little confused.
    My only other experience with interstate compacts was with 
the idea that Congress had at one point in time that if the 
States decided where to send the level nuclear waste, that 
would be the best solution, and it didn't work. So, could one 
of you clarify for me from the bill how these would work, these 
regional transmission siting agencies that States join, and 
then the regional transmission organizations that the utilities 
join?
    Mr. Hoecker. Regional transmission organizations are 
either----
    Ms. McCarthy. Well, let me make it clear. What if Missouri 
joins with New York, and that becomes our regional transmission 
siting agency, but our utilities in our two States don't join 
with those parties. The New York utilities join with 
Connecticut, and the Missouri utilities join with Texas? Well, 
who is talking to whom, and how does this all work?
    Mr. Hoecker. Okay. Our proposed rule would have contiguous 
utilities joining together in a regional transmitting grid.
    Ms. McCarthy. Oh, so you are going to do this by rule.
    Mr. Hoecker. Well, we are proposing to urge utilities to do 
it voluntarily, but we have set some baseline criteria for how 
these organizations ought to work and when they should begin to 
form.
    Ms. McCarthy. So, why do we need two different ones then, 
if you are going to tell the utilities to join in these 
contiguous States an the States to join in these contiguous 
States? Are we not--are we really opening competition? I guess 
that is where I am coming to.
    Mr. Hoecker. That is a good question. There are I think 
four or five States now--Wisconsin, maybe Illinois, a couple of 
other States--that have actually told their utilities to join a 
FERC-authorized regional transmission organization. 
Transmission is regulated at the Federal level. What we are 
trying to do is to create a broad market at the bulk power 
level, which is basically high-voltage transmission and energy 
sales and purchases between utility companies. And that will 
create access at the wholesale level that will facilitate what 
the States do at the retail level.
    Ms. McCarthy. Is it fair to presume that you, in a sense, 
will control competition, then, by the way you design these 
things?
    Mr. Hoecker. Well, we are asking the utilities to design 
it. We are finding in many States, including California, and 
the States within PJM and NEPOOL, which have now got an RTO, 
that State regulators have been very influential in how these 
organizations are governed, what their policies are, how the 
wholesale transmission entity interacts with competition at the 
retail level.
    So, this is really an opportunity, as I view it, for 
regions and for States to put their imprint on the bulk power 
market in a way that they can't now. They can engage in--help 
engage in regional planning activities for expansion of the 
transmission grid that we were talking about earlier, enhancing 
reliability measures, ensuring that----
    Ms. McCarthy. So, let me ask a question. So, my Missouri 
utilities will, based on your rule, likely join with other 
utilities right in the Midwest region. You are going to----
    Mr. Hoecker. In some logical, economic, and physical 
marketplace, yes.
    Ms. McCarthy. So, you will control that competition there--
--
    Mr. Hoecker. I don't think----
    Ms. McCarthy. [continuing] and that will----
    Mr. Hoecker. I am sorry. I didn't mean to interrupt.
    Ms. McCarthy. But what if they wanted to join with Texas or 
somebody else? I mean, that is not contiguous nor logically in 
the region, but it might make good economic sense.
    Mr. Hoecker. Well, it would have to be a contiguous 
marketplace.
    Ms. McCarthy. I am sorry?
    Mr. Hoecker. One of the propositions in our proposed rule--
and of course we are still taking comment on this and 
evaluating that--is a regional scope and configuration that for 
an RTO to operate appropriately and to be acceptable, it should 
replicate in some sense a historical, physical, and commercial 
marketplace that already exists--utilities that do transactions 
with each other. If Missouri finds itself in a position of 
sharing a common interest in terms of utility commerce with 
Texas, it need only make that argument to us, and we will 
decide whether in fact that is the case.
    Ms. McCarthy. Yes, and that is my point--you will control 
competition. I happen to think, though, by the way, with 
Missouri being a low-cost State, that just staying in the 
Midwest and making sure we all work together, which seems to be 
working well now, will continue. It ain't broke out there. We 
don't need to fix it. But I am just wondering who is in charge 
here.
    And, Mr. Chairman, thank you for indulging me with these 
questions.
    Mr. Barton. Thank you, Chairwoman--I mean, Congresswoman.
    Mr. Pickering is recognized for 5 minutes.
    Mr. Pickering. Thank you, Mr. Chairman.
    Let me ask just a quick question of each of you first to 
put things in context, and I am just going to ask a question, 
do you support or oppose an incentive-based RTO approach or a 
mandatory RTO approach? And, so if we could start with 
Commissioner Bailey, do you support mandatory RTO or an 
incentive-based approach?
    Ms. Bailey. Incentive-based, to use your words, incentive-
based.
    Mr. Pickering. Ms. Breathitt--if that is the correct way to 
pronounce it?
    Ms. Breathitt. My opening statement reflected that I think 
a voluntary approach is the best course to be on at this time.
    Mr. Pickering. Chairman?
    Mr. Hoecker. I believe in supporting incentives in the 
right context. If your question is should incentives be the 
only mechanism for creating these institutions, I would have to 
say no.
    Mr. Pickering. So, you would support a combination of a 
mandatory stick at the end as well as incentive-based approach.
    Mr. Hoecker. Well, even voluntary. I think that a lot of 
utilities find competition to be in their interest.
    Mr. Pickering. So, you--are you saying that there is a way 
to structure a voluntary, incentive-based approach without a 
mandatory approach?
    Mr. Hoecker. Well, that is what we have proposed. I don't 
know if I would call it incentive-based entirely, but there are 
certainly incentives that we are going to seriously consider.
    Mr. Pickering. Commissioner Hebert?
    Mr. Hebert. Incentive-based or voluntary. I am not sure if 
you are using those synonymously. I know Commissioner Breathitt 
had said voluntary. So, I guess to specific I would say 
incentive-based.
    Mr. Pickering. Commissioner Massey?
    Mr. Massey. I support incentives for good performance once 
the RTOs are formed. Performance-based rate incentives sound 
like a good idea to me. The customers get good performance that 
way.
    With respect to joining bonuses, I am not in favor of 
joining bonuses. I do believe----
    Mr. Pickering. How would you define a joining bonus?
    Mr. Massey. I would define it as giving some sort of a 
financial sweetener to a utility to entice them to join an RTO. 
My concern is that someone has to pay for those, and it is the 
customers of the utility through higher rates, and if we can 
achieve the formation of RTOs without increasing rates in that 
way, that would be my preference. But once they are formed, I 
do believe that we should find ways, through performance-based 
rates, to incent good performance.
    Mr. Pickering. Let me clarify in one additional way. If you 
don't believe in bonuses, do you believe in sanctions or 
penalties if they don't form RTOs or mandates to force 
formation of an RTO of a specific size or specific criteria?
    Mr. Massey. I would like to see RTOs form in every region 
of the country, and----
    Mr. Pickering. Does that mean FERC should have the 
authority to mandate that?
    Mr. Massey. Well, the Commission has market-based rate 
authority, for example, which might be----
    Mr. Pickering. So, just a clean, clear answer yes or no. Do 
you support a FERC authority to mandate RTOs?
    Mr. Massey. Yes, I do.
    Mr. Pickering. Okay. So, 4 to 1, is that correct? Incentive 
voluntary approach versus a mandated approach?
    Mr. Hoecker. Well, let me clear about this.
    Mr. Pickering. Maybe 3 to 2.
    Mr. Hoecker. I think we are going to explore with the 
industry ways to get our desired goals through a voluntary 
approach, but that the Commission may find it necessary in some 
instances in the future to explore other kinds of approaches.
    If, for example, Congressman, all the utilities in your 
part of the country were to join an RTO and began to enjoy the 
benefits of that regional marketplace, but one or two utilities 
with key transmission facilities refused to join or refused to 
fill in the blank spots, the Commission is confronted with a 
tough policy choice there.
    Mr. Pickering. Okay. Let me now go into the details or the 
substantive if you were to take an incentive-based approach. 
Now, the chairman, Chairman Barton, has included some 
incentives that were included in a bill by Mr. Sawyer that 
would give incentives to form the RTOs or the transmission 
organizations. Do you support those provisions, and what in 
addition should be included in legislation to give the greatest 
opportunity for a voluntary, incentive-based approach to work?
    Let me start, first, with Commissioner Hebert, and then, 
Chairman, if you want to add anything and anybody else on the 
panel.
    Mr. Hebert. Thank you, Congressman Pickering. I have 
supported incentives, as you know, and I have had a 
conversation, as well, with Congressman Sawyer, and he knows 
that I do support that and think that is exactly the direction 
that this Commission should move in.
    If we do it voluntarily, not only do we save ourself the 
time in not having to get out and mandate these, we also save 
our time, because through the incentive process, you are not 
going to have the lawsuits that you would otherwise have 
through trying to force, such as you have right now with 888 
and northern States. It is the better route to take. It is an 
easier route to take, and with everything being as unclear as 
it is right now, I see no reason to go in that direction.
    But the exact incentives that you are looking for would be 
something in the neighborhood of accelerated depreciation, an 
increased return on equity based on risk, an acquisition 
adjustment. Because in the end, when you are looking at the 
acquisition of those assets, there are two things that have to 
be answered. The selling company wants to know how much of it 
can they keep? In other words, the stockholders want to know 
how much of it can they keep? My suggestion is that you allow 
them to keep half of it; the other half would go to the 
ratepayers. When it comes to the other side, the acquiring 
company wants to know what type returns they are going to be 
able to make, and you need to also answer what the valuation 
will be based on when it comes to their rate of return.
    Mr. Pickering. Chairman?
    Mr. Hoecker. I believe 202(h) is the provision you are 
looking at, and I find the list of potential incentive 
transmission pricing policies listed there to be pretty 
attractive, and we are going to be sorting through those and 
figuring out how we can make that or something similar work.
    I would say, however, that the provision appears to provide 
incentives to transmitting utilities to form RTOs, and I 
suggest that the bill may be internally inconsistent in the 
sense that there is a mandate and then this incentive 
provision. I, frankly, think that utilities are going to want 
to get in the transmission business or set up a separate 
transmission company if they think that is going to be a viable 
and competitive and economically sound line of business, and 
that is what we ought to focus on--inducing good performance, 
as Commissioner Massey says, but also making it clear that 
these new companies are going to be able to attract capital in 
the marketplace, expand the grid where necessary, and that they 
are not going to be penalized in their rates of return because 
of the establishment of a transmission company.
    Mr. Pickering. How would you resolve the internal conflict?
    Mr. Bilirakis [presiding]. We are running out of time here, 
Chip.
    Mr. Pickering. I yield back.
    Mr. Bilirakis. I would hope that what they are telling us 
is that the bill's language should be changed in that regard, 
and I suppose that is where you were.
    Mr. Pickering. Yes, they were going in the right direction. 
Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Largent to inquire.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Hoecker, does the FERC currently have the authority to 
address market power in the wholesale markets?
    Mr. Hoecker. We have authority to address market power most 
specifically when we review mergers, when we set rates and 
terms and conditions of service. I think that our market power 
review is inherent in the Federal Power Act, but that there 
are, I think, some limitations in terms of the kinds of 
remedies we can achieve and how we can address market power 
concerns in a more competitive environment when utilities are 
required to change their conduct and not to, for example, 
operate their transmission to favor their own generation.
    Mr. Largent. Is the wholesale market not competitive today? 
Is that what you are saying?
    Mr. Hoecker. I don't think it is entirely competitive, no.
    Mr. Largent. And why not?
    Mr. Hoecker. Well, I think it is--I think, first of all, 
there are big parts of the wholesale market that are not 
subject to open access or part of the interstate----
    Mr. Largent. Like TVA or munis or----
    Mr. Hoecker. Yes, I think that is certainly a big question 
as to how we could possibly assure against the exercise of 
market power in those instances.
    Mr. Largent. What about in areas that FERC does have 
authority over the transmission with IOUs? Have you, at the 
FERC, have you guys looked at cases where you believe market 
power has existed, but you felt like that your remedies have 
fallen short?
    Mr. Hoecker. Well, RTOs maybe, you can view that as one 
example. The fact is that utility companies have come through 
this century as largely vertically integrated companies with 
transmission distribution and generation and that will, quite 
understandably, work in the market in ways that will favor the 
biggest return on all those assets together.
    RTOs are one way of separating or functionally 
disaggregating parts of the industry so that there is more 
competition, there is more confidence in the impartiality, 
shall we say, of the operation of the transmission system. 
Without remedies like that separation and I very seldom bring 
up the ``D'' word, because it is kind of a red flag, but 
without those kinds of remedies, we have to resort to things 
like cost of service ratemaking and to treat utility companies 
as if we were in the 1960's instead of on the verge of a new 
millennium and a market economy for energy.
    Mr. Largent. Well speaking of that, have you guys ever had 
to do that? In other words, revoke somebody's market-based 
rates as a penalty for exerting market power?
    Mr. Hoecker. Well, we have granted market-based rates in 
hundreds of instances, but we have said, for example, that in 
certain geographic areas or certain markets where competition 
cannot be shown in the generation area, we would not grant 
market-based rates.
    Mr. Largent. You have done--you have denied----
    Mr. Hoecker. We have done that, yes.
    Mr. Largent. Okay. Let me ask you another question, and 
that is that different regulatory schemes found within Mr. 
Barton's bill on transmission, on bundled versus unbundled 
sales. Is that workable? I mean, how can you do that?
    Mr. Hoecker. Are you talking about section 101?
    Mr. Largent. What section is that?
    Mr. Hoecker. The jurisdictional provision.
    Mr. Largent. I think it is section 101.
    Mr. Hoecker. Yes.
    Mr. Largent. Where you have a State PUC regulating 
transmission for bundled sales and FERC regulating transmission 
of unbundled sales, and how do you do that on a national grid? 
I mean, is that workable?
    Mr. Hoecker. It is difficult. I think that the Federal 
Power Act speaks to our jurisdiction over transmission and says 
very little else. But over the years, we have accommodated the 
States, and they have generally regulated the rates, terms and 
conditions of service or transmission that is bundled in a 
retail transaction. And I think that that is an effort to 
strike a balance over the use of facilities that we share 
jurisdiction over arguably. And that works okay if we can all 
agree.
    Mention was made earlier and in my testimony about the 8th 
Circuit decision that would allow States to, rather than 
curtail their own native load or their own retail markets, to 
prefer those and to curtail somebody else, and that is on the 
transmission level. That decision is somewhat problematic, 
because in Order 888 we said that all uses of the transmission 
should be comparable; that is, if a utility finds itself 
constrained in terms of transmission and has to curtail, it 
should do that pro rata across all uses of that transmission. 
This court decision appears to say that that is an interference 
with the retail marketplace even though we are talking about 
transmission.
    It is a very confusing area, and if that decision were 
applied very broadly, I think there is a substantial risk of 
some serious balkanization of the wholesale marketplace. And, 
quite frankly, I think a competitive marketplace where everyone 
gets the same treatment in terms of use of the wires, is the 
best protection that State retail customers and State 
commissions have, and I hope we can persuade them of that.
    Mr. Largent. Mr. Chairman, I see my time is up. I want to 
take advantage of this excellent panel and hopefully get a 
chance on a second round of questioning.
    Mr. Bilirakis. Well, that is really up to Mr. Barton. I do 
know that the next panel has been sitting very patiently since 
10 o'clock this morning, but that is up to the chairman and 
whatever he should decide to do.
    Mr.--he has gone to Norfolk?
    Mr. Markey to inquire.
    Mr. Markey. Thank you, Mr. Chairman. Thank you very much.
    Mr. Bilirakis. Your time started a few seconds ago.
    Mr. Markey. Thank you, Mr. Chairman.
    Welcome, sir. I would like to examine the Barton bill and 
have you look at section 101 and ask whether or not you believe 
that that section codifies the recent 8th Circuit decision and, 
if so, what impact that would have on FERC's ability to prevent 
utility monopolies to grant themselves preferential service for 
their own use and prevent competitors from fairly, effectively, 
and efficiently utilizing the transmission grid?
    Mr. Hoecker. Well, arguably, you can certainly read the 8th 
Circuit decision as doing just that. Whether this language--I 
think this language basically codifies what we said in Order 
888, which is that to the extent transmission is bundled within 
a retail service, to that extent, we would defer to the States 
in terms of the regulation of rates and terms and conditions of 
service, provided--and this is a big provided--provided that 
all uses of the transmission system are comparable and that a 
utility applies its curtailment policies, for example, on a 
prorated basis to the all the uses. The 8th Circuit departs 
from that formulation, but I don't necessarily see this 
language adopting that.
    Mr. Markey. You don't--so you don't--in your view, section 
101 does not undermine the Commission's comparability standard?
    Mr. Hoecker. I don't think it has to, and I think that the 
Commission----
    Mr. Markey. You don't think it has to? I mean, is it clear 
that it does or doesn't or would you need--do you need to be 
clarified or are you going to leave it for a court decision? 
Does the 8th Circuit have to go in and clarify? I mean, what do 
you mean it doesn't necessarily have to?
    Mr. Hoecker. Well, I would put it this way: The call here 
that States have authority over that portion of transmission 
that is bundled within a retail service was a call that this 
Commission made in 1996, and if the principles of comparability 
are adhered to by providers of transmission, I don't think that 
that necessarily has an adverse effect on our competitive 
objectives.
    If, however, like the 8th Circuit decision, this 
jurisdictional call is leveraged into the kind of 
discriminatory practice that you are talking about, that is a 
problem. I don't necessarily think that this language 
necessarily gets us to that point, but it certainly lays the 
predicate for it. I agree with you.
    Mr. Markey. Okay. Now, the RTO provisions of the Barton 
bill appear to tell the FERC to accept utility RTO proposals 
but give FERC no other options. Is that a correct assessment?
    Mr. Hoecker. I am very sorry; would you please say that 
again?
    Mr. Markey. I said that the RTO provisions in the Barton 
bill appear to tell FERC to accept utility RTO proposals but 
give the FERC no other options. Is that your reading of the 
Barton language?
    Mr. Hoecker. Yes, I think that it pretty much says if the 
utility proposal conforms to the criteria in the statute, that 
we should accept it.
    Mr. Markey. Okay. So, under the RTO proposal, can FERC 
reject an RTO that is too small, not sufficiently independent, 
or without adequate authority?
    Mr. Hoecker. Under the legislation, I think we could. It 
does refer to scope and configuration, and I am assuming that 
we would have to be clearer and more detailed in the statute in 
implementing that provision.
    Mr. Markey. So, you think you would have sufficient 
latitude, then, to foster an RTO that satisfies the minimum 
conditions under the language?
    Mr. Hoecker. Yes. The real problem I have is that it is not 
clear that 2, 3 years hence these are necessarily going to be 
all the appropriate minimum conditions that might be desirable 
from a commercial standpoint.
    Mr. Markey. Okay. So, in you mind, what would be the reason 
for providing incentives to an RTO that is already in 
existence?
    Mr. Hoecker. I think that the view I have of incentives 
generally runs to encouraging utilities to engage in the most 
efficient economic behavior. Certainly, whether or not they are 
in RTOs, we would want them to do that, but in particular I 
think that the benefits of RTOs and the benefits of incenting 
utilities to perform better is worth it to this Commission, and 
hopefully the Congress, to sweeten the pot a little bit.
    Mr. Markey. If I am correct, do you establish the FERC----
    Mr. Bilirakis. The gentleman's time is up. Now, how much 
further?
    Mr. Markey. I have one question.
    Mr. Bilirakis. One question with a very brief answered 
required.
    Mr. Markey. If I am correct, the established FERC position 
is to eliminate rate pancaking. Is the provision on incentive 
rates or phasing out pancaking at odds with FERC policy?
    Mr. Bilirakis. Brief response, please.
    Mr. Hoecker. I don't think it is.
    Mr. Markey. You don't think it is.
    Thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Bryant, who has been waiting very 
patiently.
    Mr. Bryant. Thank you, Mr. Chairman. I will be brief. I 
want to yield the balance of my time to my colleague from 
Oklahoma.
    But, Mr. Chairman, I have a question regarding H.R. 2944 
and its allowance to TVA to sell wholesale power outside the 
so-called fence. Could TVA get FERC approval to charge market-
based rates for these sales outside the fence? And, if you 
could, could you answer that for me in writing?
    Mr. Hoecker. I would be delighted to do it in writing.
    Mr. Bryant. Okay. And, second, my concern is that we 
deregulate--we truly deregulate as best we can, realizing there 
is a need for some regulation. What--could you answer again in 
writing what you anticipate under a Barton-type bill to be the 
growth in the size of your organization? I assume you are going 
to need additional manpower, funds, and so forth. If you could 
give us somewhat of a reasonable projection based on a Barton-
type bill.
    Mr. Hoecker. I will do the very best.
    Mr. Bryant. Is that feasible? Okay.
    And at this time, I would yield the balance of my time to 
Mr. Largent.
    Mr. Largent. Thank you, my friend from Tennessee.
    Mr. Hebert, I wanted to ask you one question about part of 
your testimony on page--well, what page is it; there is not a 
number on it. But you said that earlier existing ISOs failed 
the independence test. Could you comment on that?
    Mr. Hebert. Yes, thank you, Congressman Largent. The ISOs 
as we know them today, the very genius in the ISO itself is in 
the name--independent system operator--where they are anything 
but truly independent, because you have a stakeholder group who 
is going to make the decision when it comes to planning and 
forecasting and the organization itself. And to become 
completely independent my suggestion is that we move toward an 
independent transmission company that has total separation from 
operation and control. We have someone who is in the 
transmission business.
    Now, as you know, and you and I have had private 
conversations, and it is my testimony and my belief that at 
rates of return of under 10 percent certainly we are not going 
to get people in the transmission business, so we have got to 
give pricing signals to get them in the business. Now, the way 
for us to do that is through the incentive process, and you 
will have people come to the table. I have people come to my 
office and speak with me privately. I had a gentleman in my 
office I was speaking about earlier today who had $50 billion 
who was ready to put one together. These people are ready to do 
it, but they are not going to do it for less than 10 percent 
when on the open market they can make 12 and 15 and 18 every 
day.
    Mr. Largent. Well, the current--the ISOs that exist today, 
do they not have consumer advocate groups that are part of the 
board or----
    Mr. Hebert. Yes.
    Mr. Largent. But you are saying that they don't--it is the 
IOUs or the stakeholders that dominate the board is what you 
are saying.
    Mr. Hebert. Well, the consumer groups are one of the 
stakeholders. You also have the companies themselves. You have 
stakeholder groups which are defined by the ISO themselves.
    Mr. Largent. But I am talking about consumer advocacy 
groups that are not stakeholders in transmission or--I mean, 
there is not consumer groups that are stakeholders in owning 
generation assets or transmission assets or distribution 
assets, are there? I mean, you said that consumer groups are 
stakeholders. In what sense? As ratepayers?
    Mr. Hebert. No, in the sense--let me give you California, 
for example. You have consumer advocates, which I don't know 
how many seats they hold currently on the committee, but they 
hold seats on the committee.
    Mr. Largent. Right.
    Mr. Hebert. Which is a committee of 25, I believe.
    Mr. Largent. Well, I guess when I heard you say 
stakeholders, I assumed you meant that people who were 
regulating themselves. Consumer groups aren't regulating 
themselves other than being ratepayers. You see what I am 
saying? I mean, if a consumer advocacy group is sitting at the 
table, now there may be an issue about the ratio of IOUs versus 
consumer groups that throws the balance to what I term 
stakeholders, and that may be an issue. Maybe that is what you 
are talking about in terms of losing independence. Is that what 
you are saying?
    Mr. Hebert. Well, I guess part of the problem you and I are 
getting into is semantically in that I have become quite 
confused on exactly what a consumer group is, be it from my 
days in the State legislature to chairman of the State 
commission, to here. What is a consumer group to one is 
certainly just an advocate for an interest to another, as you 
know. You know that; you deal with on a daily basis.
    But the ISOs themselves are not independent to the extent 
that you don't have total separation from operation and 
control. The operators are still players in controlling the ISO 
itself. When it comes to an independent, for-profit 
transmission company, you have total separation.
    Mr. Largent. I gotcha. Okay, thank you, Mr. Chairman.
    Mr. Bilirakis. Mr. Hall, do you have a further question for 
these--the chairman is in the other room, and he wants to ask 
some questions, and--he does not prefer to go into a second 
round.
    Mr. Hall. You mean, he wants a round and----
    Mr. Bilirakis. No, his round--he hasn't had his round yet.
    Mr. Hall. Well, we don't want one either.
    Mr. Bilirakis. He wants to ask questions from the first 
round, but I am willing to recognize members of the panel for 
one question each, if they would like, until he comes in. I 
hereby recognize you.
    Mr. Hall. Mr. Chairman, if we would be allowed to submit 
questions and the panel would agree to answer them within a 
week, because we may be marking this up in a week or 10 days.
    Mr. Bilirakis. By all means. That of course is a request of 
the panel regarding all questions.
    I would ask this then: Some charge that H.R. 2944 codifies 
the northern States power decision and balkanizes transmission 
regulation by providing for State regulation of the 
transmission used in retail sales--the subject we were on a few 
minutes ago that Mr. Largent went into. In your view, does H.R. 
2944 codify the northern States decision or does it codify 
Order 888, and does it in fact balkanize transmission 
regulation?
    Mr. Chairman?
    Mr. Hoecker. In my view, my reading of the bill is that it 
codifies the jurisdictional call in 888. It doesn't necessarily 
codify the decision.
    Mr. Bilirakis. Any further quick responses to that? Mr. 
Hebert? Mr. Massey?
    Mr. Massey. Mr. Chairman, I would not legislate that 
division of authority. That is the call we made in Order 888, 
but it would concern me somewhat to legislate it, because I am 
not sure what flows from that, and it may be that it would lead 
to a further balkanization of the marketplace that we would see 
over time as things develop. So, my preference would be not to 
legislate that distinction between bundled and unbundled 
transactions.
    Mr. Bilirakis. Mr. Hebert?
    Mr. Hebert. Thank you, Mr. Chairman. As to Northern States, 
I would have to agree with the chairman--I think it is a very 
close call. I don't know. It would be my thought initially that 
it does not codify the Northern States' case. However, when it 
comes to 888, it does not in fact codify 888, but what it does 
do is codify the authority to issue 888.
    Mr. Bilirakis. Any further comments?
    Ms. Breathitt. With respect to bundled versus unbundled 
retail sales, I would think that at some point in time the 
other 25 States will probably make decisions to have retail 
open access, at which time there won't be any more bundled 
retail sales; that would go away. If you had it in the 
legislation, it may become outdated.
    Mr. Bilirakis. Yes, well, it is an area that needs to be 
clarified, certainly.
    Mr. Sawyer, do you have anything you want to offer?
    Mr. Bryant?
    Mr. Largent?
    Mr. Chairman?
    Mr. Barton. Thank you, Mr. Chairman. I would like to ask my 
5 minutes of questions now.
    Mr. Bilirakis. By all means, please do so.
    Mr. Barton. I want to thank the entire Commission for being 
here this afternoon. I have a few fairly simple questions.
    First, I want to ask if the Commission is generally 
supportive of the provisions in the current draft on Bonneville 
and the TVA in terms of FERC authority that is extended to 
those Federal utilities?
    Mr. Hoecker. I am.
    Ms. Breathitt. I am.
    Ms. Bailey. I am, also.
    Mr. Massey. Yes, I am too.
    Mr. Hebert. I am, Mr. Chairman, with the exception--I think 
what you are trying to accomplish is the right thing; however, 
I have told you privately, as well, I think the best way--and I 
understand bills are made of compromises--but the best way 
would be to sell of those transmissions assets to a 
jurisdictional utility instead of increasing the authority that 
FERC has.
    Mr. Barton. Okay, I understand that.
    Second, we have got several members of the subcommittee on 
both sides of the aisle that are very concerned about FERC 
jurisdiction over the transmission system in terms of 
cooperatives and municipals. We have put in a small 
transmitting utility exemption. We also encourage distributed 
generation facilities. Currently, it is at 50 megawatts, and I 
am getting a lot of complaints that that is too big. Does the 
Commission have a number that you would feel comfortable with, 
if we took that from 50 megawatts and took it down to a smaller 
number? And if you do, I would sure like to hear your number.
    Mr. Hoecker. Mr. Chairman, I know that I don't have a 
number. I think that interconnection for small distributed 
generation is certainly appropriate. I don't know what the 
feasible cutoff would be from a statutory perspective.
    Mr. Barton. Okay. Does the number 10 megawatts strike a 
bell with anybody? Or you just don't want to say?
    Ms. Bailey. I think from the standpoint of a 50 megawatt, I 
think there are some power plants that can be 50 megawatts, so 
that is why you are getting some feedback probably on that.
    Mr. Barton. Yes. And we realize that we have been too 
generous, and we--we, I; I am not going to blame the 
subcommittee for this. Okay.
    What about the provisions we have put in on self-
certification for cooperatives if they send a letter to the 
Commission that they are not FERC jurisdictional? Have you 
all--that they are not a transmission cooperative and they are 
not going to be FERC jurisdictional. We have tried to make that 
as simple and as easy as possible, because the cooperative said 
that they didn't have the funds to hire high-priced attorneys 
and things like this. Have you all looked at those provisions, 
and, if so, are those acceptable to the Commission?
    Mr. Hoecker. Speaking for myself--we haven't talked--but we 
have instances in other statutes for self-certification, and I 
think that we could make that work. We have provided waivers 
from open access for small cooperative utilities even if they 
owned transmissions. So, it is something that we have some 
sympathy for.
    Mr. Barton. Okay. Three of you are former State regulators, 
and if I were to summarize the dispute between the subcommittee 
in terms of how to reach the goal of competition, there is one 
group that thinks we ought to defer as much as possible to the 
States and be as circumspect as possible in terms of additional 
authority at the Federal level. And that is where the current 
draft is. There is another group that feels like that we need 
more direct Federal intervention to get to the market that 
everybody supports.
    In your opening statements, all of you were generally 
supportive of the thrust of the bill, which does not have a 
Federal mandate in terms of a date certain, and it does defer 
generally to the States in any area that it can. Are you all 
comfortable with that approach?
    Mr. Hebert?
    Mr. Hebert. Mr. Chairman, if I may, the August 4 draft used 
the term ``maximum practical deference'' to the States, which I 
thought was preferable to the language of this one. I think you 
just the term ``deference.'' So, if I had to choose the 
language of the two, being a former State legislator and State 
chairman, I would suggest that ``maximum practical deference'' 
would be preferable.
    And a lot of that would have to do with which boulevard you 
take. Which end of the boulevard are you going down, and if you 
are going down the one which takes you toward mandates, then 
you probably don't want to give as much deference. But if you 
are going toward voluntary incentive-type systems and RTOs, 
then maximum practical deference I believe would work and be in 
the best interest.
    Mr. Barton. Any other Commissioner, Ms. Breathitt?
    Ms. Breathitt. I haven't read NARUC's comments that will be 
proffered soon by my friend, Marsha Smith from Idaho, but the 
history of the Commission working well with the States to work 
out the difficulties where our jurisdiction butts up against 
their jurisdiction, it is fairly well defined in the Federal 
Power Act. To be a little bit more direct, unless there is 
something that I don't know at this point, I think your current 
bill keeps those lines well divided.
    Mr. Barton. Last--oh, Mr. Chairman--Hoecker?
    Mr. Hoecker. I just want to make an observation, Mr. 
Chairman. I don't think over the last half dozen years you will 
find a commission that is more deferential and accommodating to 
State interests. This integrated industry that we are talking 
about today affects both Federal and State interests 
profoundly, and we try to accommodate them in a variety of 
ways. We have been deferential in terms of their ability to 
recover stranded costs. We have been deferential in terms of 
their jurisdiction over bundled retail service. We are 
deferential in terms of their ability to regulate reliability 
at the retail level, and even in some transmission areas, I 
would be deferential. We are deferential in terms of their 
ability to have access to books and records if PUHCA is 
reformed. We are deferential in terms of how we try to 
facilitate retail competition. And we have really, I think, 
gone more than the extra mile in that regard.
    But make no mistake about it, what we are talking about 
here is regulation of an interstate--of interstate commerce in 
electricity, and at some point I think there has to be a 
recognition that there is a large Federal interest at stake 
here and that we need to take action at the wholesale level to 
make competition happen.
    Mr. Barton. Mr. Hebert, and then my time is expired.
    Mr. Hebert. Mr. Chairman, just one other quick observation.
    Mr. Barton. We will let Ms. Bailey--Commissioner Bailey--we 
are going to give everybody a shot now. So, you all waited a 
long time. That is why we wanted all five of you here.
    Mr. Hebert. Just a quick observation. As you know, once we 
start arguing what the intent of Congress was or is, we have to 
look at clarifying language, and whatever you pass, if you do 
pass something, if you come out with deference, I can guarantee 
you there will be a day at the FERC, at the Commission table, 
where someone argues they didn't mean maximum, they mean 
practical, they just meant mere deference, because they had the 
opportunity to do something else.
    Mr. Barton. Okay.
    Mr. Hebert. Thank you.
    Ms. Bailey. Mr. Chairman, let me just suggest that the 
issue of deference is because traditionally, historically, the 
bulk of the jurisdiction has been with the States. The States 
are very critical to your vision and our vision of this 
competitive electricity competition bill and reliability 
legislation that you have here.
    Legislation that just transfers more authority to FERC is 
not useful in this process, I think, to the extent that what 
you are seeing now is the result of successes of the 
initiatives that FERC has done and that should be built upon, 
and I think the States are at the point where they could help 
us do that. So, I am definitely in the camp where with 
cooperation and collaborative efforts with the States, I think 
is very necessary.
    Mr. Barton. Thank you. Thank you, Mr. Chairman.
    Mr. Bilirakis. Thank you, Mr. Chairman.
    I think we have completed the questioning from the panel 
here, and thanks so much. You have been very, very patient and 
very busy people, and you have sat here very patiently through 
these many hours. We appreciate it. You have been an awful lot 
of help.
    Thanks, Mr. Chairman, and members of the Commission.
    The next panel will also have been most patient. The 
Honorable Marsha Smith, commissioner of Idaho--with the Idaho 
Public Utilities Commission, representing the National 
Association of Regulatory Utility Commissioners, and Mr. Irwin 
``Sonny'' Popowski, Pennsylvania Consumer Advocate Office of 
Consumer Advocate, Harrisburg, Pennsylvania, representing the 
National Association of State Utility Consumer Advocates.
    If they would come forward, please.
    Let us have a little bit of order. The hearing has not 
ended.
    Your written testimony has already been presented and a 
part of the record, and I will set the clock at 5 minutes. 
Obviously, I won't cut you off if you go over it to some 
degree. You have been very patient. We appreciate your taking 
the time, both of you, to be here.
    And we will recognize Ms. Smith to present her testimony.

   STATEMENTS OF MARSHA H. SMITH, COMMISSIONER, IDAHO PUBLIC 
UTILITIES COMMISSION, REPRESENTING THE NATIONAL ASSOCIATION OF 
REGULATORY UTILITY COMMISSIONERS; AND IRWIN ``SONNY'' POPOWSKY, 
  PENNSYLVANIA CONSUMER ADVOCATE OFFICE OF CONSUMER ADVOCATE, 
REPRESENTING THE NATIONAL ASSOCIATION OF STATE UTILITY CONSUMER 
                           ADVOCATES

    Ms. Smith. Mr. Chairman, thank you for this opportunity to 
be here today. I really appreciate it. And the first thing I 
want to say is to thank the chairman for his hard work on the 
bill that we are considering today and to thank the staff of 
the committee, the subcommittee, for being always available and 
attentive to listen to the State concerns, which have been 
many. So, we really appreciate your hard work.
    This is a lengthy bill with many provisions, and of course 
it is not possible to address them all in 5 minutes, so I am 
going to hit on a few key provisions that are still very 
important to us.
    First of all, we strongly support reliability legislation. 
There is a need to move from the current voluntary system to a 
mandatory system. Title II will have our unqualified support if 
a glaring omission is corrected. And that glaring omission is 
that there is no role for State policymakers in the process 
outlined. And there must be a role for the State policymakers 
in reliability. Who gets the calls when the lights go out 
because of transmission system trouble? Governors and State 
public utility commissions, that is who. It will not be 
acceptable to tell folks at home to call FERC or Congress or a 
national reliability organization. This is not only good policy 
but just plain common sense.
    We propose two additions to the reliability section of the 
bill. Our proposed language is attached to my written 
testimony. First, we suggest a savings clause for those States 
which now exercise authority to ensure reliability. Don't take 
from the States, which already exercise their existing 
authority to deal with their specialized concerns.
    Second, we suggest a statutory process for a State advisory 
role at the regional level. Recently, opponents of the advisory 
role have raised the specter that it will balkanize and be 
another layer of regulation. All you have to do is look at the 
successes in the western interconnection to know that the 
opposite effect will occur. This will be a process to 
efficiently and cooperatively address, at the regional level, 
the concerns that arise at a regional level. It is not another 
decisionmaker or level of regulation or bureaucracy.
    The two provisions we propose have widespread support. You 
already have letters from numerous groups representing a wide 
variety of interests nationwide. Please add these provisions to 
the bill.
    We really appreciate the evidence that our earlier comments 
were heard and that there is no mandate for States to implement 
retail competition by a date certain. Nearly half the States 
have acted to date; others will follow in an appropriate manner 
and at a time that is right for them. So, it makes little sense 
to us, and we oppose the provisions of the bill that impose 
hard reciprocity. That is a detriment to States trying to 
create the most active and efficient retail competition.
    Why limit the choices their consumers can enjoy? Why limit 
off-system revenues that can lower rates? If the purpose of the 
legislation is to lower consumer electric bills, then 
reciprocity does not belong in it. Furthermore, 
interconnections also go beyond national boundaries. So, to the 
extent that reciprocity is also imposed on an international 
basis, it causes difficulty for States that have boundaries 
with Canada and Mexico.
    On distributed resources, I want to point out that many 
States are strong supporters of distributed resources and 
technologies, and some believe that those are the future of 
this industry. A 1998 NARUC resolution supporting greater 
consistency in terms and conditions of interconnection of small 
scale generating units demonstrates our support.
    Unfortunately, the provisions of section 542, dealing with 
special rules for distributed generation, will not encourage or 
facilitate the development of these technologies. Instead, they 
are likely to create more problems and probably delay and 
hamper the deployment of distributed resources.
    Interconnection on the local distribution level is a State 
and local concern. It has serious consequences for distribution 
reliability. FERC is not the correct entity to oversee these 
types of interconnections. The State commissions are in place 
to address these very local concerns, and will be able to do so 
faster and with better results, because they are aware of 
different concerns that may apply to different systems. A 
statement by Congress expressing a Federal policy to encourage 
distributed technologies would be positive. The provisions of 
section 542 may be disastrous. Public safety is at issue as 
well as electric reliability at the local level.
    I am very pleased to see that responsibility for the 
formation of regional transmission organizations, or RTOs, has 
been placed on the industry and the regions. All of the regions 
of the Nation are actively engaged in forming or working toward 
forming the right regional body in terms of geographic scope 
and governance structure. I do share some of Commissioner 
Bailey's concerns with the dates that are in the bill and 
believe that they may not be realistic.
    I would like to emphasize that State jurisdiction over 
retail services must be retained regardless of the facilities 
used. System maintenance, planning, and siting are core State 
responsibilities and must remain so. We are concerned with 
legislating the FERC's seven factor test out of Order 888. 
Instead, we urge a wholesale-retail test, a transaction test, 
not a wires classification test.
    The bill could also be enhanced by the provisions to secure 
public benefits that may otherwise be lost. NARUC supports 
maintaining programs that support energy efficiency, renewable 
technology, research and development, universal service, and 
low-income assistance.
    With that, Mr. Chairman, I would commend to you the written 
comments, which in more detail outline our concerns with the 
bill but recognizing that it is a good place to start.
    [The prepared statement of Marsha H. Smith follows:]
    Prepared Statement of Marsha Smith, Commissioner, Idaho Public 
Utilities Commission and Vice Chair, National Association of Regulatory 
                         Utility Commissioners
    Mr. Chairman and Members of the Subcommittee: My name is Marsha 
Smith. I am a Commissioner on the Idaho Public Utilities Commission and 
Vice Chair of the National Association of Regulatory Utility 
Commissioners (NARUC) Committee on Electricity. I also serve NARUC as a 
member of the Ad Hoc Committee on Electric Industry Restructuring. In 
addition, I am Chair of the Committee on Regional Electric Power 
Cooperation (CREPC), a committee of the Western Interstate Energy Board 
(WIEB). WIEB is an organization of 12 western States and 3 Canadian 
Provinces. I respectfully request that NARUC's written statement be 
included in today's hearing record as if fully read.
    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 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 United States House of Representatives, Committee on 
Commerce, Subcommittee on Energy and Power regarding H.R. 2944, the 
``Electricity Competition and Reliability Act.'' I commend the Chairman 
for holding this hearing and for the work and effort by you and your 
staff to produce this legislation. NARUC and its members appreciate the 
complexities you have confronted while trying to get H.R. 2944 to this 
juncture. We would also like to thank you for your consideration of our 
views throughout this process and your efforts to reach a compromise on 
issues important to the States.
    Since the beginning of the debate in Congress regarding electric 
industry restructuring NARUC has been guided by a set of basic 
principles in the transition to competitive retail electricity markets. 
A general theme of these principles is that the States should have 
jurisdiction over components of the competitive retail electricity 
market, including reliability and FERC jurisdiction should be focused 
upon components of the competitive wholesale electricity market. To 
this end our principles are intended to support State restructuring 
initiatives and 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 retail markets will 
have, State commissions and legislatures should decide whether, when 
and how local markets should be opened to greater competition. We would 
like to express our appreciation for your decision to not include a 
date certain mandate in H.R. 2944.
    A brief summary of NARUC's restructuring principles:

 The safety, reliability, quality and sustainability of 
        services must be maintained or improved;
 All consumers must share the benefits of structural 
        improvements and be protected from anti-competitive behavior, 
        undue discrimination, poor service and unfair service 
        practices;
 Public benefit programs must be maintained, including those 
        which support energy efficiency, renewables technologies, 
        research and development, universal service and low-income 
        assistance; and
 States and State commissions must be afforded the flexibility 
        to determine retail electric policies, including the content 
        and pace of restructuring programs and retail stranded cost 
        determinations.
    Based on these basic goals, NARUC believes that 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 and renewables 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; and
 Reaffirming a State role in reliability.
    I would now like to devote the remainder of my time to discussing 
H.R. 2944.
                   discussion of pending legislation
Title I--Open Transmission Access
    Section 101 of this Title provides that the States shall have the 
authority to require retail competition or unbundling of transmission 
and distribution. The Federal Energy Regulatory Commission (FERC) is 
given exclusive jurisdiction over unbundled retail transmission but is 
specifically denied jurisdiction over bundled retail sales of 
electricity subject to State regulation. The Section permits States to 
impose charges on retail services for public purpose programs. It also 
gives FERC the authority to determine whether a particular delivery 
facility is FERC jurisdictional or State jurisdictional, using the 7 
factor test found in Order 888. When making this determination, FERC 
shall give ``deference'' to the position taken by the State.
    NARUC supports the provision found in this section that affirms 
State authority to implement retail competition and is pleased that the 
bill denies FERC jurisdiction over bundled retail rates and services. 
However, we also support legislation that affirms State authority to 
regulate retail power delivery regardless of whether the facilities are 
transmission or distribution. Accordingly, while we applaud H.R. 2944 
for preserving State authority over bundled services, we also support 
State authority to regulate all services provided retail consumers on 
an unbundled basis, including transmission.
    Additionally, NARUC supports the provisions of H.R. 2944 that 
affirm State authority to: impose non-bypassable charges to support 
stranded benefits including implementation of programs to promote 
energy efficiency, renewable energy resources, and support for low 
income consumers; implement programs to promote energy efficiency and 
renewable energy resources, and to support low-income and rural 
consumers; and ensure that all market participants adhere to 
appropriate health, safety, reliability and consumer protection 
standards. However, NARUC also supports the inclusion in legislation of 
workable mechanisms to support State public benefits programs that 
consider a Federal-State partnership with broad-based competitively 
neutral funding mechanisms, and Federal support to assist and encourage 
the States to develop and implement public purpose programs that meet 
the needs of the States and the Nation. In addition, we continue to 
support funding for public purpose research and development programs 
based upon taxes and tax credits and non-bypassable system charges.
    Concerning the identification of facilities as ``transmission'' or 
``distribution'', NARUC has serious reservations regarding the 
workability of provisions in H.R. 2944 that codify the FERC Order 888 
seven factor test. Application of this standard can hardly result in an 
intelligible ``brightline'' between State and Federal jurisdiction as 
the Supreme Court directed over 30 years ago. We believe that the 
retail/wholesale test removes uncertainty and avoids the need to 
categorize every piece of wire in the nation when it is necessary to 
draw the transmission/distribution distinction. NARUC also supports 
legislation that would authorize States to form voluntary regional 
bodies to define the character of transmission facilities.
    In Section 102, the bill extends FERC jurisdiction to 
``transmission utilities'' defined as ``any entity (including State and 
municipality) that owns or operates facilities used for transmission'' 
of electricity. The Section also authorizes FERC to address recovery of 
stranded wholesale costs.
    NARUC has not taken a position on the extension of FERC 
jurisdiction to non-jurisdictional entities or wholesale stranded cost 
recovery. However, we would like to reiterate our opposition to FERC 
authority over the recovery of any retail stranded costs, an issue now 
being litigated in the United States Court of Appeals.
    Section 102 also includes a provision that authorizes FERC to order 
retail transmission services on behalf of retail customers served by an 
open access distribution company. While NARUC does not have a specific 
position on this issue, in general we support Federal transmission 
policies that assist States in voluntarily opening retail markets.
    Section 103 of H.R. 2944 requires transmitting utilities to 
establish or join a Regional Transmission Organization (RTO) by January 
1, 2003. Under this section FERC may approve, but not require, the 
establishment of such RTOs. NARUC supports legislative language that 
leads to the voluntary formation of ISOs. However, we believe that 
legislation should clarify the authority of State and Federal 
regulators to require that transmission owners transfer control of 
systems to ISOs, where necessary to ensure a competitive market, in the 
event voluntary action is not effective. In addition, NARUC supports 
legislation authorizing formation of voluntary regional bodies to 
address transmission system issues.
    This Section also includes a savings clause allowing State 
commissions to address transmission issues, including maintenance, 
planning and siting, ``in a manner consistent with this Act and FERC 
decisions under this Act.'' We believe it to be fundamental that 
legislation regarding retail electric competition affirms the authority 
of States to regulate retail power delivery services regardless of 
facilities used. This provision, as drafted, does not meet this 
fundamental principle. Maintenance, planning and siting are core 
responsibilities of the States, and must remain so, and not to FERC 
jurisdiction under the FPA.
    In Section 104 of this bill Congress authorizes the formation, 
under FERC approval and oversight, of interstate compacts for regional 
transmission siting. NARUC supports legislation authorizing formation 
of voluntary regional bodies to address transmission system issues such 
as the definition of transmission and distribution facilities, 
operation of transmission systems (including supervision of ISOs and 
PXs), system planning, transmission pricing and facilities siting. 
However, our policy on voluntary regional bodies does not contemplate 
FERC approval and oversight. Additionally, we believe transmission 
siting must remain State jurisdictional.
    Section 105 of H.R. 2944 gives FERC authority to order the 
expansion of transmission facilities, subject to State and local laws 
concerning property rights and siting, upon utility application and 
requires FERC to convene a joint board for the purpose of receiving 
recommendations before transmission expansion may be ordered. NARUC has 
a long history of support for FERC authority to convene joint boards. 
However, NARUC does not support FERC authority to order expansion of 
transmission facilities if that authority preempts State authority over 
siting, system planning or retail power delivery services.
                         title ii--reliability
    The reliability of the nation's electric system is one of the most 
important issues in this debate, and NARUC believes that Federal 
legislation must indeed address this subject. Federal legislation 
should facilitate effective decision-making by the States and authorize 
States to create regional mechanisms for the purpose of addressing 
transmission reliability issues.
    NARUC cannot support reliability legislation that fails to provide 
a role for States in ensuring reliability of all aspects of electrical 
service, including generation and power delivery services, or results 
in FERC preemption of State authority to ensure safe and reliable 
service to retail consumers. To that end, we recently sent to the 
Subcommittee two amendments to the reliability title to safeguard State 
jurisdiction to secure safe, reliable and adequate service for retail 
consumers. These amendments included a savings clause to protect 
current State commission authority over retail service reliability 
except for actions that harmed reliability, and a provision to 
establish a voluntary regional body of State officials to advise 
industry-based reliability organizations. Unfortunately, neither 
amendment was included in H.R. 2944. While we appreciate inclusion of 
the bill's savings clause to protect State authority over distribution, 
it is clearly inadequate to remove legal clouds over State regulation 
of transmission-related issues.
    We continue to urge the Subcommittee to include our amendments in 
this legislation. Further, we are prepared to consider alternative 
formulations of State role provisions as this legislation moves 
forward, whether as part of a broader bill or as a stand-alone 
reliability bill. However, the inclusion of no meaningful role for the 
States in addressing reliability issues is simply unacceptable.
    NARUC, however, does support workable mechanisms to assist energy 
efficiency programs that enhance reliability. We believe that 
construction of new power lines is not the only way to strengthen our 
reliability system. All alternatives must be on the table, including 
initiatives on the customer's side of the meter.
    In attachment 1 of this testimony, I have provided the Subcommittee 
with amendments that addresses the State's concerns.
                     title iii--consumer protection
    Section 301 requires that the Federal Trade Commission (FTC), in 
consultation with FERC, the Department of Energy (DOE), and the 
Environmental Protection Agency (EPA), issue rules for disclosure to 
retail consumers. NARUC supports initiatives leading to minimum, 
enforceable uniform standards for disclosure and labeling but believes 
that such activities should occur primarily at the State level. 
Therefore, NARUC would support consultation with State commissions as 
well as FERC, DOE and EPA in any legislation creating a Federal role.
    Section 302 deals with consumer privacy issues, and while NARUC 
does not have a specific position on consumer privacy, NARUC believes 
that Federal legislation ought to affirm State jurisdiction over the 
terms and conditions of retail service.
    Section 303 addresses FTC rules against slamming and cramming and a 
savings clause for State disclosure rules that ``are not inconsistent 
with'' FTC requirements. NARUC does not currently have a formal 
position on slamming/cramming issues but we would support language that 
affirms State authority to ensure adherence to consumer protection 
standard.
    Section 304 expresses a sense of Congress that States should ensure 
universal service to all consumers. NARUC's principles on restructuring 
affirm our view that universal service must be maintained in all 
restructured markets.
                           title iv--mergers
    Section 401 modifies FERC's authority over mergers by adding time 
limits for decisionmaking, authorizes FERC to address mergers at the 
holding company level, and directs FERC to assess the impact of mergers 
on wholesale and retail markets. It also extends FERC's authority over 
disposition of utility assets to include direct authority over 
generating facilities rather than indirect authority over wholesale 
power supply.
    NARUC supports a Federal merger policy where both Federal and State 
regulators (i.e. State commissions and the FERC) thoroughly evaluate 
mergers to assess their impact on competition, access to transmission 
and distribution facilities and ultimately on electric rates. We 
believe that the role of economic regulators should complement review 
by antitrust agencies to adequately protect the public against market 
power abuses. NARUC also supports merger policies where State 
commissions have primary responsibility to assess retail impacts of the 
merger. FERC should support the States in this regard, particularly 
when the State commissions in question lacks adequate State law 
authority.
                     title v--promoting competition
    Sections 501 and 502 of H.R. 2944 would establish reciprocity 
provisions restricting sales into retail markets that are open to 
competition. NARUC opposes these reciprocity provisions. Reciprocity 
limits consumer choices and potential savings. Federally mandated 
reciprocity provision will result in harm to retail customers. In the 
case of a State with retail access, a reciprocity provision may remove 
potential suppliers of lower cost power. In a State without retail 
access, a reciprocity provision may eliminate opportunities for off `` 
system revenues that could be used to reduce customers'' rates. In 
either case, consumers are worse off under reciprocity.
    In short, if the purpose of electric restructuring is to save money 
for electric consumers then a reciprocity provision should not be in 
the bill.
    Sections 511-524 and 531-533 address PUHCA and PURPA. NARUC 
supports reform or repeal of PUHCA as competition becomes effective 
through comprehensive legislation. We support mechanisms that maintain 
State and Federal authority over holding company practices and 
preserves consumer protection provisions of recent legislation `` the 
1992 Energy Policy Act and the 1996 Telecommunications Act. NARUC also 
supports reversal of the Ohio Power decision and State access to books 
and records. We oppose the legislation's provisions that grant FERC 
authority to exempt holding companies and their affiliates from State 
books and records requirements.
    With regard to PURPA, NARUC supports legislation to lift PURPA's 
purchase requirement where a State has made a finding that the 
acquisition of generating capacity is subject to competition or other 
acquisition procedures that protect the public interest with respect to 
price, service, reliability and diversity of resources. Additionally 
NARUC strongly opposes the provision in H.R. 2944 that grants FERC 
authority to preempt the States by ordering the recovery of costs in 
retail rates.
    Section 541 authorizes aggregation of acquisition of power by 
retail consumers in open retail markets, ``notwithstanding any 
provision of State law''. NARUC has taken no specific position on 
aggregation, but in general supports exclusive State authority over the 
regulation of rates, terms and conditions of retail electric services.
    Section 542 requires FERC to issue regulations requiring a local 
distribution utility to interconnect with distributed generation 
facilities presumably preempting State interconnection policies. While 
NARUC believes that access to the electric supply market by small-scale 
distributed resources can offer important public benefits (mitigating 
market power, furthering innovation, easing transmission and 
distribution constraints, increasing resource diversity, and expanding 
customer choice), NARUC does not support FERC preemption of State 
interconnection policies. State commissions should be the agencies 
responsible for removing unnecessary barriers to interconnection.
                  title vii--environmental provisions
    Sections 701 and 702 establish a renewable energy production 
incentive, and provide for net metering, with a savings clause that 
permits the State to impose a cap on net metering. NARUC supports the 
inclusion of legislative provisions affirming a national commitment to 
continued commercialization and supply of renewables. If Congress 
adopts minimum national standards, such as a renewable portfolio 
standard, NARUC supports the use of tradable credits as one market-
compatible mechanism to meet such standards. However, States should 
have flexibility to apply and supplement any Federal standards.
    NARUC also believes that it is the role of State commissions and 
legislatures to choose to adopt net metering measures. It is the role 
of Congress and FERC to remove legal barriers to State implementation 
of net metering that may be contained in the Federal Power Act or 
PURPA.
              title vii--internal revenue code provisions
    The only comment that we have with regard to this Title concerns 
Section 803. NARUC supports the provision to allow deductibility of 
decommissioning costs.
                               conclusion
    Mr. Chairman, in conclusion let me again thank you and your 
colleagues on the Subcommittee for allowing NARUC to participate in the 
legislative process, not only through my appearance here today, but in 
our informal discussions as well. Respectfully, let me state that we do 
not support the enactment of H.R. 2944 as currently drafted. The bill's 
failure to adequately provide a role for the States in the area of 
reliability is enough to require us to withhold our support at this 
time.
    In 1978, Congress enacted five bills comprising the National Energy 
Act, which for the first time injected the Federal government into 
retail electric and natural gas service issues. Virtually all of those 
statutes, with the exception of PURPA, have been either repealed or 
consigned to irrelevancy. Congress is now poised to repeal PURPA, 
completing its repudiation of the 1978 legislation's involvement in 
retail utility markets.
    We urge Congress to keep the lessons of the National Energy Act in 
mind as it considers further retail legislation. We strongly support 
the decision to abandon pursuit of the date-certain mandate. Having 
made that decision, we now urge you to focus the attention of the 
Congress on areas where new Federal laws can facilitate State 
restructuring efforts and on areas where the Federal government can 
work in partnership with the States to continue support for important 
public purposes such as R&D, low income assistance, renewable energy 
technologies, and energy efficiency.
    If Congress chooses to act, 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, I and my colleagues 
look forward to continue working with Congress and with all interested 
parties to develop workable policies that support an efficient and 
environmentally sound electric services industry that meets the needs 
of all retail customers.
    I have provided two attachments to my written statement for your 
review and consideration. Attachment 1 is the NARUC supported 
reliability amendment for inclusion in Title II. Attachment 2 is an 
analysis of H.R. 2944 with NARUC supported policy statements for each 
Title and relevant sections.
[GRAPHIC] [TIFF OMITTED] T0356.001

[GRAPHIC] [TIFF OMITTED] T0356.002

[GRAPHIC] [TIFF OMITTED] T0356.003

[GRAPHIC] [TIFF OMITTED] T0356.004

[GRAPHIC] [TIFF OMITTED] T0356.005

[GRAPHIC] [TIFF OMITTED] T0356.006

[GRAPHIC] [TIFF OMITTED] T0356.007

[GRAPHIC] [TIFF OMITTED] T0356.008

[GRAPHIC] [TIFF OMITTED] T0356.009

[GRAPHIC] [TIFF OMITTED] T0356.010

[GRAPHIC] [TIFF OMITTED] T0356.011

    Mr. Bilirakis. Thank you. Thank you very much for all that, 
Ms. Smith.
    Mr. Popowsky, please proceed.

             STATEMENT OF IRWIN ``SONNY'' POPOWSKY

    Mr. Popowsky. Thank you, Mr. Chairman.
    My name is Sonny Popowski. I am the consumer advocate of 
Pennsylvania, and I am testifying on behalf of the National 
Association of State Utility Consumer Advocates, or NASUCA. 
NASUCA is an organization of State utility consumer advocate 
offices from 39 States and the District of Columbia. We are 
charged by our respective State laws with representing utility 
consumers before State and Federal regulatory agencies, courts, 
and legislative bodies.
    First, I would like to thank Chairman Barton and the 
members and staff of this subcommittee for consistently seeking 
the input of NASUCA members as representatives of retail 
electric consumers in our respective States in each step of 
your deliberations. We heartily endorse your efforts to ensure 
that the voices of the consumers who ultimately will pay the 
bill for electric restructuring are heard in this debate.
    We believe that the success of your efforts in this 
monumental task will be judged not by the size of the financial 
gain to any particular segment of the electric industry but 
rather by the impact on the reliability and price of electric 
service to America's electricity consumers.
    With respect to the first two questions that the witnesses 
were asked to address, the need for Federal legislation and the 
necessary components of such legislation, NASUCA agrees that 
Federal legislation is required in at least two areas: 
reliability and market power. But as I and other members of 
NASUCA have testified on several prior occasions, we do not 
believe that a Federal mandate for retail electric competition 
in all States by a date certain is either necessary or 
appropriate.
    We believe that the individual States are in the best 
position to determine whether and when to open up their 
electric industries to one of the various forms of retail 
electric competition that are being implemented today in 
numerous States. On the other hand, NASUCA members recognize 
the limitations of State authority and therefore the need for 
Federal legislation in such areas as reliability and market 
power.
    With respect to reliability, I have had the honor to serve 
for the last 2 years as 1 of 2 consumer representatives on the 
Board of Trustees of the North American Electric Reliability 
Council, or NERC. I believe that NERC is an outstanding 
organization that has done a magnificent job of maintaining the 
reliability of our Nation's electric system, but as the members 
of NERC and virtually all industry participants agree, the 
basic voluntary structure of NERC cannot be sustained in an 
increasingly competitive electric industry.
    There is a need for Federal legislation to establish an 
independent electric reliability organization that can develop 
and enforce mandatory reliability rules subject to the 
oversight of the FERC. NASUCA supports Federal legislation that 
would accomplish this goal, such as the language contained in 
H.R. 2944, with the caveat that such legislation must clearly 
preserve the role of States in maintaining the reliability, 
safety, and adequacy of electric service within their State's 
borders.
    With respect to market power, NASUCA supports Federal 
legislation that would strengthen the ability of the FERC to 
ensure open, fair, and non-discriminatory access to 
transmission facilities. Federal legislation should give FERC 
clear authority to monitor the development of competitive 
markets and the authority to take necessary steps to remedy 
anti-competitive abuses. We would respectfully suggest that 
H.R. 2944 be amended to include stronger market power 
provisions, such as those included in H.R. 2050, which was 
introduced by Mr. Largent and Mr. Markey and in the 
administration bill.
    Now, H.R. 2944 requires the establishment of regional 
transmission organizations, or RTOs, but does not give FERC the 
direct authority to establish such organizations. In addition, 
while the legislation properly requires that the RTO must be 
independent of market participants, the section goes on to 
state that the independence requirement can be met, for 
example, even if a market participant owns as much as 10 
percent of the voting interest in the RTO.
    NASUCA would urge the elimination of such exceptions to the 
independence requirement, as they could lead to the domination 
of RTO governance by a particular industry segment. The 
hallmark of a successful RTO in NASUCA's view is total 
independence from the financial interests of any particular 
market participant or market segment.
    NASUCA also submits that additional transmission pricing 
incentives are not necessary in order to encourage the 
development of competitively neutral, independent RTOs.
    In addition to the need to address market reliability and 
market power, NASUCA would also support Federal legislation 
that establishes basic standards for consumer protection and 
universal service as long as such standards do not preempt 
efforts of the States to provide stronger protections and 
universal service benefits to consumers.
    Finally, in this regard, NASUCA would note that consumers' 
efforts in achieving competitive benefits at the Federal level 
would be enhanced by the establishment of a FERC Office of 
Consumer Council. The establishment of such an office was 
included in the August 4, 1999 discussion draft that was 
submitted to this subcommittee but was not included in H.R. 
2944, as introduced.
    Now, in my prepared written testimony, I have compared some 
of the specific provisions of H.R. 2944 to the consumer 
checklist for Federal legislation that was presented to this 
subcommittee by NASUCA president, Fred Schmidt, on July 22, 
1999. And we hope that you will keep these principles in mind 
as you go forward with the legislative process.
    Again, NASUCA appreciates the opportunity to comment on 
this bill and on the principles that we believe should be 
contained in any Federal electric restructuring legislation. We 
look forward to continuing to work with you, the members of the 
committee, and your staff in developing policies and 
legislation that will truly benefit all consumers.
    Thank you.
    [The prepared statement of Irwin ``Sonny'' Popowsky 
follows:]
    Prepared Statement of Sonny Popowsky, Consumer Advocate of the 
 Commonwealth of Pennsylvania on Behalf of the National Association of 
                    State Utility Consumer Advocates
    Chairman Barton and members of the Subcommittee on Energy and 
Power: My name is Sonny Popowsky. I am the Consumer Advocate of 
Pennsylvania and the Immediate Past President of the National 
Association of State Utility Consumer Advocates (NASUCA). NASUCA is an 
organization of state utility consumer advocate offices from 39 states 
and the District of Columbia, charged by their respective state laws 
with representing utility consumers before state and federal regulatory 
agencies, courts, and legislative bodies. I have been asked by you to 
testify on behalf of NASUCA regarding 1) the need for federal 
electricity legislation; 2) the specific elements that should be 
included in any federal legislation; and 3) the provisions of H.R. 
2944, the Electricity Competition and Reliability Act of 1999, that are 
of particular interest to NASUCA.
    Before addressing these questions, I would like to thank Chairman 
Barton and the members and staff of this Subcommittee for consistently 
seeking the input of NASUCA members, as representatives of retail 
electric consumers in our respective states, in each step of your 
deliberations. While we do not necessarily agree with all of the 
provisions of H.R. 2944 or, for that matter, any of the legislative 
proposals that have been introduced in this Congress, we heartily 
endorse your efforts to ensure that the voices of the consumers who 
ultimately will pay the bill for electric restructuring are heard in 
this debate. We believe that the success of your efforts in this 
monumental task will be judged not by the size of the financial gain to 
any particular segment of the electric industry, but rather by the 
impact on the reliability and price of electric service to America's 
electricity consumers.
    With respect to your first two questions--the need for federal 
legislation and the necessary components of such legislation--NASUCA 
agrees that federal legislation is required in at least two areas: 
reliability and market power.
    As I and other members of NASUCA have testified before the House 
and the Senate on several prior occasions, we do not believe that a 
federal mandate for retail electric competition in all states by a date 
certain is either necessary or appropriate. We believe that the 
individual states are in the best position to determine whether and 
when to open up their electric industries to one of the various forms 
of retail electric competition that are being implemented today in 
numerous states. On the other hand, NASUCA members recognize the 
limitations of state authority and therefore the need for federal 
legislation in such areas as reliability and market power.
    With respect to reliability, I have had the honor to serve for the 
last two years as one of two consumer representatives on the Board of 
Trustees of the North American Electric Reliability Council (NERC). I 
believe that NERC is an outstanding organization that has done a 
magnificent job of maintaining the reliability of our Nation's electric 
system. But as the members of NERC and virtually all industry 
participants agree, the basic voluntary structure of NERC cannot be 
sustained in an increasingly competitive electric industry. There is a 
need for federal legislation to establish an independent electric 
reliability organization that can develop and enforce mandatory 
reliability rules, subject to the oversight of the Federal Energy 
Regulatory Commission (FERC). NASUCA has endorsed legislative language 
that would accomplish this goal, with the caveat that such legislation 
must preserve the role of states in maintaining the reliability, safety 
and adequacy of electric service within their state's borders.
    NASUCA also supports federal legislation that would strengthen the 
ability of the FERC to ensure open, fair and non-discriminatory access 
to transmission facilities, including authority to establish 
independent and competitively neutral regional transmission 
organizations. Federal legislation should give FERC the authority to 
monitor the development of competitive markets and to remedy anti-
competitive abuses.
    In addition to the need to address reliability and market power, 
NASUCA would also support federal legislation that establishes basic 
standards for consumer protection and universal service, as long as 
such standards do not preempt efforts of individual states to provide 
stronger protections and universal service benefits to consumers.
    Finally, in this regard, NASUCA would note that consumers' efforts 
in achieving competitive benefits at the federal level would be 
enhanced by the establishment of a FERC Office of Consumer Counsel. The 
establishment of such an Office was included in the August 4, 1999, 
Discussion Draft that was submitted to this Subcommittee, but was not 
included in H.R. 2944 as introduced. NASUCA would urge that the 
creation of such an office be included in any final legislation that 
addresses electric restructuring at the federal level.
    Turning to the specific provisions of H.R. 2944 that are of 
greatest interest to NASUCA, I would like to compare those provisions 
to the ``Consumer Checklist'' for federal legislation that was 
presented to this Subcommittee in testimony presented by NASUCA 
President Fred Schmidt of Nevada on July 22, 1999. As stated by Mr. 
Schmidt, the NASUCA Consumer Checklist represents a roster of 
principles that we believe should be reflected in any federal 
legislation to ensure that electric restructuring benefits, rather than 
harms, consumers. Those principles and the extent to which we believe 
they are consistent with the provisions of H.R. 2944, are set forth as 
follows:
1. Federal Preemption: Federal legislation should permit states to 
        adopt retail competition statutes or rules. There should not be 
        a federal mandate for states to require retail competition by a 
        date certain.
    H.R. 2944 does not mandate retail competition by a date certain. 
NASUCA fully supports the decision to leave this fundamental decision 
to the states.
2. Stranded Costs: Retail stranded cost issues should be left to 
        states.
    H.R. 2944 generally leaves stranded cost issues to the states. 
NASUCA supports this reservation of critical state authority.
3. Market Power: Legislation should provide FERC with specific 
        authority to monitor the development of competitive markets, to 
        eliminate undue concentrations of market power in any relevant 
        market, and to remedy anticompetitive conduct or the abuse of 
        market power by any player, incumbents, affiliates, or new 
        market entrants. These powers should include the authority to 
        order divestiture or other structural remedies when necessary.
    NASUCA respectfully submits that H.R. 2944 does not adequately 
address market power issues. NASUCA strongly urges that market power 
provisions such as those included in the Administration Bill, H.R. 
1828, and the Largent/Markey Bill, H.R. 2050 be included in any final 
legislation.
4. Transmission and ISOs: Legislation should authorize FERC to require 
        ISOs or other independent and competitively-neutral regional 
        transmission operation organizations. Legislation should 
        authorize FERC to rectify transmission policies, practices or 
        prices which create a competitive advantage for services 
        offered by the transmission provider or affiliates.
    H.R. 2944 requires the establishment of regional transmission 
organizations (RTOs) by transmitting utilities by January 1, 2003, but 
does not give FERC the authority to establish such organizations. In 
addition, while the legislation, in Section 103 properly requires that 
the RTO must be independent of market participants, this section goes 
on to state that the independence requirement can be met, for example, 
even if a market participant maintains passive ownership or owns as 
much as 10 percent of the voting interest in the RTO. NASUCA would 
strongly urge the elimination of such exceptions to the independence 
requirement from market participants as they could easily lead to the 
domination of RTO governance by a particular industry segment. The 
hallmark of a successful RTO in NASUCA's view is total independence 
from the financial interests of any particular market participant or 
market segment. NASUCA also submits that additional transmission 
pricing ``incentives'' are not necessary or appropriate in order to 
encourage the development of competitively neutral independent RTOs.
5. Reliability: Legislation should authorize FERC to review the 
        reliability requirements imposed by an independent North 
        American Reliability Organization to promote reliability of 
        electric supply.
    H.R. 2944 contains a reliability section similar to that endorsed 
by NERC and a number of utility organizations. NASUCA supports the 
language with the addition of a savings clause clarifying that states 
have a vital role in maintaining the reliability, safety and adequacy 
of electric systems within each state's borders. The savings clause in 
Section 201 of H.R. 2944 is inadequate because it only refers to state 
jurisdiction over local distribution facilities.
6. Consumer Protection: Legislation by Congress should adopt provisions 
        which would set minimum standards for basic consumer 
        protections. States should retain authority to set additional 
        or more stringent or more specific standards.
    The draft includes many of the protections suggested by NASUCA, 
including protection from cramming and slamming, consumer privacy, and 
supplier information disclosure. NASUCA would support additional 
provisions that would establish minimum federal standards in such areas 
as credit collection activities and service quality standards. In all 
such cases, these federal standards should be viewed as floors that can 
be strengthened by state actions to protect consumers.
7. Universal Service: Legislation should adopt universal service 
        standards and principles as part of any restructuring.
    The legislation appropriately includes a sense of the Congress that 
every retail customer should have access to electric energy at 
reasonable and affordable rates. The legislation does not contain 
specific standards or principles in this regard, however. NASUCA would 
seek to work with members of this Subcommittee to develop provisions 
that would insure that all Americans can have access to safe, 
affordable electric service.
8. Aggregation: Aggregation of small customers should be encouraged. 
        Federal legislation should not preclude states from 
        facilitating the aggregation of small customers by any entity.
    H.R. 2944 contains language clarifying the authority of 
municipalities and other entities to aggregate retail customers. NASUCA 
submits that all barriers to such aggregation efforts should be 
eliminated.
9. Mergers: Legislation should specifically revise merger standards to 
        require a net benefit to consumers. Legislation should expand 
        FERC merger authority to include combinations that are 
        currently outside FERC jurisdiction, such as electric 
        communications and electric-gas mergers.
    NASUCA would respectfully urge stronger FERC review authority over 
mergers, including language that would require mergers to provide a net 
benefit to consumers.
10. PUHCA: PUHCA should be addressed only as part of comprehensive 
        restructuring legislation. Waiver of certain PUHCA provisions 
        should be conditioned on holding companies (i) being subject to 
        effective competition in every state in which they operate, or 
        (ii) divesting all of their generation assets. In addition, 
        legislation should provide FERC with current PUHCA authority to 
        review affiliate transactions, provide state and federal access 
        to books and records, and limit diversification.
    The legislation does include repeal of PUHCA as part of 
comprehensive restructuring legislation and provides state and federal 
access to books and records. It does not, however condition repeal on 
the existence of competition or divestiture of generation assets or 
provide FERC with current PUHCA authority to limit diversification.
11. PURPA: Legislation should not waive Section 210, the PURPA 
        mandatory purchase obligation, unless protections are in place 
        to insure that utility generation is subject to effective 
        competition.
    PURPA is repealed, but there are no provisions insuring that 
utility generation is subject to effective competition.
    Again, NASUCA appreciates this opportunity to comment not only on 
H.R. 2944, but on the overall principles that we believe should be 
contained in any federal restructuring legislation. We look forward to 
continuing to work with you in developing policies and legislation that 
will truly benefit all consumers.

    Mr. Bilirakis. Thank you very much, Mr. Popowsky.
    Ms. Smith--well, I guess, maybe to both of you--I would 
just say that through our subcommittee's review of electric 
restructuring, I have stressed--and I might add that the 
chairman was always willing to listen--that any restructuring 
legislation must take into account the unique factors that 
exist in each State.
    For instance, in my home State of Florida, Florida is a 
peninsula with interconnections to other States only along our 
northern border. Florida's electrical loads are concentrated in 
central and southeast Florida, but much of the generation is in 
the north, which means that there is a dominant north to south 
flow of power and not a uniform flow of power in all 
directions. Florida has no generating fuels native to the 
State. All fuels have to be brought into the State--oil, coal, 
nuclear, and natural gas. Florida's vulnerability to natural 
disasters, such as hurricanes, pose an additional threat to our 
State's electric system, and I might just add that 
approximately 90 percent of our consumers are residential 
consumers as it gets to business or industrial, if you will, 
and I know that that figure probably applies to a few other 
States, but I would say that that is kind of a unique feature 
as attributable to Florida.
    So, I guess my question goes--and you can see I would like 
to think that you can see that utility restructuring would 
present under those kind of circumstances many challenges to a 
State that would have those unique factors. So, the question 
that I would have is do you think that this bill, as it now is 
written, preserves a State's ability or Florida's ability or 
any States' ability to deal with each of the unique 
characteristics adequately?
    Ms. Smith?
    Ms. Smith. Well, Mr. Chairman, I guess that is why we 
strongly advocate the addition of our savings clause and our 
State advisory role with the reliability section. You know me, 
I have been here before stressing how unique the Northwest is, 
and that is true. And that is why I strongly believe that we 
have to work together as regions and as interconnections.
    There is no national electric grid. There is a western 
interconnection grid; there is ERCOT. If Texas didn't want to 
be part of the Union electrically, they don't have to be. And 
then there is the eastern interconnection, which I am sure from 
your point of view looks a little different than from mine in 
the West where I look east and I see one interconnection.
    So, that is why I strongly advocate that as a way to 
preserve a policymakers input into processes that will be 
important in terms of reliability.
    Mr. Bilirakis. Mr. Popowsky, do you have----
    Mr. Popowsky. I would agree. I think that is the best 
example of where you, particularly a State like Florida, would 
want to be careful to ensure that as long as you are not 
operating in a way that is inconsistent with Federal 
reliability standards in some way that would harm interstate 
commerce, certainly the issues that are faced by the Florida 
commission and all of you in Florida, with respect to 
reliability, you want to turn to your commission and turn to 
your State government first. So, we would support the concept 
that the legislation should include language that would 
preserve the role of the States in reliability.
    Similarly, with respect to--generally, with respect to 
issues like consumer protections universal service, we think 
that there is a role for the Federal law to play in developing 
basic standards, but we think that the States ought to be 
permitted to enhance those protections on behalf of their 
consumers.
    Mr. Bilirakis. And you speak on behalf of NASUCA when you 
say that.
    Mr. Popowsky. Yes.
    Mr. Bilirakis. Thank you.
    Mr. Sawyer, to inquire.
    Mr. Sawyer. Thank you, Mr. Chairman.
    You both have been strongly recommended to me to answer the 
question that I have been asking this afternoon: how best to 
preserve an appropriate State role in terms of siting decisions 
for transmission, while making sure that reluctant States, or 
those who see no internal benefit, are not in a position to 
impede the development and evolution of a sound regional grid.
    Ms. Smith. Well, Mr. Sawyer, I think I sound like a broken 
record. I think the answer does lie in a regional approach 
through a properly formed RTO with the State advisory body, and 
I think in our interconnection, I think everyone sees the 
necessity of working together, because we are interconnected, 
and an Idaho power path in eastern Idaho has operating 
limitations placed on it, because if it puts too much power 
over it, a path in southern California goes down. So, we 
understand that we are interconnected.
    We also have an active wholesale market in north-south 
transfers of power. So, it is beneficial to all of us when 
power can move north and south, and it moves both directions 
depending on the time of the year and the load.
    So, from my view in the West, the answer lies in having a 
strong regional body with State advisory role so that all----
    Mr. Sawyer. Who should create that region?
    Ms. Smith. No----
    Mr. Sawyer. Not no, who?
    Ms. Smith. Oh, who? I thought you said, ``Should you?'' 
Well, I think your voluntary--your approach is correct to allow 
the industry in the first instance to work it out. It is a 
struggle, and I won't try and minimize the struggle that it is. 
And we are going through it now. We just had an all-day meeting 
on what kind of government structure is appropriate, and there 
wasn't a resolution yet, but we are working on it. I believe 
the Midwest, the Northeast, I think all regions are working on 
that, and I think eventually the right answer, depending on 
physical operation of the system and the market where trading 
and buying and selling is occurring, will emerge.
    Mr. Sawyer. Mr. Popowsky, you are representing a State 
just--a hypothetical State that is not a participant, and you 
nonetheless are the locus of a proposed transmission facility. 
How best should your State's voice be preserved without 
standing in the way of the ability of surrounding States to 
benefit from this investment?
    Mr. Popowsky. That is not as hypothetical a question as you 
suggest, and I think there were some people who thought that 
there ought to be a power line from Ohio to New Jersey, and 
that those of us in Pennsylvania who had a little problem with 
that were being provincial.
    Mr. Sawyer. I wasn't thinking of any State in particular.
    Mr. Popowsky. But I think that the planning--and I agree 
with Commissioner Smith--I think the planning, and I think the 
prior witnesses said that the planning has to be done on a 
regional basis. We are in this together. We have to try to 
develop regional transmission plans that benefit all of us in 
Ohio, New Jersey, Pennsylvania, Maryland.
    The problem then becomes once you develop a regional plan, 
when you get to the actual physical siting, I don't think you 
can take that authority away from the people who are closest to 
where that line is going to be sited. That was really one of 
the big problems in Pennsylvania. Even if you have an agreement 
that there ought to be a power line, when you decide whose 
orchard it goes through, whose historic sites it runs through, 
whose neighborhoods, that is an issue that I think has to be 
decided at the State level, and hopefully if we have regional 
plans that benefit everyone, then we can--those local concerns 
can be accommodated, but I think the actual physical siting 
still has to be done at the State level.
    Mr. Sawyer. Is there a Federal role in that to resolve 
differences?
    Mr. Popowsky. I think there can be a Federal role in 
facilitating that regional--the regional planning issues and 
the regional development issues. I think that if people 
perceive that there is a benefit overall to these kinds of 
improvements in the transmission facilities, then they might 
get built better, but I think that you still need to--when you 
draw that line, you need to--that final decision has to be made 
at the State level.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Mr. Largent [presiding]. I am going to yield myself 5 
minutes since it was my turn.
    Commissioner Smith, you talked about the States, 24 States, 
have move forward. When will we see the State of Idaho move 
forward with electricity restructuring?
    Ms. Smith. That cold day in Hell?
    Mr. Largent. Ah. Gosh, I read all your testimony about 
wanting to induce competition, what is wrong with Idaho? We 
can't have competition there?
    Ms. Smith. Well, when you sit with the lowest rates in the 
country and there are no studies to show you will be better 
off, it is difficult to get your legislature to move anywhere 
but back.
    Mr. Largent. What are the rates for Idaho?
    Ms. Smith. Our residential customers generally pay less 
than 5 cents a kilowatt hour.
    Mr. Largent. Okay.
    Ms. Smith. Our industrial customers are less than two.
    Mr. Largent. Your residential customers are 5 cents per 
kilowatt hour?
    Ms. Smith. Yes.
    Mr. Largent. What is Oklahoma? Six? About six. And we have 
already moved forward. So, well, I guess I just wanted to kind 
of place some of your comments and your testimony in context 
with what is actually taking place in Idaho, which is awfully 
cold in Idaho.
    Ms. Smith. Well, I am here to testify on behalf of States 
of the Nation generally as represented by the NARUC.
    The other important consideration that you have to 
understand, when you talk about electric power in Idaho, you 
are also talking about our water resources in the Snake River 
and water rights, and nothing brings people out of their chairs 
faster than the idea that existing water rights may be altered 
by some change in the operation of the dams on the river. So, 
it is much more complicated than the price of power for our 
State, and I think it is going to take us a lot longer to work 
those----
    Mr. Largent. Can you, as a State commissioner in Idaho, 
deal effectively with Bonneville issues or is that something 
that has to be done at the Federal level?
    Ms. Smith. Mr. Chairman, that has to be done at the Federal 
level. There is a Northwest Power Planning Council which has 
members appointed by the four Northwest States, but they don't 
have real regulatory authority over Bonneville.
    Mr. Largent. One of your comments that you have said that 
``NARUC can't support H.R. 2944, as it is currently drafted. 
The bill's failure to adequately provide a role for the States 
in the area of reliability is enough to require us to withhold 
our support at this time.'' Could you explain that? I mean, I 
guess I heard Mr. Popowsky on the one hand say that we needed 
to have mandatory reliability standards, and----
    Ms. Smith. And I agree with him on that.
    Mr. Largent. Okay, so what are you talking about?
    Ms. Smith. I am talking about adding the two provisions--a 
State savings clause and the State advisory role. And language 
is attached to my testimony. We have been working on it for the 
last year and a half. I think there is still some work going on 
on just exactly how the savings clause should read, but the 
State advisory role language is nailed down pretty good. It has 
strong support. NERC does not oppose it and thinks its 
inclusion could be beneficial. So, I think those are the two 
provisions that we are speaking of on the reliability section.
    Mr. Largent. Well, does it make sense to have 50 different 
reliability standards on a grid that we are trying to say is a 
national grid? I mean, we now have the capacity to wheel 
electricity across State lines. Does it make sense to have 50 
different reliability standards?
    Ms. Smith. No, it wouldn't, Mr. Chairman, and that is not 
what we are advocating. If you read the State advisory role 
language, it would empower Governors to appoint members, and if 
those State policy people could agree on an interconnection-
wide proposal or recommendation, then we would ask FERC to give 
that deference, but that is a very specialized circumstance, 
and that is why I am saying it is a process whereby regional 
concerns can get solved at the regional level more efficiently 
than they could be solved at the Federal level.
    Mr. Largent. If in Federal legislation there is provisions 
that provide for non-bypassable fees that could be used for 
everything from universal service or environmental issues or 
low-income heating, why do we have to have Federal language 
specifying public benefits? I guess what I heard in your 
testimony was, on the one hand, you don't trust the Federal 
Government to do anything; leave it up to the States. But when 
it came to public benefits funds, and there was renewables and 
some other issues, you want the Federal Government to jump in 
there and make sure that we get that in.
    Ms. Smith. Well, Mr. Chairman, I hope I didn't say we don't 
trust the Federal Government not to do anything, but I did say 
that we encourage and NARUC supports workable measures to 
encourage energy efficiency, encourage the development of 
renewables technologies, to keep research and development 
going, and to promote universal service and have low-income 
assistance.
    Mr. Largent. The States don't do that?
    Ms. Smith. Some States do do that, not all States.
    Mr. Largent. Does your State do it?
    Ms. Smith. We have never seen the need to have low-income 
assistance other than on a voluntary basis where customers 
choose to add extra dollars to their bills.
    Mr. Largent. What about public benefits?
    Ms. Smith. I guess, by public benefits--well, we have 
energy efficiency programs. We have low-income weatherization 
programs, those types of things, yes.
    Mr. Largent. So, you basically have tailored something that 
fits Idaho?
    Ms. Smith. Yes, but what has happened in the Northwest is 
we have moved away from a State-by-State approach, and we now 
have a regional approach in the Northwest Energy Efficiency 
Association, NEEA. So, we do it on a regional basis now.
    Mr. Largent. You like having it on a regional basis.
    Ms. Smith. Yes. I think if you are looking toward the 
markets of the future, you want to have these on a regional 
basis.
    Mr. Largent. And wouldn't that be preferable to a national 
basis?
    Ms. Smith. I think we would appreciate the support of the 
Federal Government in implementing those programs, and some of 
them, frankly, would have national, applicable----
    Mr. Largent. So one size fits all.
    Ms. Smith. No, not necessarily.
    Mr. Largent. Oh, okay. Well, my time has expired.
    Gentleman from California.
    Mr. Rogan. Mr. Chairman, thank you.
    Following up on the chairman's federalism issue, it raised 
a point there have been a number of people that have suggested 
that any consumer protection legislation ought not be dealt 
with on the Federal side; it ought to be left up to the States. 
And I am just wondering, Mr. Popowsky, what are your feelings 
about that?
    Mr. Popowsky. We would have no objection to Federal 
legislation that would establish minimum basic standards at the 
Federal level for some of the issues that are addressed in 
2944, like slamming and cramming. We would just want to make 
sure that those standards could be enhanced and supplemented at 
the State level to address specific State concerns so that 
States would not be preempted from having additional 
protections for consumers in those areas.
    Mr. Rogan. Your suggestion would be that in Federal 
legislation there essentially be a floor established----
    Mr. Popowsky. That is right.
    Mr. Rogan. [continuing] that States could not go under but 
were free to buildupon.
    Mr. Popowsky. That is correct.
    Mr. Rogan. Are there any other areas that you would want to 
see addressed in Federal legislation?
    Mr. Popowsky. Well, as I said in my testimony, I think we 
need Federal legislation on the reliability issue, again, with 
the caveat that there are specific State issues that have to be 
addressed at the State level, and we would also support market 
power provisions that would address market power problems at 
the wholesale level that could not be addressed by individual 
States.
    Mr. Rogan. Ms. Smith, do you want to weigh in on that?
    Ms. Smith. No.
    Mr. Rogan. I wish everybody was as brief in their answers 
as you are, and, in fact, Mr. Chairman, on that happy note, I 
will yield back. Thank you.
    Mr. Barton I thank the gentleman from California.
    Now, Mr. Sawyer, have you asked questions? Okay.
    The Chair would recognize himself for the last 5 minutes of 
questions.
    Mrs. Smith, welcome for the second time to the subcommittee 
on this issue. Have you studied or your association studied the 
Bonneville title of the draft before us?
    Ms. Smith. Mr. Chairman, I haven't specifically.
    Mr. Barton. Okay. You are aware, though, that it is what 
the region--you said you believe in regionalism, and I assume 
you are aware that we put in what your region wanted on 
Bonneville.
    Ms. Smith. If you did that, then I shouldn't comment.
    Mr. Barton. Okay. So, you should say something nice about 
that part of our bill.
    Ms. Smith. Thank you very much.
    Mr. Barton. There you go. Okay.
    And I am told that in terms of the specific policy items 
that NARUC has put on the table, we have addressed every one in 
a positive way except the issue of States setting their own 
reliability standards. Can you tell me how many States 
currently set their own reliability standards?
    Ms. Smith. Mr. Chairman, I don't know that States 
specifically set their own reliability standards.
    Mr. Barton. Well, they don't, except for one.
    Ms. Smith. Is that New York?
    Mr. Barton. The Empire State.
    Ms. Smith. Yes. Well, they have specific concerns with the 
little island we call Manhattan.
    Mr. Barton. But, I mean, should we let one tail, even a big 
tail like the Empire State, wag the entire 49 other, or 47 
other States, if we exclude Alaska and Hawaii, in terms of 
State reliability standard setting? Shouldn't we go with the 49 
as opposed to the 1 State and then try to address that on a 
specific basis?
    Ms. Smith. I think, Mr. Chairman, that it may--there may be 
other States that also exercise some local reliability 
concerns, and I think there is probably room in the process, 
particularly if it is built around regions and RTOs.
    Mr. Barton. We encourage participation in RTOs.
    Ms. Smith. Yes. And I believe that kind of a structure will 
allow room to accommodate----
    Mr. Barton. And we allow for regional standards in the 
current draft. So, I think we are----
    Ms. Smith. I think we are----
    Mr. Barton. [continuing] same page there.
    Ms. Smith. [continuing] kind of on the same page.
    Mr. Barton. Yes.
    Ms. Smith. We would like to see the----
    Mr. Barton. I think we are not only on the same page, I 
think we are in the same paragraph. We are not just maybe on 
the exact sentence structure.
    Ms. Smith. That is true.
    Mr. Barton. Okay.
    Mr. Popowsky--am I saying that right?
    Mr. Popowsky. Yes, that is right.
    Mr. Barton. Oh, good. The consumer protections in the bill, 
I assume you have looked at those?
    Mr. Popowsky. Yes.
    Mr. Barton. I am getting some feedback. I just had a 
meeting with one of the members of the subcommittee, and they 
are expressing kind of a generic unease, but when I ask for 
specific changes to improve the consumer protection, I have not 
been given any definitive proposals. I did not read your 
testimony, so you may have had some specifics in there. Could 
you elaborate on any enhanced consumer protection that you 
might feel we need to put in the next draft before we go to 
markup?
    Mr. Popowsky. Well, basically, there were some additional 
areas that were in our comments that we filed at the last 
meeting concerning, for example, credit and collection 
standards, service quality standards. Mainly the point is, as 
what I tried to make with Mr. Rogan, which is that we support 
the idea that the FTC should be able to establish consumer 
protection standards at the Federal level. We think they could 
be expanded in a couple of the areas that we cited in our 
testimonies, but it is important to us also that they be viewed 
as floors rather than as ceilings, and we volunteer in our 
testimony to work with the committee to determine if there are 
any other specific provisions that are necessary.
    Mr. Barton. Okay, now we have some input that we ought to 
drop consumer protection from the Federal title, because that 
is something the States can handle. I happen to believe we 
ought to have some Federal consumer protection items in the 
bill, as does Chairman Bliley. He is very strong on that.
    But to take the devil's advocate position, would your 
association accept if we were to drop as a Federal item the 
consumer protection and just put some language in that says we 
encourage States to take up that gauntlet?
    Mr. Popowsky. No, we would prefer the approach--the general 
approach that you have taken, which is to identify consumer 
protections that ought to be recognized at the Federal level, 
use those as a floor, and perhaps to expand the categories that 
you have covered in your testimony--I am sorry, in your bill, 
rather than drop it. That would be our preference, as long as 
it is a floor, not a ceiling.
    Mr. Barton. Okay. I have got one more question; I want to 
make sure I understand it before I ask it.
    The staff has asked me to ask a question about State 
aggregation rights, and I am not sure I totally understand it. 
But should the States, in your opinion, Mr. Popowsky--it has 
been a long day--be able to discriminate against aggregators? 
For example, should the State of Texas be able to bar 
cooperatives from aggregating and the State of Louisiana be 
able to give municipalities a preference by allowing forced 
aggregation?
    Now, I don't understand what I just asked you, so if you 
don't understand it either, we are even. But there is 
apparently a concern about States doing aggregation different 
in different States if we don't have Federal aggregation 
language, which we do have in our current draft.
    Mr. Popowsky. Generally, I would--our position is we would 
like to eliminate any barriers, certainly any barriers to 
aggregation. Beyond that, we are not looking to have a Federal 
rule, I think, that would force aggregation. We would look to--
we think different States have done it differently. I think 
many of our members have a preference for what is called opt-
out aggregation where a municipality could aggregate its 
consumers and then have them opt-out of that. But the key here 
is to make sure that there are no unnecessary, in fact, no 
barriers to aggregation.
    Mr. Barton. What if a State has a State barrier against 
aggregation? Should the Federal Government preempt that State 
aggregation provision in this legislation?
    Mr. Popowsky. I don't think NASUCA has addressed that, but 
at this point we would just say that there should certainly be 
no Federal barriers to aggregation. We also have resolutions 
that would support dropping State--we would encourage States to 
drop those barriers. I can't say that we have--that we would 
ask the Federal Government to step in----
    Mr. Barton. So, if we, in order to foster competition and 
to foster the creation of markets, if we had a Federal 
preemption against State aggregation barriers--I am beginning 
to understand my question now--your association would at least 
be neutral and could possibly be supportive of that.
    Mr. Popowsky. I would say we don't have a position on that, 
because it just--that particular question hasn't come up. Like 
I said, we would support of elimination of Federal barriers on 
aggregation----
    Mr. Barton. I got what you----
    Mr. Popowsky. [continuing] and we would like to eliminate 
State barriers as well.
    Mr. Barton. There are no Federal barriers on aggregation, 
but we want you to help us take down some of these State 
barriers against aggregation.
    Mr. Popowsky. Well, we would be happy to work with you on 
that, if you are aware of----
    Mr. Barton. Okay, that is a good answer.
    Mr. Popowsky. Thank you.
    Mr. Barton. Okay. Does Mr. Pickering wish to ask questions 
of this panel?
    Mr. Popowsky. I have no further questions.
    Mr. Barton. Does Mr. Sawyer have one last question? Okay, 
does Mr. Rogan? Okay.
    We want to thank you two panelists. We are going to 
continue our hearing tomorrow, I believe at 10 a.m., and we 
have two panels, each has 6 or 7 people--9 and 8. Okay, so we 
are going to have a long day of enlightenment tomorrow from the 
private sector.
    The hearing is recessed until 10 a.m. tomorrow morning in 
this room.
    [Whereupon, at 4:15 p.m., the subcommittee recessed, to 
reconvene at 10 a.m., Wednesday, October 6, 1999.]
    [Additional material submitted for the record follows:]
Responses of Hon. James Hoecker to Questions from Joe Barton, Chairman, 
                    Subcommittee on Energy and Power
    Question 1. H.R. 2944 clarifies Federal and State jurisdiction, 
providing for FERC jurisdiction over transmission used for unbundled 
retail sales, and for State jurisdiction over transmission used for 
bundled retail sales. Is this clarification needed, and does the bill 
draw the jurisdictional line properly?
    Response. On its face, the Federal Power Act (FPA) assigns the 
Commission jurisdiction over all facilities for the transmission of 
electric energy in interstate commerce by public utilities. 
Nevertheless, consistent with the historical practice of including the 
costs of transmission used to service retail markets or ``native load'' 
in state-regulated bundled retail rates, Order No. 888 held that the 
Commission has jurisdiction over transmission used for unbundled retail 
sales, and that States have authority over transmission used for 
bundled retail sales. It was the Commission's view that, until the 
advent of retail competition where transmission becomes ``unbundled,'' 
this was the most workable arrangement. These determinations, made in 
1996, are currently pending before the Court of Appeals for the 
District of Columbia Circuit.
    As I view it, H.R. 2944 seeks to codify this 1996 interpretation. I 
believe that codification of the Commission's jurisdiction over 
transmission used for unbundled retail sales is appropriate. Such 
jurisdiction is necessary to ensure that all unbundled transmission is 
provided on a comparable basis to all users of the bulk power grid and 
to avoid balkanization of transmission access, with different 
interstate transmission rules established by each state that moves to 
retail choice.
    However, codification of State jurisdiction over bundled retail 
transmission is appropriate only if it is accompanied by other 
legislative language that ensures the Commission's ability to require 
non-discrimination in the uses of the transmission grid. Regrettably, 
the Commission's stance in Order No. 888 is now being used to hamper 
its ability to ensure comparable transmission services for all uses of 
the grid, including service to native load. A recent appellate court 
decision may have placed a jurisdictional cloud over the Commission's 
authority to achieve Order No. 888's goals of non-discrimination in the 
provision of transmission services. See Northern States Power Co., et 
al., v. FERC, No. 98-3000 (8th Cir., May 14, 1999, rehearing denied, 
September 1, 1999) (NSP). This decision, if interpreted and applied 
broadly, may allow the States--through their jurisdiction over 
transmission used for bundled retail sales--to establish preferential 
terms and conditions for the bundled transmission services they 
regulate compared to the terms and conditions available to other 
transmission users. In other words, the historical regulatory practice 
enshrined in Order No. 888 of treating transmission used as part of a 
native load service differently from transmission used for other bulk 
power transactions, including service to other utilities' native load, 
makes demonstrably less sense in a competitive wholesale marketplace.
    There are two ways to address the potential problems that could 
arise from the NSP decision. The first is to add a specific provision 
to H.R. 2944 to clarify the Commission's authority to ensure that 
transmission services within its exclusive jurisdiction are provided on 
a basis that is comparable to, i.e., no less favorable than, other 
transmission services provided by a transmitting utility. This 
clarification is necessary to remove the potential for future 
balkanization of the interstate transmission grid. Accordingly, my 
testimony suggested revising Section 101 of H.R. 2944 to add a 
provision at the end of FPA section 201(a), as modified by section 
101(b)(1) of the bill, stating that:
          In regulating the transmission of electric energy under any 
        provision of this Part [Part II of the FPA], the Commission 
        shall have exclusive authority to establish rates, terms and 
        conditions of transmission service that are just, reasonable 
        and not unduly discriminatory or preferential, including rates, 
        terms and conditions that prevent or eliminate undue 
        discrimination or preference associated with a public utility's 
        or transmitting utility's own uses of its transmission system 
        to serve its wholesale and retail electric energy customers.
This approach to addressing the NSP comparability problem is necessary 
if H.R. 2944 codifies State authority over bundled retail transmission 
or if the bill is silent on this matter.
    The second way to address the NSP problem is not to codify State 
jurisdiction over bundled retail transmission and instead to expressly 
grant the Commission authority over all transmission, including what is 
now called bundled transmission. While the Commission's interpretation 
of State jurisdiction in Order No. 888 reflected an analysis of 
existing law and a recognition of the long-standing historical role of 
states in regulating transmission associated with retail sales, the 
industry has evolved significantly since Order No. 888 was issued. If 
dual (Federal-State) regulation of the transmission system results in a 
State-mandated preference for bundled transmission services and the 
balkanization of transmission access, with different rules established 
by each State and by the Commission, the Congress should need to 
broaden the Commission's jurisdiction to address this problem. It is my 
understanding that a legislative amendment has been proposed by the 
Americans for Affordable Electricity that would take this approach and 
make my proposed clarification unnecessary.
    In sum, I urge the Congress to avoid further litigation and 
potential transmission discrimination problems by, at a minimum, 
adopting my proposed revision to section 101(b)(1) of H.R. 2944. 
Alternatively, the Congress may want to consider explicitly giving the 
Commission jurisdiction over all transmission, including transmission 
used for bundled retail sales.
    Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend 
section 212(h) of the Federal Power Act to authorize FERC to order 
retail wheeling to a consumer served by local distribution facilities 
in closed States? Is there a need to clarify the definition of ``open 
access'' in the legislation?
    Response. I interpret section 102(a)(2) as authorizing the 
Commission to order retail wheeling only to consumers in those states 
that have required their utilities to provide open access over the 
utilities' local distribution facilities, i.e., to consumers in those 
states that have adopted retail choice. Of course, retail wheeling to 
these consumers may require wheeling by utilities in closed states and 
I interpret H.R. 2944 as allowing the Commission to order this service. 
The cited provision states that, notwithstanding the existing 
provisions of section 212(h)(2), ``the Commission may issue an order 
that requires the transmission of electric energy directly or 
indirectly to retail electric consumers who are served by local 
distribution facilities that are subject to open access.'' The bill 
defines ``open access'' with respect to local distribution facilities 
as meaning that the ``local distribution company that owns, controls, 
or operates the facilities offers not unduly discriminatory or 
preferential access to the facilities.'' The bill does not alter the 
states' authority to decide whether or not to order retail open access. 
Transmission ``open access'' should be given the meaning the Commission 
gave it in Order No. 888.
    Question 3. Some charge transmission owners are redesignating 
transmission facilities as distribution facilities in order to avoid 
FERC open access requirements. Have you seen examples of such efforts 
by utilities? Are these utility efforts being supported by State public 
utility commissions?
    Response. As retail competition is implemented, there arises a need 
to draw a distinction between transmission and local distribution 
facilities. Several utilities in various states have filed with the 
Commission proposals to classify certain facilities as either 
transmission or local distribution. Consistent with Order No. 888, each 
of these proposals was reviewed previously by the relevant State public 
utility commission as to the appropriate classification. Order No. 888 
prescribed a general seven-factor test which defines what types of 
facilities would constitute transmission facilities subject to 
Commission jurisdiction or local distribution facilities subject to 
State jurisdiction. The Commission has issued six orders granting 
deference to State commissions who properly adopted the seven factor 
test. These cases did not involve substantial reclassifications.
    Recently, the Commission has received four cases involving 
application of the seven-factor test by the State of Illinois. These 
involve substantial reclassifications to local distribution and the 
Commission is still reviewing these proposals. If a proposed 
reclassification could impair the availability of open access services, 
the Commission would be concerned and would consider this possible 
adverse effect in evaluating the proposed reclassification.
    Question 4. H.R. 2944 includes an exemption from FERC regulation 
for small transmission owners. Do you believe this exemption is 
appropriate? Do you have any comments on the specific exemption 
provisions in H.R. 2944?
    Response. Section 102(b) of H.R. 2944 would require the Commission 
to adopt rules allowing an exemption from Commission regulation for 
certain transmitting utilities. The bill lists certain criteria for 
exemption, which are similar to the Commission's criteria for waiving 
Order Nos. 888 and 889, and would allow the revocation of an exemption 
in the event of changed circumstances. The bill also specifies 
streamlined procedures for applicants to seek and obtain an exemption.
    The bill's exemption provisions are reasonable. While the 
Commission is strongly committed to the policies of open access 
transmission services and competition in wholesale markets, I believe 
H.R. 2944's exemption provisions can be implemented without undermining 
those policies.
    Question 5. FERC does not regulate transmission systems operated by 
State and municipal utilities and cooperatives, which are some of the 
largest systems in the country. State and municipal utilities oppose 
FERC regulation of transmission rates, and want to retain that 
authority. If State and municipal utility transmission systems continue 
to be unregulated could they shift power costs onto their transmission 
rates? Could they discriminate against competitors?
    Response. With the exception of services ordered under section 211, 
transmission systems owned by state utilities, municipal utilities and 
cooperative-owned utilities are self-regulated or are regulated by a 
state agency such as the public utility commission or public service 
commission. If such a utility were to charge other users more than its 
own cost of transmission, it would result in discriminatory rates for 
other users. When such a utility charges competitors more for 
transmission than it charges itself, it would give the utility's 
generation a competitive advantage that was not based on actual 
differences in generation cost.
    In Order No. 888, the Commission addressed the potential for such 
cross-subsidization and discrimination by public utilities. The 
Commission required public utilities to offer transmission service to 
others at the same rates, terms and conditions that public utilities 
apply to themselves, and to take Commission-jurisdictional services 
under the same tariff available to others. This ``comparability'' 
requirement is an important tool in preventing public utilities from 
using their control of transmission facilities to discriminate against 
their competitors in power markets.
    As a matter of clarification, let me address several concerns that 
I have heard voiced about proposed FERC jurisdiction over municipally- 
and cooperatively-owned transmission. First, most public power entities 
do not own transmission and depend on open access to the transmission 
of others. Second, some cooperatives are concerned about potential 
interference in their local distribution functions. The Commission has 
no interest in regulating in that area. Third, a primary concern of 
many transmission-owning public power entities is the threat to tax-
exempt financing that open access and federal rate regulation 
represent. I believe that all transmission should be operated under the 
same rules, and that the tax rules should be adjusted to accommodate 
that result. Finally, some small cooperatives and municipally-owned 
utilities have raised concerns about the cost of FERC regulation. I 
believe the provisions of H.R. 2944 concerning exemptions for small 
transmission owners reasonably address this concern in a manner that is 
consistent with our open access policies.
    Question 6. Should FERC regulate transmission that is not in 
interstate commerce--such as transmission in noncontiguous States and 
territories?
    Response. Transmission that is not in interstate commerce consists 
principally of two types of transmission. First, such transmission 
includes transmission within noncontiguous States and territories, such 
as Alaska and Hawaii. While I do not object to Congress giving the 
Commission the authority to regulate the rates, terms, and conditions 
of transmission within noncontiguous States and territories, I do not 
believe that it is essential for the Commission to have such authority. 
It is essential that all interconnected transmitting utilities be 
subject to the same transmission ``rules of the road,'' and that all 
electricity suppliers have access to a single, seamless transmission 
grid over which to transact business. This is what allows wholesale 
buyers and sellers of electricity to have choices. Within the lower 48 
States, where the transmission systems are interconnected, the 
Commission's pro-competitive regulation is necessary to achieve this 
end.
    Second, the Commission has historically construed the transmission 
of electric energy wholly within the Electric Reliability Council of 
Texas (ERCOT) as not being in interstate commerce, and thus has treated 
the utilities performing such transmission as not being public 
utilities so long as they do not otherwise engage in Commission-
jurisdictional activities. Two of the four investor-owned ERCOT 
utilities (West Texas Utilities Company and Central Power and Light 
Company) operate both within and outside ERCOT and are public utilities 
subject to the FPA. The other two investor-owned utilities in ERCOT, 
Houston Lighting & Power (HL&P) and Texas Utilities Electric Company 
(TU), are not considered public utilities. A settlement agreement 
approved by the Commission in 1987 under section 211 of the FPA 
required certain ERCOT utilities to construct specified asynchronous 
direct current interconnections between utilities in ERCOT and 
utilities in the Southwest Power Pool. Central Power and Light Co., et 
al., 40 FERC para. 61,077 (1987). A provision in the order approving 
the settlement stated that ``HL&P and TU shall use the HVDC 
interconnections for any purpose, including the purchase, sale, 
exchange, wheeling, coordination, commingling or transfer of electric 
power and energy in interstate commerce.'' A section 211 order does not 
subject a utility to Commission jurisdiction for any other purpose. 
Thus, unlike similar entities elsewhere in the country, these utilities 
are not considered public utilities under sections 205 and 206 of the 
FPA.
    In my testimony before the Subcommittee, I noted that H.R. 2944 
would narrow even further the Commission's limited authority over ERCOT 
transmitting utilities--by denying the Commission the authority under 
section 211 of the Federal Power Act (as amended by the Energy Policy 
Act of 1992) to order transmission by those utilities that otherwise 
transmit only within ERCOT. In my testimony, however, I also stated: 
``I believe that all transmitting utilities should be subject to the 
same transmission rules. Open access to a seamless transmission grid by 
all electricity suppliers is essential if the Congress and the 
Commission intend to guarantee that buyers and sellers of electricity 
have as many choices as possible.'' I urge that the Congress at least 
retain the limited authority that the Commission presently has under 
section 211 of the Federal Power Act with respect to ERCOT utilities.
    Question 7. NARUC proposed amending the reliability title of H.R. 
2944 to authorize individual States to establish reliability standards. 
What is your position on this proposal? How many States regulate 
transmission reliability? Would 50 different reliability standards 
improve reliability? How would 50 different standards affect interstate 
commerce?
    Response. The NARUC proposal, as drafted, would reserve to States 
the right ``to take action to ensure the reliability, adequacy, or 
safety of electric facilities within the state except where the 
exercise of such authority has a material adverse impact on the 
reliable operation of the bulk power grid.'' This proposal is broader 
than H.R. 2944's provision, which would preserve existing State 
authority over local distribution facilities unless the exercise of 
such authority would unreasonably impair the reliability of the bulk 
power system. Of the two approaches, I find H.R. 2944's provision to be 
more appropriate. However, I also believe that Federal legislation 
could preserve for the States certain reliability practices that they 
have historically engaged in with respect to bundled transmission in 
their jurisdictions. Federal reliability laws should ensure that such 
State practices are consistent with the applicable regional or national 
standards and that such reliability practices do not unduly impair 
competition in bulk power markets.
    According to a recent survey by the North American Electric 
Reliability Council (NERC), three states have specific jurisdiction 
over bulk power grid security and operation and have established 
reliability standards through the Regional Reliability Councils. 
Moreover, many states have maintenance and inspection standards for 
transmission facilities, and some states establish generation reserve 
requirements. Again, these measures are developed in coordination with 
the Regional Reliability Councils.
    I do not read the reliability language included in H.R. 2944, even 
without the NARUC savings clause, as preempting those legitimate State 
roles. States would still be able to act to protect the reliability of 
local distribution, but they must do so consistent with the rules that 
apply across the transmission system. Having said that, I emphasize 
that it is essential that rules be established on a regional basis (as 
they are now) in order to prevent one state from inadvertently 
interfering with the reliability of service or the resource decisions 
made by retail customers in another state. Fifty different sets of 
reliability standards could create problems for interstate commerce and 
for maintenance of grid reliability. Individual states cannot guarantee 
reliability of the interstate grid.
    Question 8. What is your view of the transmission pricing 
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
    Response. Section 5 of H.R. 2786 would add a new section 215 to the 
FPA. This section would require the Commission to permit recovery of 
all costs associated with transmission service, including expansion 
costs. It also would require consideration of costs and benefits to 
interconnected transmission systems caused by the creation of a 
regional transmission organization (RTO). Under H.R. 2786, rates, terms 
and conditions must promote economically efficient transmission, the 
expansion of transmission networks, the introduction of new 
transmission technologies and provision of transmission services by 
RTOs, prevent cost shifting to rates for services outside the 
jurisdiction of the Commission, and be just and reasonable and not 
unduly discriminatory.
    The Commission is further required by the proposed legislation to 
issue a rule within 180 days of enactment that would provide incentives 
to transmitting utilities to promote the voluntary participation and 
formation of RTOs without having the effect of forcing utilities to 
join, and extend such incentives to existing RTOs, limit the charging 
of multiple rates for transmission service, provided that a transition 
mechanism or period is allowed, minimize shifting of costs among 
existing customers, encourage efficient and reliable operation of the 
grid through congestion management, performance-based ratemaking, or 
incentive rates, and encourage efficient and adequate investment and 
expansion of the transmission system.
    The bill would require the Commission to allow negotiated rates, 
and would allow the Commission to grant market-based rates only where 
it finds that relevant geographic and product markets for transmission 
services or for delivered wholesale power are subject to effective 
competition.
    I believe the pro-competitive objectives of Mr. Sawyer's 
transmission ratemaking provisions are appropriate and laudable. I 
subscribe to the notions that we should incent economically efficient 
behaviors by utilities, prevent cost shifting, and encourage 
transmission owners to alleviate, not prolong, system congestion and 
alleviate rate pancaking.
    I nevertheless believe that the transmission pricing provisions of 
H.R. 2786 may be too prescriptive. The standards under the FPA already 
allow the Commission to consider most, if not all, of the issues 
addressed in H.R. 2786 (e.g., incentives for utilities to join RTOs, 
congestion management, performance-based ratemaking, enlargement of 
adequate transmission investment). However, the FPA gives the 
Commission flexibility to determine appropriate ratemaking 
methodologies that are just, reasonable and not unduly discriminatory. 
This flexibility allows the Commission to craft rate approaches that 
suit specific facts and companies, and which will most effectively 
reduce the role of regulation in a competitive market.
    Several provisions of H.R. 2786, however, could be construed to 
preclude the Commission from adequately protecting transmission users. 
For example, the bill requires the Commission to allow negotiated 
transmission rates and prescribes a specific test for market-based 
transmission rates. In addition, the bill can be read to require rates 
that harm ratepayers because it appears to require recovery of all 
costs incurred, even those that were imprudently incurred. Under 
current law, the Commission does not permit recovery of imprudently 
incurred costs. I believe that these provisions could unduly hamper the 
Commission in its efforts to protect competition and consumers.
    I am also concerned that over-emphasis on creating incentives to 
expand the grid may lead to distortion of the market, where 
alternatives to expansion, such as construction of new generation or 
investment in energy efficiency technologies, would cost less. Again, 
this is an issue that calls for fact-specific consideration and 
solutions.
    I believe that appropriate incentives can be structured to create 
the proper market signals under current law. The Commission is 
exploring just such incentives in our Notice of Proposed Rulemaking, 
RM99-2.
    Question 9. Some criticize the length of FERC merger proceedings. 
How long does it take FERC to approve mergers?
    Response. The Commission has been highly responsive to the 
increasing number of requests for merger authorization. In December 
1996, the Commission issued its Merger Policy Statement, and made a 
commitment to act on mergers within 90 days of the close of a 60-day 
public comment period, or within 150 days total. Since making that 
commitment, the Commission has received 31 merger applications and 
acted on 24 of them (setting three for hearing). One application was 
withdrawn and the other six have been filed only recently. The 
Commission has met its target of action within 150 days consistently. 
In fact, in a number of cases, the Commission has acted much more 
quickly.
    As noted, the Commission set only three of these 24 cases for 
hearing. The cases set for hearing generally involved mergers of large 
utilities, with potentially significant effects on competition, and 
raised genuine issues of material facts.
    Question 10. H.R. 2944 amends section 203 of the Federal Power Act 
to expand FERC review of sales of power plants and transmission 
facilities by State and municipal utilities, cooperatives, and federal 
electric utilities. Currently, those sales are not subject to review by 
FERC, DOJ, or FTC. Is there a need for federal review of these sales to 
ensure market power issues are addressed?
    Response. Your question contains two elements: (1) whether the 
Commission needs jurisdiction over transfers of generating facilities; 
and (2) whether the Commission needs authority to review transfers of 
facilities by non-public utilities.
    As to first aspect of the question, I believe that this Commission 
should have direct jurisdiction over transfers of generation 
facilities. Concentration of generation assets may directly and 
seriously affect competition in wholesale markets, and our review of 
such transactions is critical to protect the public interest. I discuss 
this further in my answer to Question 11, below.
    As to the second aspect of the question, the Commission has not 
requested an expansion of its jurisdiction to cover review of transfers 
of facilities by non-public utilities. I would note that the Commission 
has jurisdiction under section 203 over a public utility's purchase or 
sale of jurisdictional facilities, an authority which would apply to 
some transfers of facilities by non-public utilities to public 
utilities and vice versa. Apart from these circumstances, Commission 
review of facility transfers among non-public utilities could also help 
to protect the public interest in competitive markets. The generation 
and transmission assets of certain non-public utilities are extensive, 
and the sale and redeployment of these assets could adversely affect 
competition, depending on the extent of other facilities controlled by 
the acquirer and on other circumstances.
    Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R. 
2786) repeal section 203 of the Federal Power Act. What is your view of 
this proposal?
    Response. I strongly oppose repeal of section 203. This authority 
is an essential element of the Commission's pro-competitive policy. In 
reviewing a merger, the Commission assesses the effects on competition, 
on rates, and on regulation. In most cases, the primary issue is the 
effect on competition. Consistent with its overarching goal of 
promoting competition in wholesale power markets, the Commission seeks 
to ensure that mergers will not harm competition. If a merger is likely 
to harm competition, mitigation of this potential harm is required in 
order to ensure that the merger is consistent with the public interest. 
Under this authority, the Commission has prevented competitive harm by 
providing other market participants with access to the transmission 
facilities of the merger applicants, thus ensuring that the merger does 
not reduce the competitive options available to wholesale buyers and 
sellers. Similarly, the Commission has accepted commitments by 
applicants to turn over control of their transmission facilities to 
independent system operators (ISOs), as a way of ensuring the merger 
did not cause competitive harm. The Commission also has required rate 
protection for captive customers. These and other conditions and 
commitments imposed or accepted by the Commission have provided 
substantial benefits to the public and, thus, ensured that the mergers 
were consistent with the public interest.
    Although some have argued that our review is unnecessary in light 
of the authority of the Department of Justice and the Federal Trade 
Commission, I do not agree; this Commission's expertise and its role in 
working with energy markets distinguishes it from the functions of 
antitrust enforcers. Our day-to-day involvement with the electric 
industry gives us a valuable and detailed understanding of electricity 
markets as they are shaped by the transmission grid. This expertise can 
provide critical insights in assessing a merger's effects on 
competition. Second, this Commission's authority to protect the public 
interest encompasses not only the effect of a transaction on 
competition, but also its effects on the rates consumers pay. Since 
certain aspects of the electric power industry, such as transmission, 
are not subject to effective competition, the broader scope of the 
inquiry conducted by the Commission helps to protect consumers from 
effects not considered by the antitrust agencies. Third, our procedures 
permit public participation in a timely process to determine the public 
interest, in a way antitrust enforcement does not. This public review 
process remains important in today's electric industry, given the vital 
importance of the industry to American citizens and the national 
economy.
    Question 12: H.R. 2944 allows TVA to sell wholesale power outside 
the region but provides for FERC regulation of such sales. Could TVA 
get FERC approval to charge market-based rates for these sales?
    Response. The Commission has explained in a number of cases in 
recent years the criteria that it applies in deciding whether public 
utilities may make power sales at market-based rates. The Commission 
allows power sales at market-based rates if the seller and its 
affiliates do not have, or have adequately mitigated, market power in 
generation and transmission and cannot erect other barriers to entry. 
In order for a transmission-owning public utility or its affiliate to 
demonstrate the absence or mitigation of market power, and in 
particular the absence or mitigation of transmission market power, the 
transmission-owning public utility must have on file with the 
Commission an open access transmission tariff for the provision of 
comparable services. The Commission also considers whether there is 
evidence of affiliate abuse or reciprocal dealing.
    If the Commission were called upon to decide whether TVA were 
entitled to make power sales at market-based rates, I believe that the 
Commission would be likely to apply these same criteria. I cannot at 
this juncture, however, in the absence of any factual record (including 
submissions both from TVA and from other interested parties on, for 
example, TVA's market power in generation and transmission) conclude 
whether TVA would or would not be able to meet these criteria.
    Question 13. H.R. 2944 directs FERC to approve a transmission 
surcharge on use of the BPA transmission system for electric sales in 
the Pacific Northwest. Would it be difficult to fashion this surcharge?
    Response. No. Designing a surcharge which would permit BPA to 
recover shortfalls in power sales revenues from transmission system 
users would not be difficult. Of course, BPA would be required to fully 
support its proposed surcharge in order for FERC to carry out its 
responsibility under H.R. 2944 to accept, reject, or modify the 
surcharge.
                                 ______
                                 
  Responses of Hon. James Hoecker to Questions from Hon. Vito Fossella
    Question 1. It is my understanding that FERC wants jurisdiction 
over ``retail transmission'' which means it will have to deal directly 
with retail customers. What facilities does FERC have in place to deal 
with retail customers in terms of servicing their needs, resolving 
complaints etc. when it now has virtually zero information about local 
loads and local conditions.
    Response. The Federal Power Act places interstate transmission 
services under the Commission's jurisdiction. Pursuant to Order No. 
888, the Commission established open access terms and conditions for 
all jurisdictional transmission services, including transmission of 
power that will ultimately be delivered to a retail customer as an 
unbundled, separate service. However, the Commission also emphasized 
that Order No. 888 did not affect or encroach upon state authority in 
such traditional areas as the authority over local service issues, 
including reliability of local service, authority over utility 
generation and resource portfolios, and administration of integrated 
resource planning. Order No. 888, FERC Stats. & Regs. para. 31,036 at 
31,782 (1996). As a practical matter, in a retail competition 
environment, power destined for delivery to retail customers is 
delivered, on their behalf, to the local distribution company which 
completes the delivery service under state jurisdiction. In Order No. 
888, we established procedures that allow state commissions to request 
waiver of the standard transmission terms and conditions to the extent 
necessary to accommodate their retail access programs. To date, this 
arrangement is working very well. The Commission therefore does not 
seek or need particular facilities or resources to deal directly with 
the needs of individual retail consumers of electricity.
    Question 2. New York City is unique. It's needs are unique. And to 
be frank, I am concerned that by enforcing a national standard for 
reliability, this may result in lowering the standard for some places, 
such as New York City, since it may prove too costly to reinforce other 
system's to NYC's level. How would you envision FERC's national 
reliability standard differing from New York State's reliability 
standards. In your opinion, would these differences hurt the consumers 
in New York? If FERC had jurisdiction over reliability of the 
transmission system, how would FERC coordinate efforts with the states 
especially during times of system emergencies like storm outages? A 
concern that I have, and a concern of my city and state, is that FERC 
might order recovery of the transmission system in its entirety thereby 
diverting restoration crews away from restoring services to retail 
customers. This could result in an inefficient use of resources and 
delayed recovery after a storm.
    Response. I believe the Commission's potential role in overseeing 
the establishment of bulk power reliability organizations and standards 
does not infringe or compromise in any way the ability of states to 
ensure the reliability of electric distribution systems on behalf of 
retail customers. In fact, the system for developing reliability 
standards under the provisions of H.R. 2944 is very similar to the 
system currently used. Standards are now, and will continue to be, 
developed by market participants through regional and national self-
regulating organizations. Local and regional protocols are developed 
and agreed to at the regional level. Reliability protocols that states 
rely on during emergencies are, and should continue to be, coordinated 
with regional organizations that represent other parts of the 
interconnected grid. The primary differences between the current system 
and the system contained in H.R. 2944 are that the rules would be 
enforceable and there would be avenues for appeal or review of rules by 
parties, including states, who believe that the rules are not providing 
the best protection of the reliability of their service or that the 
rules are discriminatory. These kinds of procedural protections would 
be to the benefit of New York customers as well as others. The State of 
New York would continue to have the ability to protect the security, 
adequacy and safety of local service in New York.
    FERC does not now have, nor would it have under the provisions of 
H.R. 2944, a role in emergency responses such as restoration of 
services after storm outages.
    I agree with you that New York City has unique needs. However, its 
location at the intersection of three ISOs and reliability councils 
makes it evident that the reliability of bulk power service to the city 
will depend on effective and uniform maintenance of reliability 
standards, not just in New York, but across the grid. As the 
marketplace becomes more diverse and competitive, voluntary industry 
compliance with reliability standards needs to be buttressed with a 
limited degree of federal oversight and enforcement power.
    Question 3. Does FERC believe it should have the full authority to 
order the building and siting of new electric transmission lines 
despite the objections of the host state(s)? Does FERC believe that the 
language included in Section 105 of the second draft bill, which amends 
Section 216 of the Federal Power Act would remand this power to FERC 
and take it away from the states?
    Response. H.R. 2944 would not give the Commission authority to 
order the siting of new transmission lines. This type of land use 
regulation, i.e., certifying the use of particular land for purposes of 
transmission facilities, is exercised by the States (although the 
Commission has similar authority for purposes of certificating natural 
gas pipelines and non-Federal hydroelectric facilities). As I stated in 
my testimony, I do not see a current compelling need for the changes 
specified in section 105 of H.R. 2944 at this time.
    I will note that the Commission currently has authority to order 
the enlargement of transmission capacity in conjunction with an order 
to provide transmission services under section 211 of the FPA. However, 
the Commission must terminate an order to enlarge capacity if the 
transmitting utility has failed, after making a good faith effort, to 
obtain the necessary approvals or property rights under applicable 
Federal, State and local laws. The Commission also has imposed on 
public utilities a similar obligation to enlarge transmission capacity 
if necessary to meet their open access obligations under Order No. 888. 
The latter were imposed pursuant to the Commission's authority to 
remedy undue discrimination under FPA sections 205 and 206.
    Section 105 of the second draft bill would provide authority to 
order construction in a new section 216 of the FPA. Section 216 would 
require the Commission, before exercising its authority under that 
section, to refer the matter to a joint board, including one or more 
representatives from each affected State. I believe that the ability to 
expand transmission capacity in appropriate ways will be key to 
competition and efficient wholesale power markets. An effective 
regional planning effort, which could be accomplished by regional 
transmission organizations, could complement and assist state siting 
proceedings.
    Question 4: Section 532 of the bill deals with Recovery of Costs--
stranded costs per se. As you may know, New York has agreements in 
place with all relevant parties involved that results in a sharing of 
these costs. The first batch of these agreements are set to be 
renegotiated in 2001, and then the following in 2003. Would the 
language contained in this section or anywhere else in this legislation 
preempt the agreements NY already has in place or give FERC authority 
to preempt these agreements? Do you feel that any FERC involvement in 
any future negotiations would create any obstacles or delays for this 
process that is already running fairly smoothly in NY?
    Response. Section 532 provides that, with regard to any legally 
enforceable obligation entered into or imposed pursuant to section 210 
of the Public Utility Regulatory Policies Act of 1978 prior to the date 
of enactment of the bill, the FERC ``shall promulgate and enforce such 
regulations as may be required to assure that no utility shall be 
required directly or indirectly to absorb the costs associated with 
such purchases from a qualifying facility after the date of the 
enactment of this Act.'' I do not read Section 532 or any other section 
of the bill to preempt the agreements New York already has in place 
that would result in a sharing of the costs associated with purchases 
from a qualifying facility. Nor would it give FERC authority to preempt 
these agreements. Because the bill is silent as to its effect on 
preexisting agreements such as those you describe, I believe that the 
bill has no impact on such preexisting agreements.
    Further, I do not feel that FERC involvement in any future 
negotiations would create any obstacles or delays for the process that 
you indicate is already running fairly smoothly in New York. To the 
contrary, I believe that the FERC would encourage negotiated agreements 
to address the cost recovery issue. The Commission has expressly 
encouraged such agreements in the past and has allowed the recovery of 
a utility's costs incurred pursuant to such an agreement.
    I suggest, however, that section 532 be clarified to ensure that 
utilities may agree to enter into such agreements in the future. As 
currently written, section 532 could be interpreted to bar a utility 
from negotiating such an agreement regardless of the benefits of such a 
settlement.
                                 ______
                                 
    Responses of Hon. James Hoecker to Questions from Hon. Ed Bryant
    Question 1. Would the Tennessee Valley Authority be able to make 
sales outside the fence at market-based rates?
    Response. The Commission has explained in a number of cases in 
recent years the criteria that it applies in deciding whether public 
utilities may make power sales at market-based rates. The Commission 
allows power sales at market-based rates if the seller and its 
affiliates do not have, or have adequately mitigated, market power in 
generation and transmission and cannot erect other barriers to entry. 
In order for a transmission-owning public utility or its affiliate to 
demonstrate the absence or mitigation of market power, and in 
particular the absence or mitigation of transmission market power, the 
transmission-owning public utility must have on file with the 
Commission an open access transmission tariff for the provision of 
comparable services. The Commission also considers whether there is 
evidence of affiliate abuse or reciprocal dealing.
    If the Commission were called upon to decide whether TVA were 
entitled to make power sales at market-based rates, I believe that the 
Commission would be likely to apply these same criteria. However, I 
cannot at this juncture, and in the absence of any factual record 
(including submissions both from TVA and from other interested parties 
on, for example, TVA's market power in generation and transmission), 
conclude whether TVA would or would not be able to meet these criteria.
    Question 2. What would be the budgetary effect on FERC under a bill 
such as H.R. 2944?
    Response. It is extremely difficult for me to quantify precisely 
how implementing such a bill will impact the Commission's resources. We 
are a small agency but one which is working diligently to anticipate 
many of the fundamental changes occurring in the energy industry. 
Assuming the Commission were to be authorized to act in the areas 
specified in H.R. 2944, some increase in our budget request would be 
likely, especially in the early stages of staffing these efforts. For 
example, the Commission has traditionally had no responsibility to 
review or oversee any aspect of the reliability standards process, so 
we would have to augment our engineering staff to handle these tasks.
    Our very preliminary estimates are that $5 to $17 million per year 
would likely be sufficient to implement the Administration's proposed 
legislation on electric restructuring. We would expect that the costs 
may be toward the higher end of this range during initial 
implementation and then decline over time. H.R. 2944 would cost 
somewhat less because, for example, it does not contain a provision 
requiring the Commission to receive and act on State filings on the 
decision of whether to allow retail choice.
    Any estimate I would supply you is necessarily dependent on what 
array of FERC-related provisions any new legislation might contain; 
consequently, it is somewhat premature to examine our expected staffing 
needs and other costs in depth at this time. The Commission will make 
every effort to minimize the costs of its oversight functions and is 
currently reengineering its processes to obtain greater productivity 
from the public's investment.
                                 ______
                                 
Responses of Hon. Curt L. Hebert, Jr. to Questions from Hon. Joe Barton
    Question 1. H.R. 2944 clarifies Federal and State jurisdiction, 
providing for FERC jurisdiction over transmission used for bundled 
retail sales, and for State jurisdiction over transmission used for 
bundled retail sales. Is this clarification needed, and does the bill 
draw the jurisdictional line properly?
    Response. H.R. 2944 codifies the jurisdictional split the FERC made 
in Order No. 888. I find the clarification helpful, in that Congress 
would endorse FERC's call, but not necessary. Under the current Federal 
Power Act, the FERC has jurisdiction over transmission that occurs 
separately from a retail sale and the states have jurisdiction over the 
transmission portion of a bundled retail sale. I think the bill drew 
the proper jurisdictional line.
    Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend 
section 212(h) of the Federal Power Act to authorize FERC to order 
retail wheeling to a consumer served by local distribution facilities 
in closed states? Is there a need to clarify the definition of ``open 
access'' in the legislation?
    Response. The current text is confusing. By stating that FERC could 
order transmission to a customer that purchases from distribution 
facilities subject to open access, it appears that the authority would 
apply only to states that introduced competition. In that case, no need 
exists for the amendment. FERC would control the transmission portion 
of the unbundled retail sale and the state the distribution.
    Moreover, without a definition of open access, and in context of 
other references in the bill to open access as being in the context of 
Order No. 888, one could argue that, if the utility is subject to open 
access, as all IOU's under Order No. 888, FERC may order wheeling even 
in closed states.
    Substituting ``retail competition'' for ``open access'' would make 
the provision most clear.
    Question 3. Some charge transmission owners are redesignating 
transmission facilities as distribution facilities, in order to avoid 
FERC open access requirements. Have you seen examples of such efforts 
by utilities? Are these utility efforts being supported by State Public 
Utility Commissions?
    Response. I have read anecdotes of that occurring. I have no 
evidence that any reclassification has, as its purpose, avoidance of 
FERC requirements. Indeed, if FERC follows my recommendation on 
incentives and for-profit RTOs, that kind of evasion would not happen.
    Question 4. H.R. 2944 includes an exemption from FERC regulation 
for small transmission owners. Do you believe this exemption is 
appropriate? Do you have any comments on the specific exemption 
provisions in H.R. 2944?
    Response. As a believer in incentives, performance based rates and 
for-profit transco's, I think it inappropriate to exempt small 
transmission owners from FERC jurisdiction. In a world of command and 
control, the issue of burden arises. With incentives, however, the 
industry would focus on economic benefits and opportunities, which 
should inure to all participants in interstate transmission. I would 
not favor exemptions.
    Question 5. FERC does not regulate transmission systems operated by 
State and municipal utilities and cooperatives, which are some of the 
largest systems in the country. State and municipal systems oppose FERC 
regulation of transmission rates, and want to retain that authority. If 
State and municipal utility transmission systems continue to remain 
unregulated could they shift power costs onto their transmission rates? 
Could they discriminate against competitors?
    Response. As I said in my testimony, State and municipal utility 
systems, and to an extent, cooperatives, must answer to their 
Legislatures and State governments. Therefore, FERC need not regulate 
them; under most State constitutions, authority exists to prevent 
publicly owned systems from engaging in undesirable behavior. In 
addition, under my vision of truly independent RTOs, State and 
municipal members could not survive by raising prices for transactions 
or discriminating.
    Question 6. Should FERC regulate transmission not in interstate 
commerce--such as transmission in non-contiguous States and 
territories?
    Response. No, because these areas would not form part of a national 
grid, having no connections to the ``lower 48'' States.
    Question 7. NARUC has proposed amending the reliability title of 
H.R. 2944 to authorize individual States to establish reliability 
standards. What is your position on this problem? How many States 
regulate transmission reliability? Would 50 different standards improve 
reliability? How would 50 different standards affect interstate 
commerce?
    Response. I think that neither FERC nor the States should prescribe 
reliability standards. As I stated in my testimony, reliability should 
form one of the factors in performance based rates. I think each plan 
with each RTO should have its own standards, depending on regional 
factors. In Mississippi, our Public Service Commission negotiated 
individual plans for each of our utilities.
    Question 8. What is your view of the transmission pricing 
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
    Response. I favor incentives and performance based rates, with no 
guarantees of cost recovery, but with the opportunity to keep profit 
within a range. I think that, theoretically, we might move to market 
based rates, but not in the foreseeable future.
    Question 9. Some criticize the length of FERC merger proceedings. 
How long does it take to approve mergers?
    Response. I rely on the information in the Chairman's response.
    Question 10. H.R. 2944 amends section 203 of the Federal Power Act 
to expand FERC review of sales of power plants and transmission 
facilities by State and municipal utilities, cooperatives, and Federal 
electric utilities. Currently, these sales are not subject to review by 
FERC, DOJ or the FTC. Is there a need for Federal review of these sales 
to ensure market power issues are addressed?
    Response. No. For state and municipal utilities, the DOJ or FTC 
would review the sales, if any impact on interstate commerce resulted, 
unless the state action doctrine applied. Under that judge-made law, 
the authorities in the States would closely supervise the transaction. 
If Congress wants to overrule the state action doctrine, I think it 
better to do so generically, not just in electricity.
    For Federal utilities, I would imagine Congress would need to 
authorize sales, as public funds built them. In that case, Congress 
would consider all the implications, or Congress could authorize the 
antitrust agencies to review these issues. They, not FERC have the 
expertise and the ability to collect information quickly.
    Question 11. The Burr bill (H.R. 667) and the Sawyer bill (H.R. 
2786) repeal section 203 of the Federal Power Act. What is your view of 
this proposal?
    Response. I favor it, as I testified at the hearing on October 5. 
The DOJ and FTC, not FERC, have the expertise in antitrust and the 
experience in mergers. Also, both are accountable for their actions to 
Congress and the American people.
    Question 12. H.R. 2944 allows TVA to sell wholesale power outside 
the region but provides for FERC regulation of such sales. Could TVA 
get FERC approval to charge market-based rates for those sales?
    Response. Yes, if TVA, as a new entrant in the region, had no 
market power in the area in which it makes its sales.
    Question 13. H.R. 2944 directs FERC to approve a transmission 
surcharge on the use of the BPA transmission system for electric sales 
in the Northwest. Would it be difficult to fashion this surcharge?
    Response. I disagree with the notion of imposing a transmission 
surcharge for sales. I dislike subsidies. In any event, FERC does not 
have the resources to fashion a surcharge that would have to take into 
account all the interests involved. We would have to balance the 
interests of transmission customers in proper price signals and the 
preference customers in low prices. I think we would distort the 
market. Right now, the best FERC can do in reviewing BPA rates is to 
take a quick look as to whether the agency will meet its repayment 
schedule that Congress establishes. I think that FERC would act no 
better in this instance, either.
                                 ______
                                 
   Responses of Hon. Curt L. Hebert, Jr. to Questions from Hon. Vito 
                                Fossella
    Question 1. It is my understanding that FERC wants jurisdiction 
over ``retail transmission'' which means it will have to deal directly 
with retail customers. What facilities does FERC have in place to deal 
with retail customers in terms of servicing their needs, resolving 
complaints, etc. when it now has virtually zero information about local 
loads and local conditions?
    Response. FERC does not want jurisdiction over transmission at 
retail. The Barton bill codifies the jurisdiction FERC asserted in 
Order No. 888 over interstate transmission of energy when the customer 
in a state with retail competition purchased from someone besides the 
local utility. Order No. 888 left the distribution portion in the hands 
of the State. Therefore, the State, not FERC, will continue to deal 
with local loads and local conditions in retail sales.
    Question 2. New York City is unique. Its power needs are unique. 
And to be frank, I am concerned that by enforcing a national standard 
for reliability, this may result in lowering the standard for some 
places, such as New York City, since it may prove to be too costly to 
reinforce other systems to NYC's level. How would you envision FERC's 
national reliability standard differing from New York State's 
reliability standards? In your opinion, would these differences hurt 
the consumers in New York? If FERC had jurisdiction over reliability of 
the transmission system, how would FERC coordinate efforts with the 
states especially during times of system emergences like storm outages? 
A concern I have, and a concern of my city and state, is that FERC 
might order recovery of the transmission system in its entirety thereby 
diverting restoration crews away from restoring services to retail 
consumers. This could result in an inefficient use of resources and 
delay recovery after a storm.
    Response. I oppose FERC having authority to establish reliability 
standards. I also think that the current system, involving private 
regional reliability councils establishing the standards needs reform. 
I favor injecting reliability standards in the performance based rate 
plans I advocate for utilities. In particular, each plan for each 
Regional Transmission Organization would contain a target for reliable 
performance. I envision interested parties negotiating the issue, along 
with the other factors in the plan for presentation to FERC. Each RTOs 
earnings would rise or fall on how well it does. Therefore, in the case 
of storms, rather than have FERC order deployment of crews, the RTO 
would find it in its economic interest to do the best job it could.
    In any event, it is my belief that even my colleagues favoring a 
FERC role would not necessarily establish the same standard for the 
whole Nation or fashion maximum, rather than minimum standards. I also 
do not envision FERC directing crews in storms, even if we received 
authority over reliability.
    Question 3. Does FERC believe it should have the full authority 
over the building and siting of new electric transmission lines despite 
the objections of the host state(s)? Does FERC believe that the 
language in Section 105 of the second bill draft, which amends Section 
216 of the Federal Power Act would remand this power to FERC and take 
it away from the states?
    Response. I oppose giving FERC authority to approve building and 
siting of transmission facilities. I think FERC could better give 
economic incentives for transmission expansion and upgrade. We should 
reform our pricing policy that looks at cost recovery, rather than 
economic value and efficiency. Several bills, including the Barton 
bill, contain provisions for incentive pricing. I think in that way, 
FERC would encourage a more efficient transmission system through the 
market.
    I think Section 105 does not take away siting authority from the 
States. That section gives utilities the opportunity to reverse a FERC 
order requiring expansion, if the necessary State or local agencies 
deny permits.
    Question 4. Section 532 of the bill deals with Recovery of Costs--
stranded costs per se. As you may know, New York has agreements in 
place with all relevant parties involved that result[] in a sharing of 
these costs. The first batch of these agreements [is] set to be 
renegotiated in 2001, and then the following in 2003. Would the 
language contained in this section or anywhere else in this legislation 
preempt the agreements NY already has in place or give FERC authority 
to preempt these agreements? Do you feel that any FERC involvement in 
any future negotiations would create any obstacles or delays in this 
process that is already running fairly smoothly in NY?
    Response. Section 532 states that any FERC rule would apply 
prospectively. FERC has refused to compel renegotiation of PURPA 
contracts and, in fact, preempted states, such as California, from 
abrogating existing PURPA contracts.
    As for FERC's role in renegotiations, it would depend on the wishes 
of the State. For example, last fall, New York, through Chair Maureen 
Helmer of the Public Service Commission, asked for FERC's help in 
renegotiating the PURPA contracts of New York State Electric and Gas 
Company, an upstate utility. Eventually, the New York Commission 
brought the parties together, without FERC's involvement.
                                 ______
                                 
  Responses of Hon. Vickey A. Bailey to Questions from Hon. Joe Barton
    Question 1. H.R. 2944 clarifies Federal and State jurisdiction, 
providing for FERC jurisdiction over transmission used for unbundled 
retail sales, and for State jurisdiction over transmission used for 
bundled retail sales. Is this clarification needed, and does the bill 
draw the jurisdictional line properly?
    Response. I think this clarification is useful. The clarifying 
language adopts, for the most part, the jurisdictional dividing lines 
adopted by the Commission in its Order No. 888 rulemaking; those lines, 
for the most part, have been accepted by industry participants and 
state regulatory commission. I believe it is important, whenever 
possible, to eliminate jurisdictional turf battles and protracted court 
disputes over ambiguous congressional delegations, in order to ensure 
that the benefits of increased competition flow through to consumers as 
quickly and comprehensively as possible.
    In light of recent court litigation on the subject of comparability 
of service, cited in Chairman Hoecker's response, I have no objection 
to an additional clarification that would further codify existing 
Commission policy. That policy, based on the Commission's authority to 
protect against undue discrimination or preference in the provision of 
transmission service, requires that a transmission-owning utility offer 
transmission service to others that is comparable to (i.e., no worse 
than) the service it provides to itself.
    Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend 
section 212(h) of the Federal Power Act to authorize FERC to order 
retail wheeling to a consumer served by local distribution facilities 
in closed States? Is there a need to clarify the definition of ``open 
access'' in the legislation?
    Response. I recall this question coming up during the question and 
answer session of the FERC Commissioner panel of the October 5 hearing 
on H.R. 2944. The explanation we received from the Committee is that 
section 102(a)(2) does not authorize the Commission to order wheeling 
to retail customers in ``closed'' states (that have not adopted retail 
competition). I am fine with this explanation. If, however, there is 
some perception of ambiguity in the reference to ``local distribution 
facilities that are subject to open access,'' I have no objection to a 
clarification that explains that the Commission's authority to order 
retail wheeling is confined to consumers in ``open'' states that have 
adopted retail competition.
    Question 3. Some charge transmission owners are redesignating 
transmission facilities as distribution facilities, in order to avoid 
FERC open access requirements. Have you seen examples of such efforts 
by utilities? Are these utility efforts being supported by State public 
utility commissions?
    Response. I am aware that some utilities are redesignating 
transmission facilities as distribution facilities. The Commission 
occasionally reviews such a redesignation in the context of utility 
filings that reflect the rate consequences of such a redesignation; in 
these circumstances, the Commission is very deferential of the state 
commission's characterization of transmission and distribution 
facilities. Such deference to state designations of transmission and 
distribution facilities is contemplated in Order No. 888 (which adopts 
a 7-factor test for analysis).
    Obviously, the redesignation of a facility from transmission to 
distribution acts to remove that facility from aspects of Commission 
regulation. But I am not in a position to assess the motivation of any 
such T/D redesignation, or to suggest that any such undertaking is one 
merely to evade Commission jurisdiction (such as a direction to provide 
open access, non-discriminatory service).
    Question 4. H.R. 2944 includes an exemption from FERC regulation 
for small transmission owners. Do you believe this exemption is 
appropriate? Do you have any comments on the specific exemption 
provisions in H.R. 2944?
    Response. I have no problem with the exemption provisions in H.R. 
2944. They reflect, for the most part, the Commission's existing 
practice. Specifically, the Commission already waives the requirements 
of Order Nos. 888 (to provide open access transmission service) and 889 
(to participate in an Internet-based transmission information system 
and to separate transmission from wholesale merchant functions) for 
transmission-owning utilities that are small and/or own limited and 
discrete transmission facilities.
    Question 5. FERC does not regulate transmission systems operated by 
State and municipal utilities and cooperatives, which are some of the 
largest systems in the country. State and municipal utilities oppose 
FERC regulation of transmission rates, and want to retain that 
authority. If State and municipal utility transmission systems continue 
to be unregulated could they shift power cost onto their transmission 
rates? Could they discriminate against competitors?
    Response. I am in agreement with Chairman Hoecker's response to 
this question. I add that a number of government-owned and cooperative-
owned utilities already have consented to follow the open access 
requirements applicable to transmission-owning public utilities subject 
to Commission regulation, in order for themselves to be eligible for 
``reciprocal'' open access service. In addition, an increasing number 
of cooperative-owned utilities are buying out their debt to the U.S. 
government (through the Rural Utilities Service of the U.S. Department 
of Agriculture) and are thus voluntarily acceding to Commission 
jurisdiction over their rates and terms of service.
    Question 6. Should FERC regulate transmission that is not in 
interstate commerce--such as transmission in noncontiguous States and 
territories?
    Response. A series of court cases through the decades have 
established that all transmission in the continental (lower 48 states 
of the) United States--with the exception of transmission within the 
Electric Reliability Council of Texas--is in interstate commerce. I am 
in agreement with Chairman Hoecker's response to this question as it 
relates to the activities of ERCOT utilities.
    Question 7. NARUC proposed amending the reliability title of H.R. 
2944 to authorize individual States to establish reliability standards. 
What is your position on this proposal? How many States regulate 
transmission reliability? Would 50 different reliability standards 
improve reliability? How would 50 different standards affect interstate 
commerce?
    Response. As a general matter, I much prefer fewer layers of 
regulatory review rather than more. Nevertheless, I have no objection 
to legislative language of the type found in section 201 of H.R. 2944 
that would clarify the authority of states and local authorities to 
ensure the reliability of local distribution facilities. As electricity 
markets become increasingly competitive, close cooperation with state 
and local regulatory authorities with oversight over the reliability of 
local distribution facilities become imperative. Well-publicized power 
outages in the last year (such as in San Francisco, New York City, and 
Chicago), due to isolated inadequacies in local distribution 
infrastructure, suggest that federal regulatory oversight, in itself, 
cannot assure the continued reliability of local service. Moreover, I 
am appreciative of limiting language, such as that found in revised 
section 217(n) of the FPA, that acts to ensure that any such exercise 
of state or local authority cannot ``unreasonably impai[r] the 
reliability of the bulk power system.''
    Question 8. What is your view of the transmission pricing 
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
    Response. Among the many transmission pricing provisions of Mr. 
Sawyer's bill, my principle interest lies in those that would offer 
incentives to transmitting utilities for engaging in various types of 
Commission-favored activities. I support the use of incentives to 
promote--rather than compel--participation in regional transmission 
organizations. As I explain in my written testimony, I favor the use of 
incentives that encourage utility innovation and individual design, 
rather than federal legislation that compels utility RTO filings and 
participation by a date certain. I also favor incentives that act to 
promote reliable and efficient transmission operations and that 
encourage investment in and expansion of transmission facilities.
    As Chairman Hoecker explains, however, the Commission already 
retains the flexibility under the Federal Power Act, as currently 
written, to pursue much or all of these behavior-based policy 
objectives.
    Question 9. Some criticize the length of FERC merger proceedings. 
How long does it take FERC to approve mergers?
    Response. Chairman Hoecker's response provides the raw data. The 
vast majority of the merger applications the Commission receives are 
processed in a timely manner. Nevertheless, I fail to understand why 
the Commission cannot process all merger applications in a timely 
manner (say, 150, 180 or 240 days at most) that will provide the type 
of predictability and uniformity necessary to allow utilities to 
restructure themselves in a manner that, in their judgment, is best 
able to respond and adapt to the same competitive forces that the 
Commission is attempting to promote.
    The trend toward utility consolidation is accelerating. The 
Commission is starting to receive a number of merger applications 
involving larger utility applicants. These applications likely will 
attract numerous interventions and vigorously-argued calls for extended 
evidentiary hearings, for numerous ``pro-competitive'' conditions to 
approval, or for outright rejection. My understanding is that financial 
markets and developing business strategies cannot await over a year of 
uncertainty while the Commission parses through the various options.
    Question 10. H.R. 2944 amends section 203 of the Federal Power Act 
to expand FERC review of sales of power plants and transmission 
facilities by State and municipal utilities, cooperatives, and Federal 
electric utilities. Currently, those sales are not subject to review by 
FERC, DOJ, or FTC. Is there a need for Federal review of these sales to 
ensure market power issues are addressed?
    Response. Frankly, I do not perceive a gap in regulatory oversight 
over utility asset sales that requires an expansion of federal 
jurisdiction. Market power issues currently are being addressed by the 
Commission, in its continuing assessment of: (1) the utility mergers 
and asset sales over which it currently does have authority to review; 
and (2) utility requests to sell power at wholesale at negotiated, 
market-based rates. Moreover, the Commission is actively monitoring the 
competitive operation of wholesale power markets. If the Commission 
detects the presence or exercise of market power, it retains the 
authority to adopt utility-specific corrective action. (Similar market 
monitoring and enforcement activity currently is undertaken in regional 
markets by the regional transmission institutions that the Commission 
already has approved.)
    Question 11. The Burr bill (H.R. 667) and the Sawyer bill (H.R. 
2786) repeal section 203 of the Federal Power Act. What is your view of 
this proposal?
    Response. To date, I have refrained from advocating the outright 
repeal of section 203 of the Federal Power Act. I agree with Chairman 
Hoecker to the extent he responds that the Commission retains a unique 
and vital regulatory role under section 203--but only if that role is 
exercised in a timely manner (say, no more than 150-240 days). If 
Commission merger review extends beyond that limited time frame, I 
believe Commission merger review becomes counter-productive, as it 
would inhibit the ability of utilities to take advantage of competitive 
opportunities and to develop pro-competitive business strategies.
    Question 12. H.R. 2944 allows TVA to sell wholesale power outside 
the region but provides for FERC regulation of such sales. Could TVA 
get FERC approval to charge market-based rates for these sales?
    Response. I have nothing to add to Chairman Hoecker's response to 
this question.
    Question 13. H.R. 2944 directs FERC to approve a transmission 
surcharge on use of the BPA transmission system for electric sales in 
the Pacific Northwest. Would it be difficult to fashion this surcharge?
    Response. I have nothing to add to Chairman Hoecker's response to 
this question.
                                 ______
                                 
 Responses of Hon. William L. Massey to Questions from Hon. Joe Barton
    Question 1. H.R. 2944 clarifies Federal and State jurisdiction, 
providing for FERC jurisdiction over transmission used for unbundled 
retail sales, and for State jurisdiction over transmission used for 
bundled retail sales. Is this clarification needed, and does the bill 
draw the jurisdictional line properly?
    Response. I believe that a clarification of Federal and State 
jurisdiction over the uses of transmission is necessary, but I fear 
that the one that is proposed in H.R. 2944 will lead to a further 
balkanization of the interstate grid. As Chairman Hoecker points out, 
the historical regulatory practice adopted in Order No. 888 of treating 
native load uses of transmission differently from all other uses of 
transmission makes less sense in a competitive wholesale market 
environment. Efficient electricity markets require that all grid users 
be subject to the same rules. Different transmission rules set by 
individual states will result in discriminatory access and a 
balkanization of the markets that are now developing. My preference 
would be to broaden the Commission's jurisdiction to include all uses 
of transmission, whether bundled or unbundled, so as to ensure that the 
Nation's transmission grid will support efficient electricity commerce.
    Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend 
section 212(h) of the Federal Power Act to authorize FERC to order 
retail wheeling to a consumer served by local distribution facilities 
in closed States? Is there a need to clarify the definition of ``open 
access'' in the legislation?
    Response. I endorse Chairman Hoecker's response to this question.
    Question 3. Some charge transmission owners are redesignating 
transmission facilities as distribution facilities in order to avoid 
FERC open access requirements. Have you seen examples of such efforts 
by utilities? Are these utility efforts being supported by State public 
utility commissions?
    Response. I endorse Chairman Hoecker's response to this question. I 
would also make two additional points. First, I would be deeply 
concerned if the Commission's review of reclassification proposals 
indicated that such reclassifications were being accomplished to avoid 
Commission jurisdiction and open access requirements. Second, I would 
like to point out that, in addition to impairing the availability of 
open access transmission service, strategic reclassifications can 
result in the addition of distribution charges on certain generation 
facilities and thereby make those assets, or service from those assets, 
more costly than the transmission provider's own generation assets or 
services.
    Question 4. H.R. 2944 includes an exemption from FERC regulation 
for small transmission owners. Do you believe this exemption is 
appropriate? Do you have any comments on the specific exemption 
provisions in H.R. 2944?
    Response. I endorse Chairman Hoecker's response to this question.
    Question 5. FERC does not regulate transmission systems operated by 
State and municipal utilities and cooperatives, which are some of the 
largest systems in the country. State and municipal utilities oppose 
FERC regulation of transmission rates, and want to retain that 
authority. If State and municipal utility transmission systems continue 
to be unregulated could they shift power costs onto their transmission 
rates? Could they discriminate against competitors?
    Response. I endorse Chairman Hoecker's response to this question. I 
believe that all transmission in interstate commerce, regardless of 
ownership, should be directly subject to the Commission's open access 
policies. I would also like to mention that under Order No. 888's 
reciprocity provisions, a number of non-jurisdictional transmission 
providers have filed open access tariffs with terms and conditions that 
are consistent with Order No. 888.
    Question 6. Should FERC regulate transmission that is not in 
interstate commerce--such as transmission in noncontiguous States and 
territories?
    Response. I endorse Chairman Hoecker's response to this question.
    Question 7. NARUC proposed amending the reliability title of H.R. 
2944 to authorize individual States to establish reliability standards. 
What is your position on this proposal? How many States regulate 
transmission reliability? Would 50 different reliability standards 
improve reliability? How would 50 different standards affect interstate 
commerce?
    Response. I endorse Chairman Hoecker's response to this question. I 
would add as a caveat that, because effective electricity markets do 
not respect state boundaries, we should strive for as much regional or 
national uniformity in reliability standards as possible.
    Question 8. What is your view of the transmission pricing 
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
    Response. I endorse Chairman Hoecker's response to this question in 
most respects. I would like to be clear, however, that I do not favor 
financial bonuses or incentives to entice transmission owners to 
participate in RTOs. As I discussed in my testimony, such bonuses are 
not free. They are paid for by transmission system users, and 
ultimately by consumers, in the form of higher electricity rates. I do, 
however, favor performance-based incentives where clearly defined 
performance standards are met or exceeded by transmission operators.
    Question 9. Some criticize the length of FERC merger proceedings. 
How long does it take FERC to approve mergers?
    Response. I endorse Chairman Hoecker's response to this question.
    Question 10. H.R. 2944 amends section 203 of the Federal Power Act 
to expand FERC review of sales of power plants and transmission 
facilities by State and municipal utilities, cooperatives, and federal 
electric utilities. Currently, those sales are not subject to review by 
FERC, DOJ, or FTC. Is there a need for federal review of these sales to 
ensure market power issues are addressed?
    Response. I endorse Chairman Hoecker's response to this question.
    Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R. 
2786) repeal section 203 of the Federal Power Act. What is your view of 
this proposal?
    Response. I endorse Chairman Hoecker's response to this question. I 
feel strongly that repeal of the Commission's merger authority is not 
in the public interest, and particularly not during the massive 
industry consolidation now underway.
    Question 12. H.R. 2944 allows TVA to sell wholesale power outside 
the region but provides for FERC regulation of such sales. Could TVA 
get FERC approval to charge market-based rates for these sales?
    Response. I endorse Chairman Hoecker's response to this question.
    Question 13. H.R. 2944 directs FERC to approve a transmission 
surcharge on use of the BPA transmission system for electric sales in 
the Pacific Northwest. Would it be difficult to fashion this surcharge?
    Response. I endorse Chairman Hoecker's response to this question.
                                 ______
                                 
 Responses of Hon. Linda K. Breathitt to Questions from Hon. Joe Barton
    Question 1. H.R. 2944 clarifies Federal and State jurisdiction, 
providing for FERC jurisdiction over transmission used for unbundled 
retail sales, and for State jurisdiction over transmission used for 
bundled retail sales. Is this clarification needed, and does the bill 
draw the jurisdictional line properly?
    Response. The clarification given in H.R. 2944 pertaining to 
Federal and State jurisdiction over transmission is consistent with the 
findings made by the Commission in Order No. 888, which was issued in 
1996. In that ruling, the Commission determined that it has 
jurisdiction over unbundled retail transmission, and that States have 
jurisdiction over bundled retail transmission. Therefore, it is 
appropriate for Congress to amend the Federal Power Act (FPA) as 
proposed in section 101(b)(1) of H.R. 2944. However, as Chairman 
Hoecker contends in his response to this question, if such an amendment 
is made, additional legislative language is necessary to ensure the 
Commission's ability to require non-discrimination in the uses of the 
transmission grid. Chairman Hoecker has suggested, both in his written 
testimony before the Subcommittee and in his response to this question, 
specific language to be added at the end of FPA Section 201(a), as 
modified by H.R. 2944. I concur with Chairman Hoecker that such 
additional language would be necessary.
    Question 2. In your view, does section 102(a)(2) of H.R. 2944 amend 
section 212(h) of the Federal Power Act to authorize FERC to order 
retail wheeling to a consumer served by local distribution facilities 
in closed States? Is there a need to clarify the definition of ``open 
access'' in the legislation?
    Response. Section 102(a)(2) amends Section 212(h) of the FPA to 
clarify FERC authority to order transmission of electric energy to 
retail electric consumers served by local distribution facilities 
subject to open access. It is clear to me that, as drafted, section 
102(a)(2) would apply only to those States which have enacted retail 
open access. In other words, FERC would have authority to order retail 
wheeling only in ``open'' states, not in ``closed'' states. As far as 
the definition of ``open access'' used in the legislation, I concur 
with Chairman Hoecker that transmission open access should be given the 
meaning the Commission gave it in Order No. 888.
    Question 3. Some charge transmission owners are redesignating 
transmission facilities as distribution facilities in order to avoid 
FERC open access requirements. Have you seen examples of such efforts 
by utilities? Are these utility efforts being supported by State public 
utility commissions?
    Response. The issue of transmission/distribution reclassification 
is one that concerns me, and I might add is a relatively new area 
brought about by retail open access plans. As Chairman Hoecker mentions 
in his response, several utilities have filed with the Commission 
proposals to classify certain facilities as either transmission or 
distribution. Some of the recent filings propose substantial 
reclassifications of transmission facilities as distribution 
facilities. As these cases are pending before the Commission, it would 
be inappropriate to discuss them. However, I believe these are 
important cases that deserve careful attention by the Commission.
    Question 4. H.R. 2944 includes an exemption from FERC regulation 
for small transmission owners. Do you believe this exemption is 
appropriate? Do you have any comments on the specific exemption 
provisions in H.R. 2944?
    Response. I concur with Chairman Hoecker's response to this 
question.
    Question 5. FERC does not regulate transmission systems operated by 
State and municipal utilities and cooperatives, which are some of the 
largest systems in the country. State and municipal utilities oppose 
FERC regulation of transmission rates, and want to retain that 
authority. If State and municipal utility transmission systems continue 
to be unregulated could they shift power costs onto their transmission 
rates? Could they discriminate against competitors?
    Response. In my written testimony before the Subcommittee I contend 
that, despite the Commission's diligent efforts to create an open, non-
discriminatory transmission system, certain impediments to full open 
access remain. One such impediment is that a significant portion of the 
Nation's transmission grid is owned and operated by utilities not 
subject to Commission open access requirements. I support section 
102(b) of H.R. 2944, which amends the definition of ``public utility'' 
in the FPA to include transmitting utilities and provides FERC 
authority over the transmission systems of State and municipal 
utilities and rural electric cooperatives. I believe this provision 
would result in a more cohesive transmission grid and will greatly 
facilitate open transmission access. I believe the potential exists for 
any regulated or unregulated transmission system to shift costs 
inappropriately and discriminate against competitors. However, I prefer 
to believe that discriminatory practices are the exception rather than 
the rule. Nevertheless, it is important that FERC have jurisdiction to 
regulate the transmission rates, terms, and conditions of these 
utilities.
    Question 6. Should FERC regulate transmission that is not in 
interstate commerce--such as transmission in noncontiguous States and 
territories?
    Response. I concur with Chairman Hoecker's response to this 
question. In particular, I believe the success of open, non-
discriminatory transmission access depends on the consistent 
application of transmission rules across the interconnected grid. To 
this end, I reiterate Chairman Hoecker's request that Congress not deny 
the Commission the limited authority it now has under section 211 of 
the FPA to order transmission by utilities within ERCOT.
    Question 7. NARUC proposed amending the reliability title of H.R. 
2944 to authorize individual States to establish reliability standards. 
What is your position on this proposal? How many States regulate 
transmission reliability? Would 50 different reliability standards 
improve reliability? How would 50 different standards affect interstate 
commerce?
    Response. I concur with Chairman Hoecker's response to this 
question. In particular, I support the reliability provisions in Title 
II of H.R. 2944, which, among other things, adds a new section 217(n) 
to the FPA preserving State and local authority to ensure the 
reliability of local distribution facilities within the State, except 
where the exercise of such authority unreasonably impairs the 
reliability of the bulk power system. As Chairman Hoecker states, H.R. 
2944, as drafted, would not prevent States from acting to protect the 
reliability of local distribution, as long as they do so in a manner 
that is consistent with the rules that apply across the transmission 
system.
    Question 8. What is your view of the transmission pricing 
provisions of the bill introduced by Mr. Sawyer (H.R. 2786)?
    Response. I concur with Chairman Hoecker's response to this 
question.
    Question 9. Some criticize the length of FERC merger proceedings. 
How long does it take FERC to approve mergers?
    Response. I believe that such criticism is unwarranted. As I 
indicate in my written testimony, the Commission has shown repeatedly 
that it processes merger applications within the 150-day period 
prescribed in our 1996 Merger Policy Statement. As Chairman Hoecker 
notes in his response to this question, of the 24 merger applications 
the Commission has acted on since 1996, only 3 were set for hearing. 
The remaining applications were consistently processed within the 
prescribed time period.
    Question 10. H.R. 2944 amends section 203 of the Federal Power Act 
to expand FERC review of sales of power plants and transmission 
facilities by State and municipal utilities, cooperatives, and federal 
electric utilities. Currently, those sales are not subject to review by 
FERC, DOJ, or FTC. Is there a need for federal review of these sales to 
ensure market power issues are addressed?
    Response. As stated in my written testimony, I support the 
provisions of section 401 of H.R. 2944, which authorizes the Commission 
to review proposed mergers and disposition of facilities of all 
electric utilities and transmitting utilities, including State and 
municipal utilities, most rural electric cooperatives, and Federal 
electric utilities. Given the changing nature of the electric industry 
and in order to protect the public interest, I believe it is essential 
that the Commission continue to evaluate public utility mergers and 
that the scope of our merger authority be extended as proposed in 
section 401 of the bill.
    Question 11. The Burr bill (H.R. 67) and the Sawyer bill (H.R. 
2786) repeal section 203 of the Federal Power Act. What is your view of 
this proposal?
    Response. I join Chairman Hoecker in strongly opposing repeal of 
section 203 of the FPA. I believe the Commission's authority to review 
public utility mergers is vital to the public interest. Furthermore, I 
am convinced that the Commission is uniquely situated and eminently 
qualified to assess a proposed merger's effects on competition, rates 
and regulation. Given the Commission's special expertise and knowledge 
of the electric industry, I believe that retention of the Commission's 
merger authority is absolutely necessary.
    Question 12. H.R. 2944 allows TVA to sell wholesale power outside 
the region but provides for FERC regulation of such sales. Could TVA 
get FERC approval to charge market-based rates for these sales?
    Response. I concur with Chairman Hoecker's response to this 
question.
    Question 13. H.R. 2944 directs FERC to approve a transmission 
surcharge on use of the BPA transmission system for electric sales in 
the Pacific Northwest. Would it be difficult to fashion this surcharge?
    Response. I concur with Chairman Hoecker's response to this 
question.
                                 ______
                                 
  Responses of Marsha H. Smith, Commissioner, Idaho Public Utilities 
Commission, on Behalf of The National Association of Regulatory Utility 
            Commissioners to Questions from Hon. Joe Barton
    Question 1. The Administration proposes a public benefits fund 
financed by a new $3 billion tax on electric generation. This proposal 
is based on a theory States will slash public benefits programs as they 
open retail electric markets. 24 States have opened their retail 
markets. How many slashed their public benefits programs? How many 
strengthened their programs? Is a Federal public benefits fund needed 
if States maintain public benefits programs?
    Answer: NARUC is currently in the process of producing a database 
to track the various policy elements found in each State restructuring 
plan. This database is not yet completed to the extent that would allow 
us to give a definitive answer. However, the initial research we have 
done appears to show mixed results depending upon the specific program 
in a particular State. Some States have increased some programs and 
decreased others, while other States made no changes to the way they 
handled public benefits programs.
    While we expect States to continue playing an important role in 
maintaining public benefits, NARUC believes there is a Federal role as 
well. Our policy on public benefits in restructured utility markets 
supports the inclusion in Federal legislation of ``workable mechanisms 
to support State and utility public benefits programs.'' In developing 
these mechanisms, we believe that Congress should focus its attention 
on the following goals:

 A Federal-State partnership, building upon state and utility 
        expertise in designing and implementing electric service and 
        public purpose programs, and leaving the greatest possible 
        degree of flexibility and regulatory oversight to individual 
        States;
 Such programs may be designed, supported, and delivered 
        through the nation's electric system, using broad-based, 
        competitively-neutral funding mechanisms, subject to regulatory 
        oversight; and
 Federal support should be made available to assist and 
        encourage the states to develop and implement public purpose 
        programs that meet the needs of the States and the nation.
    Further, we believe that there is a National interest in diversity 
of generation resources, including necessary and appropriate public 
interest research and development, to support a continuing Federal role 
in this area during and after the restructuring process.
    Question 2. Under the Administration bill, only certain public 
benefits programs are eligible for Federal matching grants--low income 
assistance, energy conservation, consumer education, research and 
development programs that provide environmental benefits, and rural 
assistance. Should Congress limit the ability of States to fund public 
benefits programs?
    Answer: NARUC's position, independent of the Administration's 
specific proposal, is that Congress should not limit the ability of 
States to fund public benefits programs by either restricting the 
mechanisms used to support such programs or limiting their scope.
    Question 3. H.R. 2944 clarifies State authority to impose public 
purpose charges to fund programs of their own design, even if no State 
jurisdictional facility (such as distribution) is used. Do you believe 
this approach is preferable to a Federal public benefits fund?
    Answer: NARUC strongly supports legislation that removes any doubt 
that States can establish funding mechanisms for public benefit 
programs. We believe that there is also a Federal role in this area, 
consistent with the principles described in our answer to Question 1 
above.
    Question 4. The Pallone bill (H.R. 2569) includes a Federal public 
benefits fund different from the Administration's proposal. The bill 
sets different limits for State public benefits programs, imposes a new 
distribution tax instead of a new generation tax, and is twice as large 
($6 billion instead of $3 billion). What is NARUCs position on the 
public benefits provisions of H. R. 2569?
    Answer: NARUC has taken no position on the size of any Federal 
public benefits program that restructuring legislation would establish. 
Again, as our answer to Question 1 states, we do believe that there is 
a Federal role in this area that goes beyond the removal of barriers to 
State programs.
    Question 5. Some witnesses support including market power 
provisions in electricity legislation, authorizing FERC to order 
divestiture if it determines an electric supplier has generation market 
power. Does NARUC support these proposals? Do States have authority to 
address generation marketpower?
    Answer: First of all, Congress should not preempt State 
jurisdiction to address market power issues. We believe that 
divestiture is not the only option available to mitigate market power 
in the generation market. State regulators must have at their disposal 
a continuum of options for the mitigation of market power, and 
accordingly, we urge Congress to preserve State flexibility to use 
these options as needed. Legislation should clarify the authority of 
States to use accounting conventions and codes of conduct, which may be 
sufficient safeguards in some cases. Legislation should clarify the 
authority of the States to require and police the separation of utility 
and non-utility, and monopoly and competitive businesses, and to impose 
affiliate transaction and other rules to assure that electric customers 
do not subsidize non-utility ventures. Legislation should clarify that 
States have clear authority to require the formation of appropriate 
state and regional institutions where necessary to ensure a competitive 
electricity market. As market power abuse may require the application 
of well-tailored structural solutions, legislation should clarify that 
the States are not restricted in their authority to require divestiture 
where appropriate and necessary. Additionally, Congress should also 
clarify that States have the ultimate and meaningful authority to 
ensure effective retail markets and should eliminate any barriers to 
the exercise of that authority by the States.
    Second, concerning the scope of FERC's authority to address market 
power issues, Congress may well conclude that FERC should have a 
similar array of options to apply in specific cases. We believe that 
any new authority granted the Commission to address issues within its 
jurisdiction should complement the work of the States and such other 
Federal agencies as the Federal Trade Commission and Department of 
Justice and not preempt or restrict actions taken at the State level.
    Question 6. How many of the 24 States that opened their retail 
markets addressed generation market power issues? Some States--Texas, 
California, New York, and the New England States--included generation 
market power provisions. Others--New Jersey and Pennsylvania--did not.
    Answer: Our preliminary analysis of State restructuring policies 
indicates that many States have provided their regulatory commissions 
with the array of options described in our answer to Question 5. While 
we haven't been able to conduct an exhaustive analysis of State 
restructuring legislation since we received the Subcommittee's 
questions, we can report that States that have restructured retail 
markets have provided their regulators with the authority to order 
divestiture of generation facilities directly or as a condition for the 
recovery of stranded costs (Maine, New Jersey, Nevada, Delaware, 
Arkansas, Massachusetts, Connecticut), the authority to require 
separate subsidiaries for regulated and non-regulated businesses 
(Nevada, New Jersey, Rhode Island, Connecticut, New Hampshire, Ohio, 
Virginia, Maryland, Maine), the authority to require functional 
separation of competitive and regulated businesses (i.e. the model 
adopted by FERC in Order No. 888) ( Illinois, New Jersey, Arkansas), 
and the authority to revoke subsidiary licenses for market power abuses 
(New Jersey).
    Question 7. The Administration bill authorizes FERC to provide 
backup market power remedies for retail markets at the request of 
States lack of authority to remedy market power. Do States lack 
authority to remedy marketpower issues?
    Answer: As our answers to Questions 5 and 6 indicate, States do not 
lack authority to remedy market power abuses that are within their 
jurisdictional authority under the Federal Power Act. Any legislation 
Congress considers that affects the allocation of jurisdiction must not 
restrict the ability of States to monitor market behavior and impose 
remedies necessary to protect consumers from market power abuses.
    Question 8. H.R. 2944 clarifies Federal and State jurisdiction, 
providing for FERC jurisdiction over transmission used for unbundled 
retail sales, and for State jurisdiction over transmission used for 
bundled retail sales. Is this clarification needed, and does the bill 
draw the jurisdictional line properly?
    Answer: NARUC believes clarification of Federal and State 
jurisdiction is needed. However, the bill does not draw the 
jurisdictional line properly. We support a jurisdictional division 
based upon the bright line distinction between wholesale and retail 
services: FERC would exercise jurisdiction to regulate wholesale power 
transactions, including the transmission services necessary to complete 
such transactions, and States would exercise jurisdiction to regulate 
retail power transactions, including the transmission and distribution 
services necessary to complete such transactions. Jurisdiction, 
including ratemaking authority, should not shift based upon State 
decisions to allow customer choice. Accordingly, NARUC does not support 
the bill's allocation to FERC of regulatory authority over unbundled 
retail sales.
    Similarly, we oppose other proposals that would be even more 
preemptive of State authority to regulate services provided retail 
customers, such as the proposals by Americans for Affordable Energy 
(AAE) and FERC Chairman Hoecker that would give FERC exclusive 
jurisdiction to regulate all retail transmission services, whether 
bundled or unbundled. Members of Congress should understand what these 
proposals ask it to do: provide a distant FERC exclusive authority to 
regulate prices and conditions of service provided by facilities that 
were planned and constructed to serve retail customers, that have been 
paid for by retail customers, and that criss-cross the fields, towns, 
forests and waterways owned by or adjacent to retail customers.
    Our proposal (retail authority to the States, wholesale to the 
FERC) is not a formula for chaos, or balkanization of the grid, or a 
crazy quilt. Rather, the situation described in Elizabeth Moler's 
testimony for AAE (i.e. the difference between transmission service in 
Virginia and West Virginia) is directly attributable to the decision 
FERC made in Order No. 888 to assert jurisdiction over unbundled retail 
transmission services. Had FERC not done so, regulatory jurisdiction 
would now be uniform in Virginia and West Virginia--both State 
commissions would regulate transmission services provided retail 
customers whether bundled (West Virginia) or unbundled (Virginia).
    Nor is it unusual for State and Federal regulators to share 
regulatory authority over facilities used for services provided in both 
jurisdictions. Indeed, this was the very state of affairs in the 
electricity industry beginning in 1935 when Congress first adopted the 
wholesale/retail distinction. Similar situations occur in the 
telecommunications industry where plant and equipment is used for both 
local and long-distance services. In sum, Congress should clarify the 
Federal Power Act to ensure that services provided to retail customers 
remain subject to State authority.
    Question 9. Some charge transmission owners are redesignating 
transmission facilities as distribution facilities to avoid FERC open 
access requirements. Have you seen examples of such efforts? Are any 
such utility efforts being supported by State public utility 
commissions?
    Answer: NARUC is aware of recent reports claiming that transmission 
owners are using the ``seven-factor test'' adopted by FERC in Order No. 
888 to ``refunctionalize'' their facilities. We are also aware of 
suggestions that this process is resulting in the conversion of 
facilities from Federally-regulated transmission to State-regulated 
distribution. Finally, we understand that the implementation of the 
seven-factor test is occurring in State regulatory proceedings where 
State commissions are making findings that are then implemented through 
FERC's Order No. 888 open-access tariffs. However, while we have not 
had time to conduct an exhaustive evaluation of State decisionmaking in 
this area, we can report the following:
    The Illinois Commerce Commission conducted extensive time consuming 
proceedings to apply the seven-factor test to its jurisdictional 
utilities. As Order No. 888 requires, the work conducted by the 
Illinois staff involved detailed analyses of diagrams and descriptions 
of the facilities comprising each utility's power delivery system. 
Application of the seven-factor test in Illinois resulted in some 
significant reclassification of facilities from transmission to 
distribution--up to 40% in the case of Commonwealth Edison. The 
Illinois staff is convinced that their Commission applied the test as 
FERC intended in Order No. 888, and that if there is a problem, it is 
attributable to the test itself.
    Similarly, the New York Public Service Commission conducted a 
classification proceeding to develop rules that categorize utility 
facilities consistently with FERC's Order No. 888 policies, focussing 
its attention on cost allocation and revenue impact issues, i.e. how 
the application of FERC's policies, supplemented with additional 
technical factors tailored to local conditions, would affect consumer 
rates. Importantly, while the rules developed in this proceeding have 
not been fully implemented, the New York commission undertook its 
analysis with the goal of supporting competitive markets in the State, 
not to restrict access or deny service.
    Some observations on the issue of refunctionalization:

 First, NARUC did not support the adoption of the seven-factor 
        test by Order No. 888. We believed at the time that contrary to 
        the Supreme Court's long-standing admonition that there be a 
        ``bright-line'' between State and Federal jurisdiction, the 
        ``seven-factor test'' would lead to case-by-case, power line-
        by-power line jurisdictional determinations based upon weighing 
        and reweighing of the factors. In other words, it was our view 
        that a multifactor test could only lead to differing outcomes 
        in different cases. It would appear that in this respect, Order 
        No. 888 is operating exactly as FERC intended: State 
        commissions are making case-by-case determinations in the first 
        instance based upon application of the seven factors, and the 
        results then go to the Federal level to be implemented via 
        tariff.
 Second, from the perspective of retail competition, it is not 
        clear that refunctionalization (to the extent it's occurring) 
        is necessarily being undertaken to avoid open-access 
        requirements as much as it is to shift costs from the Federal 
        to State jurisdiction. In open access States, transmission 
        owners that also provide distribution services (i.e. the 
        vertically integrated utilities formerly providing bundled 
        services) must provide open access service to retail customers 
        regardless of the character (transmission or distribution) of 
        the specific facilities used to deliver the power. Accordingly, 
        if the entire retail transaction is subject to one 
        jurisdictional authority at the State level (covering 
        transmission and distribution services), refunctionalization 
        can provide no escape from open access requirements.
 Third, our proposal to allocate jurisdiction based on how 
        facilities are used rather than through case-by-case 
        application of seven technical factors restores the bright line 
        and limits the opportunity to shift facilities from one side of 
        the jurisdictional line to the other. Clearly, an allocation of 
        jurisdiction based upon wholesale (FERC) and retail (State) 
        service avoids the case-by-case problems of the seven-factor 
        test while preserving the categorization of facilities as 
        State, Federal or joint that has existed for decades.
    Question 10. Should FERC regulate transmission that is not in 
interstate commerce--such as transmission in noncontiguous States and 
territories?
    Answer: As a preliminary matter, the extension of FERC authority to 
reach transmission services that are not in interstate commerce may 
raise constitutional issues concerning Congress' authority under the 
Commerce Clause.
    Regardless of constitutional concerns, NARUC opposes the extension 
of FERC authority that displaces, directs or preempts State authority. 
At this point, no one has made the case that FERC's authority should be 
extended to include transmission services provided in Alaska, Hawaii, 
or Texas as this question would imply.
    Question 11. Should States be able to discriminate against 
aggregators? For example, should one State be able to bar cooperatives 
from aggregating, while another State gives municipalities a preference 
by allowing forced aggregation?
    Answer: NARUC has taken no position on whether Federal legislation 
should address the specific issue of aggregation. However, we have a 
long-standing position that matters involving rates and conditions of 
service to retail consumers should be addressed at the State level. 
Accordingly, NARUC does not support legislation that preempts State 
authority over retail services. Finally, we believe that the State 
legislatures and commissions have adequate authority and interest to 
work out fair and equitable aggregation rules and procedures without 
Federal involvement.
    Question 12. H.R. 2944 includes aggregation language barring States 
from discriminating among aggregators. Have any of the 24 States that 
opened their retail electric markets discriminated against aggregators? 
If so, please identify the States and describe the discriminatory 
provisions.
    Answer: As stated in our answer to Question 11, we believe that 
issues affecting retail electric service should be addressed at the 
State level. Issues concerning eligibility standards to aggregate 
retail purchases should be addressed in State legislatures and 
regulatory commissions.
    Question 13. Mr. Brown introduced a bill (H.R. 2734) to grant 
municipal governments a preference in aggregating consumers, by 
permitting them to aggregate consumers without their express consent 
and preempting State laws that do not have opt out aggregation 
provisions. What is NARUCs position on H.R. 2734?
    Answer: NARUC has taken no position on H.R. 2734.
    Question 14. Some States established their own renewable portfolio 
standards. Is there a need to clarify State authority to impose 
renewable portfolio standards?
    Answer: There is a need to clarify State authority to impose 
renewable portfolio standards. Congress should make clear that State-
adopted RPS programs are permissible under Federal law, i.e. not 
preempted or precluded by such statutes as the Federal Power Act or 
PURPA, or the Commerce Clause.
    Question 15. H.R. 2944 includes net metering provisions. Who should 
pay for new meters--the consumer, the local distribution company, or 
the retail electric supplier? Who should own the meters?
    Answer: These issues should be left to the states, who should 
continue to have authority over distribution networks.
    Question 16. Contractors propose amendments to provide for Federal 
regulation of cross-subsidies in distribution rates, require States to 
develop codes of conduct to prevent cross-subsidies and limit use of 
names and logos by utilities, and provide for enforcement of these 
prohibitions by State public utility commissions. What is your view of 
these proposals? Do States have sufficient authority to address cross-
subsidy issues, or is Federal legislation necessary?
    Answer: NARUC reiterates its position that retail activities should 
remain within the jurisdiction of State commissions. Federal 
legislation should clarify the authority of the States and territories 
to require and police the separation of utility and non-utility, and 
monopoly and competitive businesses. Congress should also clarify that 
State and territorial regulators have the ultimate and meaningful 
authority to ensure effective retail markets and should eliminate any 
barriers to the exercise of that authority by the States and 
territories. It is inappropriate to force small businesses and other 
such aggrieved parties to take their complaints to Washington for 
resolution. States have complaint processes to deal with local 
concerns. States have instituted rulemaking proceedings to impose 
affiliate transaction and other rules on monopoly utility companies 
under their jurisdiction to assure that electric customers do not 
subsidize non-utility ventures. Current State restructuring efforts are 
providing critical tools to assist State and territorial regulators in 
addressing market power and issues of unfair competition.
                                 ______
                                 
                                                   October 18, 1999
The Honorable Joe Barton
Chairman
Subcommittee on Energy and Power
Room 2125 Rayburn Building
Washington, D.C. 20515-6115
    Dear Chairman Barton: Thank you for your letter of October 8, 1999, 
and thank you again for inviting me to testify on behalf of the 
National Association of State Utility Consumer Advocates (NASUCA) at 
your Subcommittee Hearing on October 5, 1999. As I stated at that 
hearing, NASUCA sincerely appreciates the willingness of you and your 
staff to reach out in your deliberations to NASUCA members as the 
representatives of retail electric consumers in their respective 
states. NASUCA looks forward to continuing to work with you and other 
members of Congress as you go forward with the consideration of 
legislation in this vital area.
    In response to the specific questions in your October 8, 1999 
letter, NASUCA would respond as follows:
    Question 1. Why do you believe a Federal electricity bill must 
include market power provisions? States have authority to address 
generation market power issues as they enact retail competition laws, 
and may order divestiture, as some have done. Also, antitrust law 
applies to electric utilities in competitive markets.
    Response. Like electrons flowing on the grid, market power extends 
beyond state boundaries. Individual states do not have jurisdiction 
over companies or assets outside of their state borders. Antitrust laws 
do not adequately address market power lawfully obtained, as through 
the former legal and regulatory structure that existed for almost 100 
years.
    Question 2. Should States be able to set transmission reliability 
standards that supercede national and regional standards. How many 
States set transmission reliability standards? I understand New York is 
the only State that regulates transmission reliability. If New York is 
the only State that issues such standards, how can it be an essential 
State function?
    Response. States do have a vital role in maintaining the 
reliability, safety, and adequacy of electric systems with each state's 
borders. All states address reliability issues in some way, even if 
they do not have specific regulations regarding ``transmission 
reliability.'' It is NASUCA's position that states should retain 
authority to address all reliability matters within their state 
boundaries as long as their actions are not inconsistent with the 
actions of the new North American Electric Reliability Organization or 
the Federal Energy Regulatory Commission with respect to bulk power 
transactions in interstate commerce.
    Question 3. Why tie PUHCA repeal to divestiture? In my view, PUHCA 
is a barrier to entry. Why should existing utilities have to sell their 
generation to get out from under PUHCA? How much of U.S. generating 
capacity is operated by subsidiaries of registered holding companies? 
How much of U.S. generating capacity are you proposing to divest?
    Response. NASUCA does not tie PUHCA repeal to divestiture. Rather, 
NASUCA urges the Congress not to repeal PUHCA without first insuring 
that holding companies are subject to either effective competition or 
effective regulation where effective competition does not exist. NASUCA 
does not have statistics regarding generating capacity that you 
requested, nor does NASUCA propose a specific level of divestiture.
    PUHCA still contains structural protections, vital reviews of 
affiliate transactions, and the federal means to order divestiture of 
one or more portions of a business in order to protect consumers and 
promote the public interest. It also prohibits utility holding 
companies from acquiring utility companies that provide monopoly 
distribution service in disparate regions.
    NASUCA provides several options regarding means for protecting 
consumers and competition from this occurrence. Divestiture of 
generation is only one potential mechanism; NASUCA would expect that a 
showing of competitive retail generation markets for small customers in 
each state in which the utilities have service territories would be the 
primary means to address this potential problem. In addition, 
regulators of distribution services in each state would need to ensure 
that there is effective regulation to prevent utilities from gaining an 
unfair advantage at captive consumers' expense.
    Question 4. How many of the 24 States that opened their retail 
markets addressed generation market power issues? Some States--Texas, 
California, New York, and the New England States--included generation 
market power provisions. Others--New Jersey and Pennsylvania--did not.
    Response. NASUCA does not maintain a database that would enable a 
prompt response to this question. In Pennsylvania, there is, in fact, a 
section on ``Market Power Remediation'', 66 Pa.C.S. Sec. 2811.
    Question 5. The Administration bill authorizes FERC to provide 
backup market power remedies for retail markets at the request of 
States lack of authority to remedy market power. Do States lack 
authority to remedy market power issues?
    Response. As noted in the answer to Question Number 1, states may 
lack authority to address some market power issues that arise beyond 
their borders, but that can have an impact within their borders. NASUCA 
would agree that states should be permitted to request FERC ``backup'' 
on market power issues that are beyond the states' own authority to 
address.
    Response. Again, NASUCA thanks you for the opportunity to provide 
continued input on these issues. If you have any questions about 
NASUCA's position on these or any other electric restructuring issues, 
please contact NASUCA's Executive Director, Charles Acquard at 202-727-
3908.
            Sincerely yours,
          Irwin Popowsky, Consumer Advocate of Pennsylvania
                                   Immediate Past President, NASUCA
                                 ______
                                 
    Response of Hon. T.J. Glauthier, Deputy Secretary of Energy, to 
                      Questions of Hon. Joe Barton
    Question 1. The Burr bill (H.R. 667) and the Sawyer bill (H.R. 
2786) repeal section 203 of the Federal Power Act. What is your view on 
this proposal?
    Response. We oppose the repeal of Section 203 of the FPA. As we 
transition from a period of monopoly utility service to competition in 
the wholesale and retail markets, it is imperative that we act to 
eliminate the impediments to competition. While utility mergers and 
consolidations are not per se inappropriate, some do have the potential 
to reduce competition. We need to ensure that mergers and 
consolidations don't actually reduce competitive pressures.
    Determining whether a merger will be anti-competitive requires 
regulators and antitrust enforcers to make predictive judgements. These 
judgements are frequently difficult, and are certainly more difficult 
in an industry, such as electricity, where there are no fully 
competitive markets to use as a benchmark to determine whether a 
proposed merger will harm consumers.
    It is important that the Federal Energy Regulatory Commission 
(FERC), with its significant expertise, retains its authority to ensure 
that proposed mergers are in the public interest. Section 203 provides 
FERC with the flexibility to craft appropriate policies and procedures 
dealing with mergers in the electric power industry over which it has 
jurisdiction. Section 203 also gives FERC the ability to place 
conditions on its merger approvals and to exercise continuing 
jurisdiction over the merged entities. This authority plays a 
significant role in preventing anticompetitive mergers, particularly 
during the transition period to competition.
    Question 2. States have authority to address generation market 
power issues as they enact retail competition laws, and may order 
divestiture, as a number of States have done. Also, antitrust law 
applies to electric utilities after States cease regulating retail 
rates. Why is it necessary to give FERC a broad grant of discretionary 
authority to restructure the industry and order divestiture?
    Response. The Administration bill would give FERC the authority to 
address wholesale market power problems. States do not have 
jurisdiction over sales of electricity in the wholesale market and 
consequently lack authority to address possible wholesale market power 
problems. FERC, under the Administration bill, would have backup 
authority to address retail market power problems. This authority can 
only be triggered at the request of a state. This backup authority is 
needed because a state may not have adequate statutory authority or 
jurisdiction to address market power that harms its consumers.
    As we make the transition to competition, ownership patterns and 
transmission constraints in a particular region may result in consumers 
being denied access to an adequate number of generators. This situation 
may allow the dominant firm to raise price above competitive levels to 
those consumers. In those instances, it is absolutely critical that 
FERC be given the necessary authority to mitigate market power. The 
Administration bill would give FERC the authority to mitigate market 
power, after a public proceeding, only in those instances where it is 
found that a utility can exercise market power. This is not a broad 
authority to ``restructure the industry.'' It is an authority to 
protect consumers from market power. The ultimate goal of the 
Administration's market power provisions is to ensure that consumers 
realize the benefits of competition. A failure to address adequately 
possible market power problems may result in replacing regulated 
monopolists with unregulated ones.
    The antitrust laws do not outlaw the mere possession of monopoly 
power. In other words, the antitrust laws cannot challenge the 
structure of a market. For example, if, after the advent of 
competition, a utility possesses a 90 per cent share of a market, the 
antitrust laws are powerless to prevent this firm from charging 
monopoly prices. In order for a monopolist to violate the antitrust 
laws, it must engage in ``bad acts,'' which are defined as exclusionary 
conduct designed to enable a firm to gain or maintain a monopoly. 
Charging high prices is not considered exclusionary conduct and is 
therefore not an antitrust violation.
    Question 3. The Administration bill gives FERC extraordinary powers 
to order divestiture. How many Federal regulatory agencies have the 
power to restructure the industries they regulate, including the power 
to order divestiture?
    Response. Section 11 of the Public Utility Holding Company Act 
(PUHCA) provides the SEC with the authority to require a utility 
holding company to simplify its corporate structure, including the 
authority to require divestiture. In addition, the FCC has the 
authority to require divestiture. The FCC has issued orders and 
promulgated regulations authorizing divestiture in those instances when 
the agency determines that divestiture is necessary to preserve 
competition.
    It is important to keep in mind that the electric power industry is 
fundamentally different from other industries. All electric energy 
produced by all interconnected generating stations must continuously 
and instantaneously balance the aggregate energy being consumed by all 
users. Electricity cannot be economically stored. Market power 
remedies, such as divestiture, were probably not necessary in those 
industries that did not develop from government-sanctioned monopolies.
    Question 4. The Administration bill would authorize FERC to order 
divestiture to mitigate generation market power. Aren't there less 
intrusive means of mitigating market power, such as reregulating retail 
rates charged by suppliers?
    Response. It is important to note that divestiture is not the 
exclusive remedy that FERC would have at its disposal to address market 
power under the Administration proposal. FERC may find that there are 
other remedies that adequately mitigate market power. Re-regulating 
rates may not necessarily be a ``less intrusive'' means of mitigating 
market power. Rate regulation is very costly and burdensome. It 
requires complex rules and constant oversight and examination of a 
utility's sensitive records. There are constant battles over, among 
other things, accounting rules and proper allocation of costs. After 
more than a century of experience with price regulation in this 
industry, there is a strong consensus--which forms the foundation of 
the efforts to restructure the industry--that markets are superior to 
price regulation.
    Divestiture is a common remedy used by the federal enforcement 
agencies to remedy likely market power caused by an anticompetitive 
merger. This remedy, in the merger context, preserves the competition 
that otherwise would have been lost. Once the assets necessary to 
preserve competition are sold, there is no government oversight of the 
firm. The market establishes the prices at which the firm's products or 
services are sold.
    Likewise, in a restructured electric power industry, FERC would 
seek divestiture only when necessary to give customers an adequate 
number of suppliers from which to choose. Once the assets are sold that 
are necessary to ensure that there is competition, the market sets the 
prices at which energy is sold.
    Question 5. You testified antitrust laws are not sufficient to 
address generation market power issues. Describe a market power abuse 
that would not violate the antitrust law.
    Response. The mere possession of monopoly power does not constitute 
a violation of the antitrust laws. For example, an incumbent utility 
with a significant share of the market may be able profitably to raise 
price above competitive levels to consumers. This firm's choosing to 
exploit its market power by raising its prices above competitive levels 
would not constitute an antitrust violation.
    Question 6. The Administration proposes a public benefits fund 
financed by a new tax on electric generation. This proposal is based on 
a theory States will slash their public benefits programs as they open 
retail electric markets. 24 states have opened their retail markets. 
How many slashed their public benefits programs? How many strengthened 
their programs? Why is a Federal public benefits fund needed if States 
maintain public benefits programs?
    Response. The Administration's proposed public benefits fund does 
not envision any taxes. Rather, a public benefits charge (capped at \1/
10\ of a cent per kilowatt-hour) would be established by FERC to 
generate an amount sufficient to meet requests made by State and tribal 
governments for matching funds (subject to a $3 billion/year national 
cap) to support eligible public purpose programs. If no state or tribal 
government sought matching funds, no fees would be collected.
    In addition, a wires charge of up to .17 mills per kwh would be 
available if the Secretary of Energy were to determine that competition 
has adversely impacted rural consumers. The rural safety net would be 
administered through the public benefits fund.
    Of the states that have adopted restructuring programs, six states 
have decreased their funding for energy efficiency programs and eight 
states have increase funding for these programs.
    Expenditures for public purpose programs have generally declined in 
recent years. For example. spending on demand-side-management programs 
in 1998 were approximately half the level of 1994 expenditures.
    Many, but not all, states that have opened their retail markets 
have arranged to continue funding of public purpose programs for a 
limited time period. A federal public benefits fund would provide all 
states with an incentive to maintain such programs through 2015. 
Federal encouragement is appropriate given that the benefits of public 
purpose programs often extend beyond state boundaries.
    Question 7. Legislation introduced by Mr. Pallone (H.R. 2569) 
includes a Federal public benefits fund different from the 
Administration's proposal. The Pallone bill sets different limits for 
State public benefits programs, imposes a distribution tax instead of a 
generation tax, and is twice as large ($6 billion instead of $3 
billion). What is the Administration's position on H.R. 2569?
    Response. The Administration agrees with the intent of H.R. 2569--
to provide a mechanism to promote expenditure on public benefits 
programs. Both proposals authorize the collection of a fee to help pay 
for State public purpose programs.
    With regard to the assessment of the fee, the Administration 
believes that a charge on generation is more appropriate. Many 
distribution companies are very small. A charge of as much as 2.0 mills 
per kilowatt-hour, as proposed in H.R. 2569, would represent a 
significant increase in the costs of distribution. An additional charge 
of up to 1 mill (as the Administration has proposed) would not have 
nearly the same effect on the costs of generation.
    With regard to the size of the Federal contribution to public 
benefits fund, the Administration believes that the Federal 
contribution of $3 billion and the contribution of the states at 
another $3 billion would be sufficient to cover what was being 
recovered in rates prior to the transition to more competitive markets. 
However, we also note that the charge envisioned in H.R. 2569 would be 
reduced by 50% of the amount of any wire charge imposed by a state for 
eligible public purpose programs. Therefore, the amount collected under 
H.R. 2569 is unlikely to be double the amount collected under the 
Administration bill.
    Question 8. Some argue Federal electricity legislation should not 
include any consumer protection provisions, and should rely on States 
to address these issues. Why should consumer protection provisions be 
included in Federal legislation.
    Response. The Administration believes that, generally, most 
consumer protection issues are best addressed by the states. 
Nevertheless, it is important to recognize that, in a competitive 
environment, marketers headquartered in various states will be 
competing for customers. State regulatory authority over unscrupulous 
marketers will be somewhat limited. That is why the Administration bill 
includes provisions designed to prevent retail suppliers from engaging 
and slamming and cramming practices. I understand that H.R. 2944 
contains similar provisions.
    Question 9. H.R. 2944 clarifies Federal and State jurisdiction, 
providing for FERC jurisdiction over transmission used for unbundled 
retail sales, and for State jurisdiction over transmission used for 
bundled retail sales. Is this clarification needed, and does the bill 
draw the jurisdictional line properly?
    Response. One of the reasons Congress needs to enact electricity 
restructuring legislation is to ensure that FERC's open access rules 
apply to all significant transmission owners. FERC's current authority 
is limited under the Federal Power Act and, potentially, as a result of 
a recent 8th Circuit Court of Appeals Decision in the Northern States 
Power v. FERC case. If wholesale and retail competition are going to 
effectively develop, FERC must have the ability to ensure that all 
significant transmission facilities are subject to open access 
requirements. H.R. 2944 could be interpreted as limiting the 
applicability of FERC's open access rules to unbundled retail 
transmission; leaving a significant portion of transmission exempt from 
these open access requirements. The bill needs to be modified to 
eliminate this uncertainty and ensure that the open access rules apply 
to all transmission.
    Question 10. You criticize H.R. 2944 because it does not provide 
for FERC regulation of transmission used to make bundled retail sales. 
Did the Administration bill grant FERC that authority? My understanding 
it did not. How can you criticize H.R. 2944 for not including something 
the Administration bill did not propose?
    Response. The Administration's proposed legislation is silent with 
regard to FERC's authority over bundled retail transmission. However, 
our bill was transmitted to Congress prior to the 8th Circuit's 
decision in the Northern States case. This decision raises serious 
questions about the potential effectiveness of FERC's open access 
rules. Certainly, legislation must clarify that FERC has sufficient 
jurisdiction to ensure that utilities don't use their transmission 
facilities to discriminate against other marketers.
    Question 11. FERC does not regulate transmission systems operated 
by State and municipal utilities and cooperatives, which are some of 
the largest systems in the country. State and municipal utilities 
oppose FERC regulation of transmission rates, and want to retain that 
authority. If State and municipal utility transmission systems continue 
to be unregulated could they shift power costs onto their transmission 
rates? Could they discriminate against competitors?
    Response. If FERC were to have the authority to ensure that 
municipal and cooperative utilities' transmission rates are just, 
reasonable and not unduly discriminatory, these utilities will be on 
the same footing as public utilities are today, and will be unable to 
use their transmission systems to advantage their power systems.
    Question 12. Should FERC regulate transmission that is not in 
interstate commerce--such as transmission in noncontiguous States and 
territories?
    Response. The Administration believes that FERC should regulate 
only transmission that is in interstate commerce. Constitutional 
questions might arise should FERC's jurisdiction be extended to 
transactions not in interstate commerce.
    Question 13. What is your view of the transmission provisions of 
the bill introduced by Mr. Sawyer (H.R. 2786)?
    Response. The Administration agrees with Mr. Sawyer that 
transmission is a key element of promoting wholesale and retail 
competition. However, we are concerned about several provisions in the 
bill.
    First, H.R. 2786 requires FERC to allow transmitting utilities to 
recover all costs incurred in providing transmission service. We 
believe that, while this is generally the appropriate policy, FERC must 
retain authority to review costs to ensure that they are appropriate 
for inclusion in rates.
    Under H.R. 2786, transmission rates must be established to 
accomplish a number of different policy goals. We believe that these 
are laudable goals. However, we don't believe they should be 
statutorily mandated. FERC has the expertise and experience to set 
pricing policies appropriate to the transmission industry. On the other 
hand, permitting negotiated transmission rates, as H.R. 2786 does, 
could result in discrimination among users of the transmission system.
    The Administration also agrees that FERC should encourage 
innovative pricing policies. However, we have concerns regarding 
incentive pricing to encourage participation in a regional transmission 
organization (RTO). The Administration believes that FERC should have 
the authority to require such participation, as it may not be possible 
to ensure a fully competitive electricity market without RTOs. For the 
same reason, the Administration is concerned with H.R. 2786's goal of 
voluntary RTO formation. In addition, there is no requirement that RTOs 
be independent of market participants. We agree with FERC that 
independence is an RTO's most important characteristic.
    Question 14. H.R. 2944 includes an exemption from FERC regulation 
for small transmission owners. Do you believe this exemption is 
appropriate? Do you have any comment on the specific exemption 
provision in H.R. 2944?
    Response. The Department of Energy supports an approach which 
exempts, from FERC jurisdiction, transmission facilities owned by 
municipal and cooperative utilities which are not essential to 
efficient, reliable and competitive interstate power markets.
    Question 15. NARUC proposed amending the reliability title of H.R. 
2944 to authorize individual States to establish reliability standards. 
What is your position on this proposal? Would 50 different reliability 
standards improve reliability? How would 50 different standards affect 
interstate commerce?
    Response. The issue of how best to incorporate a role for the 
states in bulk power system reliability is complex. Certainly, a system 
of 50 different standards would not improve reliability, and would have 
an adverse impact on interstate commerce. We support a continuation of 
the dialogue between NARUC and NERC and other stakeholders to develop 
provisions that would allow for an appropriate state role.
    Question 16. The reciprocity provisions of the Administration bill 
would grant States, municipal utilities, and cooperatives the power to 
regulate interstate commerce. 3,000 different entities would regulate 
interstate commerce (there are 2,000 municipal utilities and over 900 
cooperatives). Is that wise? Since reciprocity is regulation of 
interstate commerce, isn't it better it be a Federal rule?
    Response. While it is true that reciprocity requirements regulate 
interstate commerce, authorizing states and non-regulated municipal and 
cooperative utilities to impose reciprocity requirements is consistent 
with the approach taken by H.R. 2944, which leaves many matters related 
to interstate commerce subject to state and local regulation.
    Question 17. You argue that utilities could avoid the reciprocity 
provisions in H.R. 2944 by filing sham open access plans with their 
State public utility commissions. How do you propose to address the 
situation where a multistate utility operates in both open and closed 
States? Should the utility be denied access to retail markets in the 
open States it has historically served?
    Response. The Administration does not believe that a multistate 
utility should be penalized if it serves a state that requires 
competition and a state that has yet to require competition. However, 
the reciprocity provisions included in H.R. 2944, which apparently are 
intended to discourage utilities from acting to inhibit the 
introduction of retail competition, enables a utility to avoid the 
reciprocity restrictions simply by funding a competition plan with its 
state commission. There is no mechanism to ensure that the plan filed 
by the utility is a serious proposal and that the utility will make an 
effort to allow its customers access to the benefits of retail 
competition
    Question 18. The Administration bill includes a Federal date 
certain with an opt out--a flexible mandate. Why do you believe the 
flexible mandate is needed? The real pressure on States to open their 
retail electric markets comes from competition with other States for 
economic development. The flexible mandate will result in a lot of 
litigation, and may not accelerate State action.
    Response. The Administration believes that retail competition, if 
structured properly, will benefit consumers, the economy and the 
environment. We also believe that most, if not all, state public 
service commissions and non-regulated municipal and cooperative 
utilities would concur if they held a proceeding to review the matter. 
The flexible mandate approach encourages states and non-regulated 
utilities to implement retail competition programs but recognizes that 
unique local issues might require a different approach.
    We disagree with your assumption that the ``flexible mandate will 
result in a lot of litigation . . .'' The opportunities for challenging 
the decision of a state public service commission or a non-regulated 
utility to opt-out are limited.
    Question 19. A number of States have established their own 
renewable portfolio standards. Is there a need to clarify State 
authority to impose renewable portfolio standards, or is there no doubt 
States have such authority?
    Response. We are unaware of any challenges to the authority of 
states to adopt renewable portfolio standards. In addition, we believe 
states would have the ability to impose a renewable portfolio standard 
and require a higher amount of renewable generation if a Federal 
renewable portfolio standard is enacted.
    The Administration believes that the limited programs that have 
been adopted in a small number of states cannot provide the significant 
national benefits that would result from the adoption of a national 
renewable portfolio standard that requires all retail sellers to cover 
7.5% of their sales with generation from eligible renewable resources 
by 2010.
    Question 20. Does the Administration support the bill introduced by 
Mr. Waxman to amend the Clean Air Act to require older coal power 
plants in the Midwest and Southeast to meet new source performance 
standards (H.R. 2900)?
    Response. The Administration has not yet taken a position on H.R. 
2900.
    Question 21. The Administration bill includes aggregation language 
similar to the aggregation provisions in H.R. 2944. Have any of the 24 
States that opened their retail electric markets discriminated against 
aggregators? If so, please identify the States and describe the 
discriminatory provisions.
    Response. Maryland, which adopted retail competition legislation, 
prevents municipalities from acting as aggregators. In addition, it is 
not entirely clear that all states permit the rural electric 
cooperatives operating within their borders to aggregate on behalf of 
their distribution customers.
    Question 22. Mr. Brown introduced a bill (H.R. 2734) to grant 
municipal governments a preference in aggregating consumers, since it 
permits them to aggregate consumers without their consent. What is the 
Administration's position on that bill? Should municipalities have an 
advantage in aggregating over churches, social and charitable 
organizations, and others?
    Response. The Administration believes that aggregation is an 
important tool to ensure that residential and small commercial 
electricity consumers reap the full benefits of retail competition 
programs. It is the Administration's position that municipalities and 
all other entities should be able to aggregate groups of consumers. At 
the same time, we don't believe that any aggregator should be able to 
force a consumer to be served by that entity. We don't read the Brown 
bill as forcing any consumer to be served by a municipal aggregator.
    Question 23. The Administration bill includes interconnection 
provisions similar to H.R. 2944. Will these provisions lower barriers 
to entry for new power plants?
    Response. Interconnection standards in the Administration bill 
apply specifically to small-scale distributed generation facilities and 
combined heat and power facilities. These provisions lower a 
potentially important barrier to entry for those new power plants that 
fail within these categories. Unwarranted impediments to 
interconnection provide a means for incumbent utilities to prevent 
entry and exert market power. Moreover, interconnection standards vary 
widely from utility to utility thereby discouraging widespread use of 
distributed generation. For these reasons, the Administration proposes 
a provision to establish and implement national uniform, and non-
discriminatory technical interconnection standards for the hookup of 
distributed power generation systems to distribution utilities.
    Question 24. The Administration bill promotes interconnection of 
``small scale electric power generation facilities'' of undefined size, 
and H.R. 2944 promotes interconnection of distributed generation 
facilities of 50 megawatts or less. Should distributed generation 
facilities be of unlimited size? Are there reliability implications if 
these facilities are too large?
    Response. We believe that distributed power is likely to play a 
significant role in meeting customer needs in restructured electricity 
markets. The Administration bill does not set a specific size threshold 
for distributed generation facilities because we believe that the 
definition of a ``small-scale electric power generation facility'' 
should be determined based on technical considerations. A working group 
under the Institute of Electrical and Electronics Engineers is already 
developing a voluntary industry standard for interconnecting 
distributed power with electric distribution and subtransmission 
systems, and plans to have a complete draft ready by March 1999 to 
start the consensus process. We understand that the current draft 
envisions voluntary standards applicable to facilities up to 50 
megawatts in size, but this is clearly subject to further technical 
deliberation.
    Question 25. The Administration bill includes net metering 
provisions similar to H.R. 2944. Who should pay for new meters--the 
consumer, the local distribution company, or the retail electric 
supplier? Who should own the meters?
    Response. The Administration believes that questions concerning the 
ownership of and payment for distribution meters should be addressed at 
the state level. In this regard, meters used for net metering are no 
different from other distribution meters. However, given the national 
interest in increased use of renewable energy technologies, the 
Administration's restructuring proposal would insure that net metering 
service is made available to consumers in all parts of the country who 
wish to install small-scale renewable energy technologies.


            THE ELECTRICITY COMPETITION AND RELIABILITY ACT

                              ----------                              


                       WEDNESDAY, OCTOBER 6, 1999

                  House of Representatives,
                             Committee on Commerce,
                          Subcommittee on Energy and Power,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m. in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Stearns, Largent, 
Burr, Whitfield, Shimkus, Wilson, Pickering, Fossella, Bryant, 
Ehrlich, Hall, McCarthy, Sawyer, Markey, and Wynn.
    Staff present: Joe Kelliher, majority counsel; Cathy Van 
Way, majority counsel; Miriam Erickson, majority counsel; 
Ramsen Betfarhad, economic advisor; Elizabeth Brennan, 
legislative clerk; Sue Sheridan, minority counsel; and Rick 
Kessler, minority professional staff member.
    Mr. Barton. The Subcommittee on Energy and Power of the 
Commerce Committee will come to order.
    Today is a continuation of a hearing that we began 
yesterday, a legislative hearing on the pending piece of 
legislation, H.R. 2944.
    Today we are going to begin hearing from groups out in the 
country that have an interest in this. I think we have a total 
of 17 witnesses in two panels, and I believe that we have 
accepted every witness request from every member of the 
subcommittee on both sides of the aisle.
    I will make this announcement periodically during the day, 
as more members show up, but it is unlikely we will go to 
markup next week because the full committee is going to try to 
mark up a Superfund bill that Congressman Oxley is working on 
in his subcommittee, but it is the Chair's intention to spend 
the rest of this week and next week getting input from members 
and interest groups on specific legislative language and 
specific changes to H.R. 2944, and then the following week--not 
next week, but the week after next--to schedule a markup. And I 
will do that in conjunction with Chairman Bliley and 
Congressman Hall and Congressman Dingell in terms of actually 
scheduling a date certain for a markup. But it is my intention 
to do that not next week but the week after next.
    With that, we want to begin to hearing testimony. We are 
going to start with Mr. William Helton, which is somewhat 
different. Normally, we go from the Chair's left to right, but 
we are going to go from the Chair's right to left because that 
is the way we have it in the witness list.
    So, Mr. William Helton is with New Century Energies, and he 
represents the Alliance for Competitive Electricity.
    Your statement is in the record in its entirety. We ask 
that you summarize it in, let's say, 6 minutes. How about that?
    Welcome to the committee.

      STATEMENTS OF WILLIAM HELTON, NEW CENTURY ENERGIES, 
  REPRESENTING ALLIANCE FOR COMPETITIVE ELECTRICITY; DAVID R. 
  NEVIUS, VICE PRESIDENT, NORTH AMERICAN ELECTRIC RELIABILITY 
   COUNCIL; ALAN H. RICHARDSON, EXECUTIVE DIRECTOR, AMERICAN 
   PUBLIC POWER ASSOCIATION; DAVID K. OWENS, EXECUTIVE VICE 
    PRESIDENT, EDISON ELECTRIC INSTITUTE; LYNNE H. CHURCH, 
EXECUTIVE DIRECTOR, ELECTRIC POWER SUPPLY ASSOCIATION; WILLIAM 
     R. MAYBEN, PRESIDENT, NEBRASKA PUBLIC POWER DISTRICT, 
 REPRESENTING LARGE PUBLIC POWER COUNCIL; GLENN ENGLISH, CHIEF 
    EXECUTIVE OFFICER, NATIONAL RURAL ELECTRIC COOPERATIVE 
   ASSOCIATION; DAVID G. HAWKINS, DIRECTOR OF AIR AND ENERGY 
PROGRAMS, NATURAL RESOURCES DEFENSE COUNCIL; AND RAJESHWAR RAO, 
    PRESIDENT, INDIANA MUNICIPAL POWER AGENCY, REPRESENTING 
             TRANSMISSION ACCESS POLICY STUDY GROUP

    Mr. Helton. Mr. Chairman and members of the subcommittee, I 
am Bill Helton, chairman and chief executive officer of New 
Century Energies. New Century Energies serves over 1.5 million 
electric and 1 million gas customers in portions of six western 
States, including Colorado, New Mexico, Texas, Wyoming, Kansas, 
and Oklahoma. Three of the States we operate in--New Mexico, 
Oklahoma, and Texas--already have adopted customer choice 
legislation.
    We support providing customers with a choice of their 
electric supplier and are working in our other States to 
achieve that very objective.
    I also am testifying today on behalf of the Alliance for 
Competitive Electricity, an organization of 11 investor-owned 
utilities formed nearly 4 years ago for the purpose of 
promoting Federal restructuring legislation to foster a more-
competitive electric industry.
    Ten of our 11 members operate in States that already have 
adopted retail choice plans. Now, these States include: 
California, New Mexico, Texas, Oklahoma, Michigan, 
Pennsylvania, New Jersey, Massachusetts, Rhode Island, New 
Hampshire, Maine, Virginia, and Arkansas.
    The Alliance has endeavored to be an interested, credible 
broker on many difficult restructuring issues.
    Mr. Chairman, as you know better than anyone, addressing 
the Federal issues associated with restructuring the $220 
billion electric industry has proven to be complex, 
controversial, and mostly thankless task.
    I personally want to take this time to thank the committee 
for its time and energy, attention, and perseverance, and, in 
many cases, good humor that you have brought to bear on this 
issue, and for doing the hard work that needs to be done to get 
to the finish line.
    I also want to thank you and your staff for listening to 
our ideas and our suggestions and our comments on the August 4 
staff discussion draft.
    Mr. Chairman, H.R. 2944 is not a perfect bill, from our 
perspective, but it is a good one that fairly addresses most 
Federal electric industry restructuring issues in a reasoned 
and balanced way.
    At your very first hearing on electric industry 
restructuring issues in this Congress, you asked a 
distinguished panel of witnesses whether, if certain key 
Federal restructuring issues could be addressed, but not all of 
them, would it make sense to pass a good, albeit not perfect, 
bill.
    Three of your witnesses all indicated that it was important 
not to let the perfect be the enemy of the good, and there was 
an urgency to dealing with a number of restructuring issues, 
including reliability. That was good advice then and that is 
good advice today.
    As we work toward implementing customer choice in the three 
States that we serve that have adopted this as their policy, it 
is becoming increasingly clear that, despite the primary role 
the States must play, the States do not have the jurisdiction 
or the authority to do all that is necessary.
    For example, the States cannot deal with the Federal 
barriers that now stand in the way of a more competitive 
industry, including PUHCA and PURPA.
    The States cannot clarify State/Federal jurisdictional 
ambiguity that threatens FERC order number 988 and State 
restructuring plans.
    The States, additionally, cannot extent FERC's transmission 
regulation, including FERC's open access policies, to non-FERC 
jurisdictional transmission owners, including TVA and the PMAs.
    The States cannot reform the PMAs or the TVA to allow the 
consumers they serve to obtain the benefits of a more-
competitive electricity market.
    The States cannot insure the reliability of the interstate 
transmission grid.
    And, last, the States cannot establish a new regulatory 
regime governing the transmission system that ensures open, 
non-discriminatory access.
    The States cannot do these many things that need to be done 
to bring all consumers the benefits of a more-competitive 
electric industry. So, regardless of your position or your 
State's position on retail customer choice, much must be done 
in Congress in order to help smooth the restructuring path.
    We believe that your bill satisfactorily addresses most of 
these core Federal issues. In particular, we are pleased the 
way the bill addresses uniform regulation and open access for 
all transmission owners. We are pleased the way it addresses 
the clarification of State/Federal regulatory jurisdiction. We 
are pleased with the bill's assist in insuring reliability of 
the bulk power system. We are also pleased in the way it 
addresses that States should be given explicit authority to 
impose charges on jurisdictional activities. Also, the bill 
does a good job in addressing FERC's regulation that it should 
be extended to PMA's TVA energy sales rates.
    The bill adequately covers the repeal of PUHCA and PURPA.
    Mr. Chairman, these issues that I have mentioned must be at 
the core of any comprehensive Federal electric industry 
restructuring legislation, and all are addressed satisfactorily 
in H.R. 2944.
    We remain concerned, however, over the private use and the 
co-op tax relief provision contained in H.R. 2944 and believe 
that BPA, TVA, regional transmission organization, reciprocity, 
merger review, aggregation, and interconnection provisions can 
be improved without fundamentally changing your intent.
    We will be developing perfecting legislative language to 
accomplish those improvements.
    H.R. 2944 does a great deal to mitigate market power. The 
bill requires utilities to turn over operational control of 
their transmission systems to an independent RTO that allows 
customers to band together----
    Mr. Barton. Mr. Helton, can I ask you to summarize. You 
have gone past your 6 minutes.
    Mr. Helton. Yes, sir.
    Mr. Barton. We want to move this panel on.
    Mr. Helton. In conclusion, Mr. Chairman----
    Mr. Barton. Very good. Fast learner.
    Mr. Helton. I want to thank you and the other members of 
the subcommittee for the good work that you have done. H.R. 
2944 reflects your tireless efforts to seek compromising 
consensus. From any perspective, it is basically a good bill 
worthy of support.
    [The prepared statement of William Helton follows:]
  Prepared Statement of Bill Helton, Chairman of the Board and Chief 
Executive Officer, New Century Energies, on Behalf of The Alliance for 
                        Competitive Electricity
                            i. introduction
    Mr. Chairman and Members of the Subcommittee, I am Bill Helton, 
Chairman of the Board and Chief Executive Officer of New Century 
Energies. New Century Energies serves over 1.5 million electric and 
natural gas customers in portions of six Western states, including 
Colorado, New Mexico, Texas, Wyoming, Kansas and Oklahoma. Three of the 
states we operate in, New Mexico, Oklahoma and Texas, already have 
adopted customer choice legislation. We support providing customers 
with a choice of their electric supplier and are working in our other 
states to achieve that objective.
    I also am testifying today on behalf of the Alliance for 
Competitive Electricity, an organization of 11 investor-owned utilities 
formed nearly 4 years ago for the purpose of promoting federal 
restructuring legislation to foster a more competitive electric 
industry. Ten of our 11 Members operate in states that already have 
adopted retail choice plans. These states include California, New 
Mexico, Texas, Oklahoma, Michigan, Pennsylvania, New Jersey, 
Massachusetts, Rhode Island, new Hampshire, Maine, Virginia, and 
Arkansas. The Alliance has endeavored to be an interested, credible, 
broker on many difficult restructuring issues.
    Mr. Chairman, as you know better than anyone, addressing the 
federal issues associated with restructuring the $220 billion a year 
electric industry has proven to be a complex, controversial, and mostly 
thankless, task. I personally want to thank you for the time, energy, 
attention, perseverance, and good humor that you have brought to bear 
on this issue and for doing the hard work that needs to be done. I also 
want to thank you and your staff for listening to our ideas, 
suggestions, and comments on the August 4 staff discussion draft.
    Mr. Chairman, H.R. 2944 is not a perfect bill from our perspective. 
But it is a good one that fairly addresses most federal electric 
industry restructuring issues in a reasoned and balanced way.
    At your very first hearing on electric industry restructuring 
issues in this Congress, you asked a distinguished panel of witnesses 
whether if certain key federal restructuring issues could be addressed, 
but not all of them, it would make sense to pass a good, albeit not 
perfect, bill. Three of your witnesses, former Deputy Secretary of 
Energy and former FERC Chair Elizabeth Moler, former FERC Commissioner 
Michael Naeve, and former Deputy Secretary of Energy Linda Stuntz all 
indicated that it was important not to let the perfect be the enemy of 
the good and that there was an urgency to dealing with a number of 
restructuring issues, including reliability. That was good advice then, 
and it remains good advice today.
                        ii. the role of congress
    As we work toward implementing customer choice in the three states 
we serve that have adopted this as their policy, it is becoming 
increasingly clear that, despite the primary role the states must play 
in restructuring the electric industry, the states do not have the 
jurisdiction or the authority to do all that is necessary. For example, 
the states cannot deal with the federal barriers that now stand in the 
way of a more competitive industry, including PUHCA and PURPA; the 
states cannot clarify state/federal jurisdictional ambiguity that 
threatens FERC Order No. 888 and state restructuring plans; the states 
cannot extend FERC's transmission regulation, including FERC's open 
access policies, to non-FERC jurisdictional transmission owners, 
including TVA and the PMAs; the states cannot reform the PMAs or the 
TVA to allow the consumers they serve to obtain the benefits of more 
competitive electricity markets; the states cannot ensure the 
reliability of the interstate transmission grid; and the states cannot 
establish a new regulatory regime governing the transmission system 
that ensures open, non-discriminatory access, while providing the 
incentives necessary to upgrade and expand that system. The states 
cannot do these many things that need to be done to bring all consumers 
the benefits of a more competitive electric industry. So, regardless of 
your position, or your state's position, on retail customer choice, 
much must be done in Congress in order to help smooth the restructuring 
path.
    We believe that your bill satisfactorily addresses most of these 
core federal issues. In particular, we are pleased with the provisions 
addressing the following:

 Uniform Regulation and Open Access for All Transmission 
        Owners--While investor owned utilities are subject to FERC 
        regulation of the rates, terms and conditions applicable to the 
        provision of transmission service, municipal and state 
        utilities, co-ops, TVA, and the PMAs are not. As a consequence, 
        only about 70% of all transmission is subject to FERC 
        regulation, including wholesale open access requirements. This 
        creates an untenable situation. FERC jurisdiction should be 
        extended to all transmission owners in the lower 48 states. 
        With the possible exceptions of TVA and BPA, which continue to 
        be treated as ``special'' in certain respects, H.R. 2944 would 
        satisfactorily accomplish this.
 Clarification of State/Federal Regulatory Jurisdiction--As we 
        move to a new regulatory system in which the various components 
        of electric service are ``unbundled,'' it is clear that the 
        Federal Power Act, which was written at a time when retail 
        sales were ``bundled,'' needs to be updated. A clear new 
        ``bright line'' between state and federal regulatory 
        jurisdiction needs to be drawn. States should be given 
        exclusive regulatory authority over bundled retail sales, over 
        the retail sale component and the local distribution service 
        component of an unbundled retail sale, and over the ``service'' 
        of delivering retail electricity. FERC should be given 
        exclusive jurisdiction over the transmission component of an 
        unbundled retail sale and should retain its exclusive 
        jurisdiction over wholesale sales and transmission. This 
        ``bright line'' was spelled out in FERC Order No. 888, and it 
        represents a reasonable and fair division of regulatory 
        authority. H.R. 2944 adopts this position.
 Help Ensure Reliability of Bulk Power System--Our existing 
        voluntary reliability organizations have served us well. 
        However, with the advent of EPAct, FERC Order No. 888 and 
        retail competition, the transmission system is being stressed 
        as never before. In addition, there are hundreds of new 
        entrants in the electric market that make it more difficult to 
        manage the system using voluntary reliability standards. 
        Virtually all industry participants believe strongly that new, 
        enforceable, reliability standards need to be adopted to help 
        ensure that our transmission system continues to operate safely 
        and reliably. Consensus reliability legislation has been 
        developed by the NERC, and is, in most material respects, 
        included in H.R. 2944.
 States Should be Given Explicit Authority to Impose Charges on 
        Jurisdictional Activities--States, in carrying out their 
        exclusive jurisdiction over retail sales and local 
        distribution, should be given explicit authority to require the 
        payment of charges deemed necessary to recover retail 
        transition and stranded costs; to ensure adequate supply and 
        reliability; to assist low-income customers; to encourage 
        environmental, renewable energy, energy efficiency or 
        conservation programs; to provide for assistance to electric 
        utility workers adversely affected by restructuring; and to 
        encourage research and development. H.R. 2944 would do this.
 FERC Regulation Should be Extended to PMA and TVA Energy Sales 
        Rates--The PMAs and TVA essentially regulate their own rates. 
        In the new, competitive wholesale and retail marketplace, this 
        is an anachronism that could lead to unfair competition. FERC 
        jurisdiction should be extended to PMA and TVA sales. Both 
        wholesale and retail sales of capacity and energy should be 
        covered. In addition, the FERC should use Federal Power Act 
        rate making and accounting standards to carry out this new 
        authority to ensure that both IOUs and federal power agencies 
        are regulated in a similar manner. H.R. 2944 takes significant 
        steps toward accomplishing this.
 The Public Utility Holding Company Act of 1935 (``PUHCA'') 
        Should be Repealed--PUHCA is serving as an impediment to 
        competition. It should be repealed. H.R 2944 adopts consensus 
        language that would repeal PUHCA one year after the date of 
        enactment.
 The Purchase Mandate in the Public Utility Regulatory Policies 
        Act of 1978 (``PURPA'') Should be Repealed and Costs 
        Recovered--PURPA has long outlived its usefulness. It is 
        costing consumers billions of dollars a year in excess power 
        costs and is inconsistent with competitive generation markets. 
        The purchase mandate in section 210 of PURPA should be 
        prospectively repealed; existing contracts protected; and full 
        recovery of PURPA costs assured. H.R. 2944 includes the Stearns 
        consensus legislation that would accomplish this.
 Transmission Policies Should be Updated--EPAct, FERC Order No. 
        888, and FERC's Regional Transmission Organization (``RTO'') 
        Notice of Proposed Rulemaking have created unparalleled 
        regulatory uncertainty with respect to the interstate 
        transmission of electricity. Congress should establish clear 
        standards with respect to RTOs, while giving industry the 
        flexibility to develop appropriate independent organizations to 
        manage the operation of transmission facilities. H.R. 2944 
        establishes a framework that would accomplish these important 
        objectives. We believe, however, that some changes to the RTO 
        language may be appropriate and we hope to work with the 
        Subcommittee on these as the process goes forward.
    Mr. Chairman, these issues that I have mentioned must be at the 
core of any comprehensive federal electric industry restructuring 
legislation, and all are addressed satisfactorily in H.R. 2944. We 
remain concerned, however, over the private use and coop tax relief 
provisions contained in H.R. 2944 and believe that the BPA, TVA, RTO, 
reciprocity, merger review, aggregation and interconnection provisions 
can be improved without fundamentally changing your intent. We will be 
developing perfecting legislative language to accomplish these 
improvements. Some of our members also are concerned about the merger 
provisions of H.R. 2944. These provisions would expand FERC authority 
to review the retail aspects of mergers and asset dispositions, 
ostensibly for purposes of addressing market power concerns. Such power 
is already resident, both in authority and practice, in the Department 
of Justice and the Federal Trade Commission under existing antitrust 
laws. The addition of duplicate review of areas that are currently 
beyond FERC jurisdiction raises concerns of opportunities for market 
meddling, a problem that will stifle full competitive development.
    I am sure others have concerns that the bill does not go far enough 
in expanding FERC authority over transmission (thereby displacing the 
states) or that not enough is being done to address ``market power,'' a 
flexible term that is being used to justify a whole host of utility 
market restrictions.
    H.R. 2944, in fact, does a great deal to mitigate market power. 
Your bill:

 requires utilities to turn over operational control of their 
        transmission systems to independent RTOs, something Congress 
        has never required of any other network industry;
 allows customers to band together to aggregate load, thereby 
        gaining negotiating leverage; and
 establishes uniform federal interconnection standards, thereby 
        increasing competition.
    At the same time H.R. 2944 increases regulatory authority in these 
areas, it carefully preserves the array of authorities that already 
exist. For example, your bill does not:

 displace or preempt state authority to regulate retail rates;
 eliminate or curtail FERC authority to regulate wholesale 
        rates;
 diminish in any way Department of Justice or Federal Trade 
        Commission authority under existing antitrust laws or limit 
        private rights of action under these laws.
    What advocates of ``market power'' amendments are asking you to do 
is to disable particular competitors, not enable competition. I urge 
this Subcommittee not to get into the business of favoring one 
competitor over another.
                            iii. conclusion
    Mr. Chairman, I again want to thank you and the other Members of 
the Subcommittee for the good work that you have done. H.R. 2944 
reflects your tireless efforts to seek compromise and consensus. From 
any perspective, it is a good bill worthy of support.

    Mr. Barton. Thank you, Mr. Helton.
    Be advised that all your testimony is in the record. Many 
members have reviewed that, so we ask to try to hold to the 6 
minutes. I thank you for your testimony.
    The next is Mr. David Nevius, vice president of the North 
American Electric Reliability Council from Princeton, New 
Jersey.
    Welcome. You have 6 minutes. Your full testimony is in the 
record.

                  STATEMENT OF DAVID R. NEVIUS

    Mr. Nevius. Thank you very much.
    NERC applauds the subcommittee chairman for including the 
NERC consensus reliability language in title II of H.R. 2944. 
We also commend the other members of the subcommittee who have 
advanced other bills containing the NERC consensus language.
    I have submitted the prepared remarks for the record, in 
which we support prompt enactment of reliability legislation 
contained in title II of H.R. 2944, with just a few 
modifications, and we have alerted your staff of where those 
issues are.
    Being part of this large panel, with another panel to 
follow on the second day of your hearings, I am going to be 
very brief.
    My single but very, very important message to you all is: 
we need reliability legislation now.
    Without the ability to enforce compliance with mandatory 
reliability rules fairly applied to all participants, we may 
not be able much longer to keep the interstate electronic grids 
operating reliably.
    Thank you. I look forward to your questions.
    [The prepared statement of David R. Nevius follows:]
 Prepared Statement of David R. Nevius, Vice President, North American 
                      Electric Reliability Council
    The North American Electric Reliability Council (NERC) firmly 
believes that there is an urgent need for Federal legislation to 
establish an independent, industry self-regulatory electric reliability 
organization (ERO) to ensure the continued reliability of the 
interstate (and international) high-voltage transmission grids. These 
grids are critical to public health, safety, welfare, and national 
security throughout North America.
    Title II of H.R. 2944, ``Electric Reliability,'' would establish 
such an ERO that would develop and enforce mandatory reliability rules, 
with FERC providing oversight in the U.S. to make sure the ERO and its 
affiliated regional reliability entities operate effectively and 
fairly. Similar oversight would be provided by government entities in 
Canada and Mexico. NERC applauds the Subcommittee chairman for 
including the NERC consensus language in Title II of H.R. 2944. NERC 
also commends other members of the Subcommittee who have advanced bills 
containing the NERC consensus language.
    Three issues need further consideration in H.R. 2944:
    FERC Authority to Establish Interim Standards and Procedures--H.R. 
2944 includes two additions to the NERC consensus language that are 
problematic. These additions direct the Commission to: (1) establish 
interim reliability standards if it suspends any previously approved 
standards, pending development of new standards; and (2) establish 
interim procedures or governance or funding provisions if it suspends 
any previously approved provisions, pending development of new 
provisions. NERC believes that this language needs further work. The 
underlying philosophy of a self-regulatory organization is that it be 
afforded every opportunity to make any necessary modifications to its 
own standards and procedures before a regulatory body steps in to 
establish standards and procedures on its own. This is doubly important 
in the case of the ERO because it is intended to have shared oversight 
by governmental bodies in Canada, Mexico, and the United States. Any 
such interim standards established by the Commission could have 
negative reliability or trade impacts on Canada or Mexico, on which 
they would have no opportunity for input. There may be helpful guidance 
for resolving this issue in the securities industry context. For 
example, Section 19 (c) of the Securities and Exchange Act provides the 
SEC with the power to modify a self-regulatory organization's rules, 
but does so in a manner that (1) gives the self-regulatory organization 
an opportunity to modify its own rules and (2) specifies detailed 
procedures calling for notice and public participation that the SEC 
must follow. The nature of these procedures encourages the self-
regulatory organizations to modify their own standards and procedures, 
rather than have something imposed by the SEC. NERC is working with 
other supporters of its consensus language and will offer proposed 
alternative language to the Subcommittee staff for consideration.
    Role of the States--Recently, proposals have been made to add 
language to the NERC consensus language defining the role of States in 
ensuring reliable electric service to retail consumers. This is an 
important and complex issue that must be resolved. Representatives of 
industry organizations and the States are working to resolve this issue 
literally as we speak, and NERC strongly supports these efforts.
    Avoiding Statutory Ambiguities--Provisions of the existing Federal 
Power Act contain definitions that create an ambiguity as to the scope 
of the reliability title. For example, Section 201(f) states that no 
provision of Part II of the Federal Power Act applies to the United 
States, a State, or any political subdivision thereof, or to any agency 
of any of those unless the provision expressly so states. The 
reliability title is clearly intended to apply to all entities, 
regardless of ownership. To avoid such ambiguities, NERC suggests 
adding a phrase at the beginning of what would be new Section 217(b)(1) 
[H.R. 2944, page 34, line 19] to read: (b) Commission Authority--
``Notwithstanding any other provision of the Federal Power Act, . . .'' 
Such an addition would allow the provisions of Title II of H.R. 2944 to 
stand alone and independent of any existing or future provisions of the 
Federal Power Act.
    NERC supports prompt enactment of any legislation containing Title 
II--Electric Reliability of H.R. 2944. The existing scheme of voluntary 
compliance with industry reliability rules for the high-voltage grid 
system is simply no longer adequate. The rules must be made mandatory 
and enforceable, and fairly applied to all participants in the 
electricity market. Even after enactment of this reliability 
legislation, it will take some time to complete the necessary rule 
making and gain the required approvals before the ERO can actually 
begin operation. The longer it takes to establish this new system, the 
greater becomes the risk and magnitude of grid failures.
    The users and operators of the system, who used to cooperate 
voluntarily under the regulated model, are now competitors without the 
same incentives to cooperate with each other or comply with voluntary 
reliability rules.
    NERC is seeing a marked increase in the number and seriousness of 
violations of its reliability rules, yet there is no recourse under the 
current voluntary model to correct this behavior.
    Market participants are increasingly asking FERC to make decisions 
on reliability issues for which FERC does not have either the technical 
expertise or direct, clear statutory authority. The indirect, limited 
authority FERC does have regarding reliability applies to only two-
thirds of the Nation's transmission facilities-co-ops, municipalities, 
the federal power marketing administrations, the Tennessee Valley 
Authority, and ERCOT utilities are outside its jurisdiction--and FERC 
has no authority in Canada or Mexico.
    The bottom line is that not a single bulk-power system reliability 
standard can be enforced effectively today, by NERC or the Commission.
    NERC urges the members of the Energy and Power Subcommittee and the 
full Commerce Committee to push ahead aggressively with this much 
needed reliability legislation. The continued reliability of North 
America's high-voltage electricity grids and all the customers who 
depend on them are at stake.
    In Closing . . .

 A new electric reliability oversight system is needed now.
 An industry self-regulatory system is superior to a government 
        system for setting and enforcing compliance with grid 
        reliability rules.
 Title II--Electric Reliability of H.R. 2944, with just a few 
        modifications, will allow for the timely creation and oversight 
        of a viable self-regulatory reliability organization.
 The longer it takes to establish this new system, the greater 
        becomes the risk and magnitude of grid failures.
 The reliability of North America's interconnected transmission 
        grids need not be compromised by changes taking place in the 
        industry, provided reliability legislation is enacted now.

    Mr. Barton. You really learn rapidly. The chairman is going 
to be so pleased with my stewardship here. Thank you, Mr. 
Nevius.
    Next we have Mr. Alan Richardson, executive director of the 
American Public Power Association from Washington, DC.

                 STATEMENT OF ALAN H. RICHARDSON

    Mr. Richardson. Thank you, Mr. Chairman. I was going to ask 
for the balance of Mr. Nevius' time until I heard the applause.
    Mr. Barton. I think there would be an objection.
    Mr. Richardson. It is a pleasure to be here again 
testifying before you.
    APPA believes that there is a need for and supports the 
enactment of comprehensive Federal restructuring legislation 
that facilitates State electric utility restructuring 
initiatives by clarifying Federal areas of jurisdiction that 
remove interstate commerce and Federal tax code barriers to 
competition.
    We believe Congress should pass legislation because these 
issues are solely within the jurisdiction of the Federal 
Government, and Federal legislation is essential to put in 
place the industry structure that will make wholesale 
competition and retail deregulation plans work effectively.
    The key to effective and sustained competition is putting 
in place the proper structure, and the key to the proper 
structure is getting transmission right.
    I think the requirements are quite simple. We need large 
regional transmission grids that mirror regional power markets. 
The grids must be operated, maintained, planned, and 
constructed on a competitively neutral basis. That is, they 
must be completely independent, and they must encompass all 
facilities that comprise the interconnected grid.
    There are several provisions of the bill that would make it 
difficult to achieve these objectives. For example, FERC's 
jurisdiction over vast amounts of transmission facilities may 
well diminish if these facilities with State acquiescence are 
redefined or refunctionalized as State jurisdictional 
distribution facilities.
    More troubling to us, FERC is not given the authority to 
establish regional boundaries. Incumbent utility proposals for 
RTOs are more likely than not to have boundaries dictated by 
the competitive interests of the generation owners and not by 
the regional markets. We think the only way to get there is to 
permit FERC to establish these borders to give all stakeholders 
reasonable time in consensus negotiations to create RTOs that 
match those borders, ensure a process that protects the rights 
and interests of participants, and provides backstop authority 
for the Commission, as appropriately conditioned, as indicated 
in my testimony, to get the job done if the negotiations fail 
to produce the appropriate result.
    Another problem that we see with H.R. 2944 is that it 
undermines the essential requirement of independence and 
competitive neutrality of RTOs. Passive ownership of up to 10 
percent voting interest per participant will not guarantee 
independence--in fact, just the opposite.
    Incentive rates for the creation of RTOs and extending 
incentives to participants in existing RTOs is, in our view, 
inappropriate; however, incentives are appropriate to remove 
constraints and reward superior performance.
    H.R. 2944 is deficient in dealing with utility mergers and 
addressing generation horizontal market power. While reasonable 
steps should be utilized to prevent protracted proceedings, in 
the end protecting the public interest is far more important 
than expedited consideration of proposals to advance private 
corporation interests.
    Protecting the public interest includes preserving the 
opportunity for full evidentiary hearings to analyze merger 
proposals where that is necessary.
    We do support the expansion of FERC's authority over 
holding company mergers and the required consideration of how 
proposals brought to the Commission could affect competition in 
transmission and generation markets. However, the benefits of 
these changes may well be more than offset by the changes in 
the merger review process and the unreasonably short deadline 
set for intervener participation in Commission proceedings.
    Horizontal market power should also be addressed. 
Generation power may not be a long-term problem, but it is a 
significant problem in the transition phase because we start 
with such high degrees of concentration in particular markets, 
aggravated by significant transmission constraints.
    FERC should be able to deal quickly and effectively with 
the exercise of generation market power. It should be given a 
toolbox of potential remedies to deal with these issues that 
remain at its disposal until it reports to Congress that the 
transmission system is regional in scope, competitively 
neutral, and adequate to provide competition in generation 
markets throughout the country.
    Finally, the expansion of full-blown jurisdiction over 
transmission facilities of publicly owned utilities contained 
in this legislation appears to us to be a solution in search of 
a problem.
    Jurisdiction beyond that absolutely necessary to ensure 
comparability is unnecessary.
    Those are our concerns. Let me identify a few issues that 
we support.
    We do support the reliability title strongly. There are 
still some glitches to be worked out, but we believe it is 
essential that it be included and that it be passed.
    We support the aggregation provisions and are pleased that 
units of State and local government are specifically authorized 
to perform this function for their own citizens.
    We support the renewable resource provisions, although with 
some reservations, as noted in my statement.
    And we support, most of all, H.R. 2944's proposed 
resolution of public power's private use problem. Private use 
is a critical problem for public power with taxing and 
financing transmission and generation facilities. If it is not 
addressed, many of these systems will be forced to opt out of 
competition, because if they do not opt out they put their 
consumers, communities, and bondholders in jeopardy. However, 
over time, opting out is simply politically impossible; 
therefore, we are in a bind.
    H.R. 721, the Bond Fairness and Protection Act, is a fair 
and equitable resolution to the problem. It has been 
incorporated, for the most part, in H.R. 2944. We believe this 
is a very positive step forward in resolving this real problem. 
We hope the original language of that bill, H.R. 721, can be 
restored, and we hope no further changes in that legislation 
are permitted as this or a successor bill moves through the 
subcommittee.
    Mr. Chairman, thank you for the opportunity to testify. I 
appreciate it. And I look forward to answering your questions.
    [The prepared statement of Alan H. Richardson follows:]
Prepared Statement of Alan H. Richardson, Executive Director, American 
                        Public Power Association
    Mr. Chairman, members of the subcommittee, my name is Alan 
Richardson. I am the executive director of the American Public Power 
Association. APPA is the national service organization representing the 
interests of the nation's nearly 2,000 publicly owned, locally 
controlled, electric utilities, providing electric service to nearly 40 
million Americans.
    You have asked us to address four questions. First, whether APPA 
believes there is a need for Federal electricity legislation. Second, 
if so, why Congress should pass such legislation. Third, what specific 
elements should be included in such legislation. And fourth, to discuss 
the provisions of H.R. 2944, the Electricity Competition and 
Reliability Act .
                      need for federal legislation
    APPA has consistently advocated the enactment of comprehensive 
Federal electricity restructuring legislation that facilitates state 
electric utility restructuring initiatives by clarifying state and 
Federal areas of jurisdiction, and that removes interstate commerce and 
federal tax code barriers to competition that are solely within the 
jurisdiction of the U.S. Congress.
    There is only one reason for Congress to enact comprehensive 
electric utility restructuring legislation--to promote competition for 
the benefit of all consumers. The overriding objective must be to 
restructure the industry in a way that has a high probability of 
benefiting all classes of customers with no degradation of reliability 
of service.
    The abuse of existing market power, aggravated by the accumulation 
of ever increasing control over transmission and generation in the 
hands of an ever decreasing number of players is the biggest single 
obstacle to the realization of this objective and the creation of 
robust competition in the electric utility industry.
    Evidence that both of these factors exist--abuse of existing market 
power, and the ever increasing control over essential facilities in the 
hands of decreasing number of players--abounds. Attached to my 
statement is a list, on a year-by-year basis, of investor-owned utility 
mergers and acquisitions, plant acquisitions, transactions involving 
Foreign utilities, and holding companies established. The sheer 
magnitude of the change in the structure of the industry in the past 
two years alone is overwhelming. Even more significant is the 
accelerating pace of this change. In the first nine months of 1999 
alone, investor owned utilities have announced or consummated 30 
mergers or major acquisitions, compared to 12 the year before.
    There is nothing coincidental about this trend. It can be traced 
directly to the open transmission access provisions of the Energy 
Policy Act of 1992, the aggressive implementation of that Act by the 
Federal Energy Regulatory Commission two years later, combined with 
state legislative restructuring initiatives that began less than five 
years ago. As FERC tried to break open the transmission grid to promote 
wholesale competition, and states have tried to create an environment 
conducive to retail competition, the vertically integrated investor 
owned utility monopolies, while paying lip service to competition, have 
been taking dramatic steps to consolidate their control of both the 
transmission grid and the generation market.
    As noted by Albert A. Foer, president of the American Antitrust 
Institute, Inc., in his article ``Institutional Contexts of Market 
Power in the Electricity Industry'' published in the May, 1999 issue of 
The Electricity Journal, ``the ongoing wave of utility mergers, 
apparently in strategic preparation for restructuring, has the 
potential to nullify the objective of opening up markets. Many mergers 
involving adjacent geographic markets appear to be aimed at expanding 
the incumbency advantages prior to restructuring.''
    The evidence of the abuse of market power, and the urgent need to 
address it through Federal restructuring legislation, is abundantly 
clear from the hearing record of this subcommittee. The vast majority 
of witnesses with very diverse constituencies and interests that have 
appeared at subcommittee hearings over the past three years have 
pleaded for legislation to address this problem. Virtually alone on the 
other side of this debate of whether market power problems exist are 
the investor owned utilities. They deny the existence of significant 
market power problems, counsel against any legislation to deal with 
such problems, and seek further protection.
                 why should congress enact legislation?
    The market power problems that exist, as well as those that we can 
now predict with a great degree of certainty, can only be addressed by 
Congress. These are interstate commerce problems that simply cannot be 
addressed by the individual states.
    Federal antitrust laws work well to remedy problems in mature 
markets. But they are not well suited to guide the transition to 
competition for industries, such as the electric utility industry, that 
start from highly concentrated monopolies. Antitrust laws alone cannot 
convert such industries to ones that are capable of being controlled by 
competitive forces. Our antitrust laws are very useful tools to address 
market power problems after they have been identified. But they are not 
particularly useful in identifying and rooting out the causes of these 
problems.
    The identification of such problems in any modern industry is hard, 
but in the electric utility industry, this is not simply hard, it is 
extremely difficult. Electricity is a real time product. It is 
literally consumed as it is produced. It cannot be stored. This makes 
transactions in the electricity market very vulnerable to subtle 
discriminations such as capacity reservations on existing transmission 
facilities and manipulation of such seemingly innocuous events as 
unscheduled maintenance of strategically located generation and 
transmission facilities. For these reasons, the antitrust agencies have 
generally favored structural remedies. And have testified before this 
subcommittee in that regard.
    Congress held out the promise of competitive wholesale electric 
markets when it enacted the Energy Policy Act of 1992. This promise was 
reaffirmed when the Act was implemented aggressively by the Federal 
Energy Regulatory Commission. But FERC has now acknowledged that its 
approach, reflected in Order 888, is deficient in many respects. Its 
current proceeding on regional transmission organizations is an attempt 
to address some of these deficiencies. Other deficiencies are apparent 
as well, including the absence of solid, clear legal authority under 
which FERC can effectively remove obstacles in the interstate commerce 
of electricity. Only Congress can address these problems.
    Congress should also act to ensure the reliability of the electric 
utility system. Voluntary reliability standards are no longer adequate. 
In this area, at least, there is a consensus among all of the 
stakeholders that Congressional action is required, even though some 
disagreements still persist with respect to the role of the states and 
state utility commissions.
    And finally, Congress must act to address U.S. Tax Code provisions 
that are inconsistent with the new utility environment being brought 
about by state restructuring legislation. Public power's ``private 
use'' problem is a clear example of this. The operational limits 
imposed on publicly owned utilities with facilities financed by tax-
exempt bonds by statutory private use requirements are simply 
incompatible with the demands of the new market. These limits must be 
removed.
     what should be included in federal restructuring legislation?
    From APPA's perspective, the following essential elements should be 
included in Federal restructuring legislation:

 Provisions that clarify federal law to ensure that FERC has 
        jurisdiction to enforce comparability in transmission services 
        on facilities that are in fact part of the national grid.
 Provisions that broaden the criteria used by FERC in the 
        review of proposed mergers, expand the authority of FERC to 
        review holding company to holding company mergers, transmission 
        company mergers, and significant sales of generation assets, 
        and enable the Commission to address market power problems by 
        means up to and including asset divestiture.
 Provisions that expand the authority of FERC with respect to 
        the creation of regional transmission organizations that are 
        truly independent, and sufficiently broad in scope and 
        configuration to promote efficient and non-discriminatory power 
        markets, while taking into account the specific, unique 
        characteristics, rights and obligations of publicly owned 
        utilities.
 Provisions to address ``tax transition'' problems arising 
        because provisions of the U.S. Tax Code are out of sync with 
        state restructuring legislation.
    With the exception of the last item, H.R. 2944 falls far short of 
what must be included in Federal legislation. For this reason, APPA 
opposes H.R. 2944 in its present form.
    We are well aware that what we believe must be included in Federal 
legislation is seen by some as an expansion of regulation that is 
incompatible with deregulation and creation of an open, competitive 
market. APPA disagrees. Expanded regulation in some areas is in fact a 
prerequisite to expanded competition in others. As Albert Foer observed 
in the article to which I previously referred:
        Experience with examples of deregulation teaches that 
        competitive markets do not materialize just because 
        theoreticians believe they are good or because there are basic 
        economic characteristics of a market that make it possible to 
        perform more efficiently. Rather, competitive markets are 
        deeply embedded in social, intellectual, legal, and political 
        institutions. Transitions from regulation to competition, 
        therefore, are not likely to work out very well unless the 
        institutional framework is also being changed in parallel ways. 
        Transitional problems must not be dismissed as if they don't 
        affect future institutional relationships. The transition can 
        create a life of its own, leading to outcomes that were never 
        envisioned.
    We are extremely concerned over the institutional framework that is 
currently evolving, unchecked for the most part by either FERC or the 
states. Expanded regulation in the areas identified above are 
absolutely essential through this transition period to put in place the 
right institutional framework that will carry us from regulated, 
vertically integrated monopolies of today, to the deregulation of the 
bulk power market tomorrow.
    That expanded regulation in some areas is not only compatible with 
but essential for competition in others is obvious from a review of the 
transmission access provisions of the Energy Policy Act of 1992. 
Congress correctly concluded that competition in the bulk power market 
could not occur unless it expanded the authority of the Federal Energy 
Regulatory Commission in the regulation of interstate transmission 
facilities. Congress had the wisdom to understand that expanded 
regulation was required to promote competition in the bulk power 
markets. We hope Congress demonstrates the same wisdom today, and takes 
the steps necessary to ensure that the promise of competition it held 
out in 1992, becomes a reality as we move into the next millennium.
                          comments on h.r.2944
    H.R. 2944 is a lengthy and complex piece of legislation. We are 
still reviewing its provisions to determine their ultimate effect. 
However, we have set forth below our concerns with respect to several 
parts of this legislation, together with recommended changes. Our 
comments are not organized in the order of their priority to public 
power. Instead, they follow the order in which these issues arise in 
H.R. 2944.
Section 101--Clarification of State authority regarding retail electric 
        competition; clarification of Federal and State jurisdiction.
    APPA believes that the States and the self-regulated publicly owned 
utilities should retain the authority to decide if, when and how to go 
to retail competition. The legislation preserves these rights. However, 
in attempting to create a bright line distinguishing Federal and State 
regulatory jurisdiction, two provisions of H.R. 2944 combine to 
eviscerate FERC jurisdiction over significant components of the 
interstate transmission network.
    Section 101(b)(1)(B) does not allow FERC regulation over bundled 
retail sales of electric energy. Section 101(e) allows for a FERC 
determination of whether a particular facility qualifies as 
transmission or distribution, but requires FERC to give deference to 
State commission decisions. When these provisions are combined, this 
section cuts FERC out of the regulation of significant amounts of 
transmission access and use over bundled sales. If this section is 
interpreted to allow a preference for bundled firm load over unbundled 
firm load on the same transmission system under emergency situations, 
then it is clearly inappropriate. Such an interpretation would 
undermine the goals of promoting competition and standardizing 
regulation of the national grid.
    To avoid FERC regulation and to frustrate effective competition in 
the bulk power market, investor owned utilities are hard at work 
``refunctionalizing'' their assets. What was transmission and therefore 
subject to FERC jurisdiction yesterday, is being redefined or 
refunctionalized as distribution, putting those facilities under state 
commission jurisdiction in order to evade FERC regulation tomorrow. As 
noted in a paper written by Whitfield A. Russell, president, Whitfield 
Russell Associates, ``Refunctionalization of Transmission Assets Under 
FERC Order 888: Impact on Market Power,'' ``refunctionalization 
presents an opportunity for transmission owners to charge vastly 
different rates (and to offer delivery services on vastly different 
terms and conditions) to similarly situated retail and wholesale 
customers (both generators and consumers).'' (A copy of Mr. Russell's 
paper is attached to this testimony.)
    APPA members have witnessed this refunctionalization trend as well. 
Roy Thilly, the current president of APPA and the Chief Executive 
Officer of Wisconsin Public Power, Inc., in testimony at a workshop on 
market power and consumer protection sponsored by the Federal Trade 
Commission on September 13, 1999, stated that ``one Wisconsin utility 
has asked our PSC to find that there is virtually no transmission in 
our state. This utility would refunctionalize more than 80% of its 
transmission system to distribution, gutting its obligation to transfer 
control to an ISO.'' The objective of this action, according to Mr. 
Thilly, is clear. It is ``to avoid giving up control and to create an 
anticompetitive buffer between customers and the market.''
    APPA supports the ``function'' approach in H.R. 2944 (and FERC 
Order No. 888) to determine which facilities are part of the 
transmission network and therefore subject to FERC jurisdiction, and 
exclude facilities that constitute part of the distribution network. 
However, the process must be carefully and consistently administered to 
ensure that it does not permit abusive refunctionalization actions. 
While it may be appropriate for FERC to give ``due consideration'' to 
State commission determinations regarding the function and purpose of 
specific transmission facilities, requiring that they defer to these 
determinations is extremely problematic. We urge the subcommittee to 
amend section 101(e) by substituting ``due consideration'' for ``due 
deference.''
Section 102--Open Access for all Transmitting Utilities.
    Public power systems own approximately 8% of transmission 
facilities at voltage levels of 138kV or higher. These facilities are 
widely dispersed across more than 100 public power systems, and most of 
these facilities are not part of the backbone transmission grid but are 
an instead part of local distribution networks. For the most part, 
those publicly owned utilities that own significant transmission 
facilities that constitute part of the interconnected grid have 
voluntarily filed open access tariffs. We believe it is difficult on 
public policy grounds to sustain the proposition that publicly owned 
transmission facilities should be subject to FERC jurisdiction. Such 
Federal preemption of local authority in order to regulate a very 
limited amount of transmission when the owners of those facilities are 
already providing comparable service appears to us to be a solution in 
search of a problem.
    We are pleased that H.R. 2944 proposes to minimize the expansion of 
FERC jurisdiction over publicly owned transmission facilities by 
permitting FERC to waive jurisdiction over transmitting utilities whose 
transmission facilities are ``limited and discrete'' and ``do not form 
an integrated grid,'' and for ``small'' publicly owned transmitting 
utilities (annual sales of 4 million megawatt hours or less) that are 
``not part of a centrally dispatched power pool.''
    Presumably, the objective of expanding FERC jurisdiction over 
publicly owned transmitting utilities is to ensure that the 
transmission services they provide to third parties are comparable to 
the services they provide themselves. We believe that this objective 
can be achieved by limiting FERC jurisdiction to the non-rate terms and 
conditions of service for publicly owned transmitting utilities that do 
not obtain a FERC waiver. FERC jurisdiction over rates of publicly 
owned transmitting utilities could conflict with the responsibilities 
of those utilities to abide by revenue requirements contained in their 
bond covenants, and could also conflict with state legal and 
constitutional requirements.
    APPA recommends that FERC jurisdiction over public power systems 
that do not obtain waivers should be limited to non-rate terms and 
conditions to ensure they are comparable to the transmission services 
that private power companies are required to offer under their open 
access tariffs. FERC jurisdiction over rates and revenue requirements 
for public power systems should be limited to ensure comparability. 
Where FERC determines that rates are not comparable or are 
discriminatory, it could remand the rate to the local regulatory 
authority for review and revision as necessary. Public power systems 
would therefore retain local control over rate making and revenue 
requirement decisions.
Section 103-- Regional Transmission Organizations
    The Regional Transmission Organization (RTO) provision is designed 
to ensure that every transmitting utility will be in a RTO by 2003. 
This is a positive step, but there are serious problems with the 
timing, conditions for FERC approval, and the absence of FERC authority 
to correct problems after the RTO deadline passes.
    APPA continues to support the authority of FERC to establish and 
require utility participation in strong, truly independent RTOs in 
order to facilitate the development of vigorously competitive regional 
power markets. The legislation should provide such authority as well as 
appropriate criteria to govern its use. In addition to such issues as 
independence, size and scope of RTOs, the statutory criteria should 
accommodate the unique characteristics and legal requirements of public 
power to ensure that public power's participation by FERC order is not 
inconsistent with state laws and constitutional requirements. 
Furthermore, the additional criteria for public power participation 
must be consistent with bond covenant requirements and not impair 
control of local system operations or reliable and economic service to 
the public served by publicly owned facilities for whose benefits 
public funds have been expended. Lastly, the criteria should not 
require public power systems to participate in certain ISOs or RTOs in 
cases where they have been mandated as part of state legislation to 
promote retail competition and such legislation has preserved the right 
of public power systems to determine whether or not to join such 
entities.
    The deadlines established, filings by January 1, 2002, 
participation by January 1, 2003, will delay by at least two years the 
current rulemaking actions of FERC (Docket No. RM99-2-000) to promote 
an open and more competitive bulk power market through the creation of 
RTOs. FERC proposes that all public utilities that own, operate or 
control interstate transmission file proposals for an RTO by October 
15, 2000, and that RTOs be operational by December 15, 2001, more than 
a year earlier than required under H.R. 2944. This delay is totally 
unnecessary. But it is inconsequential when one considers the 
opportunity for additional delays in the creation of RTOs provided by 
this legislation. If enacted in its present form, H.R. 2944 will delay 
the formation and effective operation of RTOs for several years beyond 
2003. Section 103 requires that a stay be issued whenever a FERC RTO 
order is challenged through a petition for rehearing before the 
Commission, or subsequently is challenged in court.
    We urge the subcommittee to consider carefully the consequences of 
this provision of H.R. 2944. Consider, for example, what would have 
occurred if FERC had been required to stay the implementation of Orders 
888 and 889. These orders were issued in April, 1996. Petitions for 
rehearing were filed, granted by FERC, and certain modifications were 
made in the initial orders. Thereafter, these orders were challenged in 
an appeal that is now pending before the U.S. Circuit Court of Appeals 
for the D.C. Circuit. The case has not yet been argued. It is extremely 
complex, with multiple parties. No decision is expected until at least 
the fall of 2000. Then, of course, there is the possibility of Supreme 
Court review and/or a remand to FERC for reconsideration of specific 
issues. If Congress had directed that these orders must be stayed 
pending appeals, we would not yet have seen even the limited progress 
toward more competitive bulk power markets that these orders have 
brought about.
    Under current law, the Commission has the discretion to stay its 
orders during appeal. We believe it should retain this discretionary 
authority with respect to RTO orders. APPA also recommends that the 
deadlines proposed for RTO filings and formation should be 
reconsidered. Deadlines give comfort to those seeking to delay the 
process, and the prospect of mandatory stays of FERC orders provides a 
potent weapon for those determined to frustrate the creation of RTOs.
    Even more troubling than these timing problems, however, are the 
criteria established for FERC consideration of proposed RTOs. There are 
several characteristics that must be part of any RTO. It must be 
independent to ensure that those who control transmission cannot 
exercise vertical market power. It must have boundaries that are 
rational, and that prevent the balkanization and gerrymandering of the 
grid. It must take into consideration the needs of all stakeholders, 
including, the needs of public power transmitting utilities, to ensure 
fair and equitable treatment of all. In addition, while it may be 
appropriate for FERC to provide incentives for performance, it is not 
appropriate for FERC to provide incentives for participation. And 
finally, it is absolutely essential to clarify FERC's legal authority 
to accomplish these objectives, and to order the creation or 
reconfiguration of RTOs, consistent with the characteristics set forth 
above, if the proposals brought forward do not achieve at the outset, 
or over a reasonable period of time, the desired results. Section 103 
is deficient in all of these areas.
    APPA notes the following deficiencies and problems with the 
provisions of section 103 of H.R. 2944 (set forth in the order in which 
they appear in this section and not necessarily in their order of 
importance to APPA):

 FERC is directed to approve an RTO application filed by a 
        single transmitting utility if it meets certain criteria. Given 
        the massive consolidation occurring through mergers and 
        acquisitions, single utility RTO proposals are a distinct 
        possibility. The proposed criteria do not require the effective 
        broad participation of all affected stakeholders, particularly 
        wholesale customers. The absence of substantial customer 
        support for a RTO filing indicates that the RTO business plan 
        reflects monopoly needs, not market needs.
 The Commission may approve proposals that do not meet all 
        standards but are consistent with such standards. Since the 
        Commission cannot order the creation of RTOs, it may feel 
        compelled to accept proposals that do not fully satisfy those 
        conditions and therefore will not effectively promote the 
        development of a more competitive bulk power market. Further, 
        this is an invitation to delay through litigation over what 
        constitutes substantial compliance. Since FERC cannot order 
        participation in a RTO that is not of the transmitting 
        utility's choice, and a finding of non-compliance must be 
        stayed through the appeals process, utilities determined to 
        prolong the RTO creation process have every opportunity to do 
        so. Clearly, this will result in the failure of this 
        legislation to achieve the desired results of RTO creation and 
        participation in a timely fashion.
 The ``independence'' standard will not produce RTOs that are 
        in fact independent of market participant control over 
        operations. Permitting passive ownership interests, and 
        ownership of ten percent of voting interest (page 20, lines 2 
        through 16) must be deleted. So-called ``passive'' ownership is 
        not innocuous. In filings in FERC Docket No. RM99-2-000, the 
        Edison Electric Institute concedes that a ``passive'' ownership 
        carries with it a fiduciary relationship to the passive owners. 
        The management and board of for-profit transcos will be fully 
        aware of the impact of their decisions on the generation 
        interests of the ``passive'' owners. There will be an inherent 
        conflict of interest with respect to decisions related to 
        unaffiliated generation assets that compete head-on with the 
        generation interests of the transco's ``passive'' owners. A ten 
        percent voting interest in a company with widely held stock 
        would essentially permit the ten percent owner to control 
        corporate affairs. Two private power companies, each with ten 
        percent voting interest, would clearly permit those two 
        companies to control the corporation. APPA is opposed to the 
        ownership provisions that purportedly qualify but in fact 
        undermine the independence standard. The legislation should be 
        silent in this regard and permit the Commission to decide (and 
        if necessary reconsider) what is permissible in terms of both 
        passive ownership and voting interests.
 The conditions regarding scope and configuration are 
        appropriate, but are problematic when considered from public 
        power's perspective. Given the limited amount of transmission 
        facilities owned by publicly owned utilities, it will be 
        difficult if not impossible for them to develop, on their own, 
        RTOs that ``comprise an appropriate scope and regional 
        configuration.'' Of necessity, they will be forced to 
        participate in RTOs constructed by (and perhaps with passive 
        ownership and controlling voting interests held by) investor 
        owned utilities. There is no requirement that a collaborative 
        process be established that will protect the rights of these 
        systems. Indeed, there is no guarantee against (and based on 
        past practice every reason to be fearful of) RTO proposals 
        developed by private power companies that: operate against the 
        interests of public power; do not accommodate public power's 
        unique characteristics and legal requirements; may be 
        inconsistent with state laws and constitutional requirements 
        under which public power systems operate; are not consistent 
        with public power's bond covenants; and impair public power's 
        control over local systems operations or their ability to 
        provide reliable and economic service to the public served by 
        them and for whose benefit public funds have been expended to 
        develop publicly owned facilities. Finally, to comply with this 
        legislative directive, some public power systems may be faced 
        with the unreasonable choice of submitting a proposal to FERC 
        to join what amounts to a RTO created by state legislation to 
        promote retail competition where that same state legislation 
        has reserved to them the right to decide whether or not to 
        participate. In those cases, FERC approval could amount to a 
        Commission directive changing a RTO approved by the Commission 
        prior to enactment of this legislation, something expressly 
        prohibited in the legislation itself.
 Incentive transmission pricing policies to promote RTO 
        formation are expressly authorized, and such incentive prices 
        are to be extended to participants in existing RTOs. APPA 
        strenuously opposes rate incentives, performance based rates, 
        and relaxed FERC regulation offered as inducements to public 
        utilities to participate in RTOs. Incentives should only be 
        provided for performance, not participation.
 The Commission is permitted to withdraw approval previously 
        granted if the RTO fails to comply with provisions of the 
        legislation. But what happens then? The Commission is expressly 
        prohibited from requiring utilities from participating in a 
        different RTO than the one it proposes. It is absolutely 
        essential that this deficiency be recognized and addressed.
 Finally, this section in combination with other provisions of 
        the legislation that will contract the scope of FERC 
        jurisdiction over facilities that are in fact part of the 
        integrated transmission grid, is likely to produce entities 
        that are RTOs in name only, but without much of a functional 
        transmission grid to actually administer.
    In 1978, when Congress was considering President Carter's National 
Energy Policy Act, it came close to expanding FERC authority to require 
transmitting utilities to provide open access. In the end, Congress 
acceded to the pressure of private power companies, and the authority 
given to FERC was so encumbered with unreasonable and unrealistic 
conditions that the authority presumably granted to the Commission 
could never be exercised. This mistake was finally corrected 14 years 
later as part of the Energy Policy Act of 1992. We fear that the same 
fate, and failure, will occur with respect to the creation of RTOs 
under this section. This provision will not get the job done. The RTO 
proposals brought forth by private power companies if this provision is 
enacted will not promote competition. Instead, they will further 
entrench the control over transmission in the hands of a relatively 
few, very large private power companies. Wholesale customers, retail 
customers in states that have opened their markets, and independent 
power producers will suffer. If the past is prologue, it will be at 
least a decade before Congress returns to this issue and finally takes 
the steps necessary to create the RTOs or other grid management 
institutions required to ensure that all industry participants have 
full, fair and nondiscriminatory access to interstate transmission 
facilities.
Title II--Reliability
    It is important at the outset to reflect on the ultimate goal of 
uniform reliability standards to govern interstate commerce in electric 
transactions. First, electricity is too important to our society to 
permit voluntary reliability standards for individual utilities, that 
may or may not be followed depending on the economic consequences of 
any particular opportunity. And second, our society simply cannot 
permit the existence of inconsistent rules governing the real-time 
operation of the interstate bulk power market. Uniform rules, 
applicable to all, that can be enforced, are essential.
    APPA has been an active participant in the construction of industry 
consensus language contained in Title II that establishes an 
independent, industry self-regulatory electric reliability 
organization, transitioning the present North American Electric 
Reliability Council (NERC ) to the North American Electric Reliability 
Organization (NAERO), to ensure the continued reliability of the 
interstate high-voltage transmission grid. We were also signatories to 
the recent letter to Chairman Barton that expressed concern with the 
specific language of the proposal put forth by the National Association 
of Regulatory Utility Commissioners (NARUC) regarding a state savings 
clause. We note that H.R. 2944 has included language that creates a 
state savings clause related to the reliability of local distribution 
facilities. As noted previously, through refunctionalization the 
relatively limited facilities that are today identified as distribution 
facilities can be greatly expanded to include facilities that are in 
fact part of the interconnected grid. If this is permitted to occur, 
the significant benefits anticipated from the enactment of the 
reliability provisions in H.R. 2944 will be diminished. We look forward 
to continuing to work with the state entities and the Subcommittee to 
develop language that reasonably addresses these legitimate state 
concerns in a manner consistent with the intent of the placing of 
responsibility for bulk power system reliability in the hands of a 
self-regulating reliability organization.
Title III--Consumer Protection
    These sections guard against unfair trade practices and are 
generally consistent with APPA policy related to consumer protection. 
However, protecting consumers from abuses in a competitive market 
assumes the existence of such a market. That assumption is highly 
suspect in the current environment, and unlikely to change under the 
environment that would be created if H.R. 2944 is enacted without 
significant modification. APPA supports strong consumer protection 
provisions, but we believe that the most significant protections 
Congress can provide consumers is the creation of an industry structure 
that will in fact create a competitive market. We believe we can put 
considerable trust in a truly competitive market. But we do not have 
such a market at present. We do not believe such a market will arise 
under the laws as they now exist, and we are even more skeptical that 
they will arise under the laws as they are proposed to be restructured 
and revised by H.R. 2944.
Title IV--Mergers
Section 401--Electric Company Mergers and Disposition of Property.
    APPA strongly opposes the changes regarding the authority of FERC 
with respect to its review and approval of mergers and asset 
disposition. We cannot support this legislation unless FERC's current 
authority to review mergers through full evidentiary proceedings is not 
only preserved but expanded to address both existing and incipient 
market power problems.
    Under existing law, FERC must approve disposition of certain assets 
(which may or may not include generation facilities) by ``public 
utilities'' after ``notice and opportunity for a hearing'' if the 
proposed disposition is ``consistent with the public interest.'' The 
first draft of this legislation proposed to eliminate FERC's authority 
in this area entirely. H.R. 2944 is an improvement over the draft 
proposal in that it preserves this authority, clarifies the 
uncertainties regarding FERC jurisdiction over the transfer of 
generation assets, extends jurisdiction to include holding company 
systems that include electric utility companies, and requires 
consideration of the effect of such transfers on competition in 
wholesale and retail markets. Expanding the reach of the Commission is 
absolutely essential, and requiring consideration of the effects on 
competition of such transfers is an improvement over the provisions of 
existing law.
    Unfortunately, these improvements are more than offset by the 
prohibition of on-the-record evidentiary hearings. Under current law, 
FERC has the discretion to utilize both ``paper'' hearings with or 
without an opportunity for oral comments, or on-the-record evidentiary 
proceedings, depending on complexities of each specific case. H.R. 2944 
would eliminate the option of evidentiary hearings. Instead, those 
challenging a proposed merger or other disposition of assets, would 
have 60 days within which to file written and oral comments. FERC would 
then have 90 days (and up to an additional 90 days) to issue its order. 
Existing law, deficient as it is, is far better than what is proposed 
in H.R.2944.
    If Congress truly intends to protect all electric consumers from 
abuses of market power, it must first preserve the procedural 
protections of the review process by not eliminating the opportunity 
for evidentiary proceeds, second, expand the types of transactions 
subject to FERC review, and third, expand the scope of the Commission's 
review to require consideration of how proposed mergers and 
acquisitions will affect wholesale and retail competition. Further, in 
reviewing mergers, FERC should be directed to employ a ``net positive 
benefit test,'' not simply the ``no net harm'' test currently utilized. 
Unless proposals brought before FERC actually produce net positive 
benefits and enhance competition, they should be rejected.
    Finally, FERC's authority to address existing market power problems 
must be expanded. Concentration of market power in generation is 
already a problem, and likely to become an even greater problem in the 
near future. For the past several years, we have had a surplus of 
generation. That surplus is quickly disappearing nationally, and has 
already disappeared in some regions. At the same time, some industry 
participants have been able to acquire vast amounts of generation 
resources, and through these acquisitions they will be able to exercise 
generation market power in the future.
    APPA believes that these problems can only be addressed by 
providing FERC with additional authority to deal with generation market 
power. Generation market power may well be a transition issue. This 
would certainly be the case if we are able to achieve, through federal 
legislation, large, regional and totally independent grids that are 
able to remove constraints through the construction of additional 
transmission. This, combined with ease of entry into the generation 
markets, may eliminate, over the long term, generation market power.
    However our starting point is one of high degrees of generation 
concentration in specific markets that also have significant 
transmission constraints. The consequence of these two factors is 
higher prices and poorer service for consumers. What is required is 
clear authority for FERC to deal quickly and effectively with the 
exercise of generation market power.
    Remedies here can be temporary, not permanent. They need not have a 
long term impact on the ownership or control of utility assets. 
However, they should address the temporary market distortions. For 
example, ``temporary'' divestiture of generation could occur through an 
auction procedure for capacity for limited periods of time. Or FERC 
might impose cost-based rates for generation where market power exists. 
What is required is to transform FERC from an arcane price-setting 
agency to an agency with an affirmative duty to structure and oversee 
the bulk power market to ensure that it will be effective and sustain 
competition over time. APPA recommends that FERC be provided with a 
``toolbox'' of potential remedies to deal with generation market power. 
The toolbox should include the ultimate tool of divestiture authority. 
Just as the hangman's noose truly focus the attention of the condemned, 
the prospect of mandatory divestiture as a last resort to address 
generation market power would focus the attention of those with 
generation market power. Perhaps it will never be used. But having it 
available in the ``toolbox'' is essential. After a reasonable 
transition period, FERC could be directed to report to Congress. Such a 
report should include whether transmission organizations have captured 
the proper geographic scope, whether they are competitively neutral, 
and whether they provide for effective competition markets throughout 
the country. When these conditions are met, generation market problems 
may well have been effectively addressed, and the ``tools'' placed in 
the FERC ``toolbox'' might then be removed.
Section 402--Elimination of Review by The Nuclear Regulatory Commission
    APPA was the leading proponent of Congressional enactment of 
Section 105 of the Atomic Energy Act. With the exception of the 
transmission access provisions of the Energy Policy Act of 1992, this 
provision of law has done more to open transmission access to wholesale 
customers than any other act of Congress, including the antitrust laws.
    Today, many private utility owners of nuclear facilities are 
selling or proposing to sell these assets to a few domestic and Foreign 
corporations. These nuclear facilities are large--ranging from several 
hundred to over one thousand megawatts of capacity. Collectively, 
nuclear facilities provide nearly 15 percent of the total generation 
capacity available in the United States.
    As operating licenses for these facilities are transferred from 
incumbent owners to an ever decreasing number of domestic and Foreign 
operators, an evaluation of whether such transfers will create or 
maintain situations inconsistent with the antitrust laws seems more, 
not less, relevant. Repealing the antitrust review authority of the 
NRC, combined with other aspects of H.R. 2944, will contribute to the 
consolidation and abuse of market power in the hands of a few entities. 
As the initial advocate of this provision of law, and consistent with 
APPA's concerns over the total absence of effective controls of market 
power in H.R. 2944, APPA objects to this section.
    While we object to the repeal of this provision of consumer 
protection legislation, we believe that conditions previously imposed 
in reviewing the antitrust consequences of granting construction 
permits and operating licenses for nuclear power generation facilities 
must be enforced. H.R. 2944 preserves these conditions, and their 
enforcement. While we strongly object to the repeal of this provision 
of law, if that were to occur, conditions previously imposed must be 
preserved and enforced.
Title V--Promoting Competition
Section 501--Retail Reciprocity
    APPA has no policy on this provision but urge further 
consideration. Presumably, the reciprocity requirements that prohibit 
utilities that do not provide retail customer choice in their own 
service areas from engaging in retail markets where choice is 
permitted, are intended to promote competition. However, this provision 
could actually limit the number of competitors in a particular market, 
thereby producing the opposite of what is intended. As a practical 
matter, these requirement can be easily avoided if utilities prohibited 
from dealing directly in another state work through a power marketer 
that is not so limited. If this is not an option, the reciprocity 
requirements might operate as a backdoor mandate for retail 
competition. For all of these reasons, we suggest that this provision 
be reconsidered.
Subtitle B--Public Utility Holding Company Act of 1935
    The Public Utility Holding Company Act of 1935 has been more 
important than any other Act of Congress in regulating the structure of 
the electric utility industry. Unlike other regulatory statutes, the 
Holding Company Act requirements are passive. It defines permissible 
structures of holding company formation in order to ensure effective 
state and federal regulation of electric utility holding companies, and 
it does so in an attempt to protect consumers, investors and the public 
interest. This statute has been an outstanding success. Its repeal or 
modification should be considered with great caution.
    APPA opposes repeal of the Holding Company Act on a stand-alone 
basis, that is, outside of the framework of comprehensive, industry 
restructuring legislation. However, APPA will not object to repeal of 
PUHCA, provided that repeal is coupled with strong market power 
provisions. Such provisions are not included in H.R. 2944, and 
therefore APPA opposes PUHCA repeal as proposed in this legislation.
    More acceptable to APPA than the provisions of H.R. 2944 are 
proposals in other legislation pending before this Congress that 
provide for prospective repeal in 18 months from enactment, not the 12 
month period contained in this legislation. APPA is also concerned that 
H.R. 2944 restricts regulatory access to books and records of holding 
companies to review only costs incurred, as opposed to permitting a 
broader review of total operations. We believe this restriction is 
inadequate to protect the consumer interest. Further, not only are 
adequate consumer protection provisions lacking in this section of the 
bill, but the weakening of market power protections throughout the 
legislation make the repeal of PUHCA unacceptable even though it would 
occur as part of broader comprehensive restructuring legislation.
Section 541--Aggregation
    This section authorizes entities, including political subdivisions 
within a state, to aggregate consumer electric needs. We strongly 
support this provision and urge that it be preserved in any legislation 
adopted by this subcommittee. One consistent concern of residential 
consumers across the country is that they will be shut out of the 
benefits of competition. Noted economist and one of the fathers of 
deregulation in this country, Alfred Kahn, in a recent speech at an 
EEI-sponsored meeting in Chicago, stated that he sees few signs that 
the deregulation of the electric utility industry will provide benefits 
for small customers any time in the near future. Aggregation, 
particularly of small consumers, provides a solid, consumer-oriented 
tool that could provide options for residential and small business 
customers. APPA supports this provision so long as it expressly 
preserves the rights of states and political subdivisions to aggregate 
the electric needs of their citizens.
Title VI--Federal Electric Utilities
    More than a quarter of APPA members purchase power from the 
Tennessee Valley Authority and the various Federal power marketing 
administrations. We support regionally-based solutions that address the 
unique characteristics and relationships that TVA and the Federal power 
agencies have with their wholesale customers. The provisions in this 
section are generally consistent with the goals of APPA policy for 
maintaining the existing TVA and PMA structure as closely as possible 
with current law. With respect specifically to the Federal power 
marketing administrations, we do not believe that legislation is 
necessary to maintain the current cost-based rate structure. In fact, 
including such language in the legislation raises questions regarding 
cost-based rates for these entities, and provides opportunities for 
opponents of the Federal power program to advance proposals to change 
the cost structure of these agencies from cost-based to market based 
rates. For these reasons, APPA supports deleting the PMA sections 
dealing with PMA rates altogether. Inclusion of language that simply 
restates current practices only invites amendments to change such 
practices.
Title VII--Environmental Provisions
    Existing law providing incentives for public power investment in 
renewable energy must be maintained and enhanced. H.R. 2944 preserves 
the Renewable Energy Production Incentive Program (REPI), and restricts 
it to public power systems and other non-profit developers of renewable 
energy. Even though this provision is little more than a reaffirmation 
of existing law, APPA supports this aspect of the legislation. However, 
the legislation would and should not exclude landfill methane gas 
recovery from eligible biomass projects.
    APPA believes that increased use of available resources can be best 
achieved through competitively neutral incentives that treat public 
power entities on an equivalent basis as non-public power entities. 
Incentives should be structured to assist power generating entities to 
overcome existing barriers to increased renewable energy use and 
deployment of other green technologies. Incentives should be structured 
to provide comparable benefits to each region of the country and allow 
power generating entities to be most responsive to the needs and 
preferences of their customers and the competitive market. The 
incentives should be easy to administer and provide sufficient 
documentation for easy verification. To the extent REPI is retained, it 
should be changed to address the uncertainty of annual congressional 
appropriations and funding.
    APPA proposes a two-prong approach to encouraging renewable energy 
development in the public power community. The first is to address the 
existing authorized REPI program by providing funding to cover current 
project recipients. Under law, REPI participants are eligible for ten-
year payments calculated at 1.5 cents per kWh of electricity generated 
from eligible projects. We propose that Congress direct DOE to make 
current REPI project sponsors whole, and that sufficient funds be 
allocated to cover all eligible projects. Funds could be allocated by 
any number of mechanisms including: 1) one-time lump sum appropriation; 
2) creation of a trust fund/escrow account funded at a level sufficient 
to allow the revenues to grow over time to cover project costs; or 3) 
accelerated appropriations to provide advance funding for future REPI 
payments, similar to the Clean Coal Program.
    Part two of the package involves the creation of new incentives 
available to non-taxpaying entities that do not participate in the 
revised REPI program. The option we prefer is the creation of 
refundable production tax credits under the Treasury Department that 
could be exchanged with other utilities. Non-taxpaying entities would 
be eligible to claim a tax credit similar to the Section 45 credit. 
Specifically, the amount of credit is not effected by the amount of 
federal tax liability, rather, it would be calculated along the same 
guidelines as the Sec. 45 and REPI projects. As with these two 
programs, a participant would be given a refund based on a 1.5 cents 
(adjusted for inflation) per kWh of electricity generated from 
renewable energy projects.
Title VIII--Tax Provisions
    While APPA appreciates the fact that H.R.2944 maintains the 
structure or H.R.721 as the appropriate means to resolve public power's 
``private use'' problem that has arisen from the current 
incompatibility of U.S. tax laws and state restructuring demands, we 
are very concerned that what has been included in H.R. 2944 modifies 
provisions of H.R. 721 in a few significant ways. H.R. 721 has been 
carefully crafted to address public power's private use problem with 
full consideration of the interests and concerns of all market 
participants. H.R. 721 has been co-sponsored by more than 85 members of 
the House of Representatives, from both political parties spanning the 
broad reach of the political and ideological spectrum.
    H.R. 2944 incorporates the major elements of H.R. 721 but restricts 
the legitimate use of tax-exempt financing by publicly owned utilities 
for certain purposes in the future beyond the restrictions already 
contained in H.R. 721. At the same time, H.R. 2944 proposes to vastly 
expand the tax subsidies available to investor owned utilities with 
respect to nuclear decommissioning expenses and the tax treatment of 
decommissioning funds in event of sale of nuclear facilities. The 
provisions relating to nuclear decommissioning expenses not only go far 
beyond what has been proposed by the Administration, but go beyond 
provisions found appropriate by the House Ways and Means Committee and 
included in tax reform legislation enacted by Congress before the 
August recess and recently vetoed by President Clinton. This lack of 
symmetry in treatment of public and private power tax issues is 
troubling.
    These ``tax transition'' issues are not within the jurisdiction of 
the House Commerce Committee. Because they are obviously part of the 
electric utility restructuring debate, and because members of Congress 
will look to members of this subcommittee and the full committee for 
guidance on how all of these restructuring issues should be addressed, 
we are very pleased that for the most part H.R. 721 was incorporated in 
H.R. 2944. Their inclusion in H.R. 2944 sends a strong signal to 
committees of jurisdiction regarding the preferred approach to dealing 
with these matters. We appreciate Chairman Barton's desire to reconcile 
the tax code problems, and his desire to address the private use 
problem using the basic framework of H.R. 721.
    The provisions of H.R. 721 are an extremely fair and reasonable 
resolution of public power's private use problem. APPA insists that 
this problem be addressed. Unless we are convinced that this problem 
will be addressed, and that it will be addressed in a fair and 
equitable manner either as part of comprehensive restructuring 
legislation, or on a stand-alone basis, we will strongly oppose any 
federal electric utility restructuring legislation.
Conclusion
    APPA supports comprehensive Federal legislation to promote 
competition in the electric utility industry. H.R. 2944 in its present 
form will not achieve this goal. It fails to address serious market 
power problems. It is a step backward in its treatment of FERC review 
of utility mergers and the further accumulation of market power by 
private power companies. It purports to establish Regional Transmission 
Organizations. But the promises it holds for the creation of truly 
independent, broad RTOs that will promote competition in the bulk power 
market cannot possibly be met given the criteria established for their 
approval by FERC, and the absence of real authority for FERC to help 
structure the industry in ways that will promote competition and 
benefit consumers.
    APPA opposes H.R. 2944 in its present form. At the same time, APPA 
wants Congress to enact legislation that promotes competition and 
ensures that the benefits of competition--lower rates and better 
service--will be experienced by all electric consumers. APPA will 
continue to work with Congress to achieve these results.

    Mr. Barton. Thank you very much.
    Next we will hear from Mr. David Owens, executive vice 
president of Edison Electric Institute.
    Your full statement is submitted for the record and you 
have 6 minutes. Welcome.

                   STATEMENT OF DAVID K. OWENS

    Mr. Owens. Thank you, Mr. Chairman.
    Good morning, Mr. Chairman and members of the subcommittee.
    EEI supports Federal legislation that removes Federal 
barriers to competition, facilitates State restructuring 
actions, addresses critical transmission and reliability 
issues, and applies the same rules to all competitors.
    We believe that H.R. 2944 makes significant progress toward 
achieving some of these goals. On others we have some concerns 
and suggestions.
    My written testimony outlines EEI's views on specific 
provisions, so I will just mention a few highlights for you.
    We commend the chairman for removing Federal barriers to 
competition by removing PUHCA and reforming PURPA. In addition, 
the bill addresses a number of important transmission and 
reliability issues. For example, it would establish a self-
regulating reliability organization and extend FERC 
transmission jurisdiction over all transmission facilities. We 
certainly believe that is an important step in the right 
direction.
    We also commend the chairman for recognizing that expansion 
of transmission capacity is critical. However, the bill's 
provisions, unfortunately, do not achieve this important goal. 
Similarly, the bill recognizes the need to expedite FERC's 
merger review, but, at the same time, the merger provisions 
would result in more government regulation.
    We are concerned with some key areas of H.R. 2944. First, 
the bill fails to develop the same rules for all competitors. 
It would allow, for example, Federal utilities, government-
owned utilities, and co-ops to use their current subsidies to 
construct new generation of transmission facilities in a 
competitive market. This would simply give these entities a 
tremendous advantage over their competitors.
    Simply put, the market would follow the subsidies, and 
government share of the electricity market undoubtedly would 
increase.
    Second, the bill would reregulate, not deregulate, in 
several areas.
    H.R. 2944 would expand Federal regulation by establishing a 
deadline for the formation of regional transmission 
organizations and by increasing FERC's merger authority.
    Electricity markets are robust today. Given the degree of 
remaining Federal and State regulation, we believe neither of 
these provisions is necessary or desirable.
    Third, the bill would intrude into State jurisdiction over 
retail electric service on a number of issues, including 
interconnection standards, net metering, aggregation, and 
retail reciprocity.
    As members of this subcommittee well know, 23 States are 
moving forward with their own restructuring plans. They 
certainly should not be forced to revisit key provisions.
    Similarly, the remaining States are considering their own 
plans, and they certainly want their flexibility to maintain 
the development of these areas.
    We look forward to working with the chairman and other 
members of the subcommittee to improve these areas of the bill.
    Finally, we commend the chairman for not making H.R. 2944 a 
vehicle for micro-managing competition with punitive market 
restrictions. You heard some of those from Mr. Richardson.
    We are pleased that the bill does not expand FERC authority 
to order utility divestiture, nor does it impose competitive 
handicaps on utilities and their affiliates.
    Proponents of punitive market restrictions claim there are 
not enough competitors in the market. Nothing could be farther 
from the truth. There are thousands of electricity suppliers 
already in the marketplace, plus big, well-known, national 
companies, including some of the world's large oil and gas 
companies. They are certainly very active in this market.
    Proponents of punitive market restrictions also claim that 
competitors will not be able to reach consumers. They ignore 
the continued tight Federal and State regulation of essential 
utility facilities. These are the transmission lines which will 
ensure all competitors nondiscriminatory access to utilities' 
wires. And they ignore the continued State regulation of the 
utility affiliate transactions.
    The ability to bring lower prices or better service to 
consumers is what competitive markets are all about. Market 
share, alone, simply does not equal market power. Suppliers 
cannot be equalized in competitive markets. As long as there is 
nondiscriminatory, open access to provide consumers with a 
choice of suppliers and no company can manipulate prices or 
shut others from the marketplace, consumers will find the best 
combination of price and services to meet their needs.
    As I have stated, EEI strongly believes that H.R. 2944 
makes significant progress toward achieving important public 
policy goals, while falling short on others.
    We commend the chairman for his efforts to develop a 
workable electricity bill. We look forward to continuing to 
work with him and members of this committee.
    Thank you for this opportunity to provide our views. I 
certainly look forward to your important questions.
    [The prepared statement of David K. Owens follows:]
Prepared Statement of David K. Owens, Executive Vice President, Edison 
                           Electric Institute
                              introduction
    I am David K. Owens, Executive Vice President of the Edison 
Electric Institute (EEI). EEI is the association of U.S. shareholder-
owned electric utilities and industry affiliates and associates 
worldwide. A super-majority of EEI's members have established EEI's 
approach to competition in the electricity industry, although a few 
members disagree with some elements of that approach. We are pleased to 
have the opportunity to testify before the Subcommittee on H.R. 2944, 
the Electricity Competition and Reliability Act.
    EEI supports federal electricity legislation that removes federal 
barriers to competition, facilitates state restructuring actions, 
addresses critical transmission and reliability issues and applies the 
same rules to all competitors. We believe that H.R. 2944 makes 
significant progress toward achieving some of these goals, while 
falling short on others.
    We commend the Chairman for the inclusion of provisions on issues 
that only the federal government can address, including PUHCA repeal 
and PURPA reform; facilitating state restructuring initiatives by 
resolving federal/state jurisdictional issues; and addressing a number 
of transmission and reliability issues, including establishment of a 
self-regulating reliability organization and extension of FERC 
transmission jurisdiction over all transmitting utilities. And, we 
commend the Chairman for not making H.R. 2944 a vehicle for 
micromanaging competition with punitive market restrictions.
    However, we do have concerns with H.R. 2944 in a number of key 
areas. It fails to develop the same set of rules for all competitors by 
continuing--and in some cases expanding--federal subsidies to 
government-owned electric utilities, electric cooperatives and federal 
electric utilities, and allowing the use of these subsidies in 
competitive markets. It expands federal regulation by establishing a 
deadline for regional transmission organizations and increasing FERC's 
merger authority. The bill also would intrude into state jurisdiction 
over retail electric service and raise implementation concerns in some 
areas, including interconnection standards, net metering, aggregation 
and establishing new FTC standards. We look forward to working with the 
Chairman and other Members of the Subcommittee to improve these areas 
of the bill.
    We would like to share with the Subcommittee our views on the 
specific provisions contained in H.R. 2944.
                   title i--open transmission access
Federal/State Jurisdiction
    Section 101 of H.R. 2944 would clarify state authority to order 
retail competition and to impose nonbypassable charges for public 
purpose programs. This section also would clarify federal/state 
jurisdiction over components of an electricity sale, as well as 
distribution and transmission facilities. We believe that federal 
legislation needs to address these jurisdictional issues to help reduce 
uncertainty in electricity markets, and we support their inclusion in 
H.R. 2944.
Open Access Transmission
    Section 102 of the bill would clarify the authority of the Federal 
Energy Regulatory Commission (FERC) to require all transmitting 
utilities to provide open access transmission service and to authorize 
recovery of transition costs arising from any requirement to provide 
open access transmission. Regarding transition costs, we believe the 
legislation can be enhanced by the clarification of congressional 
intent regarding the recovery of transition costs under FERC Order 888. 
There is a need for certainty in this area--certainty that can be 
provided only by legislative direction.
    EEI strongly supports requiring all transmission providers to be 
subject to FERC transmission jurisdiction to facilitate efficient use 
of our nation's transmission system, and we commend the Chairman for 
including this provision. It does not make sense, from a regulatory 
standpoint or from a competitive standpoint, to have a significant 
portion of the transmission system operating under a different set of 
rules, or in some cases, no rules at all.
    However, Section 102 does not extend FERC transmission jurisdiction 
over the federal electric utilities, including the Tennessee Valley 
Authority (TVA), the Bonneville Power Administration (BPA) and the 
other federal Power Marketing Administrations (PMAs). While this 
authority is addressed in Title VI of the bill, we recommend that 
Section 102 be modified to include the federal electric utilities so 
that all transmitting utilities are covered in this particular section. 
Title VI is likely to be referred to other committees with jurisdiction 
over the PMAs and TVA, and those committees may make significant 
changes to the title.
    Section 102 also would allow certain transmitting utilities to 
exempt themselves from FERC transmission jurisdiction if they meet 
certain criteria. We are concerned that the self-certification process 
for exemption could be abused. FERC already has the authority to grant 
waivers from its transmission regulations to small transmission 
providers and has granted such waivers in the past. We would reiterate 
that all transmission needs to be subject to uniform regulation.
Regional Transmission Organizations
    Section 103 of H.R. 2944 would require each transmitting utility to 
establish or join a regional transmission organization (RTO), effective 
January 1, 2003. EEI supports a flexible, market-based approach to grid 
regionalization that applies to all transmission providers. We oppose 
the federal deadline by when utilities must join an RTO.
    As any stakeholder involved in the development of the six 
independent system operators (ISOs) already approved by FERC can 
attest, the establishment of RTOs is an arduous, time-consuming process 
that requires a satisfactory resolution of many contentious, critical 
issues among many interests. Several of the approved ISOs were 
developed from existing tight power pools; other RTOs will not have 
this advantage and will be more difficult and take longer to construct. 
Imposing an artificial deadline on the creation of RTOs will reduce 
flexibility in evolving transmission markets.
    In addition, this federal mandate appears to ignore the tremendous 
progress already being made at FERC with regard to its notice of 
proposed rulemaking on RTOs. FERC's proposed RTO rule will further 
facilitate the voluntary development of RTOs.
    Section 103 also would require FERC to approve an RTO application 
if FERC determines that the RTO meets specific standards outlined in 
the bill. We agree with the Chairman that if an RTO meets specific 
standards, including the ones outlined in the bill, FERC should approve 
the RTO. We recommend that the standards be expanded to include FERC 
consideration of cost and cost recovery.
    However, we are extremely concerned about the provision that would 
allow FERC to impose any other additional standards it wants on an RTO. 
We believe Congress should establish RTO standards so prospective RTO 
participants understand the requirements the RTO must meet in order to 
obtain FERC approval. Otherwise, prospective RTO participants will be 
trying to establish an RTO under a cloud of uncertainty that FERC can 
second guess their decisions by repeatedly modifying RTO standards.
    Section 103 would direct FERC to encourage incentive transmission 
pricing policies for RTOs. This language is essentially the same as the 
incentive pricing provision in H.R. 2876, introduced by Representative 
Sawyer. We propose that this provision be modified to extend these 
incentives to all transmitting utilities, as H.R. 2876 provides, not 
just those in RTOs. We also support the additional transmission 
proposals in H.R. 2876. We strongly support reform of FERC's 
transmission pricing policy, and we appreciate congressional 
encouragement of reforms.
    FERC's current transmission pricing policy does not provide 
sufficient incentives for construction of critically needed new 
transmission facilities throughout the country. FERC must reform its 
transmission pricing policy to facilitate transmission construction in 
order to assure the continued expansion of competitive markets. In the 
long run, reliability will suffer, and consumers will be harmed, if new 
transmission capacity is not built.
Expansion of Interstate Transmission Facilities
    Section 105 of H.R. 2944 is intended to help expand interstate 
transmission facilities. Unfortunately, while we agree with the intent, 
we are concerned that the section does not achieve its objective. Under 
this section, a transmitting utility may apply to FERC for an order to 
expand its transmission. If the utility is unable to obtain the 
necessary state permits to build the transmission line, the utility may 
ask FERC to rescind its order.
    The chief problem with this section is that the FERC order has no 
teeth and does not resolve the growing difficulty of obtaining 
necessary siting permits from a state that may realize little benefit 
from a transmission line being built to serve interstate commerce. 
Section 105 requires FERC to consult with a joint federal/state board 
before issuing an order to build, but the joint board does not have any 
siting authority either. Without these teeth, there is no incentive for 
a utility to seek a FERC order.
    We believe that addressing the substantial barriers to expanding 
the interstate transmission system is probably the most critical 
transmission policy issue. Without new transmission construction, 
electricity suppliers and regulators will find themselves fighting 
increasingly pitched battles over who gets priority for use of an 
increasingly scarce resource.
                     title ii--electric reliability
    EEI participated in the stakeholder process to develop the 
consensus reliability legislation sponsored by the North American 
Electric Reliability Council (NERC). Like the other stakeholders, we 
believe that new, enforceable reliability standards need to be adopted 
to help ensure our interstate transmission system continues to operate 
safely and reliably in competitive markets.
    We support the inclusion of the NERC consensus language in H.R. 
2944, and we appreciate the Chairman's support for this proposal. We 
would like to comment on the bill's most important modification to the 
NERC proposal. H.R. 2944 adds a savings clause preserving state 
authority to ensure the reliability of local distribution facilities. 
While the states have legitimate reliability concerns, it is important 
that the self-regulating reliability organization have clear 
responsibility for assuring the reliability of the interstate bulk 
power system. Otherwise, the end result may be to weaken overall 
reliability due to confusion and conflict over who has authority over 
what reliability responsibilities. EEI, along with other stakeholders, 
is continuing to work with state entities to develop compromise 
language to address the states' concerns.
                     title iii--consumer protection
    Sections 301, 302 and 303 would require the Federal Trade 
Commission (FTC) to promulgate rules addressing electric supplier 
information disclosure, consumer privacy and unfair trade practices 
(slamming and cramming). We support measures to protect consumers as 
they take advantage of choices in a competitive electricity market. Our 
primary concern with these sections is their potential to preempt 
existing state restructuring plans. These sections are among the 
provisions in the bill that tread into state jurisdictional matters 
relating to retail electric service.
                           title iv--mergers
    Section 401 of H.R. 2944 addresses FERC merger authority, while 
leaving intact merger review by the Department of Justice and the 
states. On the one hand, the section attempts to expedite FERC's merger 
review by establishing a timetable for FERC action and substituting the 
hearing requirement with a procedure for oral and written presentation 
of views. This appears closer to the approach taken by the Department 
of Justice. We strongly agree that regulatory review of utility mergers 
must be expedited, streamlined and simplified. It makes no sense that 
the BP-Amoco merger--creating one of the world's largest oil and gas 
companies--could be approved on two continents in less than 100 
business days while utility mergers can drag on for two years without 
resolution. We appreciate that BP Amoco operates in a competitive 
market, but monopoly utility functions will still remain regulated at 
both the federal and state levels after a merger to ensure access to 
essential facilities and to protect consumers.
    On the other hand, Section 401 would substantially expand FERC 
authority by authorizing FERC review of any disposition of generation 
facilities and holding company mergers, which are not currently within 
FERC jurisdiction. We are concerned that this language moves in the 
wrong direction by expanding regulation. A growing number of utilities 
are selling their generation facilities in order to focus on other 
business opportunities or to satisfy state restructuring plans. These 
dispositions of assets are subject to state review. There is no need 
for additional FERC review under Section 401, which would potentially 
slow down the move to competition in some states.
    Section 401 also would expand FERC authority by requiring FERC to 
examine a merger's impact on competition in retail markets, another 
area already subject to state review. FERC examines a merger's effect 
on wholesale competition, but requiring FERC to examine the impact on 
retail markets clearly intrudes on the states' jurisdiction and 
unnecessarily duplicates existing regulation.
    We understand that some entities argue for even more burdensome 
utility merger review. They want electric utilities to be subject to 
higher merger standards than any other industry, even though utility 
mergers already are subject to more regulation than literally any other 
industry. Proponents of these draconian proposals claim that utility 
mergers will dramatically reduce the number of competitors. We would 
point out that there are thousands of suppliers who currently 
participate in electricity markets, with many new entrants--among them 
the world's largest oil and gas companies--getting into the market. 
Claims that the electricity market will somehow lack competitors are 
both ludicrous and blatantly inaccurate.
                     title v--promoting competition
Retail Reciprocity
    Section 501 would impose a mandatory reciprocity provision on the 
states. We believe the section should be modified to clarify state 
authority to impose reciprocity requirements on suppliers if a state 
chooses to do so. Otherwise, this section as currently written would 
preempt existing state restructuring plans in a number of states, 
including California, which consciously chose not to impose reciprocity 
requirements on suppliers in their state restructuring plans. We would 
prefer a provision which facilitates, rather than intrudes, into state 
decisions relating to reciprocity.
Public Utility Holding Company Act (PUHCA)
    Subtitle B of Title V would repeal PUHCA 12 months after enactment 
and substitute a new act giving FERC and state regulatory commissions 
access to the books and records of holding companies and affiliates. 
PUHCA is an impediment to competitive markets that only Congress can 
address, and we strongly support inclusion of this subtitle in H.R. 
2944. PUHCA was enacted in 1935 during the New Deal in response to 
conditions in the electricity industry at that time. However, like 
everything else, the electricity industry has obviously changed over 
the past 60 years, and it is time that PUHCA be changed to recognize 
this fact.
Public Utility Regulatory Policies Act (PURPA)
    Subtitle C of Title V would reform PURPA by repealing prospectively 
the mandatory purchase obligation, protecting existing contracts and 
providing for the recovery of federally mandated, FERC jurisdictional 
PURPA costs. We strongly support inclusion of these provisions in H.R. 
2944, including those addressing PURPA cost recovery. A federal statute 
that forces utilities to purchase power at above-market prices, 
regardless of whether they need that power--and consequently forces 
consumers to pay billions of dollars more for power than they otherwise 
would--cannot be justified in a competitive market.
Aggregation
    Section 541 of the bill would preempt all other federal and state 
laws addressing aggregation, except those relating to undue 
discrimination and preferential treatment, to allow any entity, 
including an electric cooperative or municipality, to aggregate retail 
consumers in open states.
    EEI believes that consumers who have retail electric choice should 
be able to choose any qualified supplier they wish, including one that 
aggregates them with other customers. However, we oppose any 
government-initiated slamming that would force all customers in a 
particular area or group to switch suppliers, even if they later have 
the opportunity to opt out of such a forced switch. We are concerned 
that the preemptive provisions of Section 541 would allow a 
municipality, cooperative or other entity to force an entire group of 
customers to switch suppliers.
    In addition, we are concerned that the provisions in Section 541 
that preempt state law are so broad that they could undo other 
important public policies. For example, these provisions appear to 
allow an electric cooperative or municipality that is required by state 
law to operate only within its own discrete service territory to jump 
the fence and compete outside that service territory.
    We would be pleased to work with the Chairman to modify the 
language of this provision to assure that any service provider in open 
states may aggregate consumers who voluntarily choose to purchase 
electricity from that provider, consistent with applicable rules for 
obtaining electric service.
Interconnection
    Section 542 would give FERC the authority to order interconnections 
to utility distribution systems for distributed generation facilities. 
Distributed generation obviously will play an increasingly important 
role in meeting consumers' power needs in a competitive market. EEI, 
along with other groups, is working with the Institute of Electrical 
and Electronics Engineers (IEEE) to develop a uniform interconnection 
standard regarding reliability and safety issues relating to 
distributed generation facilities. IEEE is the organization that has 
the technical, engineering, reliability and safety expertise to assure 
the standard results in the safe integration of distributed generation 
into the distribution system.
    We have several concerns with Section 542. First, the bill defines 
a distributed generation facility as a facility of 50 megawatt capacity 
or less that is designed to serve retail electric consumers at the 
facility. Fifty megawatts is a lot of power; a facility this size is 
not one that average consumers would install in their homes or small 
businesses to meet their basic power needs. Fifty megawatts would be 
large enough to meet the peak electricity demand of a small city of 
roughly 6,000 homes. Utilities do not connect 50-megawatt generation 
facilities to their distribution systems; instead, these would have to 
be connected to bulk-power transmission systems. Forcing a utility to 
connect 50-megawatt generation facilities to its distribution system 
would create serious reliability and safety problems.
    Second, Section 542 would give FERC authority to order utilities to 
increase their distribution capacity in order to carry out a FERC 
interconnection order. This is a clear intrusion of federal authority 
into the states' traditional regulation of distribution service. At the 
same time, Section 542 does not address the crucial issue of who pays 
for any required upgrade in distribution capacity. While FERC would be 
able to order distribution upgrades, the authority for allowing the 
recovery of the cost of such upgrades would remain with state 
commissions, with no assurance of any cost recovery. We believe 
authority to order distribution upgrades should remain with the states, 
which regulate distribution activities.
                  title vi--federal electric utilities
    Electricity restructuring cannot achieve its anticipated results 
unless the rules governing competition treat all competitors alike. 
This proverbial ``level playing field'' among different types of 
electricity providers requires similar tax and regulatory treatment, 
similar access to investment capital and similar access to preference 
right power on behalf of our respective consumers. If the current 
subsidies available to public and cooperative power are available to be 
used to construct new generation or transmission facilities in a 
restructured electricity marketplace, then we will have multiple sets 
of competitors operating under multiple different sets of rules. 
Shareholder-owned utilities would be at considerable disadvantage in 
such an environment, not because other competitors are more efficient 
or better managed, but because they have better access to government 
subsidies. Unfortunately, Title VI does not address these issues; in 
fact, the title would make matters significantly worse.
Subtitle A--Tennessee Valley Authority
    Section 602 repeals certain provisions of the Federal Power Act 
dealing with interconnections, wheeling and portions of the TVA Act 
establishing the ``fence'' around TVA's service area. Section 603 
limits TVA's sales to retail customers, authorizes the sale of 
``excess'' TVA power and electricity exchanges outside its service area 
and applies various Federal Power Act requirements to TVA.
    TVA is a heavily subsidized government utility. Permitting TVA to 
sell its subsidized power beyond its service area raises the specter of 
unfair competition and undermines this bill's purpose of promoting real 
competition in electricity markets. The section provides no meaningful 
guidance on how TVA power is to be sold.
    Section 604 provides that TVA may issue bonds for new or enhanced 
generating facilities if TVA determines they are necessary to supply 
the demands of distributors and retail consumers. In tandem with 
Sections 602 and 603, this means that TVA can sell its subsidized power 
over the fence and then issue bonds to build capacity to meet its 
internal needs. TVA has plenty of generating capacity, as evidenced by 
its easily meeting power needs on sixteen record degree days during 
this summer's extraordinary heat wave and drought. The only reason for 
Section 604 is to permit TVA to acquire new generating capacity for 
anticipated sales beyond its service area. We believe there is no 
reason for TVA to build new capacity in a competitive generation 
market.
    TVA operates under a $30 billion debt ceiling established by 
Congress and currently has outstanding obligations of roughly $26 
billion. These bonds are not guaranteed by the full faith and credit of 
the United States government, but they are perceived as such by bond 
rating agencies and investors. The federal government has never allowed 
a wholly owned federal corporation to go bankrupt and those who sell 
and own bonds are banking on an ``implied guarantee'' that does not 
exist. Nonetheless, this association with the financial strength of the 
federal government gives TVA bonds an AAA rating and enables TVA to 
borrow at rates substantially below those of similarly situated 
utilities.
    A ten-year plan TVA issued two years ago articulated a goal of 
reducing TVA's debt by half over the ensuing decade. TVA has made 
little progress towards this goal and, in fact, has already slipped two 
years in its timetable. Allowing TVA to slip even further into debt 
courts fiscal disaster. We believe Congress should take TVA at its word 
and lower its debt ceiling along the schedule outlined in its ten-year 
plan.
    Section 605 permits TVA to renegotiate its long-term contracts with 
distributors. This is fair to the distributors who must now give ten 
years notice before they can leave TVA's system or buy power from other 
vendors. These contracts effectively preclude the entry of new 
competitors in the Tennessee Valley. It will take some time for TVA to 
renegotiate these complicated agreements with 159 distributors and even 
longer to agree on the treatment of stranded costs, as outlined in 
Section 608. At a minimum, TVA's over-the-fence sales should not begin 
before these agreements are reached and outside competitors have the 
same access to Tennessee Valley customers that TVA has to customers on 
the other side of the fence.
    Section 609 applies federal antitrust law to TVA but not the 
sanctions that make such laws effective. We believe TVA should be 
covered in the same manner as other utilities.
    Section 612 says that Subtitle A ``shall be interpreted and 
implemented in a manner that does not adversely affect bonds issued by 
the Tennessee Valley Authority.'' We cannot imagine a larger loophole. 
It puts the interests of TVA's bondholders ahead of those of America's 
taxpayers, the true owners of TVA. This section should be removed.
    Without changes, Subtitle A would unleash an enormous subsidized 
electricity vendor into the competitive marketplace this legislation is 
supposed to create. It does not address TVA's staggering debt and, in 
fact, encourages TVA to borrow still more. It equips TVA with special 
exemptions from law and, in its final section, essentially absolves TVA 
of the most basic regulatory constraints.
Subtitle B--Bonneville Power Administration
    Section 623 would authorize Bonneville Power Administration (BPA) 
to impose a surcharge of up to $100,000,000 per annum on its 
transmission customers. These revenues would be used to pay off debt 
Bonneville has incurred in acquiring generation capacity. The surcharge 
could ostensibly only be imposed if Bonneville projects ``that 
available financial reserves in the Bonneville Power Administration 
Fund attributable to the power function will fall below $150,000,000.'' 
The section also provides for FERC oversight.
    We strongly oppose this surcharge. Since federal transmission 
regulation began in the 1930s, policy has been that those who use power 
pay for its generation and those who use transmission capacity pay only 
for transmission. Under Section 623, in many cases, transmission 
customers would be forced to pay for electricity that someone else 
actually uses. There also would be situations where the transmission 
customer paying the surcharge would be paying for generating capacity 
acquired to compete against its own. In truth, BPA's current 
customers--more than two thirds of whom are industrial facilities--can 
easily afford to cover BPA's generating costs: It would require a rate 
increase of less than two tenths of a cent per kilowatt hour.
    Section 625 authorizes ``acquisition of new major generating 
resources.'' We believe this is a good example of ``mission creep.'' 
BPA was established to sell the power produced at 29 federal 
hydroelectric facilities on the Columbia River system. It has gradually 
metamorphosed into a utility with a much larger role in the Pacific 
Northwest. We believe BPA should return to its mission and concentrate 
on marketing and distributing the power from federal dams. There is no 
rationale for BPA to acquire or construct new thermal generating 
capacity in a competitive environment when other suppliers are willing 
to do so.
    Like the similar provision in the TVA subtitle, Section 626 applies 
federal antitrust law to BPA but without the economic penalties other 
entities face. If BPA wants to be a player in competitive markets, it 
should face the same laws and penalties that other players face.
    Section 627 calls for ``encouraging the widest possible diversified 
use of electric power at the lowest possible rates to consumers 
consistent with sound business principles.'' (emphasis added). We 
believe the foundation principle of BPA should be what it is for 
virtually every other federal agency responsible for the management and 
sale of the public's resources: To achieve for America's taxpayers the 
best possible price or ``fair market value'' whenever public assets are 
sold.
    The federal government routinely sells coal, oil, natural gas, 
timber and other assets. The prime responsibility of agencies like the 
Minerals Management Service, the Bureau of Land Management and the 
Forest Service is to ensure receipt of ``fair market value'' when the 
public's assets are sold. There are open and public bidding procedures 
under which the high bidder wins. There is administrative and judicial 
review and close congressional oversight. These programs bring to the 
Treasury billions of dollars per year in revenue.
    No such regimen covers BPA's sale of electricity produced at 
federal generating facilities. We are referring here not to the 
preference right power sold within BPA's traditional service area but 
to the power BPA sells outside the Pacific Northwest or ``over the 
fence.'' This power is sold through nonpublic negotiations and the 
prices are not released. No other federal assets can be sold in this 
way. Imagine the umbrage in Congress if the Department of the Interior 
sold coal or oil tracts through a secret process and at a secret price.
    We propose a system for the ``over the fence'' sale of Bonneville 
power, one modeled after the successful systems for selling other 
federal assets. Nothing less will ensure taxpayers that government is 
receiving top dollar on the sale of their assets.
                  title vii--environmental provisions
    We commend the Chairman for not including a mandatory renewable 
energy portfolio standard in H.R. 2944. A renewable portfolio standard 
is a hidden tax on all consumers that would force them to pay more for 
electricity. Polls demonstrate that many consumers will voluntarily pay 
more to purchase electricity from renewable energy sources, and 
consumers in open states should have this option. We believe the 
Chairman has included more appropriate incentives to promote renewable 
energy, including the renewable energy production incentive and the 
renewable energy tax credit.
Net Metering
    Section 702 of H.R. 2944 addresses net metering service. Again, net 
metering relates to the provision of retail electric service; these 
issues are being addressed by the states, and Section 702 is an 
intrusion in state jurisdiction. Further, net metering should apply 
only to the energy portion of the bill and not relieve a consumer from 
paying other charges on the bill, including those for public policy 
purposes and distribution services.
        title viii--provisions relating to internal revenue code
    For competition to work, Congress needs to address the artificial 
competitive advantages provided by the tax exemptions and tax-exempt 
financing used by government-owned utilities and electric cooperatives 
when competing against other electricity suppliers, so that all 
competitors can participate in open markets under the same set of 
rules. For this reason, EEI has concerns with section 801 and 802 of 
the bill.
Business Activities of Mutual or Cooperative Electric Companies
    Section 801 would remove the requirement that electric cooperatives 
and similar organizations pay taxes on income from sales to nonmembers 
to the extent that income exceeds 15% of revenues. Federal subsidies 
have been given to electric cooperatives on the argument that they are 
nonprofit organizations serving only their owner-members.
    We believe that section 801 goes too far when it allows electric 
cooperatives to retain their tax-exempt status while making an 
unlimited amount of sales to nonmembers. Also, we do not feel it is 
warranted to permit electric cooperatives to exclude debt written-off 
as an exclusion from the 85% member income test.
Tax-Exempt Bond Financing of Certain Electric Facilities
    EEI has major concerns with section 802 because it provides 
expansive relief to government-owned utilities, even if they do not 
fully open to competition, and allows them to issue new tax-exempt 
bonds for new transmission and generation facilities that will compete 
with privately owned, taxpaying entities. These provisions also would 
provide substantial loopholes allowing government-owned utilities to 
sell electricity for profit outside their service territories without 
paying income taxes on these sales. The provisions would distort 
competitive electricity markets by helping government-owned, subsidized 
utilities to expand at the expense of tax-paying electricity suppliers.
    In contrast, the Administration has proposed a much different 
approach to dealing with the tax consequences of electricity 
restructuring. Their proposal would grandfather outstanding bonds for 
government-owned utilities that offer choice to their consumers, but 
would eliminate the ability to issue any tax-exempt debt in the future 
for all facilities involved with transmission or generation of 
electricity. Legislation (H.R. 1253) introduced by Representative 
English takes a similar approach as the Administration, but would take 
the additional step to tax profits on sales made outside of a 
government-owned utility=s service territory. EEI believes either of 
these approaches is more equitable than H.R. 2944 as they provide for 
competition to take place on a more level playing field. Consumers 
deserve to receive true market signals as they choose their electric 
supplier. Subsidized power does not give them the true signals of 
efficiencies and lowest costs.
Nuclear Decommissioning Costs
    EEI strongly supports section 803 of the bill, the provisions of 
which were introduced by Representative Jerry Weller (H.R. 2038). The 
need for this section results from the evolution from a regulated 
environment to a competitive electricity market. Because of this 
structural change, the tax treatment of nuclear decommissioning funds 
is not clear under current law. In addition, restructuring has brought 
regulatory and market forces to bear upon continued ownership of 
nuclear power plants, resulting in transfers and sales of these plants. 
In some instances, state restructuring laws require divestiture of 
power plants. These activities have triggered unforeseen tax 
consequences that, if not corrected, could force the early shutdown of 
nuclear units that cannot be sold, resulting in the loss of jobs and a 
reduction of energy supply.
    The provisions in this section will address needed reforms to U.S. 
tax law associated with decommissioning of nuclear power plants in a 
deregulated market by: (1) eliminating the cost of service requirement; 
(2) defining nuclear decommissioning costs and clarifying that all such 
costs are currently deductible; (3) allowing for the transfer of 
nonqualified funds to a qualified decommissioning fund; and (4) 
providing for the tax-free transfer of these funds when nuclear assets 
are sold to a non-regulated entity.
Renewable Energy Tax Credit
    EEI supports section 804, which would extend the tax credits for 
electricity generated by wind and biomass.
                              other issues
    In addition to commenting on what is in H.R. 2944, we want to 
commend the Chairman for what is not in the bill. Of utmost importance, 
we are pleased that the bill does not grant FERC new authority to order 
utilities to divest their assets nor does it impose competitive 
handicaps on the ability of utilities and their affiliates to offer new 
services and products.
    Federal legislation should protect competition, not competitors; it 
should not become a vehicle for favoring new entrants by breaking up or 
otherwise handicapping the ability of existing utilities to compete. 
Recent polls conducted by EEI show that 91 percent of American 
consumers believe that their current electricity supplier should remain 
in the mix of competitors from which they can choose.
     Any evaluation of market power issues must look to where the 
electricity industry is rapidly heading, not to where it has been, or 
even where it is right now. Proponents of draconian market power 
proposals act as though monopolistic utilities are about to be 
completely deregulated to run amok in a competitive market.
    To the contrary, in competitive electricity markets, utility 
monopoly functions will continue to remain regulated at both the 
federal and state levels to ensure all competitors access to essential 
facilities and to ensure that distribution utilities do not cross 
subsidize or provide unfair preferences to their affiliates. A number 
of different federal and state statutes address potential market power 
problems. In addition, state restructuring plans are addressing 
potential market power concerns.
    And, let's not ignore what is already occurring in evolving 
competitive electricity markets: thousands of competitors currently 
exist, with many more large, established companies with significant 
name recognition entering the market. Tens of thousands of megawatts of 
new generation is being planned, which will be constructed and brought 
on line much more quickly than in the past. In addition, utilities are 
selling tens of thousands of megawatts of their own generation.
    Market share simply does not equal market power. As long as 
consumers have a choice of suppliers, a company can serve a large 
portion of the market without having the ability to manipulate prices 
or prevent other suppliers from competing. In competitive markets, 
sellers offer different advantages to consumers, and they cannot be 
equalized. The ability to bring lower prices or better services to 
consumers is what competitive markets are all about.
                               conclusion
    We support legislation that removes federal barriers to 
competition, facilitates state restructuring activities, addresses 
critical transmission and reliability issues and applies the same rules 
to all competitors. We believe that H.R. 2944 makes significant 
progress toward achieving some of those goals, while falling short on 
others. We commend the Chairman for his continuing efforts to develop a 
workable electricity bill, and we look forward to continuing to work 
with him and other Members of Congress to address our concerns with 
H.R. 2944.

    Mr. Barton. Thank you, Mr. Owens.
    We would now like to hear from Ms. Lynne Church, who is 
executive director of the Electric Power Supply Association 
and, just as a personal aside, is an expert on traffic 
congestion in northern Virginia.
    Ms. Church. Mr. Chairman, you are stealing my speech.
    Mr. Barton. Welcome. Your statement is in the record and we 
give you 6 minutes to summarize it.

                  STATEMENT OF LYNNE H. CHURCH

    Ms. Church. Thank you.
    Good morning, Mr. Chairman, Mr. Hall, and members of the 
committee.
    My name is Lynne Church. I am the executive director of the 
Electric Power Supply Association, which is the national trade 
association for the competitive power supply industry, 
including power marketers and non-regulated generators active 
in the United States, as well as U.S. global markets.
    I thank all of your for the opportunity to present my 
testimony and our analysis of H.R. 2944.
    The bill focuses primarily on the wholesale marketplace. 
While EPSA's vision of the future certainly demands a national 
competitive market for electricity, there is a very broad 
consensus that additional Federal legislation is needed to 
promote truly competitive wholesale power markets.
    We do not yet have full comparability of rates, terms, and 
conditions for interstate transmission service. Barriers to 
entry for new market participants remain. It may surprise the 
subcommittee, but many of EPSA's members actually believe the 
wholesale market is getting less, not more, competitive.
    The long-term success of your effort will be linked to a 
simple question: does this law make wholesale power markets 
more robust, more fair, and more competitive? This question has 
real-world implications for your constituents and consumers, in 
general.
    Just last week, for example, the local electric utility, 
PEPCO, announced a 7 percent rate reduction. Fully half of this 
reduction is attributed to cost savings associated with 
increased reliance on the wholesale markets.
    H.R. 2944 is complex, and EPSA clearly agrees with many of 
the provisions; however, one area of significant concern 
relates to the regulatory oversight of the interstate 
transmission grid. If this legislation is to be pro-
competitive, it must make absolutely clear that all users of 
the interstate system are subject to a consistent set of rules 
overseen by a national regulatory body.
    Unfortunately, in three separate provisions, the bill 
unnecessarily subjects the interstate grid to potentially 
intrusive State control. Any one change would be problematic, 
but the combination of the three has the potential to defeat 
the creation of a truly competitive and efficient marketplace.
    The bill clarifies that Federal authority is limited to 
unbundled power sales, or those sales where customers are 
billed separately for power generation and transmission 
services.
    For those 24 States--we count 24--which have adopted a 
framework of retail competition, all power sales are 
essentially becoming unbundled. In those States, Federal 
authority will extend to all uses of the interstate grid. 
However, as long as some States opt against retail choice, this 
legislation will perpetuate a system where large portions of 
the interstate grid will remain outside of Federal control and 
subject to State control. And those States that have moved to 
competition may well be penalized in terms of serving their 
customers.
    It is akin to suddenly turning an eight-lane superhighway 
into a bumpy country road once it reaches a political boundary 
of a State.
    This jurisdictional split will create risk in the 
marketplace and may lead some States to engage in ill-conceived 
attempts to protect in-State consumers at the expense of out-
of-State power users.
    To use the highway analogy again, imagine what would happen 
if northern Virginia decided to mitigate road congestion during 
rush hour by permitting only cars with Virginia tags on its 
highways and excluding DC and Maryland drivers from its roads 
during those hours.
    The subcommittee needs to recognize that our grid is truly 
interstate from an engineering standpoint, and even small 
disruptions can have broad impact.
    For example, we believe that a poorly managed effort to 
curtail 400 megawatts of power flowing between Ontario and 
Michigan this past July led ultimately to the dramatic price 
spike in Illinois, Indiana, and Ohio that we have read about, 
and to hundreds of millions of dollars in unnecessary costs.
    This distinction between unbundled and bundled uses of the 
transmission grid is an artificial and unnecessary one. It is 
fundamentally at odds with the concept of full comparability 
and an effort to promote a robust competitive power place.
    The other two areas of which I speak are the areas dealing 
with grid reliability and the determination of transmission 
versus distribution assets.
    The bill in those areas further interjects State regulators 
in issues that are best considered at a national level.
    In a number of other areas, the legislation has been 
significantly improved since the initial draft in August, and 
we appreciate the Chair and the committee's and the staff's 
role in listening to us and including some of these provisions.
    Particularly, the bill's language on mergers, regional 
transmission organizations, and new plant interconnections are 
very positive steps. They do not resolve all our concerns, but 
they are definitely a step in the right direction. And I refer 
you to the text of my written comments for some suggested 
refinements to those provisions, as well as to the PURPA and 
renewable power section.
    Some subcommittee members have expressed opposition to any 
new authority to FERC, yet, we do not believe that FERC needs a 
greatly expanded role. Instead, the Commission's existing 
authority needs to be clarified and FERC's role encouraged to 
evolve.
    Competitive power markets will continue to rely on an 
interstate grid that is a monopoly provided service. As such, 
these markets will require the presence of an effective 
watchdog, and FERC is, realistically, the only agency equipped 
to handle this responsibility.
    To summarize, enormous consumer benefits can be achieved 
through the enactment of pro-competitive wholesale power 
legislation, but the system today is broken. Without action by 
this Congress, your constituents and consumers, generally, will 
be threatened with unnecessary market volatility and higher 
prices for power.
    [The prepared statement of Lynn H. Church follows:]
  Prepared Statement of Lynne H. Church, Executive Director, Electric 
                        Power Supply Association
    Mr. Chairman, Ranking Minority Member, and Subcommittee Members, my 
name is Lynne H. Church, Executive Director of the Electric Power 
Supply Association (EPSA). EPSA is the national trade association that 
represents the leading competitive power suppliers--including power 
marketers and developers of competitive power projects--active in the 
U.S. and global energy markets. On behalf of the competitive power 
industry, I thank you for this opportunity to present our analysis of 
your legislation to restructure the electric power industry, H.R. 2944, 
the Electricity Competition and Reliability Act.
The Goal of Legislation: Building a Robust, Competitive Wholesale Power 
        Market
    As you know, H.R. 2944 focuses primarily on the wholesale 
marketplace. While EPSA's vision of the future demands a national, 
competitive retail market for electricity, our experience in today's 
wholesale markets underscores the potential value of your legislative 
efforts.
    As testimony before the Subcommittee has made clear, there is a 
broad consensus that much still needs to be done. True comparability of 
rates, terms and conditions for interstate transmission service for all 
classes of customers has yet to be achieved. Barriers to entry for new 
market participants remain. The monopoly providers of transmission 
services are learning to use their systems in ways that can be at odds 
with a competitive marketplace. It may surprise the Subcommittee that 
many of EPSA's members actually believe the wholesale market is getting 
less, not more competitive.
    The long-term success of your effort will be linked to a simple 
question: does this law make wholesale power markets more robust, more 
fair and more competitive? While issues in the wholesale market 
directly concern electric power distribution companies, power producers 
and marketers, this question has real world implications for your 
constituents. Just last week, for example, the local electric utility 
PEPCO announced a seven percent rate reduction. Fully half of this 
reduction is attributed to cost savings associated with increased 
reliance on wholesale markets. We believe the impacts on consumers are 
direct: more competition, more benefits; less competition, less 
benefits and higher costs.
H.R. 2944 Splits Jurisdiction Over the Interstate Market and Could 
        Increase Risk
    H.R. 2944 represents a complex policy proposal and we recognize 
that the legislative process will result in a stream of changes and new 
ideas. We look forward to working with the Subcommittee as this process 
unfolds and are optimistic that our collective efforts can result in 
critically needed, pro-competitive legislation.
    While EPSA clearly agrees with many provisions in the legislation, 
there are issues that need further action or alternative solutions. As 
one area of significant concern, we raise the issue of regulatory 
jurisdiction over the operation of the interstate transmission grid. If 
this legislation is to be pro-competitive, it must make absolutely 
clear that all users of the interstate system are subject to a 
consistent set of rules overseen by a national regulatory body. 
Unfortunately, in three separate provisions, the bill unnecessarily 
subjects the interstate grid to potentially conflicting and disruptive 
regulatory control. Any one change would be problematic, but the 
combination has the potential to defeat the creation of a truly 
competitive and efficient marketplace.
    First, the bill clarifies that federal authority is limited to 
``unbundled'' power sales. An unbundled sale is one where a customer is 
billed separately for power generation and transmission services. 
``Bundled'' sales are where a customer gets a single bill for electric 
service and typically has no choice of power provider.
    As states move to retail competition, all power sales essentially 
become unbundled: this is critical to the concept of customer choice. 
Hence, in a world where all the states have embraced retail competition 
(as 24 have done already), federal authority extends to all uses of the 
interstate grid. On the other hand, as long as states opt against 
retail choice, your legislation perpetuates a system where some uses of 
the interstate grid are subject to state control, while others are in a 
national system.
    In many states, ``bundled'' uses of the interstate grid amount to 
80% or more of the transactions on the interstate grid. As written, 
this legislation has the possible effect of reducing the interstate 
grid--our interstate highway system for power--from an eight lane super 
highway to a dirt road. In addition, this jurisdictional split may 
permit some states to engage in ill-conceived attempts to protect 
instate consumers at the expense of out-of-state power users. 
Continuing with the highway metaphor, imagine what would happen if 
Northern Virginia decided to mitigate road congestion by permitting 
only cars with Virginia license plates on its highways during rush 
hour?
    The Subcommittee needs to understand that, regardless of legal 
jurisdiction, our grid is truly interstate and even small local 
disruptions can have broad impacts. For example, we believe that a 
poorly managed effort to curtail 400 Mw of power from flowing between 
Ontario and Michigan led ultimately to a dramatic price spike in 
Illinois, Indiana and Ohio last summer and to hundreds of millions of 
dollars in unnecessary costs for consumers.
    The distinction between unbundled and bundled uses of the 
transmission grid is an artificial and unnecessary one. Separate 
treatment and regulatory oversight makes impossible a system of 
consistent rules and comparability with respect to transactional rates, 
terms and conditions. Such a split in jurisdiction creates potentially 
overwhelming commercial risk. It also is fundamentally at odds with any 
effort to promote a robust competitive wholesale power marketplace.
    In two other areas, as part of the sections dealing with grid 
reliability and the determination of transmission assets, the 
legislation interjects state regulators in issues that are best 
considered at a national level. Rules governing grid reliability, for 
example, have regional, national and commercial impacts. Allowing fifty 
states broad rights to ``adjust'' these rules to reflect local concerns 
is a formula for potential chaos in the wholesale marketplace.
    In addition, there is growing concern in the marketplace that, 
through a process known as ``refunctionalization,'' the owners of 
transmission assets will attempt to reclassify these transmission 
facilities as elements of the distribution network. In part, such 
actions will be taken to avoid federal oversight. This effort, it is 
feared, will effectively shrink the physical marketplace and result in 
potentially increased congestion and supply disruptions. If 
transmission owners are allowed to appeal to local interests and 
authorities for these determinations, a consistent set of rules will be 
impossible and erosion of the interstate transmission system could 
result. While the perspective and advice of local authorities can be 
invaluable, the legislation must make clear that local concerns cannot 
trump the national interest.
H.R. 2944 Includes Improved Market Power Provisions, But More Work 
        Needed
    In a number of other areas, the legislation has significantly 
improved since the initial draft was released in early August. Three 
such provisions relate to the bill's language on mergers, regional 
transmission organizations (RTOs) and new plant interconnection with 
the interstate grid. While not resolving our concerns with respect to 
the abuse of market power in the marketplace, these provisions 
represent a step in the right direction.
    Even in these areas, however, we encourage you to adopt further 
refinements. For example, independent control is absolutely essential 
to the operation of a commercially acceptable RTO. However, the 
legislation defines any RTO where participants each own less than ten 
percent of voting stock as ``independent.'' This language should be 
changed--an RTO where six transmission owners control 60% of the voting 
rights meets few market participants definition of ``independent.'' As 
another example, we note that the bill's provisions to ensure that the 
non-discriminatory interconnection of new power plants improve on the 
status quo. Nevertheless, the process outlined in the legislation is 
still insufficiently streamlined to have a significant, positive 
impact.
    Lastly, we urge the Subcommittee to ensure the capability of 
federal regulators to react in near ``real-time'' and with direct, but 
light-handed, remedies to allegations of market power abuse. EPSA 
members do not see the courts or anti-trust laws as a viable approach 
to resolving market power issues on a day-to-day basis. The markets and 
participants are changing rapidly. Litigation, especially when anti-
trust laws are involved, is unwieldy, extremely expensive and unlikely 
to lead to a rapid resolution of concerns. Given these circumstances, 
justice delayed will mean justice denied for many market participants.
    While some Subcommittee members have expressed opposition to any 
new authority at FERC, we do not believe that FERC needs a greatly 
expanded role. Instead, the Commission's existing authority needs to be 
clarified and FERC's role encouraged to evolve. Competitive power 
markets will continue to rely on an interstate grid that is a monopoly-
provided service. As such, these markets will require the presence of a 
effective watchdog and FERC is realistically the only agency equipped 
to handle this responsibility. States acting on their own cannot serve 
this role. On the contrary, acting on their own, states could 
exacerbate the problems facing the industry.
Additional PURPA and Renewable Power Provisions are in Order
    Before closing, we would like to comment on two other sections in 
the legislation, relating to PURPA and renewable power. For some time, 
EPSA has supported the prospective repeal of PURPA's mandatory purchase 
obligations, linked to the introduction of competitive retail markets. 
If PURPA is amended in federal law, there must be explicit recognition 
and preservation of existing PURPA contracts. We also endorse your 
efforts to guarantee the recovery of PURPA contract costs as 
appropriate federal policy. However, such cost recovery must be 
explicitly related to the honoring of existing contracts. Lastly, EPSA 
urges the repeal of the ownership restrictions on PURPA Qualifying 
Facilities (QFs). In 1992, the Congress placed no such restrictions on 
Exempt Wholesale Generators (EWGs) and the time has come for similar 
treatment for QFs.
    EPSA also endorses additional support for renewable resources. The 
bill's Renewable Energy Production Incentive is unfairly focused on 
non-profit companies. This program should be expanded to cover all 
types of companies. Alternatively, the tax credit for renewables 
included in the legislation should be expanded to include the full 
range of technologies covered by the Incentive program (i.e., ``solar 
energy, wind, biomass, or geothermal'').
Conclusion
    EPSA's members are very appreciative of this opportunity to share 
with the Subcommittee our views of your legislation and the state of 
competition in wholesale markets. We look forward to working with the 
Subcommittee and the full Committee to ensure the creation of 
critically needed, pro-competitive legislation.
    To summarize, enormous consumer benefits can be achieved through 
the enactment of pro-competitive wholesale power legislation. We are 
not advocating intrusive ``re-regulation,'' as some might claim. 
Rather, we advocate light-handed, consistent oversight of all 
competitive aspects of the industry with appropriate enforcement 
policies and national regulation of the monopoly interstate 
transmission network. Today, the system is broken. Without action by 
this Congress, your constituents will be threatened with unnecessary 
market volatility and higher prices for power.

    Mr. Barton. Thank you.
    We now want to hear from Mr. William Mayben, who is the 
president of Nebraska Public Power in Columbus, Nebraska. He 
represents the Large Public Power Council.
    Your statement is in the record. We welcome you. We hope 
that when Texas A&M plays Nebraska in a month that there is a 
power outage in the big red machine on the football field, but 
certainly not in the utility grid.
    Mr. Mayben.

                 STATEMENT OF WILLIAM R. MAYBEN

    Mr. Mayben. Nebraska has been known to have a power outage 
in the second half for just a strategic thing.
    Thank you, Mr. Chairman.
    Nebraska Public Power District is a vertically integrated 
electric utility that serves about 1 million of the 1.6 million 
people that live in Nebraska. That does not sound like very 
much, based upon some of the numbers I have been hearing, but 
for us it is pretty important.
    The Large Public Power Council is represented by 21 of the 
largest publicly owned State and locally owned electric 
utilities in the country. We have about 6 million customers in 
total, about 44,000 megawatts of generation, and about 25,000 
miles of high-voltage transmission lines.
    Now, we distinguish ourselves from the dominance of the 
electric utility industry in that we do not engage much in 
mergers--in fact, none at all--and, for the most part, we are 
not interconnected with either one of ourselves, so we truly 
depend upon the national grid.
    The Large Public Power Council applauds the chairman's 
efforts in bringing together a comprehensive bill to deal with 
deregulation of the electric industry. As it is formed, we 
believe for the most part, it will be very beneficial for the 
consumers throughout the United States.
    We have two fundamental issues with regard to the bill, as 
it is drafted, and we are really pleased with the way it is 
going, but we have a little bit of problems. Our problems are 
pretty well laid out in the details of my prepared testimony.
    The first thing we have problems with is in the private use 
area. As you know, private use was really imposed upon public 
power entities issuing tax-exempt debt to construct 
transmission lines and power plants back in the 1986 Tax Reform 
Act. That act clearly was passed in contemplation of the 
regulated monopoly utility industry that we had at that point 
in time.
    As we go forward with deregulation, it is clear that that 
act does not fit a segment of the electric utility industry 
very well, and we believe that it has to be addressed.
    Fundamental limitations that we face are that we can only 
issue or we can only take about 10 percent of the output of our 
generation or our transmission and use it in an open 
competitive market, or derive only about $15 million a year in 
the engagement of the wholesale market.
    We believe the transmission issue that is most troublesome 
to us--and, by the way, we support very strongly the work that 
is necessary to create a robust transmission system throughout 
the United States. We think that is the key to a competitive 
market, and we think if we can accomplish a competitive market, 
many of the other things that we are concerned about with 
regard to market power will be ameliorated, to some extent.
    A fundamental problem is that public power is different 
than investor-owned utilities. We are required, for the most 
part, to abide by the statutes and the rules that are set forth 
in our legislatures and in our home communities, and those 
rules are contrary to the rules that the investor-owned 
utilities can abide by with Federal jurisdiction.
    We believe that the bill needs to recognize that public 
power is different, that the rules that we are asking for with 
regard to jurisdiction by the Federal Government recognizes our 
situation.
    With regard to the creation of RTOs, the public power 
entities support that, and we believe very strongly that they 
should be a part of the regional transmission organizations. 
But, again, we believe that we need to be given the recognition 
of the uniqueness of public power in terms of becoming members 
of the RTOs.
    We are concerned, at this stage of the game, that, if we do 
not have that kind of recognition, we will find ourselves 
without the ability to participate in the RTOs, and we think 
that the market will be affected by our absence. So we urge you 
to contemplate that we be given some special consideration.
    In conclusion, again we applaud the chairman and the 
committee for coming forth with a comprehensive bill. We think 
it is the step in the right direction. We would like to work 
with you as much as we possibly can to see to it that our 
particular needs are addressed.
    [The prepared statement of William R. Mayben follows:]
  Prepared Statement of William R. Mayben, President, Nebraska Public 
       Power District on Behalf of The Large Public Power Council
    My name is William Mayben, and I am President of the Nebraska 
Public Power District. I am testifying today on behalf of the Large 
Public Power Council. We appreciate the efforts that Chairman Barton 
and this Committee have made to assemble a comprehensive electric 
industry restructuring bill that aims to benefit all consumers. Today I 
would like to comment specifically on several aspects of Chairman 
Barton's bill that are of paramount importance to our members.
    The Large Public Power Council (``LPPC'') is an association of 21 
of the largest state and locally-owned electric utilities in the United 
States. Our members serve approximately 6,000,000 retail customers, and 
own and operate over 44,000 megawatts of generation. In addition, we 
own and operate in excess of 24,000 circuit miles of transmission 
lines. LPPC's members are located throughout the country in states 
including Washington, Texas, Arizona, California, Florida, Georgia, New 
York and Tennessee.
    We have reviewed Chairman Barton's bill, and overall, we believe 
the bill takes some positive steps towards encouraging a competitive 
and healthy electricity market. We do support the comprehensive 
approach to restructuring reflected in the bill, but have some specific 
concerns regarding several provisions. As I will outline in my 
testimony, we believe that any comprehensive restructuring bill must 
both satisfactorily resolve the private use issue and recognize that 
the federal government must not regulate state and municipal agencies 
as if they were private corporations. Given these overarching 
principles, I will focus my comments on several aspects of the bill 
that are of the greatest interest to our consumers, who will ultimately 
either bear the brunt of, or enjoy the benefits of, federal 
legislation. Those issues are private use restrictions, proposed new 
powers for FERC that would extend to public power transmission, and 
participation in Regional Transmission Organizations (RTOs).
Private Use
    I will begin with the most compelling issue for LPPC's members and 
consumers today--private use restrictions. Private use restrictions 
form a serious barrier to open competition and consumer choice. Failure 
to provide relief from some of these restrictions will preclude many 
public power systems from opening their systems to full competition and 
could result in higher rates for consumers. Such a result would be 
contrary to the goal of providing a competitive market that is open to 
all who wish to participate, ultimately to the benefit of all 
consumers. Unless public power systems are provided with private use 
relief, many of us will not be able to be full participants in a 
competitive marketplace and thus would have little stake in advancing 
federal restructuring legislation. We would like to work with this 
Committee to craft fair, effective and comprehensive restructuring 
legislation--but it must be comprehensive. We cannot support federal 
restructuring legislation without effective private use relief.
Background
    By way of background, public power systems have no practical source 
of external financing other than the municipal debt markets. Unlike 
private companies, public entities cannot issue stock. The private use 
rules that apply to our financing, most recently revised by Congress in 
the 1986 Tax Reform Act, were promulgated prior to the advent of a 
competitive electric industry. The rules provide that no more than the 
lesser of 10 per cent, or $15 million, of power generated by a power 
plant financed with tax-exempt debt, or transmission capacity of a 
transmission line financed with tax-exempt debt, may be sold to a 
private entity under a customer-specific contract. In simpler terms, 
the rules preclude us, for most transactions, from providing open 
access transmission and distribution services and from offering 
competitive prices for power sales.
    In the regulated monopoly world that existed prior to competition, 
this restriction was problematic but manageable. In a competitive world 
of open transmission access, it has very serious consequences for our 
members, their customers, and investors. Here's what the private use 
rules mean in a competitive environment, which already is a reality in 
the wholesale market and which is becoming a reality in the retail 
market in nearly half of the states :
    1. In its recent Notice of Proposed Rulemaking, FERC has strongly 
encouraged that all transmission-owning utilities participate in 
Regional Transmission Organizations (RTOs). Furthermore, Chairman 
Barton's bill and a number of other legislative proposals contemplate 
mandating participation in RTOs. We support the development of RTOs as 
important to the establishment of competitive markets that are both 
efficient and reliable. At the same time, private use rules may act to 
preclude effective participation of public systems in an RTO. A public 
power system that joins an RTO will not be able to issue new tax-exempt 
bonds to finance transmission facilities that have been turned over for 
operation by the RTO, thereby raising costs to all users. Moreover, a 
public power system that wishes to join an RTO and has issued tax-
exempt bonds for transmission after July 9, 1996, will have to redeem 
those bonds with higher cost debt or interest on those bonds will 
become taxable--again, raising costs for the utility and its customers.
    2. In a competitive environment, large customers will seek and 
obtain special tailored contracts to meet their specific needs, just as 
they do in buying any product. If outdated private use rules remain 
intact, a public power utility may be unable to offer such a contract, 
even to customers in its own service territory that it has been 
successfully serving for decades. This could deny that customer the 
best choice in the market, and will lead to loss of customers for the 
utility for reasons that have absolutely nothing to do with price or 
quality of service.
    3. If a public power system loses a customer in a competitive 
environment (and all utilities will lose customers), the public system 
may be unable to re-market the generating capacity it had built to 
serve that lost customer as a result of the private use rules. Thus, 
any excess capacity that a public system has may become idle and 
unproductive for the economy solely as a result of the private use tax 
rules. Inability to resell the capacity can lead to significant 
financial losses and reductions in overall economic efficiency. The 
bottom line: the remaining customers of that utility would pay higher 
costs.
    In summation, penalties for public power consumers come in the form 
of higher rates for customers, at a time when competition is supposed 
to be reducing rates. The consequences for public power's investors are 
equally undesirable. Public power's investors include a broad spectrum 
of people who have invested in this debt to fund their retirements, 
college educations, and other needs. These investors hold more than $70 
billion in outstanding tax exempt debt issued to finance generation, 
transmission and distribution facilities, and rely on the ability of 
public power systems to repay them through the sale of power from the 
assets they financed. Failure to address private use issues places 
these investments in jeopardy, as it may cause downgrades of public 
power bonds and lead to increased turbulence in the public power debt 
market. This in turn may impact other segments of the municipal debt 
market, upon which states, cities and towns rely to finance necessary 
infrastructure. Uncertainty in these markets leads to higher borrowing 
costs, all of which ultimately will be absorbed by investors, citizens 
and customers.
Treatment of Private Use in the ``Electricity Competition and 
        Reliability Act''
    For the reasons I have just outlined, we believe Chairman Barton 
has advanced the prospects for workable restructuring legislation by 
providing relief from private use restrictions in his bill. Chairman 
Barton's bill would allow publicly-owned utilities to elect to 
permanently forego the ability to issue future tax-exempt debt to build 
new generating facilities. In return, the bill would grandfather 
existing tax-exempt debt incurred to build electric power facilities 
and permit the electing systems to operate outside of current 
restrictive private use rules. In this way, publicly-owned utilities 
will be able to bring the full benefits of competition to their 
customers. Those utilities that do not elect to terminate issuance of 
tax-exempt debt would remain subject to modified private use rules.
    We believe, and are pleased that Chairman Barton agrees, that a 
fair marketplace that invites all to participate cannot exist without 
meaningful relief from private use restrictions. I should note that we 
do have some technical concerns about a few recent modifications to the 
private use provisions of Chairman Barton's bill. I will be happy to 
address these in greater detail at the Committee's request.
Transmission Policy
    I would now like to turn to transmission issues that will be 
important for our members in an increasingly competitive market--
assuming Congress provides us with the private use relief needed to 
participate fully in that market. Since its inception, the LPPC has 
focused on transmission policy as a critical issue for its members. The 
LPPC was the first group of transmission owning utilities to express 
support for open transmission access in the debates preceding the 
Energy Policy Act of 1992. At the same time, we led the way in 
developing and promoting regional transmission entities as a mechanism 
to manage and operate the transmission system in an open access 
environment.
    The LPPC would like to continue to provide leadership in making 
changes to the transmission system that will enhance competitive 
markets. As such, we would like to work with the Committee to develop 
transmission policies that ensure nondiscriminatory access to public 
power transmission facilities while recognizing that it is not feasible 
to govern access to investor-owned and public power transmission by 
identical rules. We are concerned about provisions in Chairman Barton's 
bill that give FERC the same authority over transmission rates charged 
by state or local agencies as it has over private corporations. Such an 
expansion of FERC authority is flawed policy. By definition, State and 
local agencies are not private, for-profit corporations. They should 
not be regulated as such. For example, FERC's cost of service 
ratemaking methodology--which relies on concepts such as rate of return 
on equity--is inappropriate for public power systems whose external 
financing comes exclusively from debt. Also, in many instances, state 
and local bond covenants held by public power systems include coverage 
ratios that require transmission revenues in excess of the level FERC 
will allow under standard cost of service ratemaking.
    We recommend that the Committee not give FERC general ratemaking 
authority over public power transmission rates. If the Committee thinks 
additional FERC authority in this area is necessary, it should be 
limited to authority to require public power systems to file the same 
type of open access tariff public power systems now file voluntarily 
under the ``safe harbor'' procedure used to qualify for reciprocity 
under Order No. 888. This new authority would be limited to requiring 
that public power transmission utilities offer non-rate terms and 
conditions of transmission service comparable to those that investor-
owned utilities are required to offer under their open access tariffs. 
With respect to rates, FERC's authority would be limited to ensuring 
that a public power system's transmission rates are comparable to the 
rates it charges itself. Thus, on rates, FERC could require that public 
power transmission owners not discriminate in favor of their own sales 
services, but could not set or review such owners'' revenue 
requirements or the level of rates. Attached to our testimony is a 
proposed amendment that carries out this objective.
    We have similar concerns about provisions that mandate membership 
in RTOs. LPPC believes that an evolutionary--and not revolutionary--
approach is needed to ensure the continued delivery of reliable, 
affordable electricity to consumers. Furthermore, as FERC has 
recognized, public power faces difficult issues in participating in 
RTOs. These must be addressed before a national system of RTOs can be 
put into place. As I touched on previously, private use restrictions 
present a barrier for participation by public power systems. 
Furthermore, many public power entities operate under additional legal 
and operational requirements that affect their ability to participate 
in the ownership of an RTO or to transfer ownership or operations of 
their transmission facilities to an RTO. These requirements include 
provisions in state constitutions, state and local laws, and bond 
covenants that vary from system to system.
    For these reasons, we are unable to support any provision giving 
FERC authority to require public power systems to join RTOs unless in 
addition to addressing such issues as independence, size and scope of 
RTOs, the statutory criteria requires the RTO to accommodate the unique 
characteristics and legal requirements of public power. This will 
ensure that public power's participation by FERC order is not 
inconsistent with state laws and constitutional requirements and with 
bond covenant requirements. In addition, FERC RTO requirements should 
not impair control of local system operations or reliable and economic 
service to consumers served by publicly owned facilities. Lastly, the 
criteria should not authorize FERC to require any public power system 
to join an RTO if the state in which the public power system operates 
has chosen not to mandate that its public power entities (which are 
instrumentalities of the state) participate in RTOs.
Conclusion
    As the Commerce Committee acts on this bill, we stand ready to 
offer our assistance and support to the Committee. We are hopeful that 
other Committee members can support the work that Congressmen Barton, 
Largent, Markey and others have already done on the issue of private 
use. We also offer our assistance to the Committee in developing 
workable transmission policies that recognize the unique 
responsibilities and obligations of publicly-owned utilities.
    As pleased and reassured as we are regarding Chairman Barton's 
leadership on the private use issue, I must again caution the Committee 
that LPPC's members will not be able to support restructuring 
legislation that does not provide meaningful private use relief--either 
in the same bill or in companion legislation from the tax committees. 
We recognize that the Commerce Committee's jurisdiction does not permit 
it unilaterally to deal with all pending tax and non-tax restructuring 
issues; however, we are confident that the Commerce and Ways and Means 
committees can work together to effectively resolve this issue.
    In conclusion, the LPPC believes that the Committee continues to 
move in a positive direction on electric power competition issues. We 
look forward to working with you to ensure that private use provisions 
similar to those endorsed by Chairman Barton are enacted by this 
Congress, and through that effort, offer our assistance in supporting 
this Committee's efforts on broader restructuring issues, including 
transmission policy.
    Thank you for the opportunity to testify before you today.

    Mr. Barton. Thank you, sir.
    The Chair wants to announce they have just called a vote on 
the floor. It is on approving the journal. We are going to 
continue the hearing. If there is a fast member who can get 
over and vote and get back, I will turn the chair over, but I 
am going to continue the hearing.
    We want to hear from our next witness, the former 
Congressman from the great State of Oklahoma, Mr. Glenn 
English, who is now representing a National Rural Electric 
Cooperative Association.
    Mr. English, welcome to the committee. Your testimony is in 
the record in its entirety. We recognize you to summarize it 
for 6 minutes.

                   STATEMENT OF GLENN ENGLISH

    Mr. English. Thank you very much, Mr. Chairman. I 
appreciate that. Let me just say that we are very pleased to be 
here today and have an opportunity to address H.R. 2944.
    Restructuring, we feel, brings a new responsibility to 
electric cooperatives around this country. It is an 
increasingly important option we feel that consumers will need 
and desire, and we want to applaud the effort by the chairman 
and by the committee to work with electric cooperatives to make 
sure that we are able to fulfill that responsibility.
    Let me also say, Mr. Chairman, there are really four key 
items that electric cooperatives would like to focus the 
committee's attention on at this particular time.
    While there are a number of other elements within the 
legislation that we address in our written testimony, and some 
that are of a technical nature that we would urge to be 
considered and looked at, the four items that we particularly 
want to focus the committee's attention on today deal with the 
guaranteed right of consumers to aggregate and right of 
electric cooperatives to serve those consumers; second, to 
minimize the unnecessary regulatory burdens on consumer-owned 
electric cooperatives; third to put all electric utilities in 
the same ball park as far as the services that they can offer 
to consumers; and fourth, we want to permit electric 
cooperatives to work together to serve consumers more 
efficiently.
    The first issue with regard to the right to aggregate, we 
want to commend the chairman for the legislation and his 
addressing of this issue. We feel that certainly the 
legislation moves in the right direction as far as dealing with 
that particular concern.
    The second issue, the summary signal, that the intent was 
for electric cooperatives with limited transmission facilities 
to be able to, in an uncomplicated way, obtain exemption from 
the jurisdiction of the Federal Energy Regulatory Commission. 
We feel that is a very laudable intent by the legislation, 
since there are some 400 small electric distribution 
cooperatives who use high-voltage lines to provide retail 
service to their widely disbursed rural consumers.
    Now, these facilities have no impact--I want to repeat, no 
impact--on the transmission grid, and for that reason should 
not have to undergo any type of expensive or prolonged 
regulation by the Federal Energy Regulatory Commission.
    With that in mind, we would urge the chairman and the 
committee to work on the language, itself, to clarify the issue 
and to state in detail, if possible, a simple, inexpensive 
exemption process to provide the small distribution 
cooperatives with the kind of certainty that they are going to 
need in dealing with the process.
    Let me also say, Mr. Chairman, we took note of the fact 
that the Federal Energy Regulatory Commission is authorized to 
review mergers not only among the large entities, the mega-
mergers of this country, but between cooperatives, as well.
    We were somewhat puzzled by that inclusion in the language 
of the legislation, quite frankly, because these are, for the 
most part, small entities.
    In fact, when FERC needs to be focusing its attention on 
the mega-mergers that are taking place and the impact that that 
is going to have as far as consumers around this Nation, it 
appears that this is diverting resources and attention to deal 
with people who have little or no impact as far as the market 
power issues of this country are concerned.
    In particular, we have been calling for even a heavier 
review of some of these mega-mergers that have been taking 
place in this Nation, and we still feel that the bill unduly 
restricts FERC's authority to look at those mega-mergers.
    In particular, from a size standpoint, Mr. Chairman, to 
make my point about the fact that this is somewhat puzzling, if 
you took all the generation and transmission capabilities of 
all electric cooperatives all across this country and merged 
the whole group together, they still would not be as large as 
the American Electric Power Company's assets.
    Second is the fact that these electric cooperatives 
generate power for their own use for their own membership. If 
you take all the electric generation capability that we have 
among our membership, it still only covers about half of all 
the electric power needs of individual cooperatives. Since 
nearly all that is committed to our membership, it really does 
not leave much available for any of our members who may wish to 
become players in an open market to be much of a factor, so 
that really does not make much sense.
    The other thing that I would call to the committees 
attention, mergers by rural electric cooperatives, G&Ts, are 
already under review by the Rural Utilities Service. Any of 
those that have an RUS loan are required to undergo review and 
approval before they can take that action, so there is already 
Federal review at that particular point.
    To simply add the Federal Energy Regulatory Commission is 
an additional burden on electric cooperatives as a second 
review at the Federal level, and also as a diversion of much-
needed resources for the Federal Energy Regulatory Commission 
to be focusing on what is the real issue, and that is the mega-
mergers and the market power that is going to truly have an 
impact on the marketplace in this country.
    We would like to work with the committee to see if there is 
some way we can address this issue, and to deal with the fact 
that cooperatives that are small and self-power primarily are 
the only members, and other cooperatives already subject to 
Federal merger could not be dealt with.
    Mr. Chairman, I see my time has expired. I do want to 
address several other issues, but I hope to be able to do that 
during the question period, and particularly I would like to 
address the issues pertaining to propane. Some of the issues 
have been raised of our good friends of the propane industry 
regarding subsidies and taxes.
    Thank you, Mr. Chairman.
    [The prepared statement of Glenn English follows:]
Prepared Statement of Glenn English, Chief Executive Officer, National 
                 Rural Electric Cooperative Association
                              introduction
    Chairman Barton and Members of the Committee, I appreciate this 
opportunity to continue our dialogue on the restructuring of the 
electric utility industry. For the record, I am Glenn English, CEO of 
the National Rural Electric Cooperative Association, the Washington-
based association of the nation's nearly 1,000 consumer-owned, not for 
profit electric cooperatives.
    These cooperatives are locally governed by boards elected by their 
consumer owners, are based in the communities they serve and provide 
electric service in 46 states. The more than 32 million consumers 
served by these community-based systems continue to have a strong 
interest in the Committee's activities with regard to restructuring of 
the industry.
    Electric cooperatives comprise a unique component of the industry. 
Consumer-owned, consumer-directed electric cooperatives provide their 
member-consumers the opportunity to exercise control over their own 
energy destiny. As the electric utility industry restructures, the 
electric cooperatives will be an increasingly important option for 
consumers seeking to protect themselves from the uncertainties and 
risks of the market. I would like to thank you, Mr. Chairman, and 
Members of the Committee for your receptiveness to the concerns and 
viewpoints of the electric cooperatives.
    The title of the bill before the Committee, H.R. 2944, is The 
Electricity Competition and Reliability Act. We applaud the intention 
of the Chairman and the Committee to ensure true competition in the 
electric utility industry. We are evaluating each provision of the bill 
on the basis of whether it enhances or impedes competition, and whether 
it supports or impedes the ability of electric cooperatives to continue 
to meet the needs of our consumer-owners in that restructured industry.
    At the beginning of my testimony, I would like to focus on a few 
key issues that we believe must be addressed if NRECA is to be able to 
support H.R. 2944. In the second part of this testimony below, I will 
discuss a number of other elements in the bill about which we are 
concerned. We intend to continue to work with the Committee and 
Congress to try to address those issues. In the third part of my 
testimony I will also note a few simple changes we recommend to fix 
technical problems in the bill.
                             key priorities
    NRECA and the electric cooperatives seek legislative language that 
would guarantee consumers access to the ``cooperative option.'' We were 
looking to see if H.R. 2944 would:

 guarantee consumers the right to aggregate and the right of 
        electric cooperatives to assist those aggregation groups;
 minimize unnecessary regulatory burdens on consumer-owned 
        electric cooperatives;
 put all electric utilities on an level playing field with 
        respect to the sale of non-electric products or services; and
 permit electric cooperatives to work together to serve their 
        consumers more efficiently.
    On the first issue, the discussion summary of ``Major Changes'' 
released last week indicated that the Chairman's intention in H.R. 2944 
would be to clarify the authority of cooperatives to aggregate retail 
customers.
    And, we were pleased to see, the language of H.R. 2944 does, 
indeed, clarify the authority of cooperatives to aggregate retail 
consumers.
    On the second issue, the summary signaled the Chairman's intention 
to give distribution cooperatives with limited transmission 
facilities--utilized only for the distribution of electric service--an 
uncomplicated way to obtain an exemption from the jurisdiction of the 
Federal Energy Regulatory Commission (FERC).
    This is a laudable intent. More than 400 small electric 
distribution cooperatives use high voltage lines to provide retail 
electric service to their widely dispersed rural consumers. These 
facilities have no impact on the transmission grid, and should not be 
subject to expensive, unnecessary FERC regulation.
    We were disappointed to see, however, that the language of H.R. 
2944 was not consistent with the discussion summary. Although the 
summary described an uncomplicated self-certification process to exempt 
these distribution cooperatives from FERC jurisdiction, H.R. 2944 
subjects these small distribution cooperatives to a complicated and 
uncertain process that does not accomplish the Chairman's goal.
    Congress should not use FERC regulation as a barrier to small 
cooperatives and new entrants into the market place. We believe it is 
possible to create a simple, inexpensive, exemption process that 
provides small distribution cooperatives with the certainty they need.
    On this same issue, we were concerned that both the discussion 
summary and the bill language would authorize FERC to review mergers 
between cooperatives.
    In previous testimony before this Committee and the House Judiciary 
Committee, NRECA has expressed concern that mega-mergers in the 
electric utility industry could lead to undue market concentration that 
would harm competition, reduce the quality of electric service, and 
raise prices for consumers. For that reason, we welcomed the bill's 
restoration of FERC authority to review public utility mergers. And, as 
I discuss in the second section of this testimony, below, we are 
concerned that the bill still unduly restricts FERC's ability to review 
these mega mergers.
    At the same time, however, we are concerned that the bill also 
requires cooperatives to obtain FERC approval before they can merge. I 
want to emphasize the unnecessary burden that this provision imposes on 
electric cooperatives and their member-consumers without providing any 
benefit to the objectives of the legislation.
    Of course, we recognize the Committee's wish for a uniform approach 
to merger review, but there are legitimate differences that the 
Committee needs to recognize between mega mergers that could harm the 
development of competition for electric energy and mergers between 
small, member-owned electric cooperatives.
    First, because of their small size and member-focus, mergers 
between cooperatives simply do not have the same impact on the 
competitive market as do mergers between large investor-owned 
utilities. If all of the generation and transmission cooperatives were 
merged into one national entity, that entity would not be as large as 
AEP--American Electric Power.
    Moreover, cooperatives are selling most of the power they produce 
to their own members because they were formed to bring their members a 
reliable, affordable source of power, not to speculate in open markets 
or to make a profit. Even if they wanted to get involved in the open 
market, most generation and transmission cooperatives could not. 
Nationally, generation and transmission organizations generate only 
about half of the electricity required by their member systems. They do 
not have the uncommitted or merchant power supplies required to become 
major players in energy markets.
    Second, mergers between cooperatives are also already subject to 
extensive review. Any merger of electric cooperatives requires the 
approval of their member-owners. And, any merger involving a 
cooperative with outstanding Rural Utilities Service (RUS) financing is 
subject to comprehensive review by RUS.
    Instead of protecting the public interest, FERC review of 
cooperative mergers only makes it more difficult for cooperatives to 
meet their obligation to meet the power supply needs of their member 
consumers at the lowest possible cost. And, because of their small 
size, there are times when cooperatives can operate more efficiently, 
acquire power at lower costs and reduce market risks for their members 
by joining with their neighboring cooperatives.
    Congress should be encouraging consumer-owned electric cooperatives 
to work together to provide better service for their member-consumers, 
not subjecting them to new regulatory burdens.
    We would like to work with the Committee to draft an exemption from 
FERC merger review for those cooperatives that are small, sell power 
primarily to their own members and other cooperatives, or are already 
subject to federal merger review.
    The second issue I want to raise today is the need for Congress to 
provide some consistency with respect to the non-electric businesses in 
which sellers of electric energy can engage.
    Today, investor-owned utilities, municipal utilities, electric 
cooperatives, power marketers, and other participants in the retail 
electric market are subject to different limitations on their ability 
to participate in the market for non-electric products and services. 
Those differences are unbalancing the playing field in the electric 
energy market and increasing costs for consumers.
    More and more, competitors in the electric energy market will be 
attracting consumers by offering packages of products and services. 
Consumers may be buying their electric energy, their natural gas or 
propane, their cable television, and their local telephone service from 
the same company.
    If one class of participants in the electric energy industry is 
denied the right to offer services that other participants can offer, 
it will be unable to meet the needs of consumers interested in packaged 
offers. So limited, that class of participants will be at a distinct 
disadvantage.
    We would like to work with the Committee to draft language that 
would ensure that all participants in the electric energy industry are 
on an equal footing. Such language would not give sellers or 
distributors of electric energy the right to sell any particular 
product or say that states have to allow any seller or distributor of 
electric energy the right to sell any other product or service. All it 
would say is that states have to treat all providers equally.
    This language is particularly important if Congress chooses to 
repeal PUHCA. Proponents of PUHCA repeal have argued that it makes no 
sense to impose artificial restrictions on the lines of business that 
certain utilities can engage in based solely on the form of those 
utilities'' corporate structure. That logic applies here as well.
    Now, you are probably already hearing from some who are pressing 
for restrictions on cooperatives. In recent weeks, for example, a 
number of propane gas spokesmen and their hired Washington-based 
lobbyists have circulated misrepresentations on Capitol Hill, charging 
electric cooperatives with unfair competition in the provision of 
propane service.
    These spokesman claim that cooperatives utilize low-interest 
funding from the Rural Utilities Service to set up propane companies 
that compete unfairly by selling propane at ``below market'' prices, 
and that cooperatives are able to do so because those propane 
operations are ``cross-subsidized.''
    Let me put that notion to rest right here and now. Electric 
cooperatives may not, by law, cross-subsidize a subsidiary 
organization, be it propane, provision of water and sewer utility 
services, Internet access, satellite television service or home 
security services. All costs of subsidiaries are allocated to those 
subsidiaries or those subsidiaries are operated with separate staff and 
facilities.
    Electric cooperatives that enter the propane business generally 
enter because their consumers request it or because existing small 
propane organizations approach the cooperatives to take over the 
business. The resultant propane businesses operate to recover costs, 
not profits, and their rates reflect that.
    Some charge that cooperatives providing diversified services are 
able to compete at an advantage because they ``don't pay taxes.'' It is 
true that most cooperatives pay no federal income taxes on their 
electric business because they are tax-exempt companies and because 
they operate on a not-for-profit basis. But, when cooperatives engage 
in most diversified businesses, they must pay unrelated business income 
tax on any profit they make from those businesses. Moreover, if the 
cooperatives pass any revenue from those diversified businesses to 
their consumer-owners as dividends, the cooperatives'' members must pay 
income taxes on those dividends.
    Further, cooperatives and their subsidiaries pay every other 
business, personal property, transaction, sales, or other tax that 
every other business entity pays.
    I just wanted to make that clear. Cooperatives are different from 
corporations and proprietorships and partnerships in a number of ways: 
they are organized by and for consumers; they operate as non-profit 
entities; their sole focus is the provision of services to their 
consumers and responding to requests for services from those consumers. 
In the realm of state and local taxes, though, they are exactly the 
same as every other business.
    This is important to bear in mind in the restructuring of the 
electric utility industry. Because cooperatives are consumer-owned and 
consumer-driven organizations with a history of success in providing 
services, consumers look to their cooperatives to provide additional 
services necessary for the their communities. Limitations on the 
ability of cooperatives to continue to provide these services, to 
provide services that every other electric utility can provide is a 
restriction on the ability of consumers to provide for themselves.
    The last issue I want to focus on today is the need for electric 
cooperatives to work together to meet consumer needs.
    Let me give you an example. In Georgia, electric cooperatives serve 
a number of Kroger supermarkets. Kroger, for reasons of efficiency, 
wishes to receive one bill for the electric service for all of its 
stores.
    When Georgia moves to competition, a single large power marketer or 
investor-owned utility could probably provide that service directly. It 
would have the geographic scope and resources to be able to do so. But 
it would not have any local relationship with the individual Kroger 
stores or the communities in which they operate.
    On the other hand, the several electric cooperatives now serving 
the Kroger markets do have that long standing relationship with the 
stores and their communities. But, because more than one cooperative 
would have to work together to provide a common service, they might not 
be able to provide that consolidated bill directly without violating 
federal antitrust laws.
    Instead, they would have to expend the resources to organize a 
joint venture specifically to provide that service. And even so, they 
could inadvertently violate federal antitrust law.
    Federal antitrust law was just not written with consumers or 
cooperative consumer organizations in mind, and the law sometimes gets 
in the way of common sense. The kind of cooperation that could better 
serve consumers--in this case, both Kroger and the cooperatives other 
members--was not contemplated by the law.
    I recognize that this is not the jurisdiction of this Committee, 
but I also recognize the Committee's interest in all of the issues 
related to true competition in the electric utility industry. I'm not 
suggesting that cooperatives be exempt from antitrust provisions. I am 
pointing out to the Committee that the competitive bar is higher for 
small entities than it is for large, interstate and international 
utilities.
                      additional areas of concern
    While the three issues emphasized above are NRECA's key priorities, 
there are a number of other issues in the bill that are of concern to 
electric cooperatives and their members. As this bill moves through the 
legislative process, we intend to continue to work to address these 
issues. For the convenience of the Chairman and the Committee, I'd like 
to discuss these matters sequentially as they appear in the bill, 
rather than in any priority order.
Findings
    H.R. 2944's ninth finding states:
        Federal programs to benefit rural consumers have succeeded, and 
        rural America has been electrified. However, rural America pays 
        some of the highest electric rates in the country. Competition 
        will assure reliable, reasonably priced rural electric service.
    This finding is inaccurate. Rural America pays high electric rates 
because it costs more per consumer to provide distribution service, not 
energy. To serve their members, rural utilities must string far more 
wire and cross far more rugged country than the suburban and urban 
utilities. Rural electric cooperatives serve an average of 5.76 
consumers per mile of line. By contrast, investor-owned utilities 
average 34.85 consumers per mile of line and municipal utilities 
average 47.76 consumers per mile of line.
    Restructuring will only bring competition to sales of electric 
energy, not distribution or transmission. Thus, even if competition 
lowered energy costs, it would not have any effect on distribution 
costs, the largest contributor to rural consumers'' high energy costs.
    There is also significant question whether restructuring will bring 
benefits to rural consumers. A draft study by the Department of 
Agriculture, and studies completed by the American Gas Association, the 
Competition Policy Institute, and several universities have all found 
that competition could actually raise rates in rural communities and 
largely rural states.
    Experience in states that have already restructured also cast doubt 
on this Finding. Pennsylvania has often been touted as the state whose 
electric restructuring efforts have brought choice to the most 
consumers. To take advantage of that choice, Pennsylvania's electric 
cooperatives opened up their systems ahead of schedule to allow every 
one of their members the right to choose his or her electric supplier. 
Yet, there is not one alternative supplier of electric energy today 
willing to offer competitive service to those cooperatives'' members. 
The benefits of competition have not reached Pennsylvania's rural 
communities.
Regional Transmission Organizations
    NRECA has several concerns with Sec. 103 of the bill concerning 
regional transmission organizations (RTOs)
    Mandatory Participation
    NRECA has long been supportive of voluntary RTOs. As NRECA has 
stated in its comments on FERC's Notice of Proposed Rulemaking on RTOs, 
NRECA believes that properly designed RTOs can provide significant 
system benefits, increasing reliability and reducing the ability of 
transmission owners to exercise market power.
    Mandatory RTOs, however, as provided by H.R 2944, pose several 
risks to the reliability of the system and to the healthy operation of 
energy markets. We hear from our members that the only thing worse than 
no RTO is a bad RTO. An RTO put together too fast, without full 
agreement of all industry participants and without adequate review from 
FERC is a prescription for problems. A bad RTO can make it easier for 
transmission owners to exercise market power, to favor their own 
generation, to restrict the flow of power across the RTO, or to raise 
transmission prices unreasonably. By mandating the formation of RTOs at 
short notice, and by restricting FERC's ability to regulate the 
structure, type or form of an RTO, the language now in H.R. 2944 could 
make the formation of bad RTOs far more likely.
    Independence
    We are pleased that the standards for regional transmission 
organizations in Sec. 103 of the bill require RTOs to be independent of 
all market participants. We are concerned, however, that H.R. 2944 
requires FERC to accept as ``independent'' RTO structures that we 
believe could continue to allow large utilities to exercise undue 
control over their transmission facilities. That could require FERC to 
accept RTOs that retain, or even exacerbate, existing problems with 
reliability and market power.
    Moreover, pursuant to its Notice of Proposed Rulemaking on RTOs, 
FERC is currently holding a public process to develop appropriate 
standards for RTOs. All interested parties, including utilities, 
consumers and even Wall Street, are now filing comments and reply 
comments with FERC. Among other issues addressed in those comments is 
the appropriate definition of ``independence.'' H.R. 2944's definition 
pre-judges that process and imposes its own definition in the absence 
of a public process.
    We would like to see the definition of ``independence'' deleted 
from Sec. 103 of the bill.
    Incentive Pricing
    We have a similar concern with respect to the subsection in the 
bill addressing ``Incentive Transmission Pricing Policies.'' That 
section requires FERC to encourage incentive transmission pricing 
policies for RTOs. As with the issue of ``independence,'' appropriate 
pricing policies for RTOs is currently subject to public debate at 
FERC. The issue has arisen not only in the context of the RTO Notice of 
Proposed Rulemaking, but also in the context of at least one pending 
case on an individual RTO's rates.
    Again, we think that H.R. 2944's provision has inappropriately pre-
judged the proper result of an ongoing public process. We would like to 
see the standards in this section made voluntary for FERC so that FERC 
is free, when it has completed its current investigation, to apply the 
rule that it finds most likely to serve the public interest.
Electric Reliability
    I would like to thank the Chairman and the Committee for including 
in H.R. 2944, with only minor amendments, the electric reliability 
language that was adopted by the NERC Board of Trustees. NRECA, and a 
coalition of other industry participants, believe that the language 
adopted by the NERC Board comprises the best option now possible to 
provide for the continued reliability of the bulk power system.
    Rather than express concerns with the language in the bill, I would 
instead ask the Committee to resist requests to further amend the 
language. There are those who oppose certain aspects of the language, 
or who would like a greater say in the operation of the electric 
reliability entity or the bulk power system than the language allows, 
and NRECA and the coalition are continuing to talk to those interests 
to see if a compromise can be worked out.
    We respectfully request that the Committee not make further changes 
to the reliability language until that group can reach agreement. 
Otherwise, the fragile consensus that has developed within the industry 
on the NERC language could dissipate, and result in failure to enact 
much needed legislation to preserve reliability.
Mergers
    As I mentioned in the main part of my testimony, NRECA is very 
pleased that H.R. 2944 restores FERC merger review. As I have testified 
to before this Committee and the House Judiciary Committee, unfettered 
mega-mergers in the electric utility industry pose a significant threat 
to the development of competition in the industry.
    Unfortunately, while H.R. 2944 does restore FERC merger review, it 
also appears to reduce the opportunity for public scrutiny of mergers 
and to hamper FERC's ability to protect the public interest.
    First, H.R. 2944 replaces the current hearing process with a simple 
comment period. By doing so, H.R. 2944 reduces the transparency of the 
merger review process and denies FERC and the public the access to 
information they need to properly evaluate the potential competitive 
impact of the proposed merger.
    Second, H.R. 2944 also establishes strict deadlines that would 
hamper FERC's ability to thoroughly review large utility mergers. Some 
of these mergers involve international companies with hundreds of 
subsidiaries and affiliates, billions of dollars of assets in a dozen 
or more states, and millions of consumers. The time limits imposed by 
H.R. 2944 would not give FERC sufficient time to evaluate the impact 
that such mergers would have on the $220+ billion electric industry.
    NRECA continues to believe that it is in the public and consumer 
interest for FERC to have full authority to conduct a public review of 
mega-mergers between public utilities that could eliminate or limit 
competition in the marketplace.
    The Committee should understand that electric cooperatives do not 
oppose all utility mergers. Mergers can be a legitimate business 
strategy to respond to changing markets and changing market conditions. 
Since 1996, FERC has given its blessing to approximately 30 utility 
mergers and many more are pending. NRECA has requested hearings in only 
two of those proceedings.
    In fact, NRECA has supported the application of loosened review 
requirements for mergers between smaller entities that could increase 
competition in the market place by creating a new company that can 
compete more effectively without being large enough itself to exercise 
market power.
    NRECA would be happy to work with the Committee and Congress to 
develop language that would achieve the proper balance between 
protection of the public interest and the encouragement of efficiency 
in the industry.
Public Utility Holding Company Act of 1935
    As I have said in previous testimony, NRECA believes that it is a 
mistake to repeal the Public Utility Holding Company Act of 1935 
(PUHCA). PUHCA protects both electric consumers and competition in the 
electric utility industry by helping to ensure that public utilities do 
not grow too large or complex to be effectively regulated.
    If the Committee nevertheless intends to go forward with PUHCA 
repeal, NRECA strongly urges the Committee to consider the approach 
taken in the bill sponsored this Congress by Representatives Steve 
Largent (R-OK) and Ed Markey (D-MA), which takes a sensible approach. 
Their proposal would repeal the consumer protections in PUHCA only for 
those utilities that operate in states where competition has already 
been implemented. That approach would provide competition a better 
chance to put down roots and start to grow before any public utilities 
were freed from PUHCA's protective provisions.
Interconnection
    NRECA recognizes that the development of new distributed generation 
technologies and the interconnection of such facilities to the grid are 
increasingly important. Cooperatives have made extensive use of 
existing distributed generation technologies and have been actively 
working to study new distributed generation technologies and to develop 
new applications where distributed generation can improve reliability 
and lower costs for consumers.
    Cooperatives have also been involved in parallel efforts to develop 
standards for the interconnection of distributed generation 
technologies with the grid. One is being conducted by the Institute of 
Electrical and Electronic Engineers and the United States Department of 
Energy (DOE). The other is being conducted by the National Association 
of Regulatory Utility Commissioners (NARUC) and is funded by the DOE. 
Just this week, NRECA submitted comments on a Draft Report to NARUC on 
interconnection issues.
    Nevertheless, NRECA is concerned that the substantive provisions of 
Sec. 542 of H.R. 2944 could impose unnecessary costs on electric 
utilities and their consumers. Moreover, the section's requirement that 
FERC develop interconnection standards is probably premature. It would 
likely preempt the efforts now pending before the Institute of 
Electrical and Electronic Engineers and NARUC, and the tight deadline 
could require FERC to act before it or the industry fully understands 
the effects that developing distributed generation technologies will 
have on the safety and reliability of the interconnected grid.
Other PMAs
    NRECA is concerned that Sec. 632 of H.R. 2944, ``Wholesale Power 
Sales By Federal Power Marketing Administrations,'' gives FERC the 
unnecessary and inappropriate authority to change rates set by the 
power marketing administrations.
    Today, the PMAs are required to set their rates to recover their 
costs, as those costs are defined by Congress. They propose their rates 
to the Secretary of Energy who then submits them to FERC for review. 
Because the PMAs rates must be set according to very specific statutory 
requirements, FERC does not today have the authority to modify the PMAs 
rates. Instead, if FERC is concerned about something in the rates, it 
can only reject the rates and remand them to the PMAs. That ensures 
that the final development of the rate is set by the regulatory entity 
most familiar with the costs that have been recovered and the statutory 
mandates with regard to the rates.
    We would like to see all of Sec. 632 deleted.
Net Metering
    Section 702 of H.R. 2944 requires retail electric providers to make 
net meters available to consumers that have installed eligible on-site 
generating facilities. NRECA believes that net metering imposes an 
unreasonable obligation on electric consumers to subsidize those who 
install self-generation.
    The policies require utilities to pay consumers retail price for 
wholesale power. That is an even higher subsidy than the ``avoided 
cost'' price provided by PURPA. The policies also require utilities to 
pay high costs for what is generally low-value power. Power from wind 
and photovoltaic systems is intermittent, cannot be scheduled or 
dispatched reliably to meet system requirements, and is expensive to 
integrate into the system.
    Further, net meters cause customers to under pay the distribution 
and other fixed costs they impose on the system. A utility has to 
install sufficient facilities to meet the peak requirement of the 
consumer and recovers the costs of those facilities through a kWh 
charge. When the net meter rolls backwards, it understates the total 
kWh consumed by the customer, and thus under recovers the utility's 
costs.
    Finally, net meters can be deliberately or inadvertently ``gamed.'' 
Consumers with self-generation can lean on the system by drawing power 
at times when it is expensive for the utility to provide it and then 
run down the meter by self-generating at times when the utility does 
not need the power. That can be a problem with windmills particularly 
because wind is often calm in the hot times of day when system demand 
peaks, and then picks up again in the cool evenings when system 
requirements are low.
Environmental
    We are pleased that Section 701 of H.R. 2944 was revised from the 
discussion draft to ensure that the Renewable Energy Production 
Incentive (REPI) program is available only to not-for-profit electric 
cooperatives and municipally-owned entities that generate electric 
energy for sale using solar, wind, biomass or thermal energy. In 
addition, we applaud deletion in H.R. 2944 of a cap of $50 million 
through 2004, which had appeared in the discussion draft.
Internal Revenue Code
    While the 85/15 tax issue is addressed in H.R. 2944, it falls short 
of what is needed to address issues raised in a restructured electric 
utility marketplace. For example, the language fails to address revenue 
from unbundled electric activities (including metering, billing and 
service charges), revenues from asset sales, and revenue from 
diversified businesses provided the business is operated on a 
cooperative basis.
                            technical issues
    In addition to the substantive issues discussed above, there are a 
few technical fixes that need to be made to ensure that the language in 
the bill actually achieves its intended purposes.
Public Purpose Charges
    Section 101(d) of the bill provides that it does not affect the 
authority of a State or municipality to require public purpose charges. 
The section serves an important purpose, but appears to leave out some 
electric cooperatives.
    There are three categories of electric utilities that may need to 
collect public purpose charges. The first--state-regulated electric 
utilities--includes all investor-owned utilities and a few cooperative 
utilities that operate in states where they are subject to state 
regulation of their rates. The second category is municipal utilities, 
who are not regulated in most states. The third category is 
cooperatives who, like municipal utilities, are not regulated in most 
states. Section 101(d) takes care of the first two categories, but not 
the third: non-state regulated cooperatives.
    We would be happy to suggest to the Committee a very simple fix to 
address this oversight.
Definition of Transmitting Utility
    Section 102(d) of the bill includes a new definition of 
transmitting utility. It has been amended to include utilities that own 
transmission not used for wholesale sales. In H.R. 2944, an additional 
parenthetical has been added at the end that has not appeared in prior 
drafts: ``(other than facilities subject to an order of the Commission 
under section 210 or 211).''
    That parenthetical appears to be a partial transposition of 
language in the definition of ``public utility'' that states ``other 
than facilities subject to such jurisdiction solely by reason of 
section 210, 211, or 212.''
    The parenthetical creates a cyclical definition problem. Sections 
210 and 211 apply to transmission facilities owned by transmitting 
utilities. If ``transmitting utility'' does not include entities that 
own facilities subject to Sec. Sec. 210 and 211, then there are no 
transmitting utilities.
Reciprocity
    Section 501 of the bill provides for retail reciprocity. It 
attempts to ensure that any utility that seeks to compete for other 
utilities'' consumers provides its own consumers with choice. In order 
to prevent efforts to bypass the reciprocity provision, the bill also 
applies to entities affiliated with electric utilities.
    NRECA believes that Congress should not have to mandate reciprocity 
requirements. A national mandate inappropriately imposes rules on those 
individual states that believe their consumers interests are better 
preserved through open competition than through reciprocity 
requirements.
    Rather than focus on the merits of a reciprocity requirements, 
however, I would rather ask this Committee to make a technical fix to 
the section that should eliminate some unintended consequences of the 
bill.
    As drafted, the provision applies to ``affiliates,'' but the term 
``affiliate'' is not defined in the Federal Power Act. It is unclear, 
therefore, how the section will be applied. Depending on a court's 
interpretation of ``affiliate,'' the provision could either be too 
broad, or too narrow.
    For example, under one definition of ``affiliate,'' it would only 
include two companies, one of which owns an interest in the other. 
Under this definition, ``affiliate'' would not apply to two companies 
with common ownership. A utility could therefore evade the reciprocity 
requirements by creating a holding company and put power marketing and 
distribution functions in two sister subsidiaries.
    On the other hand, ``affiliate'' could be interpreted broadly to 
include any two companies that share significant interests, in each 
other, or in a third company. FERC has adopted this interpretation of 
affiliate in certain contexts. Under this definition, there is a risk 
that two cooperatives that each have an ownership interest in a common 
generation and transmission utility could be considered affiliates. If 
that happened, the reciprocity provision could prohibit a cooperative 
in one state from competing for consumers in that state because the 
cooperative's G&T also served a cooperative in other states that had 
not moved to competition. The reciprocity provision could apply even 
though the two distribution cooperatives involved had no ownership 
interest in each other and no common owners.
    We would be happy to work with the Committee to insert a definition 
of ``affiliate'' that would eliminate the potential for over 
inclusiveness or under inclusiveness.
                               conclusion
    Mr. Chairman, all of us harbor many concerns regarding the 
restructuring of this basic, essential, complex industry. The Committee 
and you--in particular--Mr. Chairman, have been attentive and receptive 
to the concerns of 30 million electric cooperative consumers.
    This bill does not contain everything that electric cooperatives 
would like to see in a restructuring bill. We have outlined some of 
those concerns as an attachment to my testimony. We will continue to 
work with the Committee and with the Congress to ensure that electric 
cooperative concerns are met. That is how the legislative process 
works. Given the discussions that we have had with you, Mr. Chairman, 
and with the Committee, we are confident that some of these concerns 
will be worked out, and that the intentions of the discussion summary 
will be clarified in final bill language, and on the basis of that, 
electric cooperatives do not object to moving this bill forward.
    It is, of course, possible that proposals to change this 
legislation will make parts of it totally unacceptable to electric 
cooperatives, and in that case, we would have to oppose those changes 
and, possibly, the legislation. Again, that's the way the legislative 
process works.
    I appreciate the opportunity to discuss H. R. 2944 and these very 
important matters with the Committee today. Electric cooperatives will 
continue to be available to the Committee to bring true competition to 
the electric utility industry and to ensure that the benefits of that 
competition flow equitably to all electric consumers.
    I would be happy to answer any questions.

    Mr. Barton. Thank you, Mr. English.
    We now want to hear from Mr. David Hawkins, who is the 
director of air and energy programs at the Natural Resources 
Defense Council.
    Your statement is in the record in its entirety, and we 
would recognize you for 6 minutes to summarize.

                  STATEMENT OF DAVID G. HAWKINS

    Mr. Hawkins. Thank you, Mr. Chairman.
    I would like to make two points this morning. The first is 
that we have a huge remaining air pollution problem from 
electric generating in this country, and the second is that we 
should address that problem as part of a restructuring program.
    First, the nature of the air pollution problem. Contrary to 
expectations some 30 years ago when Congress first expressed 
itself on controlling pollution from electric generation and 
their sources, many existing power plants that were in 
operation 30 years ago are still in operation, and they are 
still operating under outmoded pollution control rules and not 
meeting modern environmental performance standards, and yet 
they are competing against facilities that are required to meet 
modern environmental performance standards--in our view, 
competing unfairly.
    But first the environmental issue. The electric generating 
industry, as a result of these policies, these flawed policies, 
is the single largest sector that is responsible for some of 
the most pervasive remaining air quality problems in this 
country.
    Electric generating is responsible for over two-thirds of 
the Nation's sulfur dioxide emissions, and around a third of 
nitrogen oxides, mercury, and carbon dioxide.
    Now, these pollutants are responsible for what we call a 
Pandora's Box of health and environmental harm. They are 
responsible for fine particles that contributes to tens of 
thousands of premature deaths in the U.S. each year; smog that 
plagues our major cities and causes respiratory attacks in 
children and in seniors; acid rain that still damages lakes, 
streams, forests, and monuments; regional haze that spoils 
trips every year for millions of people who visit our national 
parks; nitrogen emissions that help over-fertilize productive 
estuaries, including the Chesapeake Bay, Long Island Sound, 
Pamlico Sound, and Pamlico Sound, and the Gulf of Mexico, 
leading to dead zones where aquatic life perishes; and mercury 
contamination of lakes and streams that has led over 40 States 
to issue continuing advisories against the consumption of fish 
that store this toxin; and, finally, carbon dioxide--the 
pollutant that you cannot get away from--carbon-dioxide-driven 
climate change that threatens to create disruptive weather 
patterns and sea level rise that modern human civilization 
simply have never experienced.
    The second point is: why address these issues now?
    First, delaying addressing these issues is not going to 
make Congress' job any easier. These issues will have to be 
addressed, and they will not get easier by simply trying to 
brush them away right now. What it would do is increase the 
environmental damage associated with delay, and also prolong 
uncertainty.
    Second, a failure to address today's balkanized emission 
rules will leave in place an industry structure where fair 
competition is simply not possible.
    Today, the amount of pollution resulting from producing a 
megawatt hour of electricity varies widely from State to State. 
Nitrogen oxide emissions in States range from below two pounds 
per megawatt hour to over eight pounds per megawatt hour. 
Sulfur dioxide emissions range from below four pounds per 
megawatt hour produced to a high of over 20 pounds per megawatt 
hour.
    Now, these policies are a direct result of the patchwork of 
regulations that, in effect, operate as a subsidy to dirtier 
generators.
    Because all markets are connected by wires, different 
pollution standards promote a survival of the filthiest market, 
where plants that are the dirtiest bid power at the cheapest 
prices and are able to increase their market share.
    But these market distortions really do not deliver large 
consumer benefits. The price differences caused by different 
pollution requirements are quite small, usually on the order of 
2 to 3 mills per kilowatt hour or less. But these small 
differences in a competitive marketplace are enough to give 
dirtier producers a decisive market advantage in many areas.
    A generation performance standard would be a reform that 
would create a level playing field for generators. The standard 
would define the amount of pollution that could legally be 
emitted for a kilowatt hour of electricity and would treat all 
players fairly, and it would directly reward cleaner, more-
efficient generators and remove the subsidy that current policy 
provides to dirtier ones.
    Congressman Pallone's Fair Energy Competition Act, H.R. 
2569, contains such an approach and we support it.
    A final benefit of setting the environmental ground rules 
for this industry is that it would provide a clear road map for 
business in planning long-term investments. The history of the 
clean air program has developed as a series of unconnected 
initiatives, typically focused on a single pollutant. Today, we 
can look over the next 10 to 15 years and realize there will be 
a number of additional environmental problems that will have to 
be addressed. But if we pursue the traditional approach, no one 
can say with certainty which pollutants will be addressed 
first, how deep the reductions will be, and in what order the 
steps will occur.
    As a result, business planners today must approach their 
investments by making educated guesses about future 
environmental requirements.
    Billions of dollars are changing hands as generation plants 
are sold under State restructuring programs. One thing we can 
say for sure is someone is guessing wrong.
    By enacting integrated cleanup programs, Congress could 
provide both certainty and reduce the tendency to prolong 
dependence on existing, outmoded plants through the traditional 
process of applying end-of-the-pipe cleanup devices normally 
aimed at controlling only one pollutant.
    Now, the chairman and the ranking member's State, Texas, 
has recognized the value of addressing both of these issues 
together, and recently enacted legislation in Texas has 
addressed air pollution directions as part of a cleanup 
program. We commend that example to the committee, but point 
out that no State can solve its problems alone; hence, the need 
for Federal policy.
    Thank you.
    [The prepared statement of David G. Hawkins follows:]
    Prepared Statement of David G. Hawkins, Director, Air & Energy 
              Programs, Natural Resources Defense Council
                electricity generation and air pollution
    Today, electric generation imposes an enormous burden of air 
pollution on the American public and the great bulk of that pollution 
comes from plants that are not required by federal, state, or local 
policy to meet technically feasible, affordable modern environmental 
performance standards. This policy failure stems from decisions made in 
Congress nearly thirty years ago.
    In the 1970 Clean Air Act Congress required that all new 
powerplants and other large pollution sources be designed to minimize 
air pollution using state-of-the-art techniques. But the Act exempted 
existing plants from this performance requirement. Instead existing 
plants, if controlled at all, were required to clean up only to the 
degree needed to address local air quality problems.
    There were several reasons for this approach. First, most air 
quality problems were perceived as local. Second, at the time, the 
electric power industry was mostly a local one. Third, the exemption 
was assumed to be temporary--Congress believed existing plants would 
retire and be replaced by new ones meeting modern performance 
standards.
    Now, nearly 30 years later, we know that the facts on the ground 
have changed. We know now that many of our most threatening air 
pollution problems are not local--they are regional, national, and even 
global. Our electric generating industry is rapidly becoming a national 
industry with all parts of the country connected by wires over which 
the product can move anywhere in the lower 48 states. And those 
powerplants that were supposed to retire have kept on running like the 
Energizer Bunny. As a result, pollution from electric power generation 
is a dominant cause of nearly all our most pressing air quality related 
problems.
    Four pollutants cause a host of public health and environmental 
damage: sulfur dioxide, nitrogen oxides, mercury, and the pollutant no 
one can get away from, carbon dioxide, the dominant greenhouse gas. 
Electric generation in the U.S. is the largest single source of these 
four horsemen of air pollution. Electric powerplants release over \2/3\ 
of total U.S. emissions of sulfur dioxide, and over \1/3\ of each of 
the other three pollutants. These pollutants are responsible for a 
Pandora's box of health and environmental harm:

 fine particles, that contribute to tens of thousands of 
        premature deaths in the U.S. each year;
 smog that plagues our major cities, and causes respiratory 
        attacks in kids and seniors;
 acid rain, that still damages lakes, streams, forests, and 
        monuments;
 regional haze, that spoils trips to national parks for 
        millions of visitors annually;
 nitrogen emissions that help over-fertilize estuaries, 
        including the Chesapeake Bay, Long Island Sound, Pamlico Sound, 
        and the Gulf of Mexico, leading to dead zones where aquatic 
        life perishes;
 mercury contamination of lakes and streams that has lead 40 
        states to issue continuing advisories of the fish that store 
        this toxin;
 and, carbon dioxide driven climate change, that threatens to 
        create disruptive weather patterns and sea-level rise that 
        modern human civilizations have never experienced.
    This plague of pollution problems is a product of the grandfather 
loopholes in current federal law that allow 30, 40 and 50-year plants 
to keep operating without meeting modern performance standards. The 
patchwork of lenient or nonexistent rules at the state and local level 
has created pollution havens where grandfathered plants can engage in 
domestic environmental dumping, distorting fair energy markets.
    As we move to modernize the electricity market economically, we 
must accompany it with modern environmental performance measures. A 
central purpose of electric industry restructuring legislation is to 
create a free and fair, competitive market for energy services. But 
fair competition is impossible in an environment where air pollution 
performance requirements are balkanized. Because all markets are 
connected by wires, different pollution standards promotes a ``survival 
of the filthiest'' market, where plants that are the dirtiest bid power 
at the cheapest prices and increase their market share.
    These market distortions do not deliver consumer benefits. The 
price differences caused by different pollution requirements are quite 
small--usually 2-3 mills per kilowatt-hour or less--but these small 
differences are enough to give dirtier producers a decisive market 
advantage in many areas. The market distortions also discourage 
investment in new, cleaner, more efficient generation and in renewable 
resources.
    Under the current rules, an entrepreneur who seeks financing for, 
say, a clean, high-efficiency natural gas plant can point out that it 
emits no sulfur, no mercury, and much less nitrogen oxides 
(NOX) and carbon dioxide (CO2) than the 
competition. But, with the partial exception of sulfur (for which 
allowance programs exist under the acid rain law), this superior 
environmental performance has no economic value in the market place. 
The financier wants to know whether the plant will be able to run more 
cheaply than the competition. If the competition is a group of 
grandfathered coal-fired powerplants, the answer often will be no and 
the new plant may not be financed.
    To address the egregious health, environmental, and economic flaws 
in the current air pollution control programs a number of bills have 
been introduced in Congress. Notable examples include Congressman 
Pallone's ``Fair Energy Competition Act of 1999'' (H.R. 2569), and the 
Waxman-Boehlert ``Clean Smokestacks Act'' (H.R. 2900). These bills 
establish industry-wide caps on tons of each of the ``four-horsemen'' 
pollutants: sulfur dioxide (SOX), NOX, 
CO2, and mercury. The caps on SOX and 
NOX would provide building blocks for meeting health-based 
smog and fine particle standards and would reduce acid rain further. 
The mercury cap would attack the largest single remaining U.S. source 
of this pollutant. And the CO2 cap would return emissions to 
1990 levels--the target set in the 1992 Rio Climate Treaty that the 
U.S. has ratified.
    With the exception of mercury, for which there are both local and 
regional concerns, these bills would implement the cap through a 
marketable permit program where power generators could trade their 
clean-up obligations to meet the caps in the most efficient manner. A 
``generation performance standard'' would create a level playing field 
for generators--the standard would define the amount of pollution that 
could be legally emitted for a kilowatt-hour of electricity. This 
system will directly reward cleaner, more efficient generators.
    In contrast to the current situation, if these bills were law, a 
developer of a new clean powerplant would be able to show direct 
tangible economic benefits from its reduced environmental impact. 
Because the new plant would be able to generate electricity below the 
law's ``generation performance standards,'' for every kilowatt-hour 
sold, the plant would produce another profit-making product: emission 
allowances that can be banked or sold on the market. This additional 
revenue stream would make financing such projects that much more 
attractive.
    A final benefit of these integrated pollution cleanup bills is that 
they provide a clear roadmap for business in planning long-term 
investments. The history of clean air progress has developed as a 
series of unconnected initiatives, typically focused on a single 
pollutant. Today we can survey the next 10-15 years and be confident 
that additional measures will be pursued to reduce the four horsemen 
pollutants. But if we pursue the traditional approach, no one can say 
now with confidence, when, how deep, and in what order these important 
steps will occur.
    As a result business planners must approach today's investments by 
making educated guesses about environmental requirements. Billions of 
dollars are changing hands as generation plants are sold under state 
restructuring programs. One thing we can say for sure is that someone 
is guessing wrong. By enacting integrated cleanup programs Congress 
could both provide certainty and reduce the tendency to prolong 
dependence on existing outmoded plants through the traditional process 
of applying end-of-pipe cleanup devices normally aimed at controlling 
only one pollutant.
    In short, we know we need to reduce a range of damaging pollutants 
from the electric generating sector; we know how to do it; and we know 
that failure to take these steps as part of restructuring legislation 
will increase damage, prolong uncertainty, and encourge unfair 
competition. Mr. Chairman, your committee has jurisdiction over both 
the economic and environmental performance of this industry. We urge 
you and your colleagues to avoid an arbitrary separation of these 
interdependent issues. Instead we hope you will seize the opportunity 
to demonstrate that Congress can address the key issues that face the 
industry and the public in a manner that produces a cleaner, more 
efficient, more sustainable, and more competitive industry that 
delivers energy services for lower costs.

    Mr. Barton. Thank you very much.
    Next we will hear from the final member of this panel, Mr. 
Rao, president of Indiana Municipal Power Agency.
    Welcome. Your full testimony has been submitted for the 
record, if you would summarize. You have 6 minutes.

                   STATEMENT OF RAJESHWAR RAO

    Mr. Rao. Thank you, Mr. Chairman and members of the 
committee.
    My name is Rajeshwar Rao. I am the president of the Indiana 
Municipal Power Agency.
    IMPA is a political subdivision of the State of Indiana, 
created in 1980 to allow its 31 municipal members serving 
250,000 people to jointly finance, develop, own, and operate 
electric generation, transmission, and local facilities in 
Indiana.
    We are relatively unique because we own $50 million worth 
of transmission facilities that make us jointly own Cinergy's 
transmission grid, and also obtain transmission from others to 
meet the needs of our members.
    I am here today to testify on behalf of the Transmission 
Access Policy Study Group. TAPS is an informal association of 
transmission-dependent utilities in 29 States created to 
promote open, equal, nondiscriminatory access to the Nation's 
electric transmission grid.
    IMPA and other TAPS members have been buying and selling 
electricity in wholesale markets for more than 20 years. We 
know from first-hand experience that merely declaring that 
there should be competition and open access does not make it 
so.
    After decades of operating particularly integrated 
monopolies, the industry will not magically transform into one 
characterized by vigorous competition without decisive action 
from Congress to restructure the industry for competition.
    TAPS believes that Federal restructuring legislation is 
needed to make retail competition work for consumers. However, 
if we are serious about electric competition, it is absolutely 
critical that we get the basic structure right and provide the 
tools needed to ensure that Federal legislation achieves its 
promise of true and fair competition in the electric power 
marketplace. Only then we can ensure that restructuring will 
lead to lower prices for all consumers across the Nation.
    Basic concerns about how H.R. 2944 fails to meet and fully 
address transmission market power are covered in my written 
statement, and in the oral statement of APPA and CFC, also. But 
I want to use my time to answer important questions which were 
asked yesterday.
    There are several questions I can answer with real-life 
examples. I will try to cover some of them in my 5 minutes, but 
would like to share the other examples later if time permits.
    Question one: are RTOs needed? Absolutely. You will not get 
competition without it. For example, TAPS members, Oklahoma 
Municipal Power Authority, have been trying to purchase 15 
megawatts from Duke Energy Trading and Marketing for the summer 
of 2000. Although Duke requested transmission from a competitor 
nearly a year ago, the competitor has refused to answer, 
stating only that transmission of this small amount of power is 
under study.
    There is no way to know if this is a stall because there 
really is not a mere 15 megawatts of transmission capacity 
available, or, on such a huge system, whether they are 
improperly holding the capacity. We do not know.
    Under these circumstances, it is not surprising in this 
situation, where transmission limitations preclude access, OMPA 
received only seven responses, most of which were transmission 
contingent to its recent RFP which it sent to 100 suppliers. 
With an RTO, the transmission decisions that are critical to 
competition would be made by the independent RTO, assuring they 
will be non-biased. Rather than re-regulation, RTOs are an 
essential step toward the more lightened FERC regulation.
    Next question: will voluntary RTOs work? No. Transmission 
owners will not voluntarily relinquish their current ability to 
use their ownership and control of transmission to prefer their 
own generation. For example, TAPS member Florida Municipal 
Power Agency has worked hard to get most of the market 
participants in the State, including the co-ops, power 
marketers, the developers of big power, utility and board to 
support creation of some form of RTO. However, these efforts 
are currently at stalemate by the opposition of the two largest 
utilities, who control 90 percent of the transmission in the 
State.
    If utilities can join and shape their own RTOs, will that 
work? No. To do their job in promoting competition, RTOs must 
be large and rationally configured, not configured to increase 
the market power of participating utilities.
    For example, I have a picture here showing the midwest and 
connecting to the east coast. AEP, back in the map, is located 
in the Ohio/Indiana/Virginia area. They tried to negotiate 
participation in the midwest ISO, the blue section, but after 
some time, after about a year, they said that they would rather 
form their own Alliance RTO and created a barrier.
    I want to give you some examples of how AEP's transmission 
is a barrier to Cinergy. BOTH AEP and Cinergy have generation 
located in the Ohio valley where there is surplus power.
    It is cheaper to transmit electricity to the white section, 
but, on the other hand, by creating a barrier, AEP 
differentiated the generation facilities owned by Cinergy and 
AEP, making Cinergy generation facilities more expensive than 
AEP generation facilities.
    Since the red light is on, I am going to stop here, but I 
have several true, real-life examples of market power in both 
generation and transmission. I will respond to questions later.
    Thank you, Mr. Chairman.
    [The prepared statement of Rajeshwar Rao follows:]
Prepared Statement of Rajeshwar Rao, President, Indiana Municipal Power 
       Agency on Behalf of Transmission Access Policy Study Group
    Good morning, Mr. Chairman and Members of the Subcommittee. My name 
is Rajeshwar Rao. I am President of the Indiana Municipal Power Agency 
(IMPA). IMPA is a political subdivision of the state of Indiana created 
in 1980 to allow its 31 municipal members to jointly finance, develop, 
own and operate electric generation, transmission, and local facilities 
to provide for their electricity needs. IMPA's 31 member municipalities 
currently serve approximately 250,000 people.
    IMPA is relatively unique because we are both a transmission owner 
and a transmission dependent utility. IMPA has invested some $50 
million in transmission facilities that are part of a Joint 
Transmission System in Indiana, through which we have rights over the 
entire Cinergy transmission system. At the same time, IMPA is a 
transmission dependent utility with respect to access for our member 
municipal systems connected to the AEP transmission grid, and access to 
our ownership share of a Louisville Gas & Electric generation facility 
in Kentucky.
    Because of this dual role, IMPA is keenly sensitive to the 
importance of establishing a transmission system that is open, fair and 
non-discriminatory. As a result, we have been aggressive advocates of 
establishing fully independent Regional Transmission Organizations 
(RTOs) that are fair to both transmission owners and transmission 
users. Nothing short of a totally ``color blind'' RTO that treats all 
transmission owners and users the same, regardless of who owns 
particular transmission facilities, will succeed in achieving 
Congress's goal of establishing a truly competitive market place for 
electricity.
    I am here today to testify on behalf of the Transmission Access 
Policy Study Group (TAPS). TAPS is an informal association of 
transmission dependent utilities and other supporters in 29 states 
created to promote open, equal, non-discriminatory access to the 
nation's transmission grids. IMPA, like the other municipal, 
cooperative and investor-owned utilities, and municipal joint action 
agencies that are members of TAPS, must depend on the use of 
transmission systems of large vertically-integrated utilities in order 
to reach alternative sources of power supply for our consumers. TAPS 
members have been active in wholesale markets for some 20 years, and 
have been on the ``bleeding edge'' of efforts to obtain transmission 
service, open access, and RTOs. We know from first hand experience 
that, given the crucial role of transmission and the current industry 
structure, merely declaring there to be choice will not magically 
transform the electric industry to one where the price of generation is 
determined by the invisible hand of vigorous competition.
    TAPS has concluded that the only way to get to a competitive 
electricity industry is by restructuring the industry to provide the 
transmission and market structure needed to allow competitive forces to 
work. We believe federal legislation is needed to achieve this critical 
objective, but it must be the right legislation. If the Chairman and 
the Subcommittee are serious about electricity competition, we need to 
work together to get the basic structure right, and to provide tools to 
ensure that the intended transformation stays on course. Watered-down 
or halfway measures simply won't work. Compromise on the key issues of 
industry structure will do far more harm than good.
    The proposed Electric Competition and Reliability Bill, H.R. 2944, 
describes its purpose as ``benefit[ting] American electric consumers 
through lower electric rates, higher quality services, and a more 
robust United States economy by encouraging retail and wholesale 
competition in electric markets . . .'' TAPS shares the Chairman's 
goals. However, TAPS is concerned that H.R. 2944 will not achieve this 
purpose. Indeed, provisions of the bill appear likely to induce 
precisely the opposite effect: strengthening the grip of monopolists, 
and exposing consumers to electricity prices disciplined by neither the 
competitive market nor regulation.
    Specifically, TAPS believes the bill fails to provide the 
transmission and market structure needed to support competitive 
wholesale and retail markets. We urge the Subcommittee to amend H.R. 
2944 to ensure that the bill serves its pro-competitive purposes.
    With regard to transmission, the Subcommittee should:

1. Grant FERC the authority to require, without delay, participation in 
        truly independent and rationally configured large, regional 
        transmission organizations;
2. Prevent transmission owners from evading inclusion of facilities in 
        RTOs by creative reclassification of high voltage transmission 
        facilities to distribution; and
3. Place regulatory responsibility for transmission service clearly in 
        FERC's hands.
    With regard to generation market power, the Subcommittee should:

1. Empower FERC to take steps to remedy and prevent the exercise of 
        market power and market manipulation; and
2. Eliminate or revise the proposed unworkable time limits on FERC 
        merger review and clarify FERC's authority to review mergers 
        involving generation-only facilities.
                              transmission
1. FERC needs authority to require strong, independent, broad regional 
        RTOs.
    H.R. 2944 correctly recognizes that the current regimen of control 
of transmission by individual vertically-integrated utilities must 
change to be compatible with competition, and that a regional 
transmission organization is the structure needed in a competitive 
electric industry. While TAPS applauds the Chairman for recognizing the 
need for RTOs, we are concerned that the proposed RTO provision is so 
compromised as to largely defeat the intended pro-competitive purposes.
     Independence: RTOs are critical to removing control of the 
transmission facilities, which all competitors need to use to reach the 
market, from the hands of one set of market participants that can use 
that control to favor themselves. Instead, control of transmission 
should be placed in the hands of a competitively neutral, independent 
body. The proposed legislation starts out by correctly recognizing that 
RTOs ``must be independent of all market participants, and no market 
participants may exercise control over the operation of the [RTO].'' 
However, it then compromises the ``bedrock'' RTO concept of 
independence by expressly defining it to ignore retention of 10% of the 
voting shares and unlimited non-voting ``passive'' interests that 
include rights to ``participate in major corporate changes'' to the 
RTO. Adoption of such lax standards means that the RTO will never be 
fully independent of market participants, leaving self-favoritism and 
undue discrimination a continuing and ever-present threat. In an RTO 
with 5 participating transmission owners, each of whom retained a 10% 
voting share, the transmission owners could hold a 50% voting interest. 
Instead of legislating plainly non-independent RTOs, the Subcommittee 
should insist on RTOs that achieve a clean structural break, completely 
separating transmission control from generation interests.
     Scope/pancaking: As FERC has recognized, RTOs can 
facilitate competition by ending the current system of balkanized 
markets, where an additional ``pancaked'' rate (or toll) must be paid 
whenever a transaction crosses the boundaries from one transmission 
owner to the next. In contrast, RTOs would permit competitors to sell 
their electricity goods throughout a broad regional market by payment 
of only a single ``non-pancaked'' charge. By expanding the market, RTOs 
can increase the number of buyers and sellers that can transact with 
each other, enhancing competition and reducing market power. H.R. 2944 
threatens to undermine this critical RTO role by giving at least tacit 
approval to the concept of RTOs comprised of just a single utility, 
preventing FERC from requiring utilities to join an RTO other than the 
one they propose (unless the bill's standards are not met), and 
permitting pancaked rates to continue for a ``transition'' period. 
Given the delayed implementation of this provision, pancaked rates 
could well be in place during the critical first years and indeed 
decade of retail competition, or not eliminated at all in the case of 
single utility RTOs. Also lethal to competition are gerrymandered RTOs 
designed by a group of vertically integrated transmission owners to 
enhance their market power by creating barriers to competitors. H.R. 
2944 seems to foster such anticompetitive RTOs, rather than give FERC 
clear authority to ensure that RTO boundaries are dictated by the scope 
of regional markets, not by individual company desires to protect the 
value of its generation or achieve a competitive advantage. The 
Subcommittee should grant FERC express authority to require 
participation in RTOs that have a large regional scope designed to 
facilitate competition and enhanced reliability, and to eliminate 
pancaked rates. As noted by APPA, the statutory criteria will need to 
accommodate unique characterizations and legal arguments of public 
power.
     Authority to require construction/incentives: The proposed 
legislation correctly acknowledges the RTO role in planning additions, 
but gives RTOs no role in requiring construction of grid expansions. 
Instead, the legislation endorses the use of incentive rates to induce 
transmission owners to construct (as well as to join RTOs). Bribing 
transmission owners is neither a necessary nor an appropriate means to 
ensure the transmission infrastructure needed for competition. Indeed, 
the costs associated with such inducements not only needlessly saddle 
consumers with excessive costs, but undermine the competitive forces 
RTOs are intended to promote by paying one group of competitors 
monopoly rents for their transmission. The best way to induce 
construction is to fully separate transmission from generation 
interests, so decisions to expand are not influenced by how the 
expansion affects the value of the transmission owner's generation. 
Providing RTOs the authority to cause needed construction by the 
transmission owner or others opens the doors to market-based means to 
get the needed transmission constructed efficiently--by bidding out 
construction to third parties. Instead of endorsing incentives, the 
Committee should strengthen the RTO's authority to require construction 
and enable FERC to evaluate the best means to ensure prompt 
construction of needed grid additions.
     Delayed implementation/incomplete remedies: H.R. 2944 as 
proposed puts RTO formation on a slow track. Transmitting utilities 
need not join until January 1, 2003 and even that date may be postponed 
``pending any proceeding under this section or Section 313,'' the 
Federal Power Act's judicial review section. A recalcitrant 
transmission owner can postpone for years the date when it must finally 
join an RTO and relinquish its ability to use ownership and control of 
transmission to benefit its generation sales. In the meantime, it can 
use its potent power to choke off competitive retail markets in their 
infancy. The provision for ``transitional'' pancaked rates further 
removes from consumers the benefits RTOs are intended to provide. The 
RTO provision is also weakened by the absence of clarity on key points, 
such as what happens if a transmitting utility does not join an RTO, 
and what happens if FERC does not initially approve the proposed RTO or 
withdraws its approval. Particularly given FERC's RTO Rulemaking, the 
legislation should require prompt formation of RTOs, and give FERC the 
tools to demand adherence to the provision.
2. Provisions are needed to prevent transmission owners from evading 
        inclusion of facilities in RTOs.
    The proposed legislation sets forth a seven-factor test for 
distinguishing transmission from distribution facilities, and requires 
FERC to give maximum deference to a state's determination. This 
provision lends itself to abuse that could result in empty RTOs, thus 
gutting the interstate transmission infrastructure necessary to support 
vigorous wholesale and retail competition. RTOs will not provide the 
needed neutral infrastructure if transmission owners are allowed to 
create competitive barriers by restricting the facilities to be subject 
to RTOs. Given the regional nature of RTOs, equity demands that there 
be consistency from state to state, utility to utility, in defining the 
facilities subject to the RTO. Finally, removal of needed transmission 
facilities from RTO control by artificial reclassification will impede 
the RTO's ability to reliably and efficiently operate the grid.
    TAPS members have seen ``7-factor test'' filings being made around 
the country as a means to escape FERC's open and non-discriminatory 
access requirements, and to retain effective control over transmission 
while ostensibly surrendering facilities to an RTO. In one such filing, 
Wisconsin Public Service Company sought to reclassify to distribution 
all but 124 miles of its nearly 1500 miles of high voltage transmission 
lines now subject to FERC open access tariffs, leaving only 7 of its 33 
interconnections with other utilities subject to FERC transmission 
regulation. Although that filing was withdrawn in response to political 
pressure, others have followed the same tactic. For example, 
Commonwealth Edison has refunctionalized 40% of its formerly 
transmission facilities (including 345 kV facilities) to distribution.
    TAPS submits that these evasion tactics, which threaten to 
undermine the effectiveness of the RTO provision, as well as FERC open 
and non-discriminatory access requirements, should be stopped. The bill 
should include a presumption, rebuttable by clear and convincing 
evidence, that non-radial lines in excess of 60 kV be classified as 
transmission. Such a standard would be consistent with my experience 
regarding the typical function of non-radial facilities of such 
voltage.
2. FERC must be responsible for regulating interstate transmission.
    For electricity competition to be successful, it is essential that 
FERC have authority to establish one set of rules for the use and 
operation of the nation's interstate transmission system. The Eighth 
Circuit, however, recently undermined FERC's ability to do so. The 
court ruled that states can set their own rules for the transmission of 
``bundled'' retail sales (traditional retail sales where the price for 
power is ``bundled'' with the price of transmission and distribution 
services) and favor these in-state users when there is insufficient 
transmission capacity. Northern States Power v. FERC, 176 F.3d. 1090 
(8th Cir. 1999).
    Under NSP, each state can set its own rules for transmission of 
bundled retail sales within that state, without regard to what other 
states do and without regard to FERC's rules, while FERC is limited to 
setting rules for wholesale and ``unbundled'' (choice) retail uses. No 
regulatory body would have authority to ensure a coherent scheme for 
the use and allocation, among all users, of what is necessarily the 
single transmission network.
    Think what pandemonium would occur if the interstate highways 
posted two sets of speed limits, one for in-state cars and the other 
for cars going out of state. Think how many crashes would occur if the 
state established a different regime for preferred in-state cars to 
switch lanes--they need not look or signal, because they are to be 
accorded priority. Imagine further that a state could establish a rule 
that if there was congestion, in-state cars would be permitted to pass, 
while out-of-staters would have to wait on the side of the road until 
the traffic subsided. Interstate commerce would plainly be impaired.
    As we move toward competition on a state-by-state basis, it is 
essential that FERC be authorized to establish a single scheme for use 
of the grid that does not relegate use of the grid for wholesale sales 
or retail choice programs to second class citizen status. Consumers 
will not switch suppliers if they cannot rely on obtaining power. The 
absence of a clear, unified set of rules would also enable one state to 
cripple choice programs in a neighboring state, by according in-state 
bundled sales a higher priority than unbundled deliveries to its 
neighbors.
    TAPS believes NSP to be wrongly decided under the current Federal 
Power Act, which provides FERC authority, without limitation, over 
transmission in interstate commerce. (We understand that FERC is 
considering seeking Supreme Court review.) The proposed bill, however, 
defines FERC jurisdiction as encompassing wholesale and unbundled 
retail transmission, while carving out expanded state authority over 
transmission of bundled retail sales. In this way, the proposed bill 
legislates at best confusion, and at worst NSP's absurd and 
counterproductive result. TAPS urges that the bill recognize that there 
can be only one set of rules for all users of the interstate 
transmission network, and those rules need to be set by FERC.
                        generation market power
1. FERC should be empowered to take steps to remedy and prevent the 
        exercise of market power and market manipulation.
    The structure and physics of the electric industry make it 
extremely challenging to transform into a robustly competitive 
industry, where market forces rather than regulation set generation 
prices. Not only do today's vertically-integrated monopolists have the 
ability to use their vertical market power derived from owning and 
controlling the transmission highways to foreclose others from 
competing to economically and reliably serve their load, but ownership 
of generation tends to be highly concentrated within geographic 
markets. Electricity is an enormously complex networked industry, in 
which operation of generation affects transmission availability for 
competitors and electricity must be produced at the same time as 
customers need it because it typically cannot be stored. These 
characteristics create many hidden opportunities to manipulate and 
control the market. Large incumbent utilities, which dominate various 
markets as a result of their history as state sanctioned monopolists, 
are in a position to effectively foreclose competition.
    Getting to real competition in a highly monopolistic industry with 
the complexities of electricity supply is a major undertaking. In the 
long run, properly structured, truly independent, large regional RTOs, 
which have the authority to plan and implement necessary grid 
additions, can go a long way toward mitigating market power concerns by 
expanding the market and eliminating constraints. However, elimination 
of constraints will not happen overnight, or necessarily even in the 
first decade after effective RTOs are up and running. Either due to the 
existence of transmission constraints and natural geographic barriers, 
or due to the existence of artificial barriers and walls created by 
vertically-integrated organizations, generation market power does exist 
within geographic regions of the country and will continue to exist, 
even with RTOs. FERC needs the authority to identify and impose 
adequate remedies to correct such market power problems if there is to 
be effective competition.
    Thus, to ensure the competitive infrastructure needed for 
competition to flourish, Congress will need to transform FERC from a 
price-setting agency to one with clear and specific responsibility to 
ensure that interstate markets for electricity are and remain 
vigorously competitive for the benefit of all consumers. FERC needs 
explicit authority to take whatever actions are necessary to remedy 
generation market power problems that threaten emerging competitive 
markets, particularly in the likely-to-be-lengthy transition period. 
This authority must include a variety of tools that FERC can employ 
where necessary, including requiring the auction of capacity for 
periods of at least four years; cost-based rates; public disclosure of 
information (including transparent pricing); shared access to assets or 
services on a nondiscriminatory basis at reasonable rates; or, where 
other measures prove insufficient, divestiture of assets for fair 
value. Unfortunately, H.R. 2944 makes no effort to address this 
critical structural issue.
    Because of the interstate nature of the grid and emerging markets, 
individual states will be powerless to effectively address this 
problem. Given the technical complexity of the industry and its real 
time nature, this task will be best accomplished by empowering FERC to 
meet its new responsibilities rather than relying on slow and expensive 
antitrust litigation, at least through the transition to mature 
competitive markets. Indeed, the Department of Justice and the Federal 
Trade Commission have conceded that antitrust laws alone are not 
adequate to address pre-existing market power. Above and beyond FERC's 
RTO and merger authority, the Subcommittee should grant FERC new 
authority to move quickly and decisively to eliminate undue generation 
market power as it arises, and to impose stiff penalties for market 
manipulation, in order to make such manipulation a very risky venture.
2. The proposed unworkable time limits on FERC merger review should be 
        revised and FERC's authority to review mergers involving 
        generation facilities should be clarified.
    TAPS applauds the Chairman for maintaining FERC authority to review 
mergers, and abandoning the approach taken in the draft bill of 
stripping that critical authority from FERC. Given the potential for 
mergers to increase market concentration and restrict competition at 
the time FERC and the Congress are attempting to promote wholesale and 
retail competition, preserving this important function is vital.
    TAPS is concerned, however, that the time limits proposed to be 
placed on FERC review will nevertheless de facto deprive the public of 
effective FERC review of mergers. Unlike the Department of Justice and 
the Federal Trade Commission, FERC operates without the benefit of the 
powerful Hart-Scott-Rodino information tools. In addition, FERC review 
is an open process, involving the public who can provide real world 
experience that can assist in evaluating the merger. Granting FERC 
merger authority, while depriving it of the time to gather and analyze 
the information needed to meaningfully assess the likely impact of the 
merger on competition, is a bad compromise that threatens to undermine 
the competitive industry structure the bill is intended to promote. 
Indeed, the time limits may well encourage merger applicants to be slow 
to provide the Commission (much less intervenors) with the essential 
information, cloaking it with claims of confidentiality and the like.
    TAPS recognizes that the Subcommittee may be concerned that the 
current system creates the potential for effective denial of mergers by 
delay. The answer, however, is not establishing unworkable time limits 
that negate FERC review of mergers with significant competitive 
consequences. Rather, an alternative approach needs to be developed 
that affords FERC the opportunity to do its job well, while respecting 
the reasonable needs of merger applicants. For example, the legislation 
could require FERC to expedite approval of non-controversial mergers, 
and could provide procedures, including information requirements for 
applicants, which will help expedite the more difficult to analyze 
mergers.
    In addition, TAPS recommends that the Subcommittee clarify FERC's 
jurisdiction over mergers of generation-only companies, to ensure FERC 
review of all mergers and acquisitions that can affect the structure of 
the electric industry. The absence of such clarification invites 
evasion of FERC authority.
    TAPS appreciates this opportunity to present its views on H.R. 2944 
to the Subcommittee.

    Mr. Barton. Thank you, Mr. Rao.
    I will now recognize myself for 5 minutes, and maybe 
longer. And let me just say, as many of you have testified 
before and been here, it is good for us to continue to move on. 
Most members have the statements, so if some members missed 
your testimony, they will get back for the opening comments, or 
at least for the questions, but it is, I think, better for all 
of us as we keep moving on in the hearing so that we can get to 
the second panel eventually.
    Let me start.
    You know, I have heard from the Illinois Municipal Electric 
Agency that generation market power, horizontal market power, 
will be a problem in a deregulated electric industry. Some of 
you have testified to that.
    There are no market power provisions in H.R. 2944 other 
than RTOs, because the hearing record seems to have made it 
clear that they are not necessary, based upon our previous 
hearings.
    When I asked the DOE witness yesterday about this issue, he 
could not explain the problem.
    Mr. Rao, in your written testimony, it also does not 
explain the problem, although I think maybe you touched on it 
in some of your questions and probably will have more real-life 
examples to share, and so there is a frustration evident in my 
search for an answer.
    Some people say there is a problem, but there is a refusal 
to explain technically how it becomes a problem, so I would 
like to ask this question to Mr. Rao and Mr. Owens, to explain 
the problem clearly and directly for the subcommittee and 
answer these questions directly.
    Exactly why cannot RTOs mitigate horizontal market power? 
And are there circumstances where generation market power 
exists today?
    Mr. Rao, why don't we begin with you?
    Mr. Rao. I have an example for the second part of the 
question, and then I will go back to the first part of the 
question.
    Generation market power is the ability of one or a few 
utilities to increase the price above the level that would 
apply in a competitive market with many competitors.
    The combination of high concentration levels resulting from 
development of this industry and State-sanctioned monopolies 
coupled with transmission limitations creates the situation 
where, in many places in the country, there is clear market 
power, and utilities are willing to take steps to keep it that 
way.
    To give you an example, Florida is a peninsula with high 
growth load coming into the State. There is about 38,000 
megawatts of load at present in Florida, and only 3,600 
megawatts of limited import capability, and there are two major 
utilities that own about 75 percent of generation to meet that 
load.
    Recently, one of the subsidiaries of Duke Energy, wanted to 
build a merchant plant in Florida with about a mere 500 
megawatt capacity. They wanted to build in one of the 
municipalities which is a member of TAPS.
    When Duke Energy's subsidiary asked the public service 
commission for approval, the two investor-owned utilities with 
the 75 percent generation market power intervened to stop that 
project, and when they did not succeed, when the commission 
approved that particular proposal, they even took it to the 
Florida Supreme Court. It is right now pending.
    It says that the utilities with existing market power will 
try to stop new entrants.
    Mr. Barton. That is an example. Of course, we all know that 
Florida is almost, for some aspects, almost not considered part 
of the continental United States because it is a peninsula. So 
how about inside the mostly contiguous 47 other States?
    I am in trouble. I am not going to run nationwide, I will 
tell you that.
    Mr. Rao. I do have another example which exists within 
the--not necessarily Florida.
    Mr. Barton. Could you briefly, because I want to get Mr. 
Owens' answer to this question, also.
    Mr. Rao. Yes.
    Mr. Barton. Just give me the location and the company.
    Mr. Rao. Eastern Wisconsin has the same type of situation 
with a 10,000 megawatts of load and 1,200 to 1,300 megawatts 
import capacity, almost all of which is controlled by three 
major utilities in eastern Wisconsin.
    These three utilities together control more than 90 percent 
of generating capacity----
    Mr. Barton. But there are three utilities that have 
competition in that market, or would have?
    Mr. Rao. They are----
    Mr. Barton. I mean, you are talking about three different 
producers.
    Mr. Rao. Three different producers.
    Mr. Barton. Let me move to Mr. Owens. I have got the 
ranking member here bugging me to move along.
    Mr. Owens?
    Mr. Owens. You asked the question whether regional 
transmission organizations would help mitigate market power, 
and I would say yes, they would.
    The issue of market power, if I might just break it down 
into two components, first, one area relates to what we call 
``vertical market power,'' and historically that has related to 
your access to the transmission system.
    All investor-owned utilities are required by law to provide 
nondiscriminatory access to the transmission system under 
FERC's implementing Order 888. Certainly regional transmission 
organizations would seek to make sure that access to the grid 
is proper.
    In addition, you asked a question relating to horizontal 
market power. Horizontal market power, many folks generally 
relate that to your ability to control the generation market.
    As I indicated in my oral remarks and in the written 
statement that I provided for the record, there is an explosion 
of participants in the bulk power supply market. There are no 
barriers to entry to that market. We have thousands of 
independent power producers.
    As others have indicated, there is a significant 
opportunity for generators to locate in all aspects of this 
market, so I do not believe that there is the existence of 
horizontal market power.
    Now, to the degree that there is, the States are well 
equipped to deal with those issues. I do not believe that there 
is a need for additional Federal authority to deal with the 
issue of horizontal market power.
    Mr. Barton. Thank you, Mr. Owens.
    I would like to turn now and recognize for 5 minutes the 
ranking member of the subcommittee, Mr. Hall.
    Mr. Hall. Thank you, Mr. Chairman.
    I am not pushing you, but I do have an 8 dinner meeting.
    And, Ms. Church, I will give you some wisdom from the 
1930's. Will Rogers said the way to solve the highway traffic 
problem was to require all automobiles to be paid for before 
they could get on the highway.
    So you can imagine how bad it is now. I wish he could see 
it today. Will Rogers would not like anybody, would he?
    I am not confused. I guess I am still confused, but I am 
trying to listen to this panel and glean from what you say what 
you mean and what you want.
    I have heard Mr. Helton say we will be developing the 
proper amendments, and Mr. Nevius said we need reliability 
legislation now, and I do not know whether this requires some 
amendments or not. Ms. Church said the bill subjects certain 
aspects to intrusive State control. Mr. Owens said we have some 
concerns and objections, repeal PUHCA and reform PURPA and the 
bill repeals both. Mr. Mayben said the bill fails to treat all 
parties alike. Mr. English--I had to leave before I got to 
listen. I tried to listen to all of his, but I sure did not 
want to miss an important vote over there. But we urge the 
chairman to work on language.
    How many of you are for the bill just like it is? How many 
of you are for the bill with a few amendments, not to 
completely restore the automobile, but just--1, 2, 3, 4, 5, 6. 
I count 12.
    Well, let me see. Mr. Helton, let me ask you some questions 
here, if I might.
    Your statement says H.R. 2944 is not a perfect bill but a 
good one, right?
    Mr. Helton. That is correct.
    Mr. Hall. And your testimony lingers long on the merits of 
the legislation. Let me ask you about some of the problems that 
you have with this legislation and, if you can--and maybe you 
cannot--give me a yes or no answer, or tell me you cannot 
answer it.
    On TVA, the bill preserves TVA consumers first call on 
cheap power, permits TVA to build a new generation of 
facilities, and allows TVA to sell outside the valley. Do you 
support that or not?
    Mr. Helton. Do not.
    Mr. Hall. And Bonneville, the bill would permit Bonneville 
to recover its stranded costs through a surcharge on 
transmission consumers that would raise costs for other users, 
such as California consumers who use the system for retail 
purchases. Do you favor that as written?
    Mr. Helton. Under reasonable terms, probably yes.
    Mr. Hall. You would have to have an amendment there though?
    Mr. Helton. Yes.
    Mr. Hall. State preemption--the bill imposes a Federal hard 
reciprocity provisions. This would reduce the number of 
suppliers from whom the consumers in open States could purchase 
and preempt State laws to the contrary. Do you support that?
    Mr. Helton. We would like to amend that one, as well.
    Mr. Hall. Okay. That is one you do not like and two to 
amend.
    Do you support the provision on RTO mandates? The bill 
includes a Federal mandate requiring transmission owners to 
join a regional transmission group by the year 2003 and setting 
specific criteria for FERC appeal. Do you support that?
    Mr. Helton. Generally, yes. The specific criteria is the 
area of concern.
    Mr. Hall. Okay. You cannot give me a yes or no on that?
    Mr. Helton. Cannot.
    Mr. Hall. FERC merger authority--the bill expands FERC's 
merger authority to include transmissions involving generation 
facilities and holding companies. Do you support that as 
written?
    Mr. Helton. Yes.
    Mr. Hall. That is the first unequivocal yes, is it not?
    Mr. Helton. No, sir. I think--didn't I do that on the first 
one?
    Mr. Hall. You may have. Yes.
    Mandatory interconnection to local distribution systems--
this bill gives distributed generators of a considerable size, 
up to 50 megawatts, the right to interconnect with local 
distribution companies. Do you support that?
    Mr. Helton. No.
    Mr. Hall. And then, let me see, your statement indicates 
that your coalition will be developing perfecting language. Do 
you have a time on when you are going to submit that language 
and you are going to give it to the chairman? He has been very 
open with us, and he will immediately send it on to us. Do you 
have those amendments ready?
    Mr. Helton. Almost.
    Mr. Hall. Okay. I think my time is up. I have two more 
pages of questions here, but I will get back to you maybe. 
Thank you.
    Mr. Barton. As long as we do not run past 8, we are going 
to be fine with Mr. Hall.
    I will now turn to my colleague from Kentucky, Mr. 
Whitfield, for 5 minutes worth of questions.
    Mr. Whitfield. Thank you very much.
    Mr. English, in your testimony you focused on some of the 
major concerns of the co-ops, and I noticed that in your 
testimony you also talked about some concerns about section 103 
of the bill relating to the regional transmission 
organizations, and I was just wondering if you could elaborate 
on that a little bit more?
    Mr. English. Mr. Whitfield, our association strongly 
supports voluntary RTOs. We do feel that that is an important 
element. We are also concerned, I might say, about the fact 
that RTOs are regulated by the Federal Energy Regulatory 
Commission, and, as far as members of RTOs, that seems to be 
the appropriate way for us to address that, particularly as you 
are dealing with some of the smaller entities such as electric 
cooperatives.
    We think that the RTO provision that is contained in the 
bill, which also allows for members to set up their own RTOs, 
is one that has some promise. We would like to do some work 
and, I suppose, like the other members here on the panel, we 
probably have got some ideas in mind for amendments. But that 
is the position that we take on RTOs.
    Mr. Whitfield. Okay. And then I had not heard a lot of 
discussion about this net metering issue. Could you elaborate 
on that just a little bit?
    Mr. English. Well, as far as any net metering, it has to do 
with those who also may be--consumers who may be generating 
some power on their own and may be able to sell it back through 
the grid.
    The issue, I guess, is what is the net between the two.
    Mr. Whitfield. Right.
    Mr. English. That, as I understand it, while it may sound 
good on paper, may have some real difficulties in the real 
world as you attempt to integrate that into the process and the 
grid, itself.
    Mr. Whitfield. Okay. All right. Thank you.
    Now, Mr. Hawkins, yesterday, when the Administration 
testified, and then when Secretary Richardson had testified on 
this previously, and even Carol Browner testified, they all 
sort of took the position that this restructuring legislation 
was not the right place or the right format to get into 
additional environmental legislation, and particularly on 
CO2 reduction mandates and so forth.
    That is still their position, but your organization 
obviously still feels that you want to pursue this; is that 
correct?
    Mr. Hawkins. Our organization and many other organizations 
believe that we should address the air pollution problem from 
this industry while we address its economic performance, and 
this is not the first instance that we have disagreed with the 
administration.
    Mr. Whitfield. And will you all be supporting the Pallone-
Waxman amendments in this area if they come forth with those, 
as they have discussed?
    Mr. Hawkins. Yes, sir.
    Mr. Whitfield. Okay. Now, as you know, I represent an area 
that uses a lot of fossil fuel to generate its electricity, and 
one thing that is frequently referred to is that these coal-
fired utility plants in the midwest and southeast are 
uncontrolled and that they are exempt from the Clean Air Act 
requirements, and yet all of these plants are required to 
comply with the national air ambient quality standards. All of 
them are required, under the Clean Air Act, to reduce their 
sulfur dioxide emissions by 50 percent below the 1985-1987 
levels. The 1990 amendments also require these plants to reduce 
their nitrogen oxide emissions by approximately 40 percent 
below existing levels, and they would also be subject to any 
reductions on the EPA's proposed fine particle and 8-hour ozone 
standards. I know that there is a problem with that in the 
courts right now. But they do meet a lot of environmental 
standards and are required to do so. So would you elaborate a 
little bit on the concern that you have about these plants?
    Mr. Hawkins. Yes, sir.
    The State of the law is that plants that were in operation 
before 1970 are treated fundamentally differently than plants 
that have been built in the last 30 years and plants that will 
be built tomorrow.
    Modern plants are required to generate electricity meeting 
state-of-the-art performance standards in terms of how clean 
you can generate electricity. Older plants are not required to 
do that. Older plants are allowed to rely on a patchwork of 
regulations that differ from State to State, and, as a result, 
the facts are clear: the power produced from an older plant 
pollutes sometimes 3, 4, 5 times as much as a competitor's 
power from a modern plant.
    We think that that is an outmoded policy and one that is 
still causing a lot of environmental harm.
    Mr. Whitfield. But you do not deny that they are meeting 
the legal requirements that they must meet today?
    Mr. Hawkins. Well, the trade press and some of the daily 
press have been filled with reports in the last several months 
about inquiries as to whether, in fact, some of these plants 
are complying with their legal obligations; specifically, 
whether they are complying with their obligations to seek a 
permit when they make certain major changes in the operations 
or the physical aspects of their facilities.
    We are aware that the New York attorney general has sent 
notice letters stating his conclusion that a number of these 
companies are, in fact, violating the law, and we have read 
trade press reports that the USEPA is carrying on its own 
investigation.
    So no, sir, we do not think it is clear that they are 
meeting all legal obligations.
    Mr. Whitfield. But even if they are, you still would like 
to see the law changed as it relates to them?
    Mr. Hawkins. That is correct.
    Mr. Barton. The gentleman's time has expired.
    The Chair recognizes the gentleman from Ohio, Mr. Sawyer, 
for 5 minutes.
    Mr. Sawyer. Thank you, Mr. Chairman, and thanks to our 
entire panel.
    Let me turn first to Mr. Nevius. First of all, thank you 
very much for all of the work that NERC has done. It has been 
important and central to a lot of the legislation that we have.
    I am assuming that you fully subscribe to the notion that 
electric supply could deteriorate over the long term if 
transmission capacity does not keep pace with growth and 
demand?
    Mr. Nevius. The reliability of the electric grids could 
certainly be at risk if we do not have a way to enforce 
mandatory standards. The issue of electric supply involves 
other things in addition to the amount of transmission, 
including the amount of generation and what kind of demand side 
measures of programs.
    Mr. Sawyer. Of course. But transmission----
    Mr. Nevius. But transmission----
    Mr. Sawyer. [continuing] adequacy is in strength, no matter 
how much generation exists, if it is not adequate? You would 
agree with that, I am sure?
    Mr. Nevius. Yes.
    Mr. Sawyer. The amount of transmission that is planned for 
the next few years, however, is substantially less than we 
talked about even a few years ago. Am I correct in that?
    Mr. Nevius. The amount that has been planned to be added 
has continued to decline over the last 10 to 15 years.
    Mr. Sawyer. Let me ask you, with regard to NERC's comments 
on the RTO, NERC asserted that transmission rates must provide 
incentives to get the right amount of transmission 
infrastructure built. Do you agree with NERC that we must 
ensure that enough transmission capacity is available to 
prevent short-circuiting competition?
    Mr. Nevius. I guess the comments that we made regarding 
RTOs and also the adequacy of transmission indicate that 
various proposals to provide incentives in one form or another 
are certainly not inconsistent or incompatible with the self-
regulatory reliability concept that is contained in title II, 
and we are not proposing specific pricing or incentive 
mechanisms, themselves.
    Mr. Sawyer. I understand that, but it is your assertion 
that incentives are useful and necessary?
    Mr. Nevius. They can be. Yes.
    Mr. Sawyer. Yes. Thank you very much.
    Ms. Church, I understood yesterday that the deputy 
secretary of Energy said that incentives are not necessary to 
attract transmission investment. Do you agree with that?
    Ms. Church. We agree. We believe that in some cases 
incentives may be appropriate. We think the whole system really 
needs to be re-looked at, because it was developed for a system 
that is changing substantially.
    Mr. Sawyer. For very different purposes.
    Ms. Church. Yes.
    Mr. Sawyer. Yes. I agree.
    Can you speak to your notion of what incentives might be 
useful, helpful, necessary?
    Ms. Church. I would be glad to provide the member with some 
comments to elaborate on that.
    Mr. Sawyer. That would be great. Thank you.
    Ms. Church. Thank you.
    Mr. Sawyer. I am assuming, from what you have said, then, 
that you would agree that if more robust transmission networks 
do not develop, that the whole notion of how we go about 
achieving the level of competition we are trying to achieve 
simply cannot take place?
    Ms. Church. Well, I believe it can be ameliorated by the 
development of RTOs. For example, one of the things that we 
have seen over the last several summers are curtailments of 
large amounts of power that have a cascading effect on the rest 
of a whole region, and the example I used in my testimony was 
the Michigan/Ontario incident.
    Mr. Sawyer. Sure.
    Ms. Church. If the midwest had a large RTO, it would have 
helped to internalize those constraints, and it may have 
prevented the curtailment of 400 megawatts.
    Mr. Sawyer. The real problem there was high delivered 
prices and not necessarily high generated prices.
    Ms. Church. But the whole reason was that power was unable 
to move into that area. In curtailing to alleviate a 400 
megawatt constraint, 4,000 megawatts were actually curtailed, 
which kept power from coming in from New York and PJM into the 
midwest, which created a shortage of generation, which, of 
course, drove the prices up.
    We believe we do need new transmission, but the existence 
of good RTOs would alleviate a lot of the problems that we are 
seeing.
    Mr. Sawyer. Thank you very much. I see my time has run out.
    Mr. Shimkus [presiding]. Thank you. Your time has run out. 
Thank you very much.
    Now I will recognize the gentleman from Oklahoma, Mr. 
Largent, for 5 minutes.
    Mr. Largent. Thank you, Mr. Chairman.
    Mr. Richardson, I would like to ask you, one of the things 
you talked about was the independence of RTOs. Is it your 
opinion that the ISOs that are currently in existence are 
independent?
    Mr. Richardson. Ones that are in existence, ones that are 
being proposed are not--you cannot give a yes or no answer to 
that because each has different characteristics. Some are, some 
are not.
    Mr. Largent. Okay. Let me ask you a question about market 
power. Can you talk to us a little bit about market power? I 
will give you my opinion here--market power exists because of 
physical realities of where generation is located, talking 
about horizontal market power, and physical constraints that 
exist because of the transmission lines that currently exist.
    Talk to us about the transient nature of market power, in 
your opinion.
    Mr. Richardson. Thank you for asking that question.
    Mr. Shimkus, if the record is incomplete with respect to 
market power, then that is our fault that we have not provided 
sufficient examples.
    I would point, as examples, to the preamble of the regional 
transmission organization preamble from the Federal Energy 
Regulatory Commission, where they say open access is 
insufficient, the need for independent system operators is 
clearly demonstrated, and then they go on to give actual 
examples of abuses of market power where there are clear 
findings of problems in the abuse of market power by vertically 
integrated utilities where they favor their own generation 
because they control transmission. They give examples of 
situations where there have been allegations of abuses of 
market power. They note that in some cases individual 
companies--my members and others--are afraid to come forward 
for fear of retribution. So they suggest that perhaps we are 
seeing only the tip of the iceberg of the abuses of market 
power.
    It is a marvelous piece of information. I hesitate to 
overburden this committee with further paper, because I have 
already done a pretty good job of that in my prepared 
testimony, but it is a very good piece that I think 
demonstrates the problems of market power and the remedies that 
are needed.
    Now, when we are looking at market power, we have what I 
regard as institutional market power problems that arise from 
the vertical integration of our utility industry historically.
    Regional transmission organizations, if they are properly 
structured and have the right boundaries that do not game the 
system by creating, rather than eliminating, constraints 
between high-and low-cost systems are the solution, and we need 
to move forward with those, and we should do so first in a 
collaborative fashion.
    We strongly believe that the Commission in the end may need 
the authority to order utilities to participate in such 
organizations because that may be the only way to rationalize 
and get rid of the vertical market power that currently exists.
    Horizontal market power, as I said in my opening statement, 
the ability to use vast amounts of generation to affect prices 
for consumers, not--because generation affects the way the 
transmission system works, and so, by constraining generation 
by unscheduled outages of generation facilities can have 
economic consequences in the marketplace that need to be 
addressed, but I think this is probably a transitional issue. 
It is not necessarily one where FERC needs authority that 
exists in perpetuity, as I suggested in my oral statement. 
Perhaps what FERC needs is a tool box of remedies up to and 
including the dreaded ``D'' word, that being a divesture of 
capacity through a capacity auction for a period of time until 
these problems are addressed.
    Other tools can be used, up to the point where they can 
come back and report to the Congress that the industry has been 
restructured, and that is really what we are talking about. We 
are talking about the structure of the industry, and that is 
why independent system operators are so critically important.
    It is the structure that we have to get right. The Holding 
Company Act structured our industry for 60 years. now we are 
talking about taking that down. We are looking at a new 
structure, and this is an opportunity for this Congress truly 
to get the structure right.
    These opportunities do not come along very often. That is 
why we want legislation now. We see the industry restructuring 
itself and we are concerned that the monopolists are 
controlling the restructuring of the industry, not policymakers 
who are looking out for the interests of the public.
    I hope that--I got a little bit on my soap box, sir.
    Mr. Largent. That is okay.
    Mr. Richardson. But I hope I addressed the question.
    Mr. Largent. Mr. English, I want to give you a chance to 
address the issue of propane.
    In what way does the Federal Government place limits on co-
ops today in terms of their ability to expand their business 
opportunities? What is the mission of a rural electric co-op?
    Mr. English. Well, I think the mission of electric 
cooperatives, whether they are in rural areas or any other 
area, is one of meeting the needs of the consumer members, the 
people who choose to come together and make their purchases 
through the entity of a cooperative.
    Mr. Largent. Meeting what needs? Their electricity needs?
    Mr. English. Whatever needs they may have.
    Mr. Largent. Any need?
    Mr. English. Exactly.
    Mr. Largent. Cable, DVS, propane----
    Mr. English. Exactly.
    Mr. Largent. [continuing] groceries?
    Mr. English. As I used the example before this committee 
once before, to deny consumers the opportunity to do it for 
themselves, and that is basically what we are talking about, or 
do it as a group for themselves, is like denying someone to 
opportunity to grow tomatoes in their back yard garden and eat 
them. That is like saying you have got to sell them to the 
grocery store and buy them from the grocery store. You cannot 
eat your own tomatoes.
    That is basically the same process that we are talking 
about here.
    But as far as whether we are talking about propane or 
whether we are talking about any other service from the 
standpoint of an electric cooperative and recognizing the fact 
there are all kinds of different cooperatives--housing 
cooperatives, you have got farmer cooperatives, you have got a 
wide variety of different cooperatives in this Nation today--it 
also should be recognized, the fact that, for instance, under 
the Rural Utilities Service, any loans are specifically 
restricted only for electric utility service.
    If they, in fact, use those funds for any other purpose 
other than for the infrastructure or assets of the electric 
utility, itself, they would be in violation of a loan 
agreement. Not only could they be declared ineligible for the 
loan, but they could also be declared--have the loan called at 
that particular time.
    Mr. Shimkus. Has the gentleman answered your question?
    Mr. Barton. Well, we have Congressional courtesy. We let 
former Members speak a little bit longer than the other 
panelists.
    Mr. Shimkus. Overruled by the chairman.
    Just remember that, my friends on the left. I tried to get 
over there.
    Mr. English. In addition, I might add this also gets into 
the question of tax exemptions. Electric cooperatives are not 
for profit and are governed by the Internal Revenue Service. As 
such, should they, in fact, cross-subsidize, as some have 
argued, then they would be in violation of their--with the 
regulations of the Internal Revenue Service and could lose 
their tax-exempt status.
    There are procedures for anyone who suspects that such 
violations are taking place to proceed, whether it be with the 
Rural Utilities Service or whether it be with the IRS.
    And also, very quickly, let me say that any other 
businesses outside electric service, they would be subject to 
the unrelated business income tax, which is a Federal tax at 
the corporate level.
    So there are taxes with regard to any of these other 
businesses, whether it be propane or whether it be anything 
else with regard to any margins that might result from that.
    Those margins, by the way, could not go back to an electric 
cooperative as far as the rates are concerned. It would have to 
go back to the membership, itself, and they, too, would pay 
income tax on that.
    Mr. Shimkus. He is going to have to throw me out of the 
chair. I am going to move on. Thank you very much.
    I move to the gentlewoman from the State of Missouri, Ms. 
McCarthy, for 5 minutes.
    Ms. McCarthy. I thank the chairman, and I would like to 
thank the witnesses for their presentation today.
    I would like to explore a concept with you that is still 
troubling to me as we move forward, and that is how, as we move 
forward into this new era of competition, do we achieve the 
efficiencies and also the environmental goals that we have 
obligated ourselves to worldwide?
    My worst fear is that, as we open up competition, industry 
will look more and more to the cheapest sources of fuels in 
order to compete, those perhaps being the more traditional uses 
of coal and others that we know make our cities hard to breathe 
in and cause the EPA great concern as far as air quality.
    Is there enough in this measure on encouraging uses of 
indigenous energies, those that are renewable and clean? Do we 
need to add a renewable portfolio standard, as we have 
sometimes talked about? Is the incentive program, as currently 
proposed, enough? And what about a public benefits fund so that 
we are encouraging conservation and low-income assistance, as 
well?
    How do we set a standard in the world where we move to 
efficiency to lower costs for consumers, but also to a better 
environment?
    I know, Mr. Hawkins, you spoke to this briefly in your 
testimony. I would like to begin with you, but I would like to 
hear from any other member of the panel who is interested in 
sharing these thoughts with us so that we can come together and 
propose language that would make this work.
    Mr. Hawkins. Well, thank you, Congresswoman McCarthy.
    Yes, our coalition of organizations supports three critical 
environmental measures: the public benefits trust that you 
mentioned, to support existing investments in efficiency, low-
income services, and other public benefits; the renewable 
portfolio standard--both of those will be addressed in the 
second panel; and, finally, achieving an environmental 
performance cleanup.
    On that last point, the way I would try to answer your 
question is the way that this industry will be incented to 
improve its performance is by making good performance valued in 
the marketplace.
    In my testimony, I point out today's situation, which is 
problematic. An entrepreneur that wants to build a new high-
efficient, clean power plant goes to investors, and that 
entrepreneur can point out that the power plant may emit very 
little sulfur dioxide, may emit very little or no mercury, may 
emit far below the required control levels for nitrogen oxides, 
and may emit much less CO2 than other competitors.
    But the investors are not interested in that. Investors are 
interested in what is your bottom line bus bar costs and how 
does it compare to your competition. And if your competition is 
an old grandfathered power plant that is able to continue to 
burn dirty fuel because of balkanized pollution control rules, 
the investor says, ``Sorry. Great idea. Come back later.'' And 
the plant doesn't get built.
    So the way to deal with this is to put a generation 
performance standard in the law which treats all generators 
equally, and says, ``When you produce a megawatt hour of 
electricity, that is a useful social service and you are going 
to get a certain allocation of pollution allowances to meet 
those needs.'' Now the entrepreneur comes in, has this super-
clean plant, and he or she can say to the investor, ``When I 
generate a megawatt hour of electricity, I am generating an 
additional revenue stream because I am going to have credits 
that can be sold into the market, and that really makes my 
investment a more-attractive opportunity for you,'' and that 
will tend to make the answer be yes to build that plant.
    Ms. McCarthy. Thank you.
    Ms. Church?
    Ms. Church. I think, generally, that enactment of 
comprehensive wholesale legislation will benefit the 
environment. We would certainly like to see, over time, 
comparability between the older and the newer plants, and we 
definitely believe that, where credits are being allocated, 
that newer entrants do need to have an opportunity to get those 
credits and they need to be reallocated periodically.
    And on renewables, we do think that there are some 
amendments that could help strengthen the bill. The current 
bill tries to provide symmetry between the tax credits that are 
already in the law and benefits to public power.
    There are still a number of renewable sources that fall 
through the cracks on that attempted symmetry, and we do think 
some refinements are needed there.
    Ms. McCarthy. I thank you. And I see that I have run out of 
time. Thank you, Mr. Chairman.
    Mr. Shimkus. Thank you. And I recognize the chairman of the 
subcommittee, Chairman Barton, for 5 minutes, or however long 
as he wants to take.
    Mr. Barton. No, no. Five minutes.
    Just an observation before I start my questions. I used to 
sit out in the audience during the natural gas debate in the 
early 1980's about decontrolling natural gas, both in the House 
and in the Senate, and I felt I knew the answer and I was so 
smart, and if those ignorant Senators and Congressmen would 
just let me do it, we could solve that problem. And now I am 
over here and I wish I was over there, because I feel like, you 
know, what are we going to do, because everybody that has 
testified today has had some very good points.
    So I used to be a lot smarter when I was sitting out there 
than I am when I am sitting up here.
    Let me start off with an easy question. The current draft 
before us has a distributed generation size cap of 50 
megawatts. We are told by a lot of people that is a little bit 
too large. Is there a better number, Mr. Owens, that you would 
like to see our third draft go to on distributed generation?
    Mr. Owens. Well, I certainly think 50 megawatts is just an 
extreme. I do not have a specific number, but I think if you we 
going to start, you certainly should start at something 
significantly scaled down. Let's say perhaps five megawatts 
could be an upper limit.
    Mr. Barton. Five to ten. Mr. Richardson, do you have a 
position, your group have a position on that?
    Mr. Richardson. Mr. Chairman, my group does not have a 
position. I was struck at the size of 50 megawatts when I first 
read through H.R. 2944. It seemed to me to be quite large.
    Mr. Barton. Okay. Let me ask you a question, Mr. 
Richardson, again on market power.
    Mr. Richardson. Yes, sir.
    Mr. Barton. Yesterday, the Clinton administration's 
witness, the deputy secretary of Energy, really enforced upon 
the subcommittee that we needed to take the Administration's 
provision on market power, which would allow the FERC to 
require forced divestiture.
    I am not of that persuasion. I think you know that, having 
come to our working group. I am concerned about, if there truly 
is market power, we need to do something, but I do not see why 
the States are not the solution. Didn't California have market 
power provisions in their State law?
    Mr. Richardson. They have divestiture requirements.
    Mr. Barton. But it was a State decision?
    Mr. Richardson. Yes, it was a State decision.
    Mr. Barton. Doesn't Texas have market power provisions in 
its law?
    Mr. Richardson. Yes.
    Mr. Barton. Okay. Doesn't Pennsylvania?
    Mr. Richardson. I am not that familiar with Pennsylvania's 
legislation, but I believe you are correct.
    Mr. Barton. Just for the subcommittee's edification, we are 
going to address market power. If we need to put a political 
fix in, so be it, but, before we decide on a political fix, we 
ought to really look at what is happening in the States, and 
every State that has acted in some fashion has addressed market 
power, and we really should think carefully, in my opinion, 
before we put a Federal fix on market power in if the States 
are taking--are already handling that.
    Now, Mr. Richardson, you said something that really struck 
me. You did not give a specific example. You said you did not 
want to burden the subcommittee with more paper. Well, burden 
us. If you know of a specific example where a utility generator 
withheld generating capacity at a critical period simply to 
drive the price up and exercised market power, I would like to 
know that.
    Mr. Richardson. We will give you examples of the 
combination of the abuse of transmission and generation.
    Mr. Barton. Well, your specific example, though, was you 
talked about horizontal generation power, where a particular 
utility could withhold generation from the system to--I think 
you used the word ``game'' the system.
    Now, I know we have had some transmission bottlenecks. I am 
familiar with most of those. I won't claim I am familiar with 
all of them. But I have not heard before somebody make the 
allegation that a generator withheld generating capacity during 
a peak period, and I would be interested in it, and I know 
former Chairman Dingell would be interested in it. That is one 
of his big concerns. So we would really like to have that.
    Now, Mr. Hawkins, I want to ask you a question. You are the 
witness that says we ought to put in some Clean Air Act 
provisions for the grandfathered power plants. If we do not put 
those in, are you going to recommend a vote against any bill?
    Mr. Hawkins. We certainly will look at the entire bill, and 
if the bill does not contain provisions which provide 
assurances that this restructured industry will protect the 
environment, then yes, we would recommend the members to vote 
against the bill.
    Mr. Barton. My understanding is, under the current Clean 
Air Act, we have Federal standards. We do grandfather some of 
these older power plants that burn some of the coal.
    Could a State put in a tighter standard on those 
grandfather plants, or does the Clean Air Act preempt that?
    Mr. Hawkins. A State could put in a standard as a matter of 
law. The problem is that the State could not protect its air 
quality just by regulating the sources within its State.
    Mr. Barton. My point is, under the current Clean Air Act, 
if that is a problem, the State of Ohio, to pick a name out of 
the air, or the State of Illinois, to pick another State out of 
the air, they could set tighter standards for those plants, 
could they not?
    Mr. Hawkins. They could, but they would be ineffective 
because----
    Mr. Barton. But they could do it? They could do it. The 
answer to that is yes.
    My time has expired and I yield back to the gentleman from 
Illinois.
    Mr. Shimkus. Thank you. And, for Mr. Richardson, if you 
would provide that information.
    Mr. Richardson. We will do that.
    Mr. Shimkus. I just wanted to get the commitment on the 
record that you would provide that information to the chairman.
    Mr. Richardson. Yes.
    Mr. Shimkus. Now I recognize the gentleman from Florida, 
Mr. Stearns, for 5 minutes.
    Mr. Stearns. Thank you, Mr. Chairman.
    This is directed to Lynne Church. Just a clarification. I 
think earlier staff indicated that you made the assertion that, 
I think in the PURPA language that I have, it does not 
explicitly protect existing contracts; is that true?
    Ms. Church. I said that in my written testimony. Correct. 
Yes.
    Mr. Stearns. I just wanted to read from page 79 of the bill 
that I have that says, ``Existing rights and remedies not 
affected,'' page 79--``Nothing in this section affects the 
rights or remedies of any party with respect to the purchase or 
sale of electric energy or capacity from or to a facility 
determined to be a qualifying small power production 
facility,'' and so forth.
    And it says, ``Pursuant to any contract or obligation to 
purchaser to sell electric energy or capacity in effect on the 
date of the enactment of this act.'' So----
    Ms. Church. Well, we would like to see some language that 
specifically provides symmetry between protection of the 
utilities for their recovery of stranded costs that are tied to 
above-market PURPA contracts with the obligation, therefore, to 
continue to supply to pay under the existing contract.
    Mr. Stearns. Well, from what I just read to you, it appears 
that they have these remedies in place in the bill that I have, 
so, I mean, I think your initial statement might not be 
correct. Do we agree on that?
    Ms. Church. We will certainly look at it again, sir.
    Mr. Stearns. Okay. You proposed granting FERC jurisdiction 
over transmission used to make bundled retail sales.
    Ms. Church. Correct.
    Mr. Stearns. What is the position of the States on this 
issue?
    Ms. Church. NARUC has filed comments that, as I understand 
it, disagree, and I think that the reason that we believe it is 
very, very important is that, while the States are very well-
meaning--and I certainly do not attribute any malevolence to 
their view--they are taking--they tend and have the 
opportunity, under the way the law is being interpreted, to 
take very parochial views, which can have the impact of 
adversely impacting neighboring States, and certainly 
preventing the market from operating the way it should.
    The example I would use is the one that underlies the 
Northern States Power case, the 8th circuit case, which I think 
has brought this to the fore, where the Minnesota law required 
the utility to curtail a firm transportation contract on its 
transmission system in order to protect its ``native load.'' 
Well, the contract that they curtailed was, in fact, power that 
was moving to the next State, Wisconsin, to serve their native 
load.
    And so what we need to realize is that the system, even 
now, and even more so in the future, as States open up, is 
going to be relied upon to serve residential customers.
    And I think the second view that there is general 
misunderstanding, both sometimes on the Commission's level and 
in the general public, that curtailment of transmission 
automatically is going to end up turning off the lights. That 
is not correct.
    What it really means is that sometimes, where a contract is 
curtailed, the recipient of that contract is going to have to 
go into the hourly market for more expensive power, but most 
times it does not mean the lights actually go out.
    Mr. Stearns. Mr. Richardson, you say that H.R. 2944 
eviscerates FERC's jurisdiction over the transmission system. 
Now, this is not what FERC told us yesterday. FERC told us that 
H.R. 2944 codifies Order 888. So let's be clear what you are 
asking here.
    You want Congress to go beyond Order 888 and give FERC 
jurisdiction over a larger part of the transmission system than 
it is asserted in Order 888? Is that not correct?
    Mr. Richardson. I do not believe so, Mr. Chairman.
    There are a couple of issues here. One, I, frankly, get 
rather confused when I look in that language in that section, 
bundled and unbundled services. There are a couple of problems 
that we have with----
    Mr. Stearns. Just let me interrupt you for a second.
    Mr. Richardson. Yes, sir.
    Mr. Stearns. Just the way I laid the question out, do you 
agree or not? Do you want me to read it again?
    Mr. Richardson. Well----
    Mr. Stearns. In other words, my question----
    Mr. Richardson. Yes. Please do.
    Mr. Stearns. Is that not correct? You are saying that----
    Mr. Richardson. Second part, Mr. Stearns, the refunction-
alization issue that I mention in my testimony gives the 
utilities the opportunity--and I think it is pretty well 
documented in another item that I included with my testimony--
to remove facilities that are currently FERC jurisdictional by 
refunctionalizing them from the function of transmission to the 
function of distribution.
    Now, that certainly diminishes the authority of the 
Commission over facilities with respect to which they currently 
do have jurisdiction.
    Mr. Stearns. Okay. Has FERC been approving those 
classifications?
    Mr. Richardson. I am not sure of the status of those 
classifications. The language of the--I can give you instances, 
for example, in Wisconsin of a proposal to take nearly 80 
percent of transmission out of FERC's jurisdiction, converting 
it to State jurisdiction. There are other examples in the 
article that I presented.
    Of particular concern to us is the requirement that FERC 
defer to those State commission decisions, and, as I believe 
Ms. Church said a moment ago, there are concerns about 
parochial treatment.
    Mr. Stearns. Okay. Mr. Chairman, my time has expired.
    I thought I would bring to the attention of the committee a 
``USA Today'' advertisement on Friday, September 17, in which 
there is probably no need for electric if this is true. It 
says, ``Tired of high electric bills? How about no electric 
bills? This machine will give you free electricity for the rest 
of your life.''
    Mr. Richardson. I will take two.
    Mr. Stearns. It says it capitalizes upon the fourth law of 
motion--now, to my knowledge there are only three--and it 
utilizes energy previously thrown away so that you will have 
free electricity for the rest of your life. So if anybody wants 
a copy of this ad, here is an opportunity for free electricity.
    Mr. Barton. TVA will be selling those in the lobby.
    The gentleman from Mississippi, Mr. Pickering. Five 
minutes. Questions only.
    Mr. Pickering. Thank you, Mr. Chairman.
    Let me just ask a number of the panelists the same 
question. Let me first start with Mr. English.
    Upon reviewing the draft in its current form, could you 
support or would you oppose, and what are the three primary 
concerns that you have with the legislation in its current form 
that would need to be addressed to obtain your support if you 
do not support it at this current time?
    Mr. English. As I stated in my previous testimony, Mr. 
Pickering, the thing that we are most concerned with is 
unnecessary regulations with regard to achieving the goals 
pertaining to the question of the regulatory burden under FERC. 
We do have concerns. We do not really think it makes much sense 
as far as merger authority under FERC.
    We are concerned that in a restructured environment that we 
have, in effect, electric cooperatives be able to provide all 
the services that any other electric utility can provide, and 
also we want to make sure electric cooperatives can work 
together to be able to provide and meet the same needs, 
particularly from a billing standpoint, that other electric 
utilities can.
    Mr. Pickering. Just a quick follow-up. How many of your 
States or how many of your co-ops operate in States where there 
is no State regulatory authority or jurisdiction at the present 
time?
    Mr. English. I would need to submit that for the record, 
but roughly--I had better submit it for the record. I think it 
is half to three-fourths, somewhere in that neighborhood.
    Most States view electric cooperatives from the standpoint 
that, since they are consumer-owned, they elect their own board 
of directors from the consumers, they regulate themselves, 
unlike other utilities.
    Mr. Pickering. It has actually been a pretty good system, 
hasn't it?
    Mr. English. Worked extremely well. I am not aware of 
complaints from States that provide for this process.
    Mr. Pickering. I believe Mississippi is one of those.
    Mr. English. It is, indeed.
    Mr. Pickering. Let me ask Ms. Church the same question that 
I first asked Mr. English.
    Would you support or oppose the current draft? And what are 
the three primary things that would need to be addressed if you 
do not currently support the legislation?
    Ms. Church. We believe, as I said before, there are a lot 
of things in the bill that we really like; however, the three 
provisions that we think give State commissions an undue 
opportunity to intrude onto the interstate grid may lead us to 
a position where we would not be able to support.
    We do believe that those provisions, particularly the 
distinction between bundled and unbundled, is a critical flaw 
in the bill.
    Mr. Pickering. And would you currently support the 
legislation?
    Ms. Church. We certainly support the passage of 
legislation. We think it is needed. But we do think this bill 
does need some revisions.
    Mr. Pickering. Mr. Owens, would you support or oppose the 
current draft?
    Mr. Owens. I think the current draft needs some 
refinements, and I would put them in probably two large 
categories. One large category, I am certainly very troubled by 
the aspects that deal with public power, the TVA, the 
Bonneville, the co-op revisions, and the municipal provisions.
    New generation and transmission should be subject to the 
same rules. Subsidies should not be used to distort the 
marketplace, so I would suggest a major improvement in that 
area.
    The second area that I am troubled about is the expansion 
of FERC's authority, particularly with respect to the merger 
provisions. I particularly believe it is unnecessary to have 
FERC dabble in the area of retail competition issues. 
Similarly, I do support flexibility in regional transmission 
organizations.
    And then, finally, I have some difficulty with the net 
metering requirements in the bill which could be fine-tuned, as 
well as the aggregation aspects, and then the inter-connection 
requirements, the 50 megawatt standard and the requirement that 
FERC can require that the distribution system be expanded.
    Mr. Pickering. Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Pickering.
    Mr. Wynn has arrived, and so we will yield to Mr. Wynn 5 
minutes for questions.
    Mr. Wynn. Thank you, Mr. Chairman.
    Unfortunately, I did not have the opportunity to hear the 
testimony, so it would probably be presumptuous to start asking 
questions. I will defer.
    Mr. Barton. It would be very Congressional for you just to 
pitch right in.
    Mr. Wynn. I am going to try to start a new precedent.
    Mr. Barton. An informed questioner. How about that?
    Is Mr. Ehrlich here?
    Mr. Shimkus. He has left, Mr. Chairman.
    Mr. Barton. Okay.
    Mr. Shimkus. Mr. Chairman, may I just ask that we can get 
some more questions submitted on the record----
    Mr. Barton. Yes.
    Mr. Shimkus. [continuing] for written response from the 
panelists?
    Mr. Barton. Yes. We are not going to do a second round of 
questions.
    Mr. Shimkus. Right. I understand.
    Mr. Barton. Okay.
    Congressman Tauzin asks unanimous consent on his behalf to 
submit a statement for the record. Is there objection to all 
members of the full committee, not just the subcommittee, being 
given unanimous consent to put a statement in the record on 
this issue?
    [No response.]
    Mr. Barton. Hearing none, so ordered.
    Let me, before I release this panel, reiterate what I said 
at the beginning.
    We are going to have one more panel today. We are not going 
to go to markup next week because of the pending markup of the 
Superfund bill at the full committee, but it is the Chair's 
intention, again, in consultation with Chairman Bliley and Mr. 
Hall and Mr. Dingell, to try to schedule a markup the week 
after that. So, all of these concerns that have been expressed 
by this particular panel, we encourage you to do two things: 
No. 1, put them in legislative language; No. 2, find a champion 
on the subcommittee, preferably two champions, one on the 
republican side and one on the democrat side, and submit them--
get your champions working, and then submit the language to 
Congressman Hall and myself so we can review it, because I do 
intend to put together a subcommittee substitute that we will 
mark up the week after next.
    So the time has come to stop being concerned and start 
being constructive in putting these issues into language that 
the subcommittee members on both sides of the aisle can take a 
look at.
    Again, thank you for your testimony. You are excused.
    As soon as they have vacated the premises, we want to hear 
from our second panel.
    Lady and gentlemen, we welcome you to the subcommittee. We 
are going to start with Mr. Brice and work our way through to 
Mr. Segal. Each of your statements is in the record in its 
entirety. We are going to recognize you to summarize it in 6 
minutes, and we are going to start with Mr. Jack Brice, who is 
a member of the board of directors of the American Association 
of Retired--is it People or Persons?
    Mr. Brice. We just say ``AARP'' now. We changed the name 
legally.
    Mr. Barton. So it is just----
    Mr. Brice. But prior to that it was ``persons.``
    Mr. Barton. Persons. Okay. AARP. We could say ``real 
people.'' How about that? Anyway, we welcome you, sir, and you 
are recognized for 6 minutes.

   STATEMENTS OF RUTHERFORD ``JACK'' BRICE, MEMBER, BOARD OF 
    DIRECTORS, AARP; ELIZABETH ANNE MOLER, GENERAL COUNSEL, 
AMERICANS FOR AFFORDABLE ELECTRICITY; MARK N. COOPER, DIRECTOR 
  OF RESEARCH, CONSUMER FEDERATION OF AMERICA; MARTY KANNER, 
COALITION COORDINATOR, CONSUMERS FOR FAIR COMPETITION; RICHARD 
H. COWART, DIRECTOR, REGULATORY ASSISTANCE PROJECT; TOM SMITH, 
DIRECTOR, TEXAS PUBLIC CITIZEN; THOMAS R. CASTEN, PRESIDENT AND 
 CHIEF EXECUTIVE OFFICER, TRIGEN ENERGY CORPORATION; AND SCOTT 
     H. SEGAL, ON BEHALF OF THE NATIONAL ALLIANCE FOR FAIR 
                          COMPETITION

    Mr. Brice. Good morning. We thank Chairman Barton and the 
other members of the committee for inviting us to present our 
views on the consumer protection provisions within H.R. 2944, 
the Electricity Competition and Reliability Act.
    We will confine our remarks to the provisions contained in 
title III of the bill, as well as to the sections in title V 
dealing with aggregation. However, as representatives of 
residential consumers, we also share some of the concerns 
surrounding the market power provisions voiced by other 
panelists over the past 2 days.
    In short, AARP wants to ensure that residential customers 
benefit from competition, that strong consumer protection 
provisions are in place, and that electric utility service is 
available to all.
    AARP believes that residential customers should benefit 
from restructuring; unfortunately, residential customers are 
simply not as attractive to utilities as industrial customers 
are.
    Mr. Chairman, we feel one means to strengthen the position 
of residential consumers is through aggregation. Aggregation 
will allow residential consumers to pool their respective 
electricity needs, enabling them to negotiate lower rates from 
a power provider and benefit from the outset.
    AARP also supports a Federal role in facilitating 
aggregation in States that have opened their markets to 
competition.
    H.R. 2944 recognizes the importance of aggregation, as 
well.
    The bill provides residential consumers with flexibility, 
allowing that any entity that aggregates consumers may acquire 
retail electric energy on an aggregate basis.
    As we have suggested before, residential consumers would 
further benefit if aggregation was offered on an opt-out basis. 
The opt-out provision would ensure that a majority of under-
served consumers could reap the benefits of lower rates.
    For competition in the electric industry to work, strong 
consumer protection laws must be applied to the sale of 
electricity in restructured industry. We are pleased that title 
III of H.R. 2944 is devoted to addressing consumer protection 
concerns.
    Mr. Chairman, the anti-slamming and anti-cramming 
provisions will go a long way toward addressing these abuses.
    AARP is also pleased that the need for information 
disclosure is increasingly understood by policymakers and 
reflected in H.R. 2944. The bill includes provisions outlining 
the kind of information that supplies must present to consumers 
when offering services. Many of the details that we have urged 
to be included in billing statements are included in this 
section.
    Further, the legislation clarifies that States may impose 
additional requirements. This kind of consumer information 
floor is what we have been seeking.
    Further, we applaud Chairman Barton for striking a delicate 
balance between the protection of individual privacy and the 
need to make aggregate consumer information available to 
promote competition.
    AARP values the individual's right and ability to control 
the movement of personal information. We are pleased that 
provisions in H.R. 2944 recognize that right by requiring prior 
written approval before personal information can be disclosed.
    We also support the provision in H.R. 2944 that requires 
local distribution companies to make aggregate consumer 
information available to retail electric suppliers upon 
request.
    By facilitating the transfer of this type of information, 
residential consumers are more likely to be offered choice.
    While we are pleased overall with the consumer protection 
provisions included in H.R. 2944, AARP would still like to see 
a truth in billing requirement adopted to supplement the 
information disclosure provision. AARP is concerned that, in a 
competition environment, less-attractive customers will be 
adversely affected.
    H.R. 2944 recognizes universal service through a sense of 
Congress, but places the full burden on a State to collect fees 
and implement the program.
    AARP believes that there is still a role for the Federal 
Government in ensuring that electric service is provided to all 
consumers.
    AARP is pleased with the attention Chairman Barton has 
devoted to residential consumers in H.R. 2944. The consumer 
protection and aggregation provisions should benefit consumers, 
but only if adequate market power provisions are put into place 
to ensure that competition becomes a reality.
    And, finally, AARP hopes that, as legislation moves toward 
passage in the House, the provisions we have discussed today 
remain intact or are improved. We urge this committee to 
remember that residential consumers will benefit from 
restructuring only if aggregation is facilitated, strong 
consumer protection provisions are enacted, and electric 
service is ensured for all.
    Again, Mr. Chairman, we thank you for inviting us to 
testify.
    [The prepared statement of Rutherford ``Jack'' Brice 
follows:]
   Prepared Statement of Rutherford ``Jack'' Brice, Member, Board of 
                            Directors, AARP
    Mr. Chairman and Members of the Committee: My name is Jack Brice 
and I am a member of AARP's Board of Directors. We thank Chairman 
Barton and the other members of the Committee for inviting us to 
present our views on the consumer protection provisions within H.R. 
2944, the ``Electricity Competition and Reliability Act.'' We will 
confine our remarks to the provisions contained in Title III of the 
bill as well as to the section in Title V dealing with aggregation. 
However, as representatives of residential consumers we also share some 
of the concerns surrounding the market power provisions voiced by other 
panelists today.
    AARP's membership has a vested interest in the move towards 
competition now underway in the electric utility industry. For 
everyone, electricity is a basic necessity of modern life. The cost of 
this necessity, however, can comprise a significant portion of an 
average consumer's personal expenditures. In fact, energy costs can 
take up to as much as 5 percent of the median-income household's 
monthly budget. Older Americans are particularly vulnerable to rapid 
increases in energy prices. Although older persons consume 
approximately the same amount of residential energy as non-elderly 
Americans do, they devote a higher percentage of total spending to 
residential energy. Among low-income older families, an average of 17.5 
percent of their income is spent on residential energy. Too often, low-
income older persons are faced with the choice of risking their health 
and comfort by cutting back on energy expenditures or reducing spending 
for other basic necessities.
    In testimony AARP presented to this Committee earlier this year we 
discussed generally our concerns surrounding the move to retail 
competition. We questioned the claims that retail competition would 
bring about substantial rate reductions for all ratepayers, including 
the elderly. We also expressed hope that consumers would receive the 
corollary benefits of the ability to shop among competitive providers, 
and to take advantage of a new array of products and pricing options. 
We concluded that the fate of residential consumers in a restructured 
electric industry will depend on whether the new market structure gives 
them a fair chance to receive the benefits of competition, ensures that 
their interests are represented in the market, and provides fundamental 
protections against abuse.
    Residential ratepayers, and particularly older Americans, face very 
significant risks--and few, if any, assured benefits--in the move to 
retail competition in the electric power industry. These risks go 
beyond the ability to benefit from choice. They also include risks 
associated with confusion, deception and fraud.
    AARP is pleased that H.R. 2944 addresses these risks. Our testimony 
today will focus on how elements of Chairman Barton's bill support 
AARP's goals to:

 Ensure that residential customers are among the first to 
        benefit from competition;
 Provide strong consumer protection provisions; and
 Establish a comprehensive universal service policy, including 
        a guarantee of affordability.
Residential Customers First
    AARP believes that residential customers should benefit from 
restructuring. Unfortunately, residential consumers are simply not as 
attractive to utilities as industrial customers are. Discussions 
between AARP staff and representatives of electric utilities, 
industrial consumers and regulators have highlighted the fact that 
residential consumers are not likely to reap the full benefits of 
restructuring during the initial years of competition. The ability to 
aggregate, however, will help to bring some benefit in the short-term.
    Aggregation will allow residential consumers from like communities 
or associations to pool their respective electricity needs, enabling 
them to negotiate lower rates from a power provider and benefit from 
the outset.
    AARP supports a federal role in facilitating aggregation in states 
that have opened their markets to competition. H.R. 2944 recognizes the 
importance of aggregation as well. The bill provides residential 
consumers with flexibility, allowing that any entity that aggregates 
consumers may acquire retail electric energy on an aggregate basis. As 
we have suggested before, residential consumers would further benefit 
if aggregation were offered on an opt-out basis. The opt-out provisions 
would ensure that a majority of underserved consumers could reap the 
benefits of lower rates. Rep. Brown has introduced the concept of a 
residential opt-out aggregation system in his ``Community Choice for 
Electricity Act of 1999.''
Consumer Protection Laws
    For competition in the electricity industry to work, strong 
consumer protection laws must be applied to the sale of electricity in 
a restructured industry. Low-income, non-English speaking and elderly 
consumers, in particular, will need very strong consumer protections to 
prevent abuse in the competitive market.
    We are pleased that Title III of H.R. 2944 is devoted to addressing 
consumer protection concerns. Attacking the problems of slamming and 
cramming, while providing for information disclosure and privacy 
restrictions is to be commended.
    If enacted, the anti-slamming and anti-cramming provisions of the 
Chairman's legislation will go a long way towards addressing these 
abuses.
    AARP is pleased that the need for information disclosure is 
increasingly understood by policymakers and is reflected in H.R. 2944. 
The bill includes provisions outlining the kind of information that 
suppliers must present to consumers when offering services. Many of the 
elements that we have urged be included in billing statements, such as 
price information, description of charges, and information regarding 
interruptibility of service are included in this section. Further, the 
legislation clarifies that states may impose additional requirements. 
This kind of ``consumer information floor'' is what we have been 
seeking.
    Further, we applaud Chairman Barton for striking a delicate balance 
between the protection of individual privacy regarding information 
exchange and the need to make aggregate consumer information available 
to promote competition. AARP values the individual's right and ability 
to control the movement of personal information. We are pleased that 
the provisions in H.R. 2944 recognize that right by requiring prior 
written approval before personal information can be disclosed.
    We also support the provision in H.R. 2994 that requires local 
distribution companies to make aggregate consumer information available 
to retail electric suppliers upon request. By facilitating the transfer 
of this type of information, residential consumers are more likely to 
be offered choice.
    While we are pleased overall with the consumer protection 
provisions included in H.R. 2944, there are certain areas that need 
further attention. In earlier testimony we detailed the importance of 
adopting a ``Truth-in-Billing'' requirement to supplement the 
information disclosure provision. AARP suggested that a comprehensive, 
easy-to-read billing statement each month would help alleviate consumer 
confusion, making consumers more likely to become participants in the 
competitive marketplace. This provision is missing from H.R. 2944.
    AARP also supports the creation of a consumer database housed at 
the FTC to assist residential customers in obtaining information about 
retail electric utility providers, including aggregators. Additionally, 
the creation of an Office of Consumer Counsel within the FERC, as 
outlined in an earlier draft, would assist consumers.
    Finally, as large aggregators, utility companies and power 
marketers are likely to operate on an interstate basis, it is incumbent 
upon the Congress to ensure that they meet certain threshold 
operational requirements and that deceptive, fraudulent or other 
illegal behavior not be not tolerated.
Universal Service
    As we have said previously, electric utility service is essential. 
Therefore, one of the cornerstones in any restructuring effort is the 
requirement that electric utility service be universal and affordable. 
A universal service policy must ensure basic electric service at a 
level of consumption that would meet the needs of residential 
ratepayers for lighting, heating, cooling, cooking, and recreation. In 
our view, affordability means that electricity rates do not strain the 
household budget.
    AARP is concerned that in a competitive environment, less 
attractive customers may be adversely affected. H.R. 2944's only 
recognition of universal service is through a ``Sense of the Congress'' 
provision. Unfortunately, such a declaration places the full burden on 
the states to collect fees and implement the program. AARP believes 
that there is still a role for the federal government in ensuring that 
electric service is provided to all consumers. At a minimum, federal 
involvement should include participation on a Federal-State Joint Board 
that would oversee a program funded by a fee placed on all generators 
of electricity.
Conclusion
    AARP is pleased with the attention Chairman Barton has devoted to 
residential consumers in H.R. 2944. The consumer protection and 
aggregation provisions should benefit consumers, but only if adequate 
market power provisions are put in place to ensure that competition 
becomes a reality.
    AARP hopes that as legislation moves toward passage in the House, 
the provisions we have discussed today remain intact or are improved. 
We urge this Committee to remember that residential consumers will 
benefit from restructuring only if aggregation is facilitated, strong 
consumer protection provisions are enacted and electric service is 
ensured for all.
    Mr. Chairman, the work that you have done to highlight many of the 
inherent problems in the move to a deregulated environment is to be 
commended. H.R. 2944 is a big step in the right direction. AARP looks 
forward to continuing our active participation in this debate on both 
the federal and state level and to working with you in crafting 
solutions that will ultimately benefit not only our members, but the 
nation as a whole.

    Mr. Barton. Thank you, Mr. Brice.
    We would now like to hear from The Honorable Betsy Moler, 
the general counsel for Americans for Affordable Electricity 
and a former deputy secretary of Energy and commissioner at the 
FERC.
    Ms. Moler?

                STATEMENT OF ELIZABETH ANNE MOLER

    Ms. Moler. Thank you, Mr. Chairman and members of the 
subcommittee. It is a pleasure to be before the subcommittee 
again today.
    I am testifying on behalf of Americans for Affordable 
Electricity, or AAE. AAE is a diverse coalition of over 200 
member organizations. Their common bond is support of a more 
competitive electric marketplace. We appreciate the opportunity 
to testify.
    AAE believes there is an urgent need for Congress to enact 
legislation to modernize the laws governing this Nation's 
electricity business. Many of the laws currently on the books, 
as you have recognized, Mr. Chairman, are impeding progress 
toward a more-competitive electric marketplace.
    AAE supports customer choice. Since Chairman Bliley took 
customer choice off the table, as he said, as a legislative 
priority in this Congress, we have turned our focus to 
improvements in the wholesale electricity marketplace that will 
further competition.
    My testimony today focuses on wholesale issues; however, I 
do want to reiterate our support for customer choice, as well 
as legislation that would give all customers the right to 
aggregate their electricity purchases, whether or not they are 
located in States that provide customer choice.
    We believe that H.R. 2944 is a well-intentioned piece of 
legislation; however, we do not support enacting it in its 
current form because we believe it will serve to inhibit 
competition, rather than to promote it.
    In the brief time I have today, I want to focus on one 
aspect of H.R. 2944 that is particularly troublesome, the 
transmission jurisdiction provisions.
    Section 101 purports to clarify the respective role of 
Federal and State jurisdiction, but in doing so it creates new 
barriers to competition. We need to have all transmission under 
one set of rules, and we need to separate the transmission 
function from the sales function in order to make electricity 
markets more open and competitive.
    Let me explain.
    Section 101 clarifies that FERC has authority over 
unbundled transmission of electric energy sold at retail, while 
State regulatory authorities have authority over any bundled 
sale of electric energy. This same standard is being applied 
today, although it is being challenged in the DC circuit 
litigation over Order 888.
    In Order 888, FERC determined it had jurisdiction over so-
called ``unbundled transmission'' in interstate commerce by 
public utilities. Thus, in States that have adopted customer 
choice, the use of the transmission facilities is under FERC's 
jurisdiction. However, the same type of facility is not under 
FERC's jurisdiction in States that have not adopted customer 
choice.
    What does this mean in the real world? You have a crazy 
quilt of jurisdictional lines. FERC has authority over 
transmission lines in States that have adopted customer choice, 
while State regulators have authority over exactly the same 
type of facilities in States that have not adopted customer 
choice.
    Virginia, for example, has adopted customer choice 
legislation, while West Virginia has not. The Virginia 
transmission lines are subject to Federal regulation, while the 
West Virginia lines are not.
    This simply does not make sense any more. All transmission 
lines that are part of the interstate network must be under 
FERC's jurisdiction and subject to the same type of open access 
requirements. Split jurisdiction over the interstate grid 
simply does not make sense.
    Based upon experience since Order 888 was issued, AAE 
firmly believes that we need to put all uses of the interstate 
transmission grid under the same rules. The same open access 
tariff should apply to wholesale transmission transactions and 
to both bundled and unbundled retail transmission.
    We have submitted legislative language with my testimony 
today to treat all transmission lines the same, whether they 
are used for bundled or unbundled retail sales.
    Let me explain and emphasize this is not back-door customer 
choice. The text of the amendment makes it very clear FERC does 
not have any authority to require customer choice. That choice 
would remain with the States.
    The amendment addresses two other issues we believe are 
also critical. First, it would require all uses of the 
transmission system to be under the same open access tariff. 
Utilities would be required to take service under an Order 888 
type tariff just like everyone else. That is not the case 
today.
    Second, it would require utilities to separate their 
transmission and electric sales functions.
    This approach is not some wild idea that we dreamed up 
overnight. It is the same approach that FERC applies now for 
natural gas pipelines.
    Order 636 put all shippers under the same tariff and 
required pipelines to separate their transmission and sales 
functions. It works.
    The proposal dovetails with the reliability section of the 
bill. Frankly, I cannot reconcile the reliability section with 
the provisions in section 101 that limit FERC's authority over 
transmission lines.
    Nothing is more critical to the Nation's economic well-
being than a reliable power supply. This is a classic 
interstate commerce issue.
    Individual States cannot guarantee reliability of the 
interstate grid. FERC must have the authority to do so.
    We urge the subcommittee members to take an evenhanded 
approach to writing this vitally important piece of 
legislation. We support restructuring legislation that will 
address these anachronistic laws such as PUHCA and PURPA, 
provided that new mechanisms are put in place to encourage open 
competitive markets.
    Thank you for allowing AAE to testify.
    [The prepared statement of Elizabeth Anne Moler follows:]
 Prepared Statement of Elizabeth Anne Moler on Behalf of the Americans 
                       for Affordable Electricity
    Mr. Chairman and Members of the Subcommittee: It is an honor to 
appear before you today. My name is Elizabeth Anne Moler. I am a 
partner in the law firm of Vinson & Elkins, L.L.P. I am testifying 
today on behalf of Americans for Affordable Electricity, or AAE. AAE 
represents over 260 member organizations; their common bond is support 
of more competitive electricity markets. The diverse coalition includes 
commercial, residential and industrial energy consumers, utility and 
non-utility generators, power marketers, other energy providers, 
citizens groups, school administrators, and others.
    We appreciate the opportunity to testify on H.R. 2944, Chairman 
Barton's recently introduced Electricity Competition and Reliability 
Act.
    AAE believes there is an urgent need for Congress to enact 
legislation to modernize the laws governing this Nation's electricity 
business. Much has changed since 1992 when Congress passd the Energy 
Policy Act. Since then, events in the marketplace, and actions 
undertaken by both Federal and State regulators have partially reshaped 
this vital industry. Now inaction by the Congress is frustrating 
further progress toward an even more reliable, efficient, competitve 
industry for our Nation. Many of the laws currently on the books are 
impeding progress toward a more competitive electricity marketplace.
    AAE supports customer choice. We favor legislation that would give 
all customers the right to choose their electricity supplier by a date 
certain. Since Chairman Bliley took customer choice ``off the table'' 
as a legislative priority for this Congress, we have turned our focus 
to improvements in the wholesale electricity marketplace that will 
further competition. Most of my testimony today focuses on wholesale 
issues. However, I want to reiterate our support for customer choice as 
well as legislation that would give all customers the right to 
aggregate their electricity purchases whether or not they are located 
in states that provide customer choice.
    We believe that H.R. 2944 is a well intentioned piece of 
legislation. However, we do not support enacting it in its current form 
because we believe it will serve to inhibit competition rather than 
promote it. In the brief time I have today, I want to focus on one 
aspect of H.R. 2944 that is particularly troublesome. Section 101 
purports to ``clarify'' the respective role of federal and state 
jurisdiction. But in doing so it erects new barriers to competition. We 
need to have all transmission under one set of rules. And we need to 
separate the transmission function from the sales function in order to 
make electricity markets more open and competitive. Let me explain.
    Section 101 would clarify that the Federal Energy Regulatory 
Commission (FERC) has authority over ``unbundled transmission of 
electric energy sold at retail'' while state regulatory authorities 
have authority over ``any bundled retail sale of eletric energy, to any 
local distribution service component of any unbundled retail sale of 
electric energy, or to any retail sale component of any unbundled 
retail sale of electric energy''.
    What would this mean in the real world? You would have a crazyquilt 
of jurisdictional lines where FERC would have authority over 
transmission lines in states that have adopted customer choice, while 
the state regulators would have authority over exactly the same type of 
facilities in states that have not adopted customer choice. Virginia, 
for example, has adopted customer choice legislation while West 
Virginia has not. The Virginia transmission lines would be subject to 
Federal regulation while the West Virginia lines would not. It would 
make more sense to have all transmission lines that are part of the 
interstate network be under FERC's jurisdiction and subject to the same 
type of open access requirements. Split jurisdiction over the 
interstate grid just doesn't make sense.
    Frankly this crazyquilt exists today and is causing significant 
problems in wholesale markets. FERC Order No. 888, issued in April, 
1996, required utilities to ``open up'' their transmission lines. They 
were required to file open access transmission tariffs and to take 
transmission service for their own new wholesale sales under the 
tariff. The Commission determined that it had jurisdiction over so-
called ``unbundled'' transmission in interstate commerce by public 
utilities. Thus, in states that have adopted customer choice, the use 
of transmission facilities to serve retail customers is under FERC's 
jurisdiction. However, the same type of facility use is not under 
FERC's jurisdiction in states that have not adopted customer choice. 
(The Commission's determination that it lacked jurisdiction over the 
transmission aspects of bundled retail sales is being challenged 
today--3\1/2\ years later--in the Order No. 888 litigation that is 
before the D.C. Circuit.) Based upon our experience since Order No. 888 
went into effect, AAE firmly believes that we need to put all uses of 
the interstate transmission grid under the same rules. The same open 
access transmission tariff should apply to wholesale transmission 
transactions, and to both bundled and unbundled retail transmission.
    We are submitting an amendment as an attachment to my testimony 
that would treat all transmission lines the same, whether they are used 
for bundled or unbundled sales. Let me emphasize that this is not 
``back door'' customer choice. The text of the amendment makes it very 
clear that FERC does not have any authority to require customer choice; 
that choice would remain with the states.
    The amendment addresses two other issues that we also believe are 
critical. First, it would require all users of the transmission system 
to be under the same open access transmission tariff. Utilities would 
be required to take service under an Order No. 888-type tariff, just 
like everyone else. Second, it would require utilities to separate 
their transmission and sales functions.
    This approach is not some wild idea that we thought up overnight. 
It is the same approach that FERC uses for natural gas pipelines. Order 
No. 636 put all shippers under the same tariff, and required the 
pipelines to separate their transmission and sales functions. It works. 
States still have the authority to determine whether to adopt customer 
choice; some have while others have not. The natural gas marketplace is 
truly open and competitive. Congress should ensure that electricity 
markets are equally efficient and competitive.
    This proposal will also enhance the usefulness and effectiveness of 
other provisions in H.R. 2944. This is particularly true for the 
reliability section. Title II gives FERC jurisdiction over a new 
electric reliability organization. The reliability organization is 
charged with the responsibility of developing binding reliability 
``organization standards'' for the ``bulk-power system''.
    Frankly, I cannot reconcile the reliability section with the 
provisions in Section 101 that limit FERC's authority over transmission 
lines. Nothing is more critical to the Nation's economic well being 
than a reliable power supply. This is a classic ``interstate commerce'' 
issue. Individual states cannot guarantee reliability of the interstate 
grid; FERC must have the authority to do so.
    Section 103 requires all transmitting utilities to join a Regional 
Transmission Organization (RTO). AAE has not taken a position on this 
particular proposal. However, RTOs will be much more effective if FERC 
has authority over all transmission lines, not just those used for 
wholesale transactions and unbundled retail transactions.
    The aggregation issue is also important. In the absence of a date 
certain for customer choice, AAE advocates allowing customers in both 
``open'' and ``closed'' states to aggregate their purchases. The ABC 
grocery store chain, or the RAH RAH university alliance, should be able 
to aggregate their purchasing power to purchase electricity for 
multiple locations in multiple states. Without such a provision millons 
of residential and commercial customers will be unable to enjoy the 
benefits that competition will bring and H.R. 2944 should provide.
    AAE supports legislation that will address these vitally important 
transmission market power issues. Our July 22 testimony addressed 
PUHCA, PURPA, grid management and reliability. Our position on those 
issues remains the same.
    We urge the Subcommittee Members to take an even-handed approach to 
writing this vitally important piece of legislation. We support 
restructuring legislation that will address anachronistic laws, such as 
PUHCA and PURPA, provided that new mechanisms are put in place that 
encourage open, competitive markets.
    Thank you for allowing AAE to testify.

    Mr. Barton. You are very welcome. We are just delighted 
that you testified, and we liked your testimony, actually. Do 
not agree with it all, but we liked the way you gave it.
    We are going to hear from Mr. Mark Cooper, who is director 
of research with the Consumer Federation of America.

                   STATEMENT OF MARK N. COOPER

    Mr. Cooper. Thank you, Mr. Chairman. And I also speak today 
on behalf of Consumers Union, who has signed onto our 
testimony.
    With well over half the electricity in this Nation sold in 
States that have restructured their industry, consumers' 
electricity bills will be increasingly determined by the actual 
performance of markets. Unfortunately, the promise of lower 
prices and more choices at the State level is being undermined 
by the failure of the interstate market to support effective 
competition.
    Only Federal authorities can order and oversee the 
interstate market, we believe, according to seven principles. 
We fear that the legislation before the committee will 
deregulate the industry without de-monopolizing it. Unless 
amendments are made, it will make matters worse, not better, 
because consumers will be denied the benefits of competition 
while they are subject to abuse of market power by incumbent 
utilities who are no longer restrained by regulation.
    The seven principles are straightforward, and I will 
deliver these in seven sentences, because they are simple 
amendments.
    Federal legislation should make a clear commitment to 
universal service, defined as the availability to all Americans 
of electricity services at rates that are just, reasonable and 
affordable.
    Market power and generation must be eliminated. Federal 
authorities must ensure that generation markets are free of the 
exercise of market power. Simply put, antitrust authorities, 
who already have broad powers to oversee these markets, should 
make an affirmative finding that the market is competitive, 
workably competitive, before they are deregulated. Simple 
finding.
    Third, open highways of commerce are necessary. The 
authority of the Federal Energy Regulatory Commission to 
require the national grid be operated in a reliable and open 
manner must be clarified and sharpened. All utilities should be 
required to participate in transmission organizations that have 
no interest in generation or energy service markets and include 
representatives of all customer classes.
    Fourth, residential consumer sovereignty must be promoted. 
Federal legislation should require States to facilitate 
aggregation. At the very least, it should require that no State 
or local statute prohibit or hinder consumers from aggregating 
their purchase of electricity to all types of organizations, 
including cooperatives and units of local government.
    Fifth, all consumers should benefit from competition. No 
utility should have the opportunity to enjoy the benefits of 
competition outside of its service territory until consumers 
within its service territory also have the benefits of 
competition. Before a company enjoys the benefits of being 
provided relief from Federal regulations, at home it should 
ensure that its own markets are open to competition. 
Competition is the replacement for regulation.
    Sixth, financial transactions must be sound. Basic 
oversight has to be applied to financial transactions and 
commodity markets on a national basis, such as certification 
and licensing of brokers, and establishment of margin 
requirements, which should be imposed on electricity as a 
commodity, which is, in fact, a very, very special and precious 
commodity.
    Seven, electricity restructuring should not result in any 
degradation in environmental quality. Congress should ensure 
that performance standards, portfolio requirements, whatever 
instruments you prefer should be available to ensure that, as a 
result of the increase in production from certain facilities, 
there is no resulting degradation in the environment.
    Those are seven principles. I believe we can state those 
very, very clearly and specifically, and that is the way we 
think the interstate market should be----
    Mr. Barton. It was more than seven sentences though. I lost 
count at about 20. But they were seven principles.
    Continue with your statement.
    Is it concluded?
    Mr. Cooper. Thank you, Mr. Chairman.
    [The prepared statement of Mark N. Cooper follows:]
 Prepared Statement of Mark N. Cooper on Behalf of Consumer Federation 
                     of America and Consumers Union
    Mr. Chairman and Members of the Committee, my name is Dr. Mark N. 
Cooper. I am Director of Research at the Consumer Federation of 
America. I appreciate the opportunity to appear before you today to 
offer our views on federal legislation to restructure interstate 
electricity markets. Consumers Union joins in these views.1
---------------------------------------------------------------------------
    \1\ Consumer Federation of America is the nation's largest consumer 
advocacy group, founded in 1968. Composed of over 250 state and local 
affiliates representing consumer, senior citizen, low-income, labor, 
farm, public power, and cooperative organizations, CFA's purpose is to 
represent consumer interests before the congress and the federal 
agencies and to assist its state and local members in their activities 
in their local jurisdictions.
    Consumers Union is a nonprofit membership organization chartered in 
1936 under the laws of the State of New York to provide consumers with 
information, education and counsel about goods, services, health, and 
personal finance; and to initiate and cooperate with individual and 
group efforts to maintain and enhance the quality of life for 
consumers. Consumer's Union's income is solely derived from Sale of 
Consumer Reports, its other publications and from noncommercial 
contributions, grants and fees.
---------------------------------------------------------------------------
 legislation is necessary to ensure effectively competitive interstate 
                                markets
    With well over half the electricity in the nation sold in states 
that have restructured their industries, consumers' electricity bills 
will be increasingly determined by the actual performance of 
electricity markets. This unparalleled transition for an industry that 
is so vital to the national economy and has such a large impact on 
consumer pocketbooks must be made to result in a market that will truly 
benefit American consumers. Unfortunately, the promise of lower prices 
and more choices at the state level is being undermined by the failure 
of the interstate market to support effective competition.
    In order for any market to function properly there must be an 
effective supply-side, an effective demand side, and open highways of 
commerce in between so that transactions can take place. The interstate 
market is failing consumers and competitors in all three areas. These 
market failures allow incumbent utilities to preserve their monopoly 
and frustrate the flow of competitive electricity.
    The objective of restructuring is to replace traditional regulation 
with market forces. In many instances, however, consumers have been 
hurt because regulation has been removed before market competition 
exists. The result has been the unfettered exercise of market power. 
Evidence of the abuse of market power in interstate markets is 
abundant. Electricity has been withheld from markets to inflate prices. 
Electricity has been hampered from flowing across state borders by 
self-interested foreclosure of transmission facilities. Manipulation of 
financial transactions and speculative deals have driven prices far 
above reasonable levels at critical moments. Barriers have been erected 
by some states that prevent consumers from effectively expressing their 
demands in the marketplace.
    Federal legislation is critically necessary to correct this series 
of dramatic failures. Only federal authorities can order and oversee 
the interstate market. The market must be restructured according to 
seven principles.

 A commitment to universal service
 Elimination of market power in generation
 A reliable national grid operated on principles of non-
        discrimination
 Meaningful choice for residential consumers
 Equal opportunity all consumers to benefit from competition
 Sound financial transactions
 Environmental preservation
             universal service must be ensured and enhanced
    The ultimate goal of restructuring in the electric utility industry 
should be to ensure and promote universal service in a more efficient 
manner than at present. Affordable and reliable service to the public 
is the ultimate goal; competition is the means to that end. Federal 
legislation should make a clear commitment to universal service defined 
as the availability to all Americans of a reasonable level of 
electricity service at rates that are just, reasonable and affordable.
             market power in generation must be eliminated
    As the transition to competitive markets begins, incumbent 
utilities still dominate the generation market in many areas and at 
critical peak periods when supplies can become extremely tight. Federal 
authorities must ensure that the generation market is competitive and 
free from the exercise of market power. Antitrust authorities have 
broad powers to prevent the abuse of market power. The Federal Trade 
Commission should be required to make an affirmative finding that 
markets are workably competitive before federal regulatory authority is 
relaxed.
                open highways of commerce are necessary
    At this point in time, many incumbent utilities still own 
generation and the transmission system, which provides opportunities 
for vertically integrated monopolies to use their market power in 
transmission to foreclose others from competing in the generation 
market. Separating ownership of generation from transmission and 
distribution is the best method of preventing abuses. Independent 
operation and control over the transmission network is necessary to 
ensure reliability and open, non-discriminatory access to the 
transmission system for all parties.
    The authority of the Federal Energy Regulatory Commission to 
require the national electricity gird to operate in a reliable and open 
manner needs to be clarified and sharpened. All utilities should be 
required to participate in transmission organizations that have no 
interest in generation or energy service markets and include 
representatives of all customer classes on the governing board. The 
infrastructure for the market must be competitively neutral and 
operated as a common carrier. The boundaries for these transmission 
organizations should be dictated by the scope of regional markets of 
sufficient scale to promote competition.
            residential consumer sovereignty must be created
    In order for consumers to have the opportunity to benefit from the 
competitive marketplace for electricity they must have the ability to 
make informed choices. Aggregation is crucial to creating an 
alternative for residential consumers; education is crucial to 
effective choice.
    Federal legislation should require states to facilitate 
aggregation; at the very least, it should require that no state or 
local statute should prohibit or hinder consumers from aggregating 
their purchases of electricity. Therefore, federal legislation should 
require that no state or local statute or regulation or other state or 
local legal requirement prohibit or have the effect of prohibiting the 
ability of consumers to aggregate their demand through all types of 
organizations including cooperatives and units of local government.
    Instrumental in the ability of consumers to benefit from a 
competitive market is the ability to make informed choices. Information 
must be provided in a readily understandable manner that allows 
consumers to make comparisons between sellers in terms of price, terms 
and conditions (such as fees, contract terms and minimum payments), the 
services that are being provided and the type of electricity that is 
being used. Post-purchase remedies must be facilitated by clear 
identification of the seller, provision of a toll-free telephone number 
and policies to prevent abusive marketing practices, such as slamming, 
cramming and the bundling of regulated and unregulated services.
equal opportunity for all consumers to benefit from competition must be 
                                provided
    No utility should have the opportunity to enjoy the benefits of 
competing outside of its service territory until the consumers within 
its service territory have the opportunity to benefit from competition.
    Before a company may enjoy the benefits of being provided relief 
from regulations intended to promote the public interest, such as PURPA 
and PUHCA, there should be a showing that the generation market in 
which they are based is competitive. If they are not subject to 
competition at home, the potential abuses that these statutes were 
intended to prevent remain a threat to consumers.
                  financial transactions must be sound
    Markets must have confidence in the financial transactions that 
trigger the exchange of goods and services. The electricity market has 
been plagued by defaults, questionable deals (daisy chains) and 
misleading transactions. Prices have not been transparent. Terms and 
conditions have been unclear. Electricity is unlike most other 
commodities in that it cannot be stored and moves according to unique 
physical laws. When financial transactions break down, the electricity 
market can be severely disrupted.
    The basic oversight that is applied to financial and commodity 
markets--such as certification, licensing and bonding of sellers, 
establishment of margin requirements, regulation of financial 
instruments and disclosure of transactions, publication of prices, 
etc.--should be applied to the electricity commodity market by an 
existing federal financial agency. A study of additional steps 
necessary to ensure the smooth functioning of the electricity market 
should be conducted.
                       environmental preservation
    Electricity restructuring should not result in any degradation in 
environmental quality. Reliance on market forces may increase the use 
of generation resources that do not directly bear the full cost of the 
environmental burden they place on society (i.e. they impose negative 
external environmental costs). Congress should ensure, through 
performance standards, portfolio requirements, credit trading, or 
direct funding that environmental quality is preserved and improved.

    Mr. Barton. Okay. Thank you.
    We want to now hear from Mr. Marty Kanner, who is the 
coalition coordinator for the CS for Fair Competition, which is 
different than the Americans for Affordable Electricity. See, 
we have all these good groups here before us today.
    So we will put your statement in the record and encourage 
you to summarize it in 6 minutes, please, sir.

                    STATEMENT OF MARTY KANNER

    Mr. Kanner. Certainly, Mr. Chairman. And, if nothing else, 
your efforts have fostered a plethora of organizations, 
coalitions, and initials.
    I would like to start my testimony, Mr. Chairman, with the 
concluding statement from the executive summary of EEI's 
testimony. ``As long as consumers have a choice of suppliers 
and no company can manipulate prices or shut out other 
competitors, consumers will find the best combination of prices 
and services to meet their needs.'' Mr. Chairman, I could not 
agree more strongly that that is exactly the end state that we 
seek to achieve. The difference, however, is quite sharp.
    Edison Electric Institute and their members and many of 
their members and allies would argue that we simply step away 
and let the markets take care of themselves. I think we would 
all agree that the financial markets--the New York Stock 
Exchange is one of the best examples of free markets anywhere 
in the world, but I do not think we would say that Morgan 
Stanley, Michael Milken, and the Bass brothers should be able 
to regulate the system on their own; that we need the SEC as an 
oversight agency to ensure there is not market manipulation, 
consumer and investor abuse, or other things antithetical to 
that competitive end state that we seek to achieve.
    A number of you have asked important questions that I would 
like to answer.
    Mr. Shimkus asked whether RTOs can mitigate horizontal 
market power, and the answer, Mr. Chairman, is absolutely yes, 
but we need to make sure that those RTOs, in fact, are 
independent, have clear and robust authorities, and are of 
geographic scope that achieves the desired aim.
    Mr. Chairman, the provisions in your bill I believe do not 
achieve that objective, because they allow the transmission 
owners to continue to set the rules of the market and do not 
have that independent authority to look at it and say, ``No, 
not good enough.'' And then, second, as a number of witnesses 
have suggested, even if we create the perfect RTO, if we remove 
from the jurisdiction of those facilities a vast share of the 
transmission lines in the country, then we do not have that 
open highway of commerce that most of us believe is necessary.
    Another question was whether there are examples of 
generation market power. The answers are clearly yes. In 
California, where they have opened retail markets, after doing 
so and where, Mr. Chairman, as you noted, generation assets 
were divested, you had substantial price increases, you had the 
State-created ISO and State-created power exchange, as well as 
the investor-owned utilities that used to own the generation go 
to the Federal Energy Regulatory Commission and say, ``There is 
an exercise of generation market power.'' The State, itself, 
had no authority to control and regulate those price spikes, 
and, had there not been price caps in place, consumers would 
have seen a doubling of their monthly electric bills.
    Those are the sorts of examples we want to avoid, not 
institutionalize.
    You asked, Mr. Chairman, if States can do it alone, and you 
noted that a number of States have required asset divestiture. 
While that is true, I note that in the main the objective in 
those divestiture examples was to create evaluation for 
stranded cost recovery, not to address market power.
    The effect was that assets were bundled and you just 
changed the name of the owner. You still had the same 
concentration levels in those relevant power markets. We did 
not divvy up the pie, if you will.
    One important exception, however, is your State of Texas, 
where they expressly said, ``We want to make sure that we have 
competitive generation markets,'' and created some mechanisms 
that I believe form a very workable model at the national 
level, that we say we want to make sure the generation markets 
are competitive.
    Have the utilities file their own mitigation plans, and 
then have an impartial third party look over those and 
determine whether they are acceptable or not.
    Mr. Chairman, I would encourage you to provide for all 
consumers the competitive benefits and choices that it looks 
like consumers in Texas will be able to have.
    Mr. Chairman, as it has been noted by several witnesses, we 
need legislation. The current market is not properly 
functioning, and those retail markets that have opened up won't 
realize the benefits that those States tried to create if we do 
not, in fact, have a competitive market structure.
    Consumers for Fair Competition has put together model 
legislation to address these issues. We would encourage you and 
your staff to review those and work cooperatively with us and 
the members of the committee to make sure that the intended 
benefits of a competitive market are, in fact, realized.
    [The prepared statement of Marty Kanner follows:]
  Prepared Statement of Marty Kanner on Behalf of Consumers for Fair 
                              Competition
    Mr. Chairman, Members of the Subcommittee, I am Marty Kanner. I am 
testifying today on behalf of Consumers for Fair Competition (CFC), a 
coalition of small business interests, power marketers, consumer and 
investor owned utilities, small and large electric consumer 
representatives and environmentalists. Chairman Bliley has repeatedly 
called for putting consumers front and center in the restructuring 
debate, and the members of CFC want Congress to pass legislation that 
will enable electric consumers to realize the benefits of competition. 
As underscored by a recent letter sent to Congress by more than 100 
organizations, which I have attached to my testimony, legislative 
action is imperative to correct the significant failures in the 
wholesale electric market and create the open highway of commerce 
needed for state retail competition efforts to succeed.
    As I have testified before, this is not an infant industry in which 
business success is decided by innovation, entrepreneurial prowess and 
efficiency. We are attempting to restructure an industry of government-
sanctioned monopolies that control the vast majority of generation, 
transmission and distribution facilities and associated customer 
information. Despite the Energy Policy Act and other efforts to infuse 
competition in the wholesale market, the reality is that there is not 
robust competition in the market today:

 System constraints and market manipulation have caused wild 
        price volatility and price spikes that--had retail consumers 
        not been insulated by price caps--would have led to outrageous 
        electric bills and an outcry for action;
 Large, vertically-integrated utilities have a chokehold on the 
        transmission system and all users and uses of the grid don't 
        operate under the same tariff;
 Many regional power markets are dominated by a single or small 
        handful of players, that can dictate prices and shut out 
        competitors;
 The continuing wave of utility mergers are likely to 
        accelerate this consolidation; and
 Utilities continue to leverage ratepayer-provided funds and 
        resources to enter new business lines through unregulated 
        affiliates that compete unfairly with small and large 
        businesses.
    As CFC has previously testified before this subcommittee, Congress 
must pass legislation to achieve a market in which these structural 
flaws are remedied so that consumers have many choices, competitors are 
not unfairly disadvantaged, and competitive market forces prevent 
consumer abuse and market manipulation.
    H.R. 2944, if enacted in its current form, would not create the 
vibrant competitive market that consumers want and need. In fact, it 
would be a step backward.
Transmission
    The nation's transmission grid is the highway of commerce. Even in 
the states that have adopted retail competition, consumers won't be 
able to effectively choose among suppliers if those suppliers cannot 
gain access to the market. Despite the progress made in the Energy 
Policy Act of 1992, the transmission network remains a two-class 
system, with transmission owners granting themselves first-class 
service while competitors are relegated to the end of the line. All 
users of the transmission grid must operate under the same tariff and 
have the same tariff choices.
    Today, each utility's transmission network, despite a certain 
amount of reliability coordination, is operated largely as if it were 
an isolated island. This unnecessarily constrains and contracts 
markets. By acting in their own self-interest, owners can:

 reserve the majority of transmission capacity for their own 
        use (which use is not effectively subject to FERC comparability 
        standards);
 hide retail and wholesale charges in bundled rates and create 
        a lack of transparency in the transmission market;
 operate the system to favor its own (or affiliates') wholesale 
        or retail marketing function,
 take actions ostensibly for reliability purposes--such as 
        congestion management and emergency curtailment procedures--in 
        a discriminatory and anti-competitive manner,
 impede the development of and sales by competing power 
        suppliers; and
 fail to make transmission investments that would alleviate 
        congestion and promote the competitive market.
    Provisions in Section 101 of H.R. 2944 erode existing transmission 
access standards and drastically reduce the amount of transmission that 
would even be part of the interstate grid. A recent decision in the 8th 
Circuit has crippled FERC's vaunted ``comparability'' standard. Section 
101 would codify this decision by granting the states exclusive 
jurisdiction over bundled transmission service. Such action effectively 
limits application of open access policies to the 10-15 percent of 
transmission capacity that are surplus to a utility's own needs.
    The impact of this provision on bundled transmission service is 
compounded by subsection (h) which facilitates the reclassification of 
transmission facilities as distribution--outside the scope of 
comparability requirements. Such reclassification can also result in 
discriminatory cost-shifting to entities receiving service on these 
reclassified lines.
    Combined, these provisions dramatically shrink the transmission 
network and cripple interstate commerce. It would be like allowing 
parts of the interstate highway system to be reclassified as county 
roads that then have toll gates erected. If these provisions are not 
changed, even the most robust RTO provision would not create the open 
system needed for competitive electricity markets.
    Unfortunately, H.R. 2944 does not advance effective RTOs.
    CFC believes that control of the nation's transmission system must 
be transferred to truly independent bodies that encompass the broadest 
geographic regions and have strong authority to operate, plan, maintain 
and expand the transmission system. Such entities must provide for the 
functional separation of the monopoly transmission and market 
functions. It is imperative that all users of the system have equal, 
and non-discriminatory access to the nation's grid.
    The provisions of section 103 do not break the utility stranglehold 
on the transmission system nor foster the open markets that must be 
achieved:

 Utilities are allowed to structure RTOs to serve their own 
        interests rather than having an independent referee promote 
        RTOs based on the interests of the market. Section 103 fosters 
        a ``take it or leave it'' approach. While utilities are 
        required to establish or join an RTO and the FERC is given 
        standards by which to judge these filings, the Commission 
        cannot require formation of or participation in an RTO if the 
        filing fails to meet the standards. Thus, utilities could file 
        inadequate RTOs and FERC is left with the choice of accepting 
        ``half a loaf'' or rejecting the filing and retaining the 
        flawed status quo.
 The bill doesn't foster true independence. By allowing 10 
        percent voting interests to pass the ``independence'' test, a 
        small handful of utilities within an RTO can hold a majority of 
        the voting interests. This is hardly a separation of the 
        ownership and control of transmission and generation and 
        creates a loophole that guts the underlying purpose of the RTO.
 Bill encourages, small, numerous RTOs. H.R. 2944 encourages 
        smaller, more numerous RTOs that will encourage ``pancaking'' 
        rates and increase costs for consumers.
 RTOs would become an exclusive club. The provision allows 
        transmission owners to shut out new market entrants, end-users 
        and transmission dependent utilities from the RTO process.
 The RTOs responsibilities are limited--we cannot allow 
        monopolists to set the rules of the market. The provision 
        allows RTOs that have no meaningful authority, simply 
        administering rules and procedures established by the 
        transmission owners. The provision fails to provide authority 
        over associated generation that is essential for transmission 
        regulation. Moreover, the bill is silent on which entity--the 
        RTO or the transmission owner--will calculate available 
        transmission capacity and reserve requirements and implement 
        curtailment and reliability procedures.
 Transmission incentives send the wrong signal. Cost based 
        pricing is the proper norm for monopoly services. We do not 
        believe that incentive rates are needed or appropriate to 
        induce formation of RTOs, eliminate rate pancaking, or minimize 
        cost-shifting. The failure to invest in transmission has more 
        to do with the strategic and financial value in sustaining 
        transmission bottlenecks than the lack of ``incentives''. While 
        congestion pricing can be used to reflect true transaction 
        costs and encourage new investment, utilities should not be 
        rewarded for providing an essential, monopoly service. 
        Transmission incentives are not needed.
    Failure to provide an open highway of commerce, in which all users 
operate under the same tariff and have the same tariff choices, will 
raise rates, frustrate competition and lead to the further 
balkanization of the system.
Market Concentration
    In the electric generation market, market boundaries are determined 
largely by transmission constraints--physical limitations on transfer 
capabilities. Within these boundaries, it is common for an incumbent 
utility to own more than 40 percent of the generating capacity. At this 
level of concentration, economists recognize that the dominant firm can 
set and control prices above what would occur in a truly competitive 
market.
    Despite a significant increase over the past few years in the 
construction of non-utility generation, such facilities still represent 
a comparatively small fraction of total generation. Moreover, potential 
developers of such facilities often face a diverse set of entry 
barriers. For example, incumbent utilities displace competitors in the 
queue to connect new power plants to the grid. They also own the prime 
sites for future plant location (often adjacent to existing plants). In 
addition, in many states, only utilities themselves can request and 
receive the necessary regulatory permits. Even if new, independent 
plants can be built, it will be years--and there will need to be 
considerable growth in demand--before competitive suppliers will break 
the lock of the dominant player and markets will begin to operate 
competitively.
    CFC supports the provisions of the DeLay-Markey bill of last 
Congress, which grants FERC affirmative authority to investigate and 
remedy undue concentration, as an effective means for addressing this 
problem. Alternately, Mr. Chairman, your state of Texas adopted 
provisions that provide a workable model for federal legislation. We 
would encourage you to provide consumers throughout the nation the same 
assurances of competitive generation markets that Texans will enjoy.
    In addition, Congress must eliminate discriminatory standards for 
interconnection with the grid. We cannot allow utilities to advantage 
their own generation projects to the detriment of new market entrants.
Mergers
    The various procedural limitations on merger review established by 
H.R. 2944 effectively eliminate meaningful review.
    There are certainly potential utility mergers that do not warrant 
timely and extensive review. However, for many mergers, the time limits 
and elimination of hearings and cross-examination will severely limit 
the ability to analyze the competitive impact of the proposed merger. 
While there are time limits under the anti-trust laws in merger 
reviews, I would highlight that those same laws have robust data filing 
and discovery requirements.
    We would urge you to delete the procedural limits in H.R. 2944. If 
the merger review process is to be truncated, then data filing and 
discovery requirements analogous to that which exists under the anti-
trust laws must be established.
Affiliate Transactions
    By straddling regulated and unregulated markets, utilities can 
cross-subsidized their competitive, unregulated activities with 
revenues and resources provided by captive ratepayers. Not only do such 
actions harm consumers, they harm the countless small and large 
businesses that the utilities unfairly compete against.
    The information disclosure and consumer privacy provisions of H.R. 
2944 are important steps in addressing some of the underlying problems 
in affiliate transactions. However, more is needed. While state 
commissions can review and regulate the practices of utility affiliates 
providing energy services, they are unlikely--or often unable--to 
review the activities of utility affiliates in energy related 
enterprises targeting residential and commercial markets for 
electrical, mechanical, air conditioning and heating and fuel supply 
markets. State Commissions already act on behalf of consumers. Now they 
need the direction and authority to act on behalf of existing 
competitors in a deregulated retail energy market.
    Congress recognized the need to prevent anti-competitive cross-
subsidization in the 1996 Telecommunications Act. Congress should not 
set a lower standard of fair competition for the energy market than it 
did for the telecommunications market. CFC urges Congress to prohibit 
cross-subsidization, adopt model structural and behavioral standards 
for state commissions and establish a cause of action for abusive 
affiliate practices. We believe the limitation on books and records 
under the PUHCA provisions are a step in the wrong direction.
Conclusion
    The current system is not working, and action is needed to correct 
market deficiencies and promote competition.
    Congress must make a clear choice: advance the interests of 
monopolists, or the interests of consumers and competition. These are 
not issues that can be balanced or compromised. In order to achieve the 
benefits of competition, we must eliminate the anti-competitive 
vestiges of the old, regulatory system.
    Mr. Chairman, we appreciate your openness to improving amendments 
and look forward to working with you and the members of the Committee 
to develop a bill that advances a competitive electric marketplace.

    Mr. Barton. Thank you, Mr. Kanner.
    We would now like to hear from Mr. Richard Cowart, who is 
the director of the Regulatory Assistance Project.
    Mr. Cowart?

                 STATEMENT OF RICHARD H. COWART

    Mr. Cowart. Thank you, Mr. Chairman.
    I guess I should emphasize that I speak today as someone 
who for 12 years sat as the Chair of a State Public Utility 
Commission, and my views are my own.
    As is obvious to the members of the committee, the subject 
of electric restructuring is no longer a theoretical one. The 
States have clearly been the laboratories of democracy in this 
transformation, and the good news now is that Congress can 
learn from what has been going on throughout the Nation.
    A review of this bill reveals that much has been learned 
from the policy debates and experiences of the States.
    Provisions in the bill on consumer protection, electric 
product disclosure, net metering, and a number of the 
transmission and reliability provisions are commendable. In 
other areas, though, it seems that key lessons from recent 
experiences around the country are not being dealt with in 
Congress.
    In particular, the draft bill does not adequately address 
the challenges we now face in maintaining environmental 
quality, universal service, and electric system reliability. 
And in my short time with you today I am going to focus on 
reliability.
    We know that this is the most important goal of the 
American electric system. Customer polls consistently reveal 
that keeping the lights on reliably is the top priority that 
people have for the electric system, and it is the No. 1 
concern that they have about industry restructuring.
    In recent months, it has become clear that the reliability 
of the Nation's electric system is under great strain. Outages, 
power warnings, price spikes, rolling brownouts--I think you 
know the litany of events that have occurred in all regions of 
the country over the past 2 or 3 years, and particularly during 
the summer peak periods.
    The North American Electric Reliability Council, which 
likes to speak quietly on such things, is starting to warn that 
we face a real reliability problem, and I heard Mr. Nevius say 
this morning that we need reliability legislation now.
    The common response to the events that we are discussing 
here has been a call for more construction of more energy 
supply facilities--90,000 megawatts, 100,000 megawatts, 120,000 
megawatts of new generation is often called for--along with the 
accompanying gas pipeline capacity and electric transmission 
capacity to serve this growth in output and throughput.
    But there really are three elements to the equation, and 
the bill only deals with two of them. The three elements are: 
generation, transmission, and end uses. We need to focus for a 
moment on the end use issues.
    The reliability problem that we now face is, in large 
measure, the result of rapid load growth over the past decade, 
coupled with a serious falling off in efficiency and demand 
side management measures by the Nation's utilities.
    According to the EIA, electric consumption grew by 31 
percent over the past decade. In the critical summer peak 
period, growth has even been more dramatic--a 56,000 megawatt 
increase between 1993 and 1997, alone.
    This is the electrical equivalent of adding the entire six-
State region of New England to the Nation's peak demand every 
18 months, and that process is continuing.
    Unfortunately, while this demand has been rising, utilities 
have been dramatically reducing their investments and their 
achievements in cost-effective energy efficiency and demand 
side management programs.
    And we should pause for a moment to remind ourselves that 
these utility efficiency programs have, in fact, been very 
successful.
    In the early 1990's, energy savings were rising annually at 
double-digit rates, costs of power reduction averaged 2.1 cents 
per kilowatt hour, and peak load reductions of up to 29,000 
megawatts were attained.
    But with the advent of competition all this has turned down 
sharply. Total utility spending on demand side management and 
achievements in this area have dropped in half, and the 
achievements that were expected to be attained by now have also 
been dropped in half.
    Utilities in 1993 expected that we would be now able to 
clip our peak demand by 55,000 megawatts. That has been reduced 
to 25,000, leaving an efficiency gap of about 30,000 megawatts.
    Just imagine for a moment what an extra 30,000 megawatts of 
non-polluting----
    Mr. Barton. Mr. Cowart, would you suspend? We are not going 
to take this away from your time. I would just make an 
announcement to the subcommittee. I am told we have three 15-
minute votes, and I count three more witnesses after Mr. Cowart 
at 6 minutes each. That is 18 minutes.
    So at the conclusion of Mr. Cowart's testimony we are just 
going to put a little firewall right there between Mr. Cowart 
and Mr. Smith and take a lunch break and we will reconvene at 
1:30. But we are going to finish with Mr. Cowart, take a break, 
come back at 1:30. Every member of the audience has to be back 
in the same seat at 1:30, and then we will hear from Mr. Smith, 
Mr. Casten, and Mr. Segal.
    Continue, Mr. Cowart.
    Mr. Cowart. All right. Thank you.
    Imagine what an extra 30,000 megawatts of non-polluting 
capacity could have achieved to forestall the blackouts and 
power outages that we have been seeing over the past couple of 
summers.
    The potential for energy efficiency investments in this 
country is by no means exhausted, and the good news is that it 
would save a lot of money, it would leave a lot of money in the 
pockets of American households and at the bottom lines of 
American businesses.
    There are a number of important provisions in this bill to 
strengthen the reliability of the electric grid, but when you 
are trying to keep up the water level in a big reservoir, you 
might need some bigger pumps and you might need some bigger 
pipes, but it is also smart to see if the water on the other 
end is just leaking into a hole in the ground.
    We need to go out and work on energy efficiency, Mr. 
Chairman, as part of the restructuring of the electric 
industry.
    Now, the good news, in conclusion, is that the States have 
been working on these issues, and there are good models out 
there, both for the provision of energy efficiency services and 
also for the provision of renewable energy services to American 
consumers.
    I would commend the committee's attention to the work the 
States have been doing in this area, and I would recommend that 
you add provisions to support those measures to this 
legislation.
    [The prepared statement of Richard H. Cowart follows:]
    [GRAPHIC] [TIFF OMITTED] T0356.012
    
    [GRAPHIC] [TIFF OMITTED] T0356.013
    
    [GRAPHIC] [TIFF OMITTED] T0356.014
    
    [GRAPHIC] [TIFF OMITTED] T0356.015
    
    [GRAPHIC] [TIFF OMITTED] T0356.016
    
    [GRAPHIC] [TIFF OMITTED] T0356.017
    
    [GRAPHIC] [TIFF OMITTED] T0356.018
    
    [GRAPHIC] [TIFF OMITTED] T0356.019
    
    [GRAPHIC] [TIFF OMITTED] T0356.020
    
    [GRAPHIC] [TIFF OMITTED] T0356.021
    
    Mr. Barton. Thank you, Mr. Cowart.
    The subcommittee stands in recess until 1:30.
    [Brief recess.]
    Mr. Barton. We are going to go ahead and start. We had a 
malfunction of the House automatic teller machine, so there was 
a move to record the rule on health care by actual old-
fashioned roll call vote, and, unfortunately, I am a ``B,'' and 
before I knew about it they were past me, so I had to wait. I 
apologize.
    Mr. Sawyer. Mr. Chairman, is this an electric reliability 
problem?
    Mr. Barton. It has been pointed out that there was a 
transmission access problem.
    Actually, what happened, Mr. Barcia got a new voting card 
today. Our members are given these electronic voting cards. 
They put his name in it as Arcia, not Barcia. So when he 
recorded his vote, the electronics of the machine tried to find 
Arcia and went crazy because there is no Arcia, to it melted 
down the system, looping, trying to put the ``no'' vote of 
Arcia where there was no person. So they have corrected that 
problem.
    Mr. Smith, your testimony is in the record in its entirety, 
and we recognize you for 6 minutes. I know it will surprise 
some of the audience, but you were my witness, which has got to 
be something of a first for me, having a representative of 
Public Citizen testify at my request.
    Welcome.

                     STATEMENT OF TOM SMITH

    Mr. Smith. Mr. Chairman, I am honored. And thank you very 
much for your invitation. I am proud to be here.
    I run Public Citizen's Texas office. As you know, we are a 
national nonprofit consumer organization, founded over 25 years 
ago now by Ralph Nader, and we are here today to talk about our 
concerns about electric utility deregulation.
    Before I begin, I would like to say thank you to you, Mr. 
Chairman, and other members of this committee because there are 
a number of provisions in this bill that we recognize as being 
here because people like myself or others in the environmental 
community have asked for them--your disclosure section, the net 
metering section, your privacy and slamming and cramming 
sections, and, although we do not think they go far enough, the 
renewable sections that begin to encourage it through 
extensions of various tax credits.
    I have basically five themes I want to talk with you about 
today. And let me begin by saying, for those of us in Texas and 
around the Nation who are looking at electric utility 
deregulation, the test is really who is going to benefit. Is 
Bubba going to benefit, or is it the big boys?
    And what we see today is that there is not enough in this 
bill for Bubba to really benefit yet, and it seems to us it is 
kind of like crossing the stream. You have gotten about three 
steps out into the middle of the stream and the path is not 
clear to the dry bank on the other side, and if we do not get 
some more stones in the middle of that stream, we are all going 
to get wet and wish we would never have started to cross.
    And so what I would like to do today is visit with you 
about some of those other stones that we think we can put in 
the stream that will get us to a place that may be better for 
us all.
    First, let me go through the five or six big themes I want 
to talk about, and then I will come back and hit them in 
greater depth.
    The first is, as you have heard across the table today, 
there is a lot of interest in aggregation. We think the most 
cost-effective way to serve the average residential consumer is 
through opt-out aggregation like they have in Ohio and 
Massachusetts, where a group of people is aggregated together 
and then has the opportunity to leave and go out if they choose 
to play in the retail market.
    The second big issue for us we think is reducing pollution 
from our power plants and not choking our kids in the future. 
It is important to recognize that over two-thirds of the coal 
plants in this country are grandfathered and do not meet 
today's current standards. And if we were to require them to 
meet those standards, three-quarters of significant pollution 
that is choking our cities would be eliminated. We think that 
this is an opportunity to clean up the air over our cities.
    We think that we need to ensure that new energy sources are 
developed for our future. And, as we mentioned, we appreciate 
the renewables portion of your bill, but we think the way to go 
about it is through a renewables portfolio standard and a small 
public benefit trust fund.
    We think that we need to enhance competition, if possible, 
and help consumers save money through enacting strong energy 
efficiency provisions.
    And, last, we need to prevent just uncuffing the monopolies 
and give consumers new tools and strong tools to assure that we 
are able to deal with market power.
    Let me go to the first point.
    We think that the problem with the aggregation provision 
that is in your bill today is that it puts all the transaction 
cost on those that are not going to be able to afford them--the 
associations or the local government agencies that may choose 
to try and put together a package of electricity to sell to 
consumers.
    And what it does is it creates an impenetrable barrier of 
high marketing and transaction costs that will functionally 
prevent that kind of aggregation from benefiting any except the 
trade associations and perhaps a few rural communities.
    Many States have taken a look at this issue and have said 
the cost of switching a customer is high, and so high that we 
think the way to go about it is what they have done in Ohio and 
Massachusetts--allow the community to have a great debate and 
say, ``Do we want to serve the customers within our 
boundaries?'' And if, after that debate, the answer is yes, 
then everybody in that community is part of that buying club 
and you have professional help in making a choice among the 
various offers made to that community for power.
    And then, if somebody wants to go out and buy at retail, 
they have the opportunity to do so and can opt out and go play 
in the retail market.
    Why is this important? After competition in Texas, 60 
percent of us are still with AT&T. Most of us do not care 
enough about the nuances or the various differences in price to 
go out and shop. This is a real opportunity to lower the costs 
for everybody in that community.
    The second thing we want to talk about, an incredibly 
important part of the issue for us is air pollution.
    As I mentioned, two-thirds of our power plants are 
grandfathered. And, Mr. Barton, you asked a darned good 
question. Why is this not a State issue?
    In Texas we said, ``We are going to clean up our 
grandfathered power plants, require them to reduce emissions by 
50 percent.'' And we decided that this--the reason we did this 
was because it was the most cost-effective way to reduce 
pollution in our State, far less expensive than even getting 
our cars inspected, and significantly less costly than buying 
reformulated gasoline or low-emission vehicles. It was a 
bargain that was worth doing.
    But the problem is, what you heard time and time again from 
people in Texas is, ``This is going to make us uncompetitive in 
the national market.'' That is why it is important that we set 
the standard across the United States to be the same.
    If we were to adopt the current Federal new source 
performance standard, there would be dramatic reduction in 
pollution in the eastern United States. The ``New York Times'' 
reported on August 28 that if we adopted the Federal new source 
performance standard and cleaned up all those old power plants, 
industrial NOX in New York City would drop by 80 
percent. That is the implication of this.
    And if we do not do that, what we do is we drop our 
generating portfolio to the dirtiest common denominator, and we 
can do better than that.
    Recently, a study came out--yesterday--called ``Out of 
Breath'' by a coalition called ``Clear the Air.'' This will be 
distributed to you all soon. It basically documents that 
153,000 times a year somebody goes to the emergency room due to 
asthma. Power plants are the largest single cause of this.
    And, last, I would make the argument that we need to do 
something better for renewable resources. The renewable 
portfolio standard would set a national goal that would enable 
us to have energy independence, be able to reduce the cost of 
these resources, be able to produce a product we can sell to 
the emerging countries who are not yet hooked up to the grid, 
and get us away from the single fuel dependence that we are 
rushing toward at headlong speed because everybody is buying 
and building natural gas plants.
    I am old enough, as you are, Mr. Chairman, to have been in 
Texas in the days when we could not get natural gas for our 
power plants, and that caused us to make the mistakes that have 
caused us to have the stranded cost problem today, to build 
those nuclear plants, to build those coal plants, and to go 
down the wrong path. But the wrong path does not need to be 
replicated, and we are about to do that unless we require fuel 
diversity in our mix, and we believe that having a set-aside of 
10 percent for renewable energy by 2010 is a good way to do 
that and a cost-effective way.
    Thank you for your time, and thanks for the invitation.
    Mr. Barton. Thank you, Mr. Smith.
    We now want to hear from Mr. Tom Casten, who is president 
and CEO of Trigen Energy Corporation headquartered in White 
Plains, New York, but I am told he is a constituent or at least 
a personal friend of Congresswoman Karen McCarthy of Missouri, 
who wanted to introduce you to the committee, but she is 
apparently still on the floor in the roll call vote. So when 
she comes back, if she comes back and this panel is still here, 
we will give her an opportunity to brag on you a little bit.
    Your statement is in the record in its entirety, and we 
recognize you for 6 minutes to summarize it.

                  STATEMENT OF THOMAS R. CASTEN

    Mr. Casten. Thank you, Mr. Chairman. I am going to leave my 
statement in the record and you can look at the things there.
    I was struck this morning by your comment that it was 
easier on this side, and that you and the panel have to wrestle 
with competing ideas and philosophies and sort something out of 
all of this. I think I can provide one comment that might help 
you sort through those competing ideas, and then--you before 
have complimented people on providing facts as part of their 
answer, and I would like to present a couple facts.
    One of the things that I have heard on this and earlier 
panels very consistently is that we have one point that we all 
agree about: we do not want competition in our part of the 
business. I completely agree with that. I find it is a 
horrible, evil force for any businessman. I lay awake at night 
trying to think about how to innovate and how to cut my costs, 
and I cannot get that done. We have to give up profits. And I 
would be very pleased if this bill would simply say, ``Nobody 
can compete with Tom Casten.'' And I would thank you for that.
    My suspicion is that that is----
    Mr. Barton. We do not have anybody from Nebraska on the 
subcommittee or that would probably be an amendment.
    Mr. Casten. My suspicion is that the goal of this panel 
and, indeed, the Congress is not to prevent people from 
competing with Tom Casten, and I do not think it should be to 
prevent people from competing with the members of the Edison 
Electric Institute or the American Public Power Association or 
the TVA or the RUS, but that the real goal is for you to 
unleash competition and get at the innovation.
    With that said, let me present a couple facts.
    I am that competition. As we sit here, there are some 200 
small generators that we have installed in the last 20 years 
running in about half the States in the country--those that do 
not have laws against it.
    We have 32 power plants in 18 States that serve multiple 
users, and I would just like to go through the facts of what 
those competitive power plants do in hopes that that might give 
this committee some idea of why you are going through all this 
heavy lifting and how big the goal is at the end of the day.
    In 1998, those 31 power plants put out 46 percent of the 
criteria pollution that EPA said would have come from producing 
the same heat and power in a conventional way.
    They save more than 30 percent of the fossil fuel that 
would have been burned doing it in a conventional way.
    They are technology and fuel independent. We burn coal, we 
burn gas, we burn oil, we burn biomass, we burn municipal 
waste. I do not think Congress needs to tell us what to burn. 
We will burn whatever is cheapest if you give us the chance to 
compete.
    Now, the common thing that I see in the press and I hear 
people talking about is to portray this whole process as what 
benefits will go to the individual as a purchaser of 
electricity in their home, and I think that is important, and 
competition will help those people, but I think it is the wrong 
question.
    I would like to review with you where the benefits go from 
our plants.
    In Philadelphia, our 150 megawatt cogen plant provides the 
thermal energy to virtually every educational institution, 
every higher educational institution--people like University of 
Pennsylvania, Drexel, Thomas Jefferson--and that lowers the 
cost of tuition and education.
    In Tulsa, Oklahoma, we provide that kind of savings to all 
of the city buildings.
    In Kansas City, we provide it to city, State, county, and 
Federal buildings. Kansas City even uses us as a way to meet 
their air quality rules, because we are so much less polluting 
that they do not have to force carpooling. So the benefits go 
to lowering the taxes that people pay for government.
    We serve some 26 hospitals, and we save them between 20 and 
40 percent of what they would have paid, and this lowers the 
cost of medical care to everybody.
    If those benefits are not persuasive, I can tell you that 
we do some really important things. In Golden, Colorado, we cut 
down the cost of making a can of beer.
    Those benefits go to everybody.
    What I believe is in front of this panel is to understand 
what can happen if you continue with your good work and get a 
bill passed.
    Our estimates are that the U.S. consumer will save more 
than $100 billion a year with competition. Our estimates are 
that the air quality will come into compliance everywhere just 
through competition.
    We believe that the competitiveness of every U.S. 
manufacturer will improve by reducing the cost that they pay 
for energy.
    I just leave you with a thought. Where would we be today 
without competition in other places? Maybe only 60 percent of 
the people still stay with AT&T, but I suspect 60 percent of 
the people in this room have a cell phone because Craig McCall 
could compete and was not forced not to.
    Where would we be in computers if Michael Dell was not 
allowed to compete and say, ``I have got a different way to do 
it''?
    The challenge that I think this panel has is to get a bill 
out that will let everybody compete, and then just stand back 
and enjoy, because it will be fun to watch.
    Thank you.
    [The prepared statement of Thomas R. Casten follows:]
   Prepared Statement of Thomas R. Casten, President and CEO, Trigen 
                           Energy Corporation
    Mr. Chairman and members of the Subcommittee, thank you for 
allowing me to testify before you today on H.R. 2944, the Electricity 
Competition and Reliability Act of 1999.
    My name is Tom Casten, and I am the CEO of Trigen Energy 
Corporation. Trigen specializes in generating energy very efficiently. 
We own and operate the most efficient power plants in the world, and 
our stock in trade is combined heat and power, or CHP.
    We have thirty-three projects, with operations in nineteen states, 
Canada and Mexico. We joint venture with many companies, including 
electric utilities such as Cinergy and Pepco. Since I last testified 
before this subcommittee, Trigen has announced several major new 
projects and has won two very satisfying industry awards, including an 
award from the National Council for Public-Private Partnerships and the 
Power Plant of the Year Award from McGraw-Hill.
    Mr. Chairman, our projects and our people are at work every day 
showing how efficient energy production is both good for business and 
good for the environment. By restructuring the electricity industry, 
Congress can reward investors, benefit consumers, strengthen our 
economy and clean up our air, land, and water. As you know, I've had 
the privilege of appearing before this Subcommittee and other House 
committees to share my thoughts on the important economic and 
environmental benefits of electricity restructuring. Rather than 
restate those comments, I have attached copies of my previous testimony 
to these remarks and ask that they be made part of the record of this 
hearing.
    Chairman Barton and the Members of the Subcommittee, thank you for 
pushing forward on electricity restructuring. This is an issue of 
critical importance to our industries, to the wholesale and retail 
consumers of electricity, and to the global competitiveness of the 
United States. Competition is already upon us, with the States leading 
the way. The Federal government must rise to the task of completing 
this nationwide effort by addressing those barriers to competition that 
inherently lend themselves to national legislation, matters that cannot 
be responsibly dealt with in a piecemeal, State-by-State way.
    It is evident that H.R. 2944 is the result of painstaking, 
thoughtful work that reflects the benefit of numerous hearings, 
consultations, examination of issues by the Subcommittee's working 
group, and input by incumbents and independents, the States, the 
Administration, consumer groups and others. H.R. 2944 marks a critical 
step in efforts to improve electricity markets and we offer our support 
for its enactment.
    As I read the bill, it strikes me, however, that the current 
language should be modified with regard to the following five issues: 
interconnection, PURPA repeal, CTC's , depreciation schedules, and tax 
incentives. I'll discuss the changes we think you should make, and have 
attached to my testimony specific amendatory language for your 
consideration.
Interconnection
    H.R. 2944 correctly recognizes the economic and environmental 
importance of new distributed generation, including CHP systems, by 
addressing the central issue of interconnection. Current charges for 
interconnection can be prohibitively and unreasonably expensive, and 
requirements vary arbitrarily from State to State, utility to utility, 
site to site. Incumbents who do not want to face competition often 
attempt to cloak anticompetitive behavior in the guise of technical 
disagreement over interconnection. It's essential for interconnections 
to be safe and reliable, but let's take the market gamesmanship out of 
electrical engineering. Bringing uniformity to interconnection through 
national technical standards will reduce uncertainty, lower costs, and 
facilitate deployment of modern generation, including CHP technology, 
across the country.
    Interconnection language must be sufficiently broad to help all 
appropriately sized generators connect to the distribution grid. I am 
concerned, however, that the present language ofSec. 542 may be too 
limiting, and will retard the ability of the nation to realize the 
substantial economic and environmental benefits offered by CHP and 
other new generators. For example, the present language apparently does 
not apply to third-party owned systems, systems currently designed to 
serve wholesale customers, or systems designed for off-site sales of 
electricity. It should give you some sense of the unduly narrow scope 
of the current language to note that it would appear to benefit few of 
my company's projects.
    Let me give you an example of the interconnection problem. We know 
how to interconnect generators with the distribution grid. We have done 
it literally dozens of times. Technically, it is a pretty 
straightforward task. In 1997, my company approached a Maryland utility 
to request interconnection for a 703 kw generator to be installed in a 
downtown Baltimore office building. The small system would supply the 
building's electric load and air conditioning. Yet, two years later, we 
were still dickering with the utility over so-called ``technical'' 
issues. Months after receiving our initial request for interconnection, 
the utility asked that Trigen design a different, specialized 
interconnection. Trigen completed the new design at an additional cost 
of $44,000. The utility rejected the design. In response, Trigen 
offered to use guidelines developed by Consolidated Edison in New York 
City, even though the ConEd guidelines were disproportionately 
burdensome and expensive given the very small size of the installation. 
The utility agreed, but after Trigen complied with these requirements, 
the utility imposed further ``technical'' restrictions on Trigen's 
ability to operate the facility. These disagreements have only recently 
been resolved, at a great cost to Trigen and our customer. One would 
strongly suspect that this was anti-competitive behavior masquerading 
as technical disagreement which successfully prevented the unit from 
operating for two years. H.R. 2944 would not fix this sort of problem, 
and thus needs to be amended.
Prospective Repeal of PURPA's ``Must-Sell'' Provision
    H.R. 2944 would repeal both the ``must buy'' and the ``must sell'' 
requirements of Section 210 of PURPA. Trigen does not challenge 
elimination of the ``must buy'' provision, but the ``must sell'' 
provision absolutely should not be repealed until all retail markets 
are competitive and until back-up power can be purchased competitively. 
That's not the case now, and until those fundamental changes are made, 
the utility should continue to be required to provide back-up power for 
qualifying facilities. The current language of Sec. 531 would harm 
competition. Elimination of PURPA's ``must sell'' requirement before 
laws are changed to allow new facilities to purchase back-up power 
competitively will leave new entrants at the mercy of the local 
utility, subject to discriminatory pricing or outright denial of back-
up power. Let's not take a step backward.
Elimination of Competitive Transition Charges
    Trigen recognizes that utilities should be able to recover 
prudently incurred, legitimate and verifiable stranded costs that 
cannot be reasonably mitigated. However, States should be required to 
consider reducing the stranded cost charge on an electric consumer 
which efficiently produces energy on-site by a fuel cell or a combined 
heat and power, distributed power or renewable power facility. Such a 
provision would be consistent with an overall agenda of promoting clean 
and efficient power generation without imposing a mandate on States. 
Trigen believes that the relevant language contained in section 101 of 
the restructuring proposal submitted by the Administration would be an 
appropriate amendment to this legislation.
Tax depreciation schedules
    The tax code currently does not allow depreciation of CHP and 
distributed generation technologies in a way that matches how the 
technology is actually used. This inappropriate treatment discourages 
investments in these technologies. For example, the IRS allows a gas 
turbine located inside a building for on-site generation use to be 
depreciated over a 39-year period. The same piece of equipment used for 
transportation (e.g., on an airplane) depreciates in one quarter of the 
time. The moving parts of the turbine used for electricity and heating 
may be replaced as many as three times while the owner continues to 
depreciate the original investment. Shortening the time over which this 
equipment depreciates would remove an impediment to investment in what 
is otherwise an efficient and environmentally beneficial technology.
    The Administration's restructuring proposal included a provision 
that would shorten the depreciation period to 15 years. While we were 
grateful for the Administration's recognition that new distributed 
generation and CHP systems should not be subject to a depreciation 
period of 39 years, the approach failed to recognize that a one-size-
fits-all class life for energy equipment is a fundamentally flawed 
approach which will grow increasingly anachronistic by the month.
    New and small turbines have different physical properties and will 
generally operate under quite different conditions than large turbine 
units employed by traditional electric utilities and, consequently, 
will have different service lives. Further, the competitive marketplace 
will force energy suppliers to replace or ``upgrade'' standing 
equipment before it fails, since installation of more efficient 
technology offers lower costs to customers and the opportunity to hold 
or capture market share for competitive energy suppliers. We expect 
that energy generation equipment will come and go in the marketplace in 
a manner that strongly resembles that of modern computers `` assets 
which outlive their economic lives long before they cease to work 
properly. Because these new and efficient technologies have different 
``actual'' lives, they should not be subject to a single class life in 
the code. Accordingly, we have attached to this testimony modifications 
to the Internal Revue Code which would add new schedules of class lives 
for key energy generation technologies.
Combined Heat and Power Investment Tax Credit
    Tax credits are typically offered by the Federal government to 
obtain public benefits by prompting private parties to make economic 
choices that they would not so readily make otherwise. As such, an 
investment tax credit is a good short-term mechanism to promote CHP 
systems, which offer very significant public and private economic and 
environmental benefits, but can often be more difficult for the private 
sector to deploy than electric-only projects because of the complexity 
inherent in assembling a ``thermal load'' or set of heating/cooling 
customers. We believe it is appropriate to enact a short term tax 
credit to assist deployment of new, modern generation while longer term 
solutions to competitive barriers are being developed, such as 
adjustments to the depreciation schedule, as discussed above. To be 
clear, to the extent the depreciation treatment of CHP is corrected, we 
do not believe that a tax credit will be necessary. However, to the 
extent a lesser fix is chosen for the depreciation treatment of CHP, 
the tax credit would remain an important short-term incentive for CHP 
system deployment.
Conclusion
    Given the inevitability of competition in the electricity market, 
and both national and global trends that will guide the future of 
energy production in this country, I believe that emerging technologies 
are serving and will serve an indispensable purpose in meeting goals of 
energy efficiency and environmental demands. I urge this subcommittee 
to pass a strong, balanced restructuring bill reflecting the concerns I 
have raised here today. I thank the subcommittee for the opportunity to 
appear before you. Thank you, Mr. Chairman.

    Mr. Barton. Thank you, Mr. Casten. We appreciate your work 
that you have done in your company providing services for the 
communities that you are in and appreciate your testimony.
    Now we would like to hear from our last witness, Mr. Scott 
Segal. Apparently, he is just representing Bracewell and 
Patterson.

                   STATEMENT OF SCOTT H. SEGAL

    Mr. Segal. Yes, we are a potent player in the electricity 
area.
    Mr. Barton. The only law firm that has its own lobbyist 
just on this issue. That is pretty interesting.
    Mr. Segal. The new alternative energy source.
    Mr. Barton. Actually, I am told you are representing 
contractors. Your statement is in the record in its entirety. 
We recognize you for 6 minutes.
    Mr. Segal. Thank you, sir.
    Good afternoon, Chairman Barton and members of the 
subcommittee. My name is Scott Segal, and I am an attorney with 
the law firm of Bracewell and Patterson here in Washington and 
a proud native of the great State of Texas, I might add.
    I also serve as outside counsel for the Air Conditioning 
Contractors of America, and we are appearing today on behalf of 
the National Alliance for Fair Competition, of which ACCA is a 
member.
    The alliance is composed of 10 trade associations, and was 
formed especially to draw attention to the problems of small 
service contracting businesses with respect to unfair 
competition from public utilities and their unregulated 
affiliates. Many of our members are family owned and operated 
companies.
    As the subcommittee has considered electricity 
restructuring legislation, I know that each of you has been 
barraged with information on a bewildering array of topics, 
such as stranded cost, transmission access, and the like. The 
Alliance is concerned that in this thicket of complexities the 
issue of cross-subsidization and other forms of anti-
competitive conduct and their impact on small businesses has 
been lost.
    My job today is to attempt to clear away the underbrush and 
present you with a simple message: Congress must address cross-
subsidization and related unfair monopoly practices if you are 
to create a framework in which competition can flourish, and 
you can do so without giving undue power to Federal regulators 
or interfering with State prerogatives in this area.
    Mr. Chairman, what is this whole debate about electricity 
restructuring all about? Well, in my view it is about creating 
the conditions for competition in the electric power industry 
so that the American consumer will benefit from more choice, 
better service, and lower prices. The members of our alliance 
strongly support full competition. We are fully accustomed to 
competition, do not seek subsidies or special treatment in 
order to compete. Similarly, we do not believe that utility 
affiliates competing in service industries should enjoy cross-
subsidies derived from their parent companies' monopoly power. 
To allow these practices to go unchecked will destroy, or at 
least potentially harm, the goals of full competition, and, 
subsequently, shortchange consumers.
    We do not oppose utility diversification. In fact, we 
welcome the competition. However, ensuring vigorous competition 
and benefits to consumers will take place only if the legal 
framework ensures the competition is open rather than dominated 
by the vestiges of this monopoly status.
    I would illustrate my point--and with all due respect to 
Mr. Casten--ours are member companies that do not fear 
competition. We think we are competition.
    I brought along with me a local telephone directory, which 
I would now like to read into the record. No, just kidding. 
This is a local telephone directory from northern Virginia. If 
you look up air conditioning contractors in here, there are 31 
pages of listings. If you look up electric utility, there is 
one--not page, one listing.
    The point I am trying to make is: do we want the market for 
energy services to look more like the former or the latter? We 
know competition and are not afraid of it.
    Mr. Chairman, I know that as you have proceeded you have 
been rigorous limiting the content of the bill to matters in 
which Federal action is necessary. I submit to you that 
establishing some standards in the area of affiliate 
transaction meets this litmus test.
    First, antitrust law, a traditional area of Federal 
responsibility, does not address cross-subsidization and 
related practices adequately. There is a long-established role 
for the Federal Government in antitrust policy; however, both 
the Department of Justice and the Federal Trade Commission have 
testified that antitrust laws are ill-suited to addressing 
existing market power resulting from the previous regulated 
monopoly status of electric utilities; therefore, existing 
antitrust law is not sufficient. Indeed, this Congress 
recognized the need to enact stringent affiliate safeguards in 
the Telecommunications Act of 1996.
    Our alliance seeks only to assure that minimal protections 
against market power abuse are enacted and that States remain 
free to achieve these ends in the manner they see fit.
    Second, unregulated competitive affiliates will operate 
across State lines. Suffice to say that electric utilities 
exist across State lines and they offer affiliate services 
across State lines, so a national solution is justified.
    Further, the availability and application of State remedies 
to claims of competitive harm is uneven, at best, and even 
within States there is typically a division of authority 
between State PUCs, which are charged with protecting 
ratepayers, and antitrust enforcement agencies, which are 
charged with enforcing restriction on anticompetitive 
practices.
    We go to either one, and both say we are going to the wrong 
agency, and that can get frustrating for a small business.
    Ultimately and fortunately, we believe that Federal 
guidance on cross-subsidization and self-dealing will 
complement rather than supersede State action. The alliance is 
simply seeking to ensure that competitive issues confronting 
small business and the people they serve do not fall between 
the cracks.
    I want to make crystal clear, we are not asking the 
subcommittee to dictate the details of State codes of 
condition; rather, we seek broad policy principles that are 
essential to guaranteeing competition while continuing to allow 
the States the utmost freedom to innovate.
    Accordingly, our members believe that the legislation can 
be improved by the addition of a few minimum standards.
    First, a clear prohibition on cross-subsidization of 
competitive affiliates.
    Second, a requirement that States develop codes of conduct 
and that they be applied to all affiliates, but note I say that 
States develop it.
    Next, a requirement that competitors harmed by cross-
subsidies and anticompetitive conduct have recourse to State 
PUCs.
    And, last, a requirement that enforcement include a remedy 
for harm to competitors occasioned by such unfair competitive 
practices.
    Again, I must emphasize our alliance is not advocating that 
Congress prescribe the details of codes of conduct for utility 
affiliates, nor are we asking that Congress provide broad new 
powers to Federal agencies like the FERC or anybody else. 
Rather, we are asking that Congress set broad policy goals 
which represent a minimum, a floor, to ensure free and open 
competition.
    Well, as they say in the refrigeration business, we just 
hope you do not freeze us out of the bill.
    I thank the members of the subcommittee for this 
opportunity to appear before you today, and we look forward to 
answering any questions you may have.
    [The prepared statement of Scott H. Segal follows:]
Prepared Statement of Scott H. Segal on Behalf of the Air Conditioning 
 Contractors of America and the National Alliance for Fair Competition
    Good morning Chairman Barton, Congressman Hall and members of the 
Subcommittee on Energy & Power. My name is Scott Segal and I am an 
attorney with the law firm of Bracewell & Patterson here in Washington, 
D.C., and serve as outside counsel for the Air Conditioning Contractors 
of America (ACCA). I'm also appearing today on behalf of the National 
Alliance for Fair Competition (NAFC), of which ACCA is a member. The 
National Alliance for Fair Competition is composed of ten national 
trade associations. NAFC was formed specifically to draw attention to 
the problems small businesses face with respect to unfair competition 
from public utilities and their unregulated affiliates.
    The organizations which comprise NAFC consist, overwhelmingly, of 
small, private sector businesses engaged in the design, supply, sale, 
rental, installation and servicing of electrical and mechanical 
products, equipment, and systems, as well as providing energy fuels. 
These firms operate in residential, commercial and industrial markets. 
While a few larger firms are included within the group, the majority of 
businesses are small. Many are family owned and operated.
    As the Subcommittee has considered electricity restructuring 
legislation, I know that each of you has been barraged with information 
on a bewildering array of topics such as stranded costs, transmission 
access, the role of the federal power administrations, and others. Each 
issue has its own complexities. NAFC is concerned that in this thicket 
of complexities, the issue of cross-subsidization and other forms of 
anticompetitive conduct and their impact on small business has been 
lost. My job today is to clear away the underbrush and present you with 
a simple message: Congress must address cross-subsidization and related 
unfair monopoly practices if you are to create a framework in which 
competition can flourish, and you can do so without giving undue power 
to FERC or interfering with state prerogatives in this area.
    During the course of the Subcommittee's hearings on this issue, you 
have been presented with testimony from contractors and other working 
people regarding the types of practices that allow incumbent utilities 
to unfairly leverage their market power in competitive markets, such as 
heating, ventilating, air conditioning and refrigeration (HVACR) 
services. I do not intend to revisit these issues in detail, but 
provide a representative list of the types of conduct that concern 
small business including cross-subsidies to and preferential treatment 
of affiliates. This encompasses: shared customer data, equipment, 
vehicles and personnel, cost-shifting, marketing data, free advertising 
for affiliates, preferential referrals, discriminatory access and 
pricing of services, and similar uncompensated transfers of tangible 
and intangible benefits.
    I will focus my testimony on the following points: (1) cross-
subsidization and other anticompetitive practices harm consumers and 
competition; (2) there is a need for federal legislation to create a 
framework for competition and precedent for doing so; (3) Congress can 
set minimum standards to achieve the goals of competition without 
stifling state innovation; and (4) H.R. 2944 does not currently go far 
enough to address these issues.
Getting Back to Basics: Creating the Conditions for Competition
    I would like to return to first principles for a moment. What is 
the debate over electricity restructuring all about? It's about 
creating the conditions for competition in the electric power industry 
so that the American consumer will benefit from more choice, better 
service and lower prices. The members of the NAFC strongly support full 
competition. We are fully accustomed to competition and do not seek 
subsidies or special treatment in order to compete. Similarly, we do 
not believe that utility affiliates competing in service industries 
should enjoy cross-subsidies or other advantages derived from their 
parent company's monopoly power. To allow these practices to go 
unchecked will destroy your goals of full competition and subsequently, 
short change consumers.
    As a deregulated retail market for electricity takes shape, 
incumbent utilities feeling competitive pressure are increasingly 
driven to diversify into energy services and other affiliate 
activities. For instance, if you go to the Pepco webpage, you will find 
a link to Pepco Energy Services. This webpage states, ``Pepco Energy 
Services is backed by the strength, stability and commitment of its 
parent company, which has a 100-year history of delivering quality 
customer service.'' 1 The same webpage describes Pepco 
Energy Services' ability to design and install HVACR systems, lighting 
and other energy equipment, and a full range of services performed by 
contractors today. NAFC does not oppose this diversification, and in 
fact, welcomes the competition. We are, however, concerned that as many 
regulators have recognized, ``there is a strong incentive for regulated 
utilities or their holding companies to subsidize their competitive 
activity with revenues or intangible benefits derived from their 
monopoly businesses . . .'' 2
---------------------------------------------------------------------------
    \1\ See .
    \2\  Promulgation of New Rules Governing Activities Between 
Affiliates, Public Utility Commission of Texas, Project No. 17459, 23 
Tex. Reg. 5294 (May 22, 1998).
---------------------------------------------------------------------------
    In creating a framework for competition, the Subcommittee must be 
mindful of the background against which you are legislating. 
Competition is not starting from the level playing field characteristic 
of a newly developing market, but rather, with regulated monopolies. 
Ensuring vigorous competition and benefits to consumers will take place 
only if the legal framework ensures that competition is open rather 
than dominated by the vestiges of this monopoly status.
    As I mentioned, the NAFC believes that cross-subsidization and 
other anticompetitive practices are bad for consumers and bad for 
competition. Here's why:

 Bad for Consumers: Cross-subsidization and preferential self-
        dealing will artificially increase the costs of the regulated 
        utility as costs incurred for the benefit of the affiliate are 
        shifted to the regulated firm. These higher costs will be 
        passed on to consumers in increased prices in the regulated 
        market. In addition, these practices will increase costs in 
        unregulated markets like those for HVACR services by displacing 
        innovative, lower-cost suppliers and entrants with a higher-
        cost affiliate of the incumbent utility which can undercut 
        pricing due to the subsidy that it enjoys.
 Bad for Competition: Competition thrives in an environment 
        where numerous entrants compete on choice, price and quality of 
        service for consumers. Yet, as we make the transition to a 
        competitive environment, there are strong incentives for 
        regulated utilities or their holding companies to subsidize 
        their competitive affiliates with revenues or intangible 
        benefits derived from monopoly businesses. These benefits allow 
        the affiliates to drive lower-cost providers from the market 
        and to deter new entrants into the market. This results in less 
        competition and less choice for consumers.
    To illustrate my point, I have brought along with me today a local 
telephone directory. In this Northern Virginia directory, I find 
thirty-one pages of entries for HVACR contractors. By contrast, I find 
only one entry under ``electric company.'' Do we want the market for 
energy services to look more like the former or the latter?
Why is Federal Legislation Necessary?
    Mr. Chairman, I know that as you have proceeded to develop 
consensus legislation you have been rigorous in attempting to limit the 
content of the legislation to matters in which federal action is 
necessary. I submit to you that establishing some standards in the area 
of affiliate transactions meets this litmus test.

 Antitrust law, a traditional area of federal responsibility, 
        does not address cross-subsidization and related practices. 
        While the federal government shares authority over enforcement 
        of the antitrust laws with the states, there is a long-
        established federal role due to the impact of competition 
        policy on interstate commerce. Yet in testimony before this 
        Subcommittee, representatives of the Antitrust Division at the 
        Department of Justice and the Federal Trade Commission, the 
        principal agencies charged with enforcing the antitrust laws, 
        have testified that the antitrust laws are ill-suited to 
        addressing existing market power resulting from the previous 
        regulated monopoly status of electric utilities.3 
        Therefore, leaving the competitive implications of market power 
        abuses affecting small business to the antitrust laws is not 
        sufficient. Indeed, this Congress recognized the need to enact 
        stringent affiliate safeguards in the Telecommunications Act of 
        1996 to prevent the opportunity for market power abuses by the 
        Bell operating companies to the benefit of their affiliated 
        competitive businesses. Some of these provisions included 
        requiring separate affiliates, biennial audits, restrictions on 
        joint marketing, prohibitions on preferential treatment to name 
        just a few. By contrast, NAFC seeks only to assure that certain 
        minimal protections against market power abuse are enacted and 
        that states remain free to achieve these ends in the manner 
        that they see fit.
---------------------------------------------------------------------------
    \3\ Electricity Competition: Market Power, Mergers and PUHCA, 
before the Subcommittee on Energy & Power of the Committee on Commerce, 
U.S. House of Representatives, 106th Cong. (May 6, 1999) (statement of 
Mr. Douglas A. Melamed, Antitrust Division, United States Department of 
Justice, and statement of The Honorable Mozelle Thompson, Commissioner, 
Federal Trade Commission).
---------------------------------------------------------------------------
 Unregulated, competitive affiliates will operate across state 
        lines. The presence of these unregulated affiliates in several 
        states will present new difficulties for individual state 
        commissions, and it is unlikely that the limited jurisdiction 
        of state bodies will be well-suited to ensure fair and open 
        competition when multistate holding companies are involved. 
        State commissions frequently lack the authority and resources 
        to pursue these issues effectively. It is unrealistic to expect 
        a nationwide energy market to develop without national 
        legislation to ensure true, fair retail competition.
 The availability and application of state remedies to claims 
        of competitive harm is uneven at best. Because the electric 
        power industry has been regulated for most of this century as a 
        local monopoly, state regulators have been concerned primarily 
        with issues related to ratepayer protection and ensuring an 
        appropriate rate-of-return. In the newly emerging competitive 
        environment, there will be an increasing need to pay close 
        attention to issues of competition and competitive harm 
        occasioned by unfair practices such as cross-subsidization.
 There is a division of authority between state PUC's, charged 
        with protecting ratepayers, and antitrust enforcement agencies 
        charged with enforcing restrictions on anticompetitive 
        practices. Indeed, in some states, affiliate codes of conduct 
        have been held not to apply to all competitive affiliates, but 
        only to marketing affiliates.
 Small business is often left without an effective remedy for 
        competitive harm. As a result, small businesses harmed by 
        anticompetitive practices are often left without a remedy. 
        While state PUC's have the ability to deny a rate increase or, 
        in an extreme case, impose a fine, these remedies have little 
        meaning for competitors harmed by cross-subsidization and 
        related practices. As previously noted, the antitrust laws are 
        similarly ill-equipped to address concerns arising from 
        existing market power. Therefore, those harmed by 
        anticompetitive practices are left without a remedy.
 Federal guidance on cross-subsidization and self-dealing will 
        complement rather than supersede state action. In moving from 
        an electric power industry characterized by local monopolies to 
        one in which there is unfettered competition, the NAFC is 
        simply seeking to ensure that competitive issues confronting 
        small businesses and the people they serve do not fall between 
        the cracks. I wish to make crystal clear that we are not asking 
        this Subcommittee to dictate the details of state codes of 
        conduct. Rather we seek to see enacted certain broad policy 
        principles that are in our view essential to guaranteeing the 
        creation of a free and open competition while continuing to 
        allow the states the utmost freedom to innovate to achieve 
        these policy objectives.
H.R. 2944 and the Need to Address Affiliate Safeguards
    To the extent that H.R. 2944 addresses affiliate transactions, 
please refer to Title V of the bill, and in particular in sections 513, 
514 and 516. Sections 513 and 514 of the bill take the important first 
step of ensuring that federal and state regulators have access to the 
books and records of utilities and related companies for the purpose of 
assessing costs incurred to protect ratepayers. Section 516 of the bill 
entitled ``Affiliate Transactions'' serves merely as a savings clause 
which states that nothing in the legislation shall preclude the 
application of other existing law to determine whether costs of an 
activity performed by a related company may be recovered in rates. In 
other words, this provision preserves the status quo.
    Yet, as I have detailed above, the status quo is not sufficient to 
promote truly open competition in energy services markets, and this 
will ultimately be to the detriment of the American consumer. The lack 
of federal or state protections that provide an adequate remedy in 
these areas and the increasingly interstate nature of these operations 
demands congressional attention. Accordingly, the members of the NAFC 
believe that federal legislation should at a minimum take the following 
modest steps, including:

 a clear prohibition on cross-subsidization of competitive 
        affiliates;
 a requirement that states develop codes of conduct and that 
        they be applied to all affiliates equally;
 a requirement that competitors harmed by cross-subsidization 
        and other anticompetitive conduct have recourse to the state 
        PUC for a remedy; and
 a requirement that enforcement include a remedy for harm to 
        competitors occasioned by such unfair competitive practices.
    Again, I must emphasize that the NAFC is not advocating that the 
Congress prescribes the details of state codes of conduct for utility 
affiliates. Nor are we asking that Congress provide broad new powers to 
federal agencies such as the FERC. Rather we are asking that Congress 
set certain broad policy goals to ensure free and open competition in 
the market for energy services which are inextricably bound up with 
this debate. These broad policy goals represent basic tenets of a 
competitive marketplace which Congress has seen fit to protect before 
to ensure that the benefits of competition are available across the 
country. The states have, and should continue to, be free to devise 
innovative solutions to achieve these basic objectives of competition.
    I thank the Members of the Subcommittee for the opportunity to 
appear before you today. I hope that many of you will agree that some 
congressional action in this area is appropriate, and look forward to 
answering any questions that you may have.

    Mr. Barton. We do appreciate that. You may get a chilly 
reception on your use of metaphors, but we are going to work on 
it. Thank you, Mr. Segal, for that testimony.
    The Chair is going to recognize himself for 5 minutes for 
questions.
    Mr. Brice, you used a term that I am not familiar with in 
your testimony. You talked about you wanted a ``truth in 
billing'' requirement. Could you, in layman's terms, express to 
me what ``truth in billing requirement'' means in terms of this 
bill?
    Mr. Brice. I think what we are--I am at a loss, myself, to 
really explain what that means.
    Mr. Barton. Well then just give it to us for the record, 
because Congressman Hall did not know, I did not know, my staff 
did not know. Whoever wrote your testimony hopefully does know.
    Mr. Brice. Yes, I am sure they do.
    Mr. Barton. And we are open to it, if we understand what it 
is, because who can be against truth in billing? I mean, it 
kind of, on its surface, appears to be a good idea. So if you 
will just get that to us for the record.
    Mr. Brice. Yes, Mr. Chairman.
    Mr. Barton. Okay.
    Ms. Moler, I am going to ask you a cheap shot question, but 
I am going to tell you up front that it is a cheap shot 
question, because I do not mean it personally, but I was struck 
by some of the terminology in your testimony. You talked about 
the crazy quilt of regulation.
    Who was the chair of FERC in 1996?
    Ms. Moler. I was.
    Mr. Barton. You were.
    Ms. Moler. Yes, sir.
    Mr. Barton. Okay. I thought so. When was FERC Order 888 
issued?
    Ms. Moler. In 1996, when I was the chairperson.
    Mr. Barton. In 1996, when you were Chair. Now, remember, I 
told you up front this is a cheap shot question.
    Ms. Moler. I will not give you a cheap shot answer. I will 
give you a serious answer.
    Mr. Barton. I know. Do not we codify, if the bill before us 
were to become law, do not we codify the crazy quilt regulatory 
scheme that FERC Order 888 put in place in 1996 when you were 
chair of the FERC?
    Ms. Moler. Mr. Chairman, as my statement acknowledges, 
Order 888 applies to wholesale transactions and to unbundled 
retail transactions. It does not apply to bundled retail 
transactions.
    Mr. Barton. I mean, that is what----
    Ms. Moler. At the time we issued the order, there was one 
State that had customer choice enacted. The world has changed 
very, very significantly since Order 888 was enacted. So I am 
and Americans for Affordable Electricity believe that at this 
point, with the industry having evolved the way it has evolved, 
that you need to go farther than Order 888.
    Mr. Barton. But you admit----
    Ms. Moler. I recognize that it does codify Order 888. I 
recognize that, sir, but I also----
    Mr. Barton. So I am in agreement with where you were in 
1996. I am just not in agreement----
    Ms. Moler. Well, I am hoping you will come along.
    Mr. Barton. [continuing] yeah with where you are in 1999.
    Ms. Moler. I am hoping you will come along. The crazy quilt 
that has evolved has very little happening under the Order 888 
tariffs, and we simply need to go farther at this point to 
encourage further competition. But it does codify it. Yes.
    Mr. Barton. Okay. Well, I do not mean that personally, you 
know. I want you to know that. I would not--that just kind of 
struck me the way you put it that I needed to chastise you a 
little bit, but I understand----
    Ms. Moler. Well, one of the challenges in these jobs is you 
have to look at changed circumstances----
    Mr. Barton. That is true.
    Ms. Moler. [continuing] to figure out what the appropriate 
response is under the changed circumstances.
    Mr. Barton. Now let me ask you another question. And this 
is not a cheap shot question. Why will not the bill, as it is 
drafted--we have mandatory participation in RTOs. They have to 
join RTO's. We give the States regulation of bundled rates, and 
the States I think--I think the States will do a better job of 
looking at that issue than the group that you represent do--and 
we still have the Federal antitrust regulatory scheme that is 
in generic law. So why won't that combination of mandatory RTO 
participation, State regulation of bundled sales at retail, and 
Federal antitrust law that is still on the books, why doesn't 
that solve the market power problem if there is a market power 
problem?
    Ms. Moler. Until you require everyone to be under the same 
rules for transmission, you are not going to get the much-
revered level playing field.
    Mr. Barton. But the RTO is regional.
    Ms. Moler. The RTO would not require all of the utilities' 
use of its system to be subject to its requirements.
    Mr. Barton. But it does require every utility who 
participates in that RTO to be subject to the rules for that 
RTO.
    Ms. Moler. Sir, there are many RTOs--ISOs now--for which 
the vast majority of the utilities' use of its transmission 
system are not under their jurisdiction.
    Mr. Barton. Okay. Well, I----
    Ms. Moler. I was stunned, frankly, when I learned this. I, 
too, thought we had done a great thing with Order 888, and I 
still believe it was a great thing.
    Mr. Barton. Well, you did a good thing.
    Ms. Moler. But what we are learning in the actual----
    Mr. Barton. We are doing a great thing in our bill. You did 
a good thing in Order 888.
    Ms. Moler. Well, I encourage you to even greater greatness.
    Mr. Barton. Okay.
    Ms. Moler. What we have learned is that until you put all 
of the uses of the same kinds of facilities under the same 
rules, that you are not going to get comparability and you are 
not going to get the kind of competition that will serve the 
public.
    Mr. Barton. Okay. I want to ask Mr. Smith a question 
because my time has expired, and then I am going to go to Ms. 
McCarthy, if she wants to introduce Mr. Casten after the fact.
    Mr. Smith, you talked about an opt-out preference for 
aggregation, which sounds to me suspiciously like forced 
municipal aggregation. Why are you not satisfied with our opt-
in aggregation provision which gives people the voluntary 
right--and not just city governments, but any group to 
aggregate in a State that is open?
    Mr. Smith. I was hoping you would ask me that question.
    Mr. Barton. I bet you were. That is why I asked it.
    Mr. Smith. And the other argument, of course, that I 
expected was, ``Well, is not this just State-sanctioned 
slamming.'' I think there are two answers to that. One is, we 
are not going to make anybody change unless the community has a 
great and robust debate over whether or not they ought to serve 
as that aggregator.
    And the genius of democracy is at the smallest levels, 
where people can have that debate as to whether or not they do 
want to create a new municipal utility or whether their county 
government should serve them, or out in the rural areas of 
Texas, beyond where you and I both live, whether or not the 
school district or the councils of government perhaps could 
serve them at lower cost.
    And I think that is the--in our question, in our minds, as 
we have begun to look at this as to whether or not we are 
better off in those instances having new municipals created, or 
what opportunities this gives us, that debate is what gives us 
comfort that it is not just forced municipalization.
    The other key component to this, sir, is----
    Mr. Barton. You could have a 51/49 debate, though, or a 52/
48.
    Mr. Smith. You sure could.
    Mr. Barton. I mean, there is--democracy is a wonderful 
thing, but I see votes on the floor almost every week that are 
218 to 217, or very close to that.
    Mr. Smith. And I am usually on the losing side of it, but I 
understand that democracy----
    Mr. Barton. Well, we want to keep it that way.
    Not really. I retract that.
    Mr. Smith. And, Mr. Barton, the other thing that scares me 
to death is putting this to a vote when you have got the big 
utilities having the right to fund the elections against you. I 
understand that this is a big issue, and it is a gut call for 
all of us that we think is worth doing.
    But I think that is the point. We think it is worth doing, 
and, as people have looked at how to make this work best for 
consumers, there are those situations where new creations of 
government make the best sense. That was what happened two 
generations ago when our grandfathers electrified most of Texas 
or, in my case, Illinois.
    They looked at the fact the most cost-effective way to do 
this was with a public aggregator.
    Mr. Barton. Well, we are for aggregation. Our bill has got, 
I think, a very strong and defensible aggregation provision in 
it. I am just not sure we want to go to the opt-out version 
that your group supports.
    Mr. Smith. And the reasons that we think that it is 
superior are two. One is it eliminates that solicitation and 
transaction cost that is essentially a barrier that prohibits 
many municipalities from going out and trying to aggregate and 
then switch consumers, because that has been an incredibly 
difficult thing, as we have seen, in just about every State 
that has gone to competition, to get people to move.
    And, second----
    Mr. Barton. Be concise, because my time expired about 5 
minutes ago.
    Mr. Smith. And that is probably the most concise thing is 
the cost barrier is so high that, unless you do it the other 
way--and the other point that I wanted to make is we do give 
people who want to go out and play in the retail market, who 
think there is a better deal out there for them, the 
opportunity to leave and go out and buy in the retail market, 
to join associations like mine or AARP or the big business 
association and go out and buy in those groups if they want to, 
or buy in the retail market, and so it is the best of both 
worlds, we think.
    Mr. Barton. Okay. The gentleman from--well, first the 
gentlelady from Missouri. Does she wish to formally introduce 
Mr. Casten to the committee?
    Ms. McCarthy. Mr. Chairman, I am going to brag about him 
when it is my turn to ask questions.
    Mr. Barton. Okay. Then we are going to recognize the 
gentleman from Ohio, Mr. Sawyer, for 5 minutes for questions.
    Mr. Sawyer. Thank you, Mr. Chairman.
    Let me go back to Commissioner Moler and go back to the 
dead horse I keep beating in terms of transmission.
    I hope it is not a dead horse, Mr. Chairman.
    It seems to me that one of the things we keep hearing in 
one form or another is that people are deeply concerned about 
equality of access, and to make sure that transmission is not 
used as a conscious tool in advantaging one supplier over 
another, and in the end wind up cutting off markets.
    It seems to me that you are probably a veteran of the 
California transmission wars. In fact, it was the head of the 
California Commission who at one point said that 100 years of 
transmission wars made the ISO a psychological necessity. That 
was before RTOs.
    Putting those wars behind us, could you look into the 
future and speculate on what the success of stand-alone 
transmission entities might look like, the kind of things that 
the Transmission Alliance is talking about five, 10 years into 
the future?
    Ms. Moler. I believe that there are substantial pressures 
on utilities to look at what their core businesses are going to 
be. There is some interest in the industry in developing stand-
alone transmission companies.
    One of the challenges that we have in the industry today, 
as I look at it, and as my clients look at it, is that not all 
uses of that system are on the same tariff, and so there are 
dramatic differences in access, terms, and conditions, rates, 
preferences, all those kinds of things in terms of use of the 
same kinds of facilities.
    Mr. Sawyer. Are you describing, in effect, the arenas of 
regulatory reform that would be required to enable the success 
of these kinds of structures?
    Ms. Moler. I believe that, in order to have a fully 
competitive market, transmission will continue to be a monopoly 
for the foreseeable future. I do not think we want two sets of 
wires down the interstate highways.
    Distribution I believe will continue to be regulated by the 
States for the foreseeable future. And what we are seeing now 
is a diminution in wholesale transactions. We are seeing the 
wholesale market is not functioning well at all. We are seeing 
less trading now on NYNEX, for example, than you saw just a 
year ago. Things are headed in the wrong direction.
    An economist I talked to yesterday said that he believes 
that on most systems that less than 10 percent of the use of 
the transmission lines is subject to Order 888 requirements. I 
was stunned by that number.
    We have got to have more happening--same kinds of 
facilities, under the same set of rules.
    Mr. Sawyer. Do we need to encourage investment?
    Ms. Moler. Absolutely.
    Mr. Sawyer. Can you talk about the kind of encouragement 
that we ought to provide?
    Ms. Moler. Americans for Affordable Electricity does not 
have a particular position on incentive rates versus 
traditional rate-making approaches. I think there is some 
experimentation going along.
    I can tell you from experience that it is difficult to 
develop an incentive rate structure that really works.
    Mr. Sawyer. In one point in your testimony you analogize 
to--is it Order 668?
    Ms. Moler. Order 636 is the gas equivalent.
    Mr. Sawyer. That is what I meant, the natural gas order. 
Does that analogy extend to citing decisions, as well? Should 
it? And, if not, what is the solution to the conundrum that we 
face with regard to----
    Ms. Moler. AAE does not have a position on this. I, 
personally, have testified before this committee that I believe 
there should be Federal siting of electric lines that is 
analogous to the siting under section seven of the Natural Gas 
Act.
    Mr. Sawyer. Thank you very much. I appreciate your 
flexibility, Mr. Chairman.
    Mr. Barton. The Chair is turning the Chair over to Mr. 
Largent, and the Chair recognizes Mr. Largent for 5 minutes for 
questions.
    Mr. Largent [presiding]. Thank you, Mr. Chairman.
    I want to ask your question, first of all, to a 
distributive generator, and that is Mr. Casten with Trigen.
    One of the questions our chairman has been asking is about 
this 50 megawatt language that is in the bill and what would be 
an appropriate number.
    You are a distributive generator. What would be a fair 
number if it was something less than that?
    Mr. Casten. I believe that you should eliminate the number 
and describe what it is you are protecting. You cannot get a 
right number.
    What I would suggest is that a distributive generation 
facility be defined as one that is designed and primarily used 
to provide electricity to its host, and that if you are doing 
that you have the right to an interconnect that is a standard 
and that is safe, but it is equitable for the size differences 
between things, because that is----
    Mr. Largent. Is there a certain size, Mr. Casten, that has 
to be interconnected to a transmission versus a distributive 
distribution system?
    Mr. Casten. Yes, there is, but it is going to vary by 
utility by utility, and I think Congress shouldn't get anywhere 
close to the electrical engineering. We can work that out. But 
the point is that if you can connect to the local distribution 
system you ought to have the right to do it if primarily there 
to provide services for that entity.
    Mr. Largent. Okay.
    Mr. Casten. Coming back to the earlier question, I think 
everybody is focused on a view that the world will continue to 
generate its power centrally and it will all go through the 
transmission system. I predict that the big competitive force 
will be transmitting energy through gas pipelines, oil trucks, 
coal, and it will be made at the other end of the line, and 
that is what will put the pressure on the transmission lines to 
behave.
    Mr. Barton. Will the gentleman yield just to follow up on 
that?
    Mr. Largent. Sure.
    Mr. Barton. We thought about a functional definition 
instead of a discrete number, and the reason we do not have a 
functional definition is that we are told that there are some 
fairly creative utilities out there and distributive generators 
that can game that definition.
    Are you satisfied that there are attorneys adequate enough 
to the task to come up with a functional definition that can 
withstand the gamesmanship?
    Mr. Casten. I am reasonably satisfied, and we will submit 
the best shot we can that would do that. The gaming is severe 
right now.
    Mr. Barton. Okay. Thank you. Thank you, Mr. Largent.
    Mr. Largent. Let me ask Mr. Kanner, Marty, I want to ask 
you a question about the remedies for market power. If FERC had 
ability to address--market power, does it have to be 
divestiture? That is the first question. Or does divestiture 
have to be one of those tools that they have in their box?
    No. 2, if you say it does need to be in the tool box, does 
it have to be permanent divestiture?
    And then, three, because most people have viewed the market 
power issue as being sort of transitional, maybe over a 3- to 
5-year period of time, does the potential exist to say that we 
could sunset FERC's ability to address market power after, say, 
a 5-year window?
    Mr. Kanner. Thank you, Congressman. Those are all very 
important and valuable clarifications.
    We do not advocate forced divestiture of all utility 
generation. It is simply not real. And we do think that it is a 
useful tool, as a tool of last resort, but there are many other 
things that can be used. I note that in the State of Texas, 
where they do not prescribe asset divestiture, they do have a 
system where the utilities, in essence, auction off the 
capacity from generation, or some portion of it, for a set 
period of time, and I think that is a very effective tool to 
both foster the competition that we need and address market 
power. So it is sort of a ``twofer'' if you will.
    And I think that, as they did in Texas, some of those 
remedies can, in fact, be sunset. I would urge the committee, 
while we have our ideal language that does grant FERC that last 
resort mechanism of divestiture, that the Texas model is also a 
very valuable one for the committee to look at.
    One of the keys there is that the utility, itself, 
prescribes its mitigation plan, as you did in the bill that you 
offered with Mr. Markey, so the utility says, ``Here is what we 
propose to do,'' and then the Commission reviews whether it is 
adequate, and the bill can prescribe what some of those tools 
can be.
    Mr. Largent. Okay. The Chair is going to give himself 1 
more minute, since the chairman took some of my time, and I 
wanted to ask Ms. Moler a question.
    I think Mr. Sawyer talked about the analogy that you used 
between what we did--and I wasn't here, unfortunately, which is 
why I ask the question--the analogy between gas transportation 
and what we are attempting to do in terms of regulating the 
transmission lines and not having, you know, the FERC regulate 
unbundled retail sales and States regulate bundled sales.
    How did that work with gas and how do you see--I mean, can 
you kind of enlighten us on that analogy a little bit?
    Ms. Moler. The very short course in the evaluation of the 
natural gas rulemakings would go something like: first, FERC 
tried to have some special programs where you could have 
customer choice if you wanted it. They were reviewed by the 
courts. They were found to be discriminatory. FERC then 
eventually, in Order 636, required all gas pipelines to develop 
tariffs that would provide open access, same terms and 
conditions for everyone, use the gas pipeline, and also 
required the sale of the natural gas to be separated from the 
transmission as far as the corporate arrangement is concerned.
    It did not go beyond the city gate, so a lot of States 
still have bundled sales, so it is possible to have both 
bundled and unbundled transmission subject to the same rules as 
far as the interstate aspects of it are concerned.
    And the gas market has been relentlessly competitive since 
that time.
    Mr. Largent. Okay. I am going to yield to the next 
questioner, but I would like to get maybe a 1- or 2-page 
summary of what you just said, and maybe a few more details on 
that, if you would not mind.
    Ms. Moler. I would be happy to do so.
    Mr. Largent. Thank you.
    Who is next? Ms. McCarthy from Missouri?
    Ms. McCarthy. Thank you, Mr. Chairman, and thank you for 
your generous use of time. I hope that we can all be granted 
the same.
    I wanted to begin, first of all, by welcoming back Mr 
Casten. When you visited with us the last time, as we were 
having discussions about what would be in the perfect bill, you 
mentioned to me that there are, in fact, at least in our State, 
and perhaps in others, laws that impede companies from 
competing, and you were very enthusiastic about us taking up 
and passing a bill.
    But does this bill that we are looking at, if it were 
enacted as it is currently drafted, really solve or exacerbate 
problems you are facing in trying to conduct your business 
today in Missouri? And I would like any other panelist to 
reflect on that, as well.
    And I would like to ask a second question to you, Mr. 
Casten, to Mr. Cooper and Cowart, and that is one that I asked 
an earlier panel today. Does the Barton bill provide sufficient 
guarantees that renewable power providers will be able to 
compete successfully in a deregulated market, and would it, 
indeed, improve reliability in a restructured market?
    Mr. Casten, thank you again. I am quite proud, as is my 
county executive, of the work you are doing. In fact, she was 
just in New York on a national panel that ``Forbes Magazine'' 
sponsored talking about the public/private partnership that you 
have established in our community. It is a great model to us 
all.
    But my concern, as a member of this committee, is to make 
sure whatever we do at the Federal level enhances that, does 
not impede it, and, therefore, speaks correctly to it.
    Thank you.
    Mr. Casten. Thank you for the question.
    There are a series of barriers that we face that I wrote 
about in chapter eight of my book, and I am not sure how many 
of them you can deal with at the Federal level, but I will just 
take off some of the ones that are there.
    Fifteen States make it illegal for a third party to 
generate power, and I think that the Federal Government in the 
bill could say everybody can generate power.
    There is a law in Missouri, as you know, that is an anti-
flip-flop law which has been used that if you have once been 
supplied by one supplier, you cannot flip to another one. That 
is a pretty effective way to shut off competition, and that 
needs to be affirmatively stated.
    The largest problem that distributed power faces is 
interconnection, and it is a boring electrical engineering 
thing, and I appreciate the panel dealing with it, but it is 
consistently used to say, ``We have got to have these safety 
standards that are appropriate for a 1,000 megawatt nuclear 
plant apply to everything that comes on line.'' As the chairman 
of the West Chester Putnam Boy Scouts, we are trying to put in 
a 12-cabin campground that is sustainable, and we want to put 
up 12 kilowatts of photovoltaic, and the local utility has been 
given the right to force us to spend $30,000 testing the 
interconnect. They have no standards.
    Well, you have got net metering in the bill, but if you do 
not get the interconnect standards set by an impartial agency, 
then net metering won't help.
    So get the interconnect. I do not think that you can get 
one bill that does everything the first time. I think you have 
done a great job as far as you have come. It can be improved, 
of course. But get it started, and then, with 2 years in, come 
back and fix up some other things.
    Your second question was: does it give enough help to the 
renewables?
    Ms. McCarthy. To compete successfully.
    Mr. Casten. To compete successfully.
    Ms. McCarthy. And provide reliability.
    Mr. Casten. Okay. I think that it gives enough with the 
interconnect to take 2 years and see what happens.
    I am struck by Fredrich von Hayek, who said that the 
affairs of human beings became so complicated that nobody could 
predict what they would do, about 30,000 years ago.
    And so the minute you change the rules and open it up to 
competition, I am looking over my back, because somebody is 
going to figure a way to do it cheaper, and I think renewables 
will--see what happens for a couple years and then adjust it, 
is my advice.
    Ms. McCarthy. Mr. Cowart?
    Mr. Cowart. All right. I will take my turn.
    First, I would like to make an observation about 
distributed resources, generally. We tend to concentrate on 
distributed generation as an important goal, as an important 
public value as we move into a more competitive environment, 
and I agree with Mr. Casten that distributed generation can be 
a really important resource for the Nation.
    But efficiency resources are also distributed. They are 
modular. They can be manufactured at scale. And they produce, 
in an electrical sense in terms of providing electrical service 
to end users, much of the same benefits as distributed 
generation.
    We need to remember to support both distributed efficiency 
and distributed generation as we go forward.
    To answer your question about renewables, I do not believe 
the bill does do enough to ensure the healthy future for 
renewables that the Nation will need.
    With respect to reliability, as I said earlier in my 
remarks, I am very concerned, in fact, that we are missing the 
boat on reliability. We are leaving out of the equation here 
one-third of the picture--that is the efficiency with which 
electricity is ultimately used, which drives the problems that 
we are seeing in transmission and in generation adequacy.
    And I know the question will be asked: well, why is that a 
Federal issue? Why is energy efficiency a Federal issue?
    Probably 10 times today, maybe more, I have heard people 
say that reliability is a regional issue, that incentives ought 
to be given to support new transmission investments, and 
incentives need to be given to open up the market for the 
construction of new generation.
    Because the grids that we all are connected to are regional 
in scope, the physics of those grids dictate that what happens 
somewhere else on the grid is going to affect reliability 
everywhere and the price everywhere. And, for that reason, it 
just doesn't make--it is not logical, and we are leaving a lot 
of money on the table if we say that an RTO or other 
reliability organization has the authority to mandate the 
construction of new transmission for reliability purposes, or 
we can raise the reserve margin across an entire region for 
reliability purposes, which are going to raise costs to 
everybody.
    But we do not have a mechanism at the regional level to 
support enhanced investments in energy efficiency which could 
achieve the same reliability goal less expensively.
    Ms. McCarthy. Mr. Chairman, I know that time has expired, 
but I know there are a couple of other panelists who would like 
to speak to the reliability question that I raised. May I have 
an extension of time?
    Mr. Largent. The gentlelady has had an extension of time, 
but yes, if you would like to have one more response, that 
would be fine.
    Ms. McCarthy. Yes. Mr. Segal, I think you wanted to speak, 
and then Mr. Cooper.
    Mr. Segal. Thank you, Congresswoman.
    Ms. McCarthy. Or whomever.
    Mr. Segal. It will be a real short answer for us.
    We are not here to talk about the renewables portfolio or 
anything like that. As service contractors, the bottom line is 
this with respect to what is in the bill: the bill has a good 
first start in some areas with respect to open books and 
records, but, frankly, that is not much of a start.
    In order to actually fix the problem with respect to cross-
subsidization, getting into unregulated affiliate markets, 
there need to at least be broad principles articulated within 
the bill, as there were in earlier drafts. There need to be 
broad principles that include a clear prohibition and cross-
subsidization, because, just like this committee recognized in 
the Telecommunications Act of 1996, there are not sufficient 
protections in existing antitrust law with respect to 
competition in unregulated markets. There need to be at least 
some mechanism to make sure that these small businesses--
really, the small business discussion item for this bill, these 
small businesses do not fall through the crack because there is 
no enforcement mechanism in place to make sure that they are 
not crushed by utilities as they try and move into unregulated 
markets.
    Ms. McCarthy. Mr. Smith?
    Mr. Largent. Maybe we can have the rest of the panelists 
submit their responses in writing. We have got to move on. 
There is a reception in here at 4, I am told, so we have to 
keep moving.
    Ms. McCarthy. First things first.
    Mr. Barton. The gentleman from Illinois, Mr. Shimkus, is 
recognized for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Mr. Kanner, will you please describe for me horizontal 
market power? Just define it. I am having a hard time getting 
it defined the last couple days. Can you do that?
    Mr. Kanner. Sure. It would be where, in a given market all 
trading the same thing or selling the same thing, the ability 
of an entity or a group of entities to raise and sustain prices 
above what would occur in a competitive marketplace.
    So, in other words, if it is office supplies, I could sell 
pencils for whatever I want and there is no one else that can 
effectively cut my ability to do so.
    Mr. Shimkus. And so, in the term of power instead of office 
supplies, it would be controlling the price?
    Mr. Kanner. In terms of power, it would be two summers ago 
in California where the generators in southern California were 
able to raise the prices 3,500 percent in some of the ancillary 
services market and sustain those prices because there were 
only four players.
    Mr. Shimkus. Why cannot a quality, independent RTO approved 
by FERC, which, based upon my understanding, would require open 
access, why can they not control or mitigate this type of 
market power?
    Mr. Kanner. Again, in California during those price spikes 
there was a qualified ISO approved by FERC in place, and that 
entity went to FERC, went to a Federal regulator, to ask for 
help to resolve the problem.
    You simply have markets that get defined by transmission 
constraints, and within those markets, if you do not have 
enough players, then you do not have the competitive price 
check that I think we are all looking for.
    Mr. Shimkus. Ms. Moler, always pleased to see you again 
after attending so many hearings. Do you want to add to this 
for me?
    Ms. Moler. The only thing I would add to it, Marty--I 
believe that Marty, Mr. Kanner, has correctly described the 
answer to your market power question.
    A qualified RTO can work if all transactions from all of 
the entities participating in the RTO have to be under the same 
rules. A lot of the RTOs that are already approved by FERC do 
not--the tariffs do not apply to utilities' sales, bundled 
sales to their own customers, so they are first in line and 
they are not even on the tariff.
    So they are a good start. Some of the RTOs would do that, I 
might add. But you have got to have all uses of the 
transmission system covered.
    Mr. Shimkus. If the FERC required for the system to be 
open--and we are talking physics here--and people put power on 
the grid and the consumer pulls power down, it is in a pool, 
and so the producer has a record of how much they are putting 
on the grid, the consumer has a record of how much they are 
pulling down, and those interact, and if the grid is open, how 
is there horizontal market power?
    We do not know where those electrons are going. That is my 
point.
    Ms. Moler. The electrons all get mixed up. Right.
    Mr. Shimkus. I mean, that is the point. In the physics of 
this in this debate, we cannot follow it from the producer to 
the consumer. All we know is that it is going to a pool and 
people are pulling it down, and we are going to individually 
contract with a producer.
    So if the FERC requires that the ISO or the RTO or the 
transco is opened, why doesn't this system work? People are 
telling me they need more tools than that.
    Ms. Moler. I believe that truly open access, where it 
covers all the transactions on that grid, is a very effective 
remedy for market power. I view that as a market power 
initiative.
    When people talk to this subcommittee and advocate market 
power remedies, I believe that truly open access, as described 
in the amendment that we submitted today, would accomplish 
that.
    Mr. Shimkus. And, Mr. Casten, do you want to just add to 
that debate on the physics?
    Mr. Casten. The only point I would say is that the issue 
that people are concerned about came about because there was no 
price signal to the consumers, and so we want to be careful 
trying to solve a problem with legislation. We can get the 
wrong problem.
    The consumers did not see that high price and could not do 
anything about it. Hopefully, in a competitive market consumers 
will say, ``I do not want to pay $3,500 a megawatt hour right 
now. I will do something else.'' That will solve some of the 
market power from the other end.
    Mr. Shimkus. As we saw with the price spikes in the 
midwest, there has been numerous entries now into the 
generation, or at least proposals on the board to fulfill the 
void.
    Thank you, Mr. Chairman, for being so generous with the 
time, and I yield back the balance of my time.
    Mr. Largent [presiding]. The chairman wants to announce 
that any and all members who have additional questions can 
submit those in writing for the panelists, and we will get 
responses.
    I recognize the gentleman from Massachusetts.
    Mr. Markey. Thank you, Mr. Chairman, very much.
    One thing I have learned is I never get in between Steve 
Largent and a reception.
    We are going to keep that consecutive game streak going 
here, you know what I mean?
    You know, here is the thing that I try to keep in the back 
of my mind, which is that these are monopolies, you know, and 
it is a deep-seated pathology. Okay? It really is. And you are 
what you eat, and when you eat monopoly profits for that long 
it is going to be hard to change, and there is a kind of a 
paradox when you deal with monopolists, when you legislate in 
that area, which is that it takes more regulations to put on 
the book in order to break up the monopoly than already existed 
beforehand, but it is toward the goal of making sure that all 
the rest of these competitors can get in, and once all the 
competitors are in and secure then you can take all the 
regulations away and then you do not need any at all.
    But breaking down 100 years of pathology is not easy, so 
you have got to go through that process to turn it into a 
healthy, balanced, normal marketplace, which most other parts 
of the economy have.
    So what I would like to ask--first, Ms. Moler, I will try 
to get all my questions in to Ms. Moler and Mr. Kanner--is why 
is it that in the testimony today all the people representing 
retail consumers and industrial consumers and independent power 
producers and power marketers and other competitors have very 
serious problems with the Barton bill, the transmission, the 
RTO, the merger, and the other market-power-related provisions, 
and all the monopolies support the Barton bill?
    Why is that, Ms. Moler? What, in your opinion, do you think 
it is about the Barton bill that----
    Ms. Moler. I would hazard a guess that they do not believe 
that the monopoly power has been appropriately constrained.
    Mr. Markey. What do you think, Mr. Kanner?
    Mr. Kanner. Well, Congressman, I think we can say that very 
clearly all of the proponents of markets and competition and 
consumers believe that Congress needs to and must address these 
sets of issues if we are going to receive the intended benefit 
to competition.
    Mr. Markey. Okay. Now, Mr. Kanner and Ms. Moler, earlier 
one of the witnesses from the last panel mentioned some 
specific examples of instances in which incumbent utility 
monopolies had exercised market power, including Florida Power 
and Light, AEP, and some utilities in Wisconsin.
    Are you familiar with any real-world examples of market 
power problems? Can you point to any States, regions, Mr. 
Kanner?
    Mr. Kanner. I think you can. I used earlier the example in 
California, which is, to me, the starkest, where there were 
dramatic price increases in the ancillary services market of 
some 3,500 percent and it was limited there because the 
computer could only enter four digits, so it was $9,999. So 
that is a very clear example.
    I think we have had market power examples elsewhere where 
these new generators that Mr. Shimkus mentioned are desirous of 
building new plants, but they are told that they are last in 
line because the utility's own plants get to grandfather and be 
cued up first for interconnection, and the longer you wait, not 
only do we forestall that competitive market, but the cost of 
interconnection, because of the impact on the system, goes up, 
and ultimately those projects can be uneconomic, not viable.
    Mr. Markey. Mr. Cooper, could you give me the nightmare 
scenario? Could you briefly?
    Mr. Cooper. Well, the nightmare scenario I think occurs in 
reality in California. If you think about what happened there, 
the State of California could not make a market on its own and 
had to turn to the FERC and say, ``We need some relief.'' The 
simple fact of the matter is that this is an interstate market. 
The nearest competitive power may be across the State border, 
and the State cannot--the entity that has that power can, in 
fact, be operating in both States.
    Imagine the screaming and shouting if the State of 
California tries to tell a generator in Nevada who is 
withholding his power in California that they have to sell it 
into the State. It cannot happen. They would just scream and 
shout and say they crossed the State border.
    This is an interstate market. The transmission grid is a 
highway. This is the highway of commerce.
    Imagine if you are a vegetable producer in Texas who says, 
``Look, let's put up a toll booth at the State border and turn 
back all the trucks that might come from California with fruit 
in them.'' This is a nightmare system.
    You have to have a supply side, a demand side, and a 
highway of commerce in between, and clearly that highway is an 
interstate highway and it is an interstate market.
    Mr. Markey. Ms. Moler, let me ask you a question.
    Does section 101 of the Barton bill codify the 8th circuit 
decision which held that FERC cannot bar utilities from giving 
first priority in transmission to serving their native load 
even if this undercuts their obligation to provide firm 
transmission service to other parties?
    Ms. Moler. I believe that section 101 does codify the 8th 
circuit decision. The FERC----
    Mr. Markey. And what impact does that have on FERC's 
ability to prevent utility monopolies to grant themselves 
preferential service for their own use and prevent others from 
fairly, effectively, and efficiently utilizing the transmission 
grid?
    Ms. Moler. FERC would have no authority to look at the 
bundled transactions that you describe.
    Mr. Markey. None at all?
    Ms. Moler. Correct. The reliability provision does talk 
about FERC having authority over ``bulk power facilities.'' 
And, as I said in my prepared statement, I cannot reconcile the 
bulk power sections and the jurisdictional sections.
    I noticed that NERC today proposed to solve that by saying, 
notwithstanding any provision of the Federal Power Act, this 
reliability authority would be up and running, but section 101 
does amend the Federal Power Act.
    Mr. Markey. Thank you.
    Thank you, Mr. Chairman.
    Mr. Largent. Thank you.
    I recognize the gentleman from Tennessee.
    Mr. Bryant. Thank you, Mr. Chairman.
    Again, let me thank you for just continuing to hold these 
various hearings on this very important issue.
    Today we have had two very representative panels, and I 
appreciate their testimony. Unfortunately, I have been in and 
out today with another subcommittee hearing with the Surgeon 
General in one, and also on the floor talking about health 
care, which is another very important issue, certainly one of 
the day.
    In order to avoid duplication, since I have not heard all 
of your testimony, I am not going to wade in and try to ask you 
additional questions, but, Mr. Chairman, I would ask that we be 
given a few days and maybe we could submit questions in writing 
if we have any additional questions.
    Mr. Largent. Yes. Without objection.
    Mr. Bryant. Thank you.
    And, again, thank you for your presence here today.
    I yield back the time.
    Mr. Largent. And the gentleman from Texas is recognized for 
5 minutes, Mr. Hall.
    Mr. Hall. Mr. Chairman, thank you.
    I have noticed that there are not very many people asking 
Mr. Smith any questions, and I left--I had to leave and go and 
come back, and I have been going to see where Mr. Markey was. 
He goes and comes and then come back revved up and ready to go.
    Are you the same one they call ``Smitty'' down in Austin, 
Texas?
    Mr. Smith. Mr. Hall, I am that same Smitty.
    Mr. Hall. The same one that came to my office and told me 
everything I was doing wrong----
    Mr. Smith. And hope to do that again.
    Mr. Hall. Well, I enjoyed you. You are a class guy.
    Mr. Smith. Thank you.
    Mr. Hall. And you just say what everybody else says, so--
but I noticed that some here represent AARP, some Americans for 
Affordable Energy, coalition coordinator for Consumers for Fair 
Competition, Consumer Federation of America, and then you 
represent everybody else. You represent the public citizen, 
right?
    Mr. Smith. Right. That is what I try and do.
    Mr. Hall. I have a quick question to ask everybody, but I 
will ask you first. How has this bill been implemented in Texas 
that we just passed there? How is it working?
    Mr. Smith. Well, it is good and bad and ugly, and the----
    Mr. Hall. In that order?
    Mr. Smith. Yes. I think our Public Utilities Commission has 
done a great job of doing rulemaking on this.
    The bad news is that we did not anticipate a number of the 
problems in the bill and we did not get language tight enough 
in a number of key areas, some of which you have been talking 
about today.
    Mr. Hall. It was amazing to get a bill with the vote you 
got down there, right?
    Mr. Smith. Well, especially in the House. And it was a bill 
that was heavily worked, and we got tremendous--almost 
everybody, with the exception of Public Citizen and the 
consumer groups, were in support of the bill, and the chairman 
and the House did a tremendous job down there. And we got an 
awful lot in that bill. I do not mean to be belittling it. We 
just did not think that this was a good idea.
    But the ugly part and the part that I think is really 
important here in this conversation is what we did not really 
understand was that the way we set up the ISO, the ball has 
been stolen from the Public Utilities Commission on a number of 
critical matters regarding reliability, access to transmission, 
the data collection about consumers and how consumers get 
shifted around.
    And so when you all do your ISOs, unless you--our goal 
would be to have them done publicly, but if you do have these 
regional ISOs, make sure you have a significant majority of 
consumer representatives on those boards that control them; 
otherwise, the same big old boys that have been running the 
system are going to continue to control who gets access and you 
will continue to have monopolies really running the system.
    Mr. Hall. Part of your presentation was to assure we are 
not just benefiting the big boys.
    Mr. Smith. Yes. That is the essence of it.
    Mr. Hall. You recommended allowing communities to buy at 
wholesale for their citizens, and you said to help protect 
residential consumers you should consider adding a provision 
called ``community choice.'' There is a provision on 
aggregation, but community choice you say is different. How is 
different from the provision the that chairman put in his bill?
    Mr. Smith. We had a robust discussion a few minutes ago 
about this, and----
    Mr. Hall. Okay. I won't--if you have covered that, I won't 
go into it.
    Mr. Smith. But let me give you the short version, and that 
is that what happens then is the community gets together, votes 
on whether to create a new public power entity or buy power for 
its consumers, and then we think gets the wholesale deal.
    In Texas, what we found was that when people went out to 
wholesale they were getting 20, 28 percent reductions in price. 
The best in the country right now, the best market in the 
country right now in Pennsylvania, the star market, it is only 
an 18 percent difference from what it was before they did 
deregulation.
    We believe that wholesale gets you better deals for the 
average consumer, and that is the key message that we have got, 
so that is why we are suggesting that you give the community 
choice and then you give the people the opportunity to opt out 
if they would like to do so.
    Mr. Hall. Are you for this bill?
    Mr. Smith. No, sir, I am not. As I mentioned earlier, I 
think it is a--there are a couple good things in it, but it 
needs to go further.
    Mr. Hall. All right. You are not for the bill.
    Mr. Brice, do you support this bill?
    Mr. Brice. With some revision.
    Mr. Hall. All right. Betsy?
    Ms. Moler. With some change.
    Mr. Hall. Do you all have the same opinion?
    Mr. Barton. I have seven amendments. By the time we are 
done with the amendments, it will not look like the original 
bill, that is for sure.
    But we need legislation.
    Mr. Hall. Who was it that asked a while ago and they gave 
us all the things that were wrong with it, and I whispered to 
the chairman, ``Ask him what is right about that.''
    Mr. Barton. That was our strongest supporter.
    Mr. Hall. Well, you cannot fault this chairman. He has laid 
it out there and we can take shots at it and can restore it and 
correct it maybe. I hope we can.
    Mr. Kanner?
    Mr. Kanner. With some substantial changes, substantial.
    Mr. Hall. Mr. Cowart?
    Mr. Cowart. Also with substantial changes. I think it can 
be restored, frankly.
    Mr. Hall. Maybe I have not got enough time for you to tell 
me what. Go ahead. Go ahead and tell me. You are just against 
it like it is and you do not think it is repairable?
    Mr. Cowart. No. I said I think it could be repaired. There 
are some very significant, positive elements in this bill, and 
it is just the very important parts of what ought to be done 
aren't included at all.
    Mr. Hall. Mr. Smith, you have already spoken. You have not 
changed?
    Mr. Smith. Have not changed in the last five witnesses.
    Mr. Hall. Mr. Casten?
    Mr. Casten. Given a choice between this bill and no bill--
--
    Mr. Hall. You, in your testimony, seemed to have wanted a 
smaller bill. You think the time is not right, or something?
    Mr. Casten. No, I did not mean that at all.
    Mr. Hall. Did I misunderstand you?
    Mr. Casten. Yes, sir.
    Mr. Hall. Okay.
    Mr. Casten. Given a choice between this bill and nothing, I 
wholeheartedly support passing the bill.
    Mr. Hall. Okay.
    Mr. Casten. I think there are some more barriers that have 
not been dealt with and they could be added, but you are in the 
right direction, sir.
    Mr. Hall. Well, you know, we are at the subcommittee level 
and we will have a new chairman when we get to the committee. I 
do not know in whose hands and what those hands want to do with 
this bill when it gets there. And Rules is going to have an 
awful lot to say about it, the Speaker will have a whole lot of 
input at the Rules Committee, and when it gets to the floor--we 
are a long way from the bill. But I agree with you--I think it 
is better than no bill, and that with some real helpful 
amendments that we can maybe restore this vehicle.
    Yes?
    Mr. Segal. Mr. Hall, I have got good news and I have got 
bad news.
    Mr. Hall. Give me the bad news first.
    Mr. Segal. Bad news first is, as the bill is currently 
drafted, the service contractors cannot support it. But the 
good news is, all we have to have is a cross-subsidization 
provision in with broad principles and we can support pretty 
much any other bill, no matter what it says about all their 
transmission problems, doesn't matter as long as there are 
good, broad principles on our issue.
    Mr. Hall. To get that one thing, how many votes up here can 
you deliver?
    Mr. Segal. I will answer that question. We have chapters in 
every Congressional District in every State, air conditioning 
contractors, alone, 4,000 of them, and we will mobilize----
    Mr. Hall. It is already getting to be winter now. How about 
the people in the wood business?
    Have you got any people----
    Mr. Segal. Electricians, plumbers, you name it, they are 
going to kill me because I am leaving somebody out, but every 
service contractor that is facing unfair monopoly based 
competition, we are absolutely willing to support a bill that 
contains adequate provisions on cross-subsidies.
    Mr. Hall. Mr. Chairman, I asked to be last because I wanted 
to go out in good nature and real gratitude to you, and I say 
this in all sincerity, for the openness, that your door has 
absolutely been open to everyone, and you have traversed this 
Nation back, forward. I have asked for hearings in Honolulu. 
You have turned those down. I did not like that.
    But I think that we owe you a great debt of--hell, I am the 
only one up here.
    I am in slapping distance, so I have to be for him.
    We do thank you for the way you have engineered this, and I 
am honored to be a part of it with you.
    I yield back my time.
    Do you want me to take another 30 minutes?
    Mr. Barton. No, no. I think we are--we were supposed to 
have been out of the room at 3, because they are getting ready 
for an Armey reception at 4.
    Let me close the hearing. I want to thank you, Congressman 
Hall. You have been polite to me. This is a team effort, and I 
could not ask for a better ranking member than you in terms of 
being open and congenial and forward-thinking in trying to 
reach the goal.
    I want to compliment the full committee ranking member, Mr. 
Dingell, for all of his accessibility and his willingness to 
listen and make sure the process goes forward.
    Chairman Bliley has been very supportive of the hearing 
process and moving toward delineation of the issues. So it is a 
team effort.
    I want to thank this panel. I apologize. Because of the 
lateness of the day and the votes, we did not have all of the 
subcommittee back to hear your testimony, but it is in the 
record and we are going to be looking at it.
    As I have told this first panel, my intention is to go to 
markup the week after next, so, Mr. Casten, who said he had 
some language on functional distribution, we need to look at 
that, and I know Mrs. Moler's group has got some discrete 
language. I know Mr. Kanner's group has. Try to get a champion 
on each side of the subcommittee to bring it forward. I am 
going to sit down with Congressman Hall as soon as we get all 
that in, go through and see if we need to change the current 
draft before we go to markup, or whether we want to go to 
markup and then have a log of amendments. But we are going to 
have an open markup process.
    The one thing that I am going to discourage is subcommittee 
members coming into the markup having not shown their 
amendments to anybody. I cannot prevent that from coming up for 
a vote. It is an open process. But I am going to tend to be 
very negative on amendments that have not been shopped and have 
not been shown to both sides of the aisle in terms of them 
being accepted into whatever the legislative vehicle is.
    Our subcommittee is well versed in the issue, well educated 
on both sides of the aisle. This is a big, big issue. I think 
it dwarfs telecommunications. I think it is more complex than 
natural gas deregulation was. So we need the best minds working 
on these issues, giving us the legislative language, and then I 
have got confidence, between the kinds of members we have on 
both sides of the aisle that are dedicated to trying to get a 
good bill, we can come up with a good bill.
    I do not disagree with most of your testimony, quite 
frankly, that this is--you know, not too many of you are 
categorically for the bill as it is, but with some changes. The 
key is going to be, you know, how do we balance those changes 
in the good for the country.
    I have told the republicans on the subcommittee when we 
meet, ``I want suggestions on good public policy,'' and then we 
are going to have to make some political decisions, but I want 
suggestions on good public policy so that, if we start with 
good public policy, when we have to make a political decision 
to get the votes, at least the base underline is good public 
policy.
    So I know you have got interest groups and I know your 
interest has got to be preeminent in your presentation, but 
when you go back and make your reports tonight or tomorrow to 
the trade groups that you represent, try to get them to think 
about not just what is best for you, but what is best for good 
public policy, because we have got a chance in the next 2 weeks 
to mark up a bill that restructures an industry that has never 
been in any type of a competitive market for over 100 years, 
and that is a real opportunity, and we ought to take advantage 
of it in this session of Congress.
    I thank this panel. You are adjourned, and the committee is 
adjourned.
    [Whereupon, at 3:20 p.m, the subcommittee was adjourned, to 
reconvene at the call of the Chair.]
    [Additional material submitted for the record follows:]
Responses of David K. Owens, Executive Vice President, Edison Electric 
               Institute to Questions of Hon. Joe Barton
    Question 1. Some witnesses suggest including Clean Air Act 
amendments in electricity legislation based on the Waxman bill (H.R. 
2900) or the Pallone bill (H.R. 2569). What is your position on these 
bills?
    Response: EEI does not support including Clean Air Act amendments 
in electricity restructuring legislation. Any provisions affecting air 
emissions from electric generating sources should be part of an overall 
reauthorization of the Clean Air Act which applies to all industries, 
rather than done piecemeal in other legislation. Electric generating 
plants already face uncoordinated, overlapping and inconsistent 
programs under the Clean Air Act, probably the most complex of 
environmental statutes. Adding more requirements outside of the Clean 
Air Act structure would only make matters worse. Additionally, the air 
emissions included in both the Waxman and Pallone bills are addressed 
in the existing Clean Air Act, and implementation of the statutory 
programs is underway or currently under development. It would be 
premature to add other requirements outside of the Clean Air Act before 
all the existing Clean Air Act provisions are fully implemented and the 
impact on overall air quality fully realized.
    Question 2. You assert FERC has no authority over holding company 
mergers. If so, why did AEP and CSW submit their merger for FERC 
approval? Do you expect PECO Energy and Unicom to submit their merger 
for FERC approval? H.R. 2944 does not expand FERC regulation if it 
merely clarifies existing authority.
    Response: The Federal Power Act does not grant FERC explicit 
authority over mergers of holding companies. In fact, FERC's assertion 
of jurisdiction over holding company mergers is relatively recent. Many 
disagree with its position as a matter of law. But, as a practical 
matter, litigation of this issue during the pendency of a merger could 
delay merger approval for years. Approvals of utility mergers already 
take too long. Thus, as a practical matter federal restructuring 
legislation needs to resolve this issue, just as it should resolve 
other issues where FERC jurisdiction is ambiguous. However, we are 
opposed to expansion of FERC merger authority over holding companies.
    Question 3. Mr. Rao proposes establishing a rebuttable presumption 
that nonradical lines in excess of 60 kilovolts are transmission 
facilities. What is your reaction?
    Response: FERC's seven part test, which is accepted in the Barton 
bill, properly concludes that a variety of factors need to be 
considered to correctly distinguish transmission from distribution. 
FERC developed this test in Order No. 888 after considering comments 
from all interested parties. FERC concluded that no single factor, not 
even voltage, is sufficiently important to be a primary measure of the 
nature of a given facility. Under the current FERC approach, FERC will 
give great deference to state determinations applying the seven part 
test. Mr. Rao's approach might well deny states authority over 
facilities that really serve a distribution function.
    Question 4. Mr. Rao gives examples of IOUs redesignating 
transmission as distribution in order to avoid open access 
requirements. Why did Commonwealth Edison reclassify 40% of its 
transmission as distribution? Why did Wisconsin Public Service Company 
try to reclassify over 90% of its transmission as distribution?
    Response: Every proposal to clarify what is transmission and what 
is distribution is subject to regulatory review and approval by state 
regulatory commissions and FERC. FERC established the seven part test 
for identifying transmission facilities in Order No. 888 because it 
recognized that restructuring could require utilities to revise 
precisely how they accounted for transmission and distribution 
facilities based on whether or not an asset was actually being used for 
a transmission or distribution function in a competitive context. FERC 
recognized, for example, that open transmission access could utilize 
facilities which utilities had traditionally treated as distribution 
for accounting and regulatory purposes. The requirement of open access 
distribution in state restructuring plans similarly could cause 
utilities to take a new look at how they classified various facilities. 
In fact, states such as Illinois have required utilities to 
refunctionalize as part of their restructuring legislation.
    In Order No. 888 FERC also described the process and factors it 
would use to review these classifications. This process provides for 
public input, and deference to state determinations about the proper 
classification of transmission and distribution facilities within each 
state. However, FERC makes the final decision on all of these requests. 
No utility can unilaterally transfer facilities from one category to 
another. In short, this process is a natural response to the changing 
use and regulation of the utility delivery system that is fully 
regulated by FERC and the states.
    Question 5. You state Congress should authorize States to impose 
reciprocity, which would give States the power to regulate interstate 
commerce, by denying out-of-state electric suppliers access to their 
retail markets. Are you concerned States may abuse this power? For 
example, New Jersey could use its reciprocity power to deny the access 
of coal utilities to its retail markets.
    Response: With the modification we suggest, the only criteria which 
a state could use to require reciprocity involves whether a utility has 
applied for or provides open access distribution. A state could not 
impose environmental or other restrictions under this reciprocity 
approach.
    Question 6. You state TVA provisions ``absolves TVA of the most 
basic regulatory constraints.'' Under the status quo, TVA is not 
regulated, it has a closed transmission system, it sets its own 
transmission rate and power rates, Federal law requires its customers 
to buy from TVA, and antitrust law does not apply to TVA. H.R. 2944 
opens TVA's transmission system, provides for FERC regulation of TVA 
transmission and power sales outside the region, gives TVA customers a 
choice, and applies antitrust law to TVA. What is a better deal for 
TVA, the status quo or H.R. 2944?
    Response: The phrase you quote in your questions refers to Section 
612 of H.R. 2944, which says that Subtitle A ``shall be interpreted and 
implemented in a manner that does not adversely affect bonds issued by 
the Tennessee Valley Authority.'' We believe that this extraordinarily 
broad loophole virtually voids many of the regulatory provisions that 
might otherwise apply to TVA under other sections of H.R. 2944.
    We also do not believe the goal of fair competition is advanced by 
allowing TVA to carry its subsidies and exemptions over the fence into 
competitive wholesale markets. If TVA is to be an active competitor in 
the electricity marketplace, it should play by the same rules as other 
active competitors.
                                 ______
                                 
Responses of Alan Richardson, Executive Director, American Public Power 
             Association to Questions from Hon. Joe Barton
    Question 1. You say H.R. 2944 eviscerates FERC jurisdiction over 
the transmission system. That is not what FERC told us yesterday. FERC 
told us H.R. 2944 codifies Order 888. Let's be clear what you are 
asking for--you want Congress to go beyond Order 888 and give FERC 
jurisdiction over a larger part of the transmission system than it 
assessed in Order 888. Isn't that correct?
    Response. APPA's view is not that H.R. 2944 eviscerates all FERC 
jurisdiction over the transmission grid. Rather, as I testified 
previously:
          [I]n attempting to create a bright line distinguishing 
        Federal and State regulatory jurisdiction, two provisions of 
        H.R. 2944 combine to eviscerate FERC jurisdiction over 
        significant components of the interstate transmission network.
          Section 101(b)(1)(B) does not allow FERC regulation over 
        bundled retail sales of electric energy. Section 101(e) allows 
        for a FERC determination of whether a particular facility 
        qualifies as transmission or distribution, but requires FERC to 
        give deference to State commission decisions. When these 
        provisions are combined, this section cuts FERC out of the 
        regulation of significant amounts of transmission access and 
        use over bundled sales. If this section is interpreted to allow 
        a preference for bundled firm load over unbundled firm load on 
        the same transmission system under emergency situations, then 
        it is clearly inappropriate. Such an interpretation would 
        undermine the goals of promoting competition and standardizing 
        regulation of the national grid. [emphasis added]
    The bill's attempt to establish a bright line between state and 
federal jurisdiction is likely to balkanize the grid and to lead to 
protracted litigation of the new divide. As private power companies 
seek to protect themselves from competition, they could use the 
extension of slate jurisdiction over facilities and the bright-line 
prohibition on FERC inquiry into the comparability of bundled retail 
service to unbundled wholesale service to establish effective barriers 
to competition.
    Section 101 will prompt utilities to forum-shop, seeking to 
transfer assets to state jurisdiction where the regulatory climate is 
favorable and the objective is to protect their generation and merchant 
functions from competition.
    APPA does not seek to extend direct FERC authority over the 
transmission of electric energy, as part of a bundled retail sale. 
However, the Commission must have the authority to ensure that all 
users of the transmission grid receive comparable, non-discriminatory 
access to the grid, whether the sale is characterized as a bundled 
retail sale, an unbundled retail transaction, or a sale for resale in 
interstate commerce. Chairman Hoecker has in fact sought just such a 
clarification in his testimony, illustrating that H.R. 2944 in fact 
does not codify Order 888. Rather it constricts the scope of the 
Commission's existing jurisdiction.
    H.R. 2944 here raises two issues of grave concern to APPA. First, 
if transmission facilities are refunctionalized to ``local 
distribution,'' it becomes much more difficult to make the case that 
such facilities must be controlled and operated by RTOs. The results 
may be RTOs that lack operational control over the entire bulk 
transmission grid. An RTO's ability to perform each of the functions 
identified by FERC and those identified within H.R. 2944 would clearly 
be impaired if, for example, a major portion of the grid's Available 
Transfer Capability, is controlled not by the RTO, but by local 
utilities. Of equal importance, an RTO's ability to expand the grid in 
response to the needs of all transmission customers will be hobbled by 
dependence on each local utility to upgrade non-RTO facilities.
    Second, the bright line between bundled retail and unbundled FERC-
jurisdictional transactions would appear to foreclose inquiry by FERC 
(or by a wholesale customer in a court of competent jurisdiction) into 
the comparability of the transmission services afforded by a local 
utility to its bundled sale retail customers in comparison to the 
rates, terms and conditions of transmission access afforded to 
wholesale transmission customers. One must remember that none of the 
independent system operators now in operation or the RTOs now 
envisioned by the industry intends to operate the entire grid--from 
generator busbar to customer meter. Thus, comparability of the 
wholesale and retail delivery services provided by the local utility is 
still an issue of great concern to public power. For the most part, 
APPA members are interconnected at sub-transmission voltages through 
facilities that may or may not be operated by RTOs. Thus, our members 
will remain subject to discriminatory conduct by private power 
companies. Reliance upon state Commissions to ensure that public power 
systems receive comparable access would result in increased regulation, 
as states are forced to take on functions now performed at the federal 
level. In addition, one can anticipate a proliferation of differing 
regulatory regimes among the states governing local transmission 
access. While each state properly must design and implement its own 
program for retail choice, standardization of the rules for local 
transmission access under a FERC-jurisdictional tariff is essential for 
the creation of large and liquid regional power markets.
    Question 2.  One thing we have heard loud and clear the past four 
years is the need to respect the States. You propose granting FERC 
jurisdiction over transmission used to make bundled retail sales. What 
is the position of the States on this issue?
    Response. APPA has been among those urging Congress to respect the 
rights of the States (and their political subdivisions) regarding if, 
when and how to address retail competition. In our view, they, are 
better positioned than Congress to address these issues. This is why we 
have consistently, opposed a ``date-certain Federal mandate'' for 
retail competition. At the same time, we have endorsed Federal 
legislation to sort out the difficult jurisdictional issues necessary 
to make wholesale competition (competition in interstate commerce) work 
as intended, and to lay the foundation for effective retail competition 
in those states that have or may in the future proceed down that path. 
Theoretically, every electron in the grid flows in interstate commerce. 
We have never suggested that Congress could not endorse this expansive 
view of what constitutes interstate commerce, only that it should not. 
The problem then is how to draw reasonable boundaries between those 
issues subject to FERC jurisdiction, and those that should be left to 
the States. Transmission has historically been used to define the 
boundary, and, following Order 888, this has given rise to questions 
regarding FERC jurisdiction over transmission for bundled retail sales 
and unbundled wholesale sales. We believe that there should be 
comparability with respect to access, use and price for transmission 
services without regard to whether the facilities are used for bundled 
retail sales or unbundled wholesale sales. We believe this was one of 
many goals of Order 888.
    Congress should make it clear that FERC has full jurisdiction over 
all elements of transmission in interstate commerce, including the use 
of subtransmission and distribution voltage facilities that are needed 
to accomplish the transmission of energy at wholesale. To the extent 
that the Congress determines that the states should retain jurisdiction 
over the transmission portion of bundled retail sales, Congress should 
also find that such jurisdiction is shared with the Commission. Where 
there is a conflict between state commissions and FERC under the 
Federal Power Act, the interests of the state should give way to the 
extent that they create a barrier to interstate commerce.
    If we do not have uniform treatment of transmission facilities 
there will be wide disparities in treatment of similarly situated 
customers. For example, citizens of State A served by a publicly owned 
electric utility that purchases power at wholesale and unbundled 
transmission service from a private power company could be treated 
differently from other citizens in the same state who are retail 
customers of the same private power company simply because the IOU's 
transmission costs are bundled together with the power and distribution 
components of the retail bill. The opportunities for discriminatory 
treatment with respect to transmission access, use and charges in such 
situations are apparent.
    We do not speak for the States on this issue, and therefore cannot 
provide a definitive answer regarding their position.
    Question 3. You oppose FERC deference to the States in 
determination of transmission and distribution facilities, which is the 
approach FERC laid out in Order 888. Is FERC giving too much deference 
to the States? Can you give examples? You indicate utilities are trying 
to reclassify facilities. Is FERC agreeing to this reclassification?
    Response. In Order No. 888, the FERC announced that it had 
jurisdiction over all facilities necessary to complete a wholesale 
transaction, without regard to whether such facilities were labeled 
``transmission,'' ``distribution'' or ``local distribution.'' The 
Commission stated that it would apply a seven-factor test to determine 
what facilities were ``distribution'' facilities for purposes of 
determining the federal/state jurisdictional split when a sale is made 
to a retail end user and that it would defer to state regulators' 
determinations of what facilities are distribution.
    In the real world, under the guise of applying the seven-factor 
test, owners are seeking to ``refunctionalize'' (reclassify) 
substantial amounts of their existing transmission facilities in an 
attempt to remove these facilities from FERC jurisdiction. As of yet, 
the states and FERC would appear to have properly applied the seven-
factor test. Recent utility initiatives give us great pause, 
particularly in light of the language proposed in H.R. 2944.
    In one recently filed application to the FERC, a major transmission 
owner in Illinois has proposed to refunctionalize approximately 40% of 
its total transmission facilities to distribution. Although details in 
the filing are sketchy, it appears that almost all 138 kV and below 
facilities would be ``distribution'' facilities if FERC approved the 
application. Only 345 kV and above facilities would remain 
transmission.
    Another transmission owner in Wisconsin submitted a filing to its 
state regulatory agency under which only 124 out of a total of 1,474 
pole miles of existing transmission should remain transmission. The 
remaining 1,350 miles would be reclassified as ``distribution.'' The 
filing would have left only seven of the owner's 33 interfaces 
available for transfer to a RTO.
    In Order No. 888 FERC has stated that it will defer to state 
commission determinations. While such deference may be appropriate in 
the determination of what facilities constitute ``local distribution'' 
or ``transmission'' facilities, these proceedings do not take place in 
a regulatory vacuum. Restructuring presents many states with a 
substantial loss of regulatory jurisdiction to FERC (in the area of 
RTOs and transmission), to a self-regulatory NAERO (in the realm of 
reliability), and to largely unregulated markets (in the area of 
generation and marketing). State regulators will have a strong 
incentive to capture jurisdiction, by extending their purview from 
local distribution to the transmission of electric energy, even where 
such transmission is of an interstate or multi-state character. Owners 
also have a strong incentive to retain control of such facilities 
rather than transferring them to an RTO.
    The refunctionalization of facilities from transmission to 
distribution raises significant issues, including:

 Would refunctionalization of transmission to distribution mean 
        that FERC has no jurisdiction over these ``distribution'' 
        facilities?
 Will these ``distribution'' facilities become subject only to 
        state jurisdiction?
 Will operational control of these ``distribution'' facilities 
        be transferred to the RTOs as originally planned or will owners 
        retain full operational control over such facilities?
 Will these ``distribution'' facilities no longer be subject to 
        the requirements of Order No. 888?
 Will these ``distribution'' facilities no longer be subject to 
        any of FERC's open access or comparability requirements?
 Will state regulators determine rates, terms and conditions 
        under which wholesale customers have access to these 
        ``distribution'' facilities, including whether owners can 
        reserve significant portions of the capacity of these 
        facilities for reliability purposes (i.e., CBM), impose load 
        ratio restrictions on the use of such facilities, adopt non-
        comparable allocation or curtailment schemes or otherwise 
        impose rates, terms or conditions that would discriminate 
        against and limit customer access to such facilities?
 Will states that have different or conflicting economic 
        interests use their new authority to balkanize regional 
        markets, e.g., to prevent the transmission of low-cost energy 
        to ``downstream'' states or to prevent the transmission of 
        energy deemed to be insufficiently ``green?''
 Will customers be exposed to a vertical rate pancake if they 
        are served by ``distribution'' facilities or are purchasing 
        from a generator connected to the grid by ``distribution'' 
        facilities? If so, will the sum of the vertical pancake exceed 
        the owner's current transmission rate?
    The functional approach to differentiating between transmission and 
distribution facilities makes sense, so long as it is applied taking 
into account these and other questions. It is appropriate for FERC to 
consider state commission determinations, but requiring FERC, by 
statute, to give due deference to state commission determinations at 
the very least is an invitation to litigation.
    Question 4. Mr. Rao proposes establishing a rebuttable presumption 
that nonradial lines in excess of 60 kilovolts are transmission 
facilities. What is your reaction?
    Response. A rebuttable presumption based on the size of the 
facilities as proposed by Mr. Rao would be appropriate. We have not 
addressed what the appropriate threshold should be.
    In light of our concerns with the refunctionalization of 
transmission facilities to local distribution, we agree that a lower 
voltage threshold provides greater assurance that utilities will not be 
able to create barriers to competition. A rebuttable presumption would 
also allow a transmitting utility to petition for the exclusion of 
specific facilities or classes of facilities from transmission.
    Congress might consider, for example, the restructuring legislation 
recently enacted in Wisconsin. According to The Energy Daily, Friday, 
October 8, 1999, page 2, Wisconsin's Reliability 2000 legislation 
contains language that classifies anything above 130 kilovolts as 
transmission and puts the burden on a utility to explain why lines in 
the 50-130 kilovolt range should not be classified as transmission.
    Question 5. You say ``it is difficult on public policy grounds to 
sustain the proposition that publicly owned transmission facilities 
should be subject to FERC jurisdiction.'' I agree that small public 
transmission systems should be exempt from FERC jurisdiction, and H.R. 
2944 does that. Why should large public transmission systems like New 
York Power Authority be exempt from FERC regulation? Why shouldn't 
these large systems be fully open?
    Response. As noted in our testimony, APPA appreciates the fact that 
H.R. 2944 limits FERC jurisdiction over small publicly owned 
transmitting utilities. The specific comment in our testimony, that is 
quoted in this question is based on a number of factors. For example, 
most of the large public power systems that own substantial amounts of 
transmission facilities have voluntarily filed tariffs with FERC or a 
Regional Transmission Group that provide for comparable transmission 
service, are participants in ISOs (such as is the case with the New 
York Power Authority), or both. The transmission facilities of these 
utilities are fully open. In addition, publicly owned transmitting 
utilities are subject to FERC open access transmission orders under 
amendments to the Federal Power Act contained in the Energy Policy Act 
of 1992. Further, APPA supports the expansion of FERC authority to 
require all transmitting utilities to participate in RTOs. However, as 
noted and more fully explained in our testimony, the exercise of this 
authority with respect to publicly owned utilities must take into 
account the unique conditions and characteristics of publicly owned 
utilities. Therefore, based on what publicly owned utilities have 
already done to provide comparable treatment, what they may be required 
to do on a case-by-case basis under provisions of the Energy Policy Act 
of 1992, and what we believe should occur with respect to RTO formation 
and participation, additional FERC jurisdiction appears unnecessary. 
However, to the extent Congress concludes that FERC jurisdiction over 
publicly owned transmitting utilities should be expanded, we urge that 
such regulation be as light-handed as possible to ensure comparability 
without imposing unnecessary regulatory burdens.
    Question 6. You want to limit FERC regulation of large public 
transmission systems to non-rate terms and conditions. If large public 
systems retain rate authority, they could shift power costs into 
transmission rates, and would have an incentive to shift costs if their 
power costs were above-market. Should publics be able to shift power 
costs into transmission rates?
    Response. Shifting power costs into transmission rates is 
inappropriate. For the reasons set forth in our testimony, we do oppose 
FERC jurisdiction over public power transmission rates. jurisdiction 
over rates and revenue requirements should be limited to ensure 
comparability. Comparability encompasses standards of reasonableness 
and non-discrimination. We stated in our testimony that ``where FERC 
determines that rates are not comparable or are discriminatory, it 
could remand the rate to the local regulatory authority for review and 
revision as necessary. Public power systems would therefore retain 
local control over rate making and revenue requirement decisions.'' 
[emphasis added]
    Question 7. You say market power issues ``simply cannot be 
addressed by the individual States.'' Did California reduce generation 
market power? Did the New England States reduce generation market 
power? Did Texas reduce generation market power?
    Response. In fact, the states have a major role to play in the 
control and mitigation of market power, through the conditions and 
directives they impose on utilities during the restructuring process. 
States, for example, have used utility generation divestiture to ensure 
there are multiple owners of deregulated generation assets within their 
state. Without such state action, their restructuring efforts risk the 
creation of unregulated monopolies.
    Once the divestiture has occurred, most states will find it 
difficult if not impossible to mitigate market power, because electric 
power markets generally extend far beyond the boundaries of a single 
state. Texas, with its DC voltage interconnections to other states, is, 
like Alaska and Hawaii, an obvious exception. Even a state as large as 
California is overwhelmingly dependent on electric power imported from 
other parts of the west. In fact, throughout much of the year, imports 
set the market price for power sold into the California market. Thus, 
concentration in the electric generation market in a region, 
particularly where coupled with control of scarce import capacity, 
presents a risk from the exercise of market power in these 
``downstream'' markets. If the concentration is in the upstream (and 
out-of-state) region, regulators in downstream states have few if any 
tools to deal with such concentration.
    States lack the power to halt the trend of mega-mergers intended to 
create large, regionally dominant generation suppliers. Neither can the 
states effectively halt the creation of multi-state holding companies 
whose complex financial and business relationships are difficult for 
even federal regulators to decode. This problem will become even more 
serious if the current restrictions on the scope and configuration of 
utility holding companies are eliminated by the repeal of the Public 
Utility Holding Company Act.
    Question 8. Should individual States have the authority to 
establish transmission reliability standards? Would fifty different 
state standards improve reliability? What would be the impact on 
interstate commerce?
    Response. States have had the authority to regulate the plans and 
actions of the utilities within their borders with regard to 
reliability standards for several decades as a part of the voluntary 
industry self-governance system known as the North American Electric 
Reliability Council (NERC). The NERC system functions through several 
regional grids that really reflect the engineering of the system and 
have little relationship to state political boundaries. This system 
worked to produce the most reliable electric system in the world while 
the industry functioned through the geographic monopolies regulated 
primarily at the state level.
    Since the passage of EPACT in 1992, when Congress opened up the 
national electric transmission grid to promote greater wholesale 
competition and exchange, those geographic borders have been become 
even less relevant to the control and flow of electricity around the 
country. The industry, with an unprecedented level of cooperation, 
decided that the voluntary system no longer fulfills the reliability 
needs of the system, and that a self-regulatory organization (NAERO) 
with federal enforcement powers was needed to provide the proper level 
of focus on the reliability of the system. This focus on national 
reliability standards is also needed to support the expected increase 
in market activity that will be carried out over the system.
    There is nothing in the industry consensus language, which is 
included in H.R. 2944, that undermines the states' abilities to 
regulate the actions of utilities operating within their borders with 
respect to reliability standards for transmission and distribution 
delivery of electric power to retail customers in their state.
    Fifty sets of different state reliability standards could undermine 
the reliability of the interstate electricity transmission system. The 
national standards that the NAERO process envisions will reflect state 
and regional input throughout the process. States should not have the 
authority to establish standards that affect the national standards for 
transmission reliability necessary to create an effective and properly 
functioning interstate transmission grid. If states are allowed to 
create standards that negatively affect national transmission 
reliability, it could undermine the goals of promoting electric 
competition in interstate commerce.
    Question 9. You assert H.R. 2944 prohibits FERC merger hearings. 
H.R. 2944 does not eliminate hearings and maintains the discretion of 
FERC to hold hearings when it believes doing so is necessary to build a 
record to base a decision on. Do you believe FERC has to hold hearings 
under current law? How many of the 30 recent mergers were set for 
hearings?
    Response. I attempted to be very precise in my testimony. I did not 
state that H.R. 2944 prohibits FERC merger proceedings. I did state 
that ``H.R. 2944 would eliminate the option of exidentiary hearings.'' 
[emphasis added] Section 203 of the Federal Power Act provides for 
``notice and opportunity for hearing.'' H.R. 2944 would delete this 
language, and substitute language providing for ``notice and a 60-day 
opportunity for oral or written presentation of views . . .'' There is 
a significant difference between an opportunity for a hearing, which 
may include everything from no hearing, to a paper hearing, to a full-
blown evidentiary hearing, on one hand, and the much more limited 
opportunity for oral or written presentation of views on the other. In 
our view, the opportunity for oral and written presentations provided 
in H.R. 2944 does not encompass evidentiary hearings. For the reasons 
set forth in our testimony, we do not believe FERC should be prohibited 
from requiring such hearings. We are concerned over the potential for 
mergers to frustrate rather than promote competition. FERC has found 
this to be the case in its evaluation of certain merger proposals.
    While every merger takes at least one competitor out of the market, 
some mergers may promote greater competition and benefit consumers. 
Therefore, we do not believe FERC must hold an evidentiary hearing in 
every merger proceeding that comes before it, but we do believe it must 
have the opportunity to do so.
    According to research done by FERC Commissioner Massey and 
presented at a recent Commission meeting, of the 30 merger applications 
received since the FERC adopted its new and streamlining procedures, 
five were received within the last five months and have not yet been 
processed. Of the remaining 25 cases, only three were directed to be 
set for hearing. These three were: American Electric Power and Central 
and Southwest; Western Resources and Kansas City Power & Light; and 
Allegheny-Duquesne. In the latter case, the applicants were offered the 
option of going to hearing or accepting a set of conditions to address 
and mitigate market power concerns. That merger was subsequently placed 
on hold (in our view, for reasons unrelated to FERC's action). Thus, 
only two of the last 30 major merger applications have been to full 
evidentiary hearings. Examples of expeditious consideration include 
Scottish Power, which received FERC approval to acquire PacifiCorp 
within 98 days of its filing at FERC, and the MidAmerican Energy and 
CalEnergy merger; which was approved in 93 days.
    FERC has a self-imposed 150-day deadline for processing merger 
applications. Clearly, many merger applications can be handled within 
that time, but some clearly cannot. The Federal Power Act directs FERC 
to review mergers and only approve those that are consistent with the 
public interest. It is simply, not possible, and in our view not 
appropriate, to ask FERC to examine extremely complex transactions and 
determine whether they are indeed consistent with the public interest, 
and to do so within time constraints legislated by Congress.
                                 ______
                                 
    Responses of David Nevius, Vice President of the North American 
     Electric Reliability Council to Questions from Hon. Joe Barton
    Question No. 1: Is there a way to provide for enforceable 
reliability standards without providing for some additional Federal 
authority to enforce standards? Can private organizations such as NERC 
assume police powers or compel transmission owners or bulk power users 
to join NERC? Can there be enforceable reliability standards without a 
Federal role?
    Answer: No, I don't believe it is possible to have enforceable 
reliability standards without some additional Federal enforcement 
authority, for three reasons. First, the Federal Energy Regulatory 
Commission has jurisdiction over the wholesale sale of electricity in 
interstate commerce and the transmission of electricity in interstate 
commerce. FERC does not have clear jurisdiction over issues dealing 
with reliability. Following the Northeast blackout in 1965, legislation 
was introduced in Congress that would have given the Federal Power 
Commission (FERC's predecessor) clear authority and responsibility over 
reliability matters. But Congress never adopted that legislation. 
Instead, the industry formed what would become the North American 
Electric Reliability Council to coordinate industry standard setting on 
a voluntary basis, with compliance based on ``peer pressure.'' There 
were no enforceable reliability standards, but that approach has served 
North America well for more than three decades. It is the emergence of 
competition in the electric industry that now calls that approach into 
question.
    Second, FERC does not have jurisdiction over all entities that must 
interact to maintain the reliability of the interstate, international 
high voltage electric transmission system. FERC does not have 
jurisdiction over the utilities within the Electric Reliability Council 
of Texas, the Tennessee Valley Authority, the Federal power marketing 
administrations (Bonneville Power Administration, Southeastern Power 
Administration, Southwestern Power Administration, and Western Area 
Power Administration), the municipally- and state-owned utilities, and 
the rural electric cooperatives that have financing from the Rural 
Utilities Service. Those entities account for approximately 30 percent 
of the transmission assets in this country.
    Third, policing and enforcement is inherently a governmental 
function. Absent governmental authorization, such as exists in the 
securities laws for the stock exchanges and National Association of 
Securities Dealers to operate under Securities and Exchange Commission 
oversight, NERC cannot assume police powers nor can it compel 
transmission providers or bulk power system users to become members.
    For these reasons, NERC proposes creation of an independent 
industry self-regulatory reliability organization under FERC oversight. 
This plan follows the self-regulatory models of the securities 
industry. The new organization would have the authority to set and 
enforce mandatory reliability standards. This approach capitalizes on 
the electric industry's technical expertise in this highly complex 
area, while also providing the governmental presence needed to assure 
the fairness and validity of the enforcement process.
    Question No. 2: There are some differences between the proposed 
NERC reliability language and the reliability provisions of H.R. 1828. 
Please provide comments on those differences, and indicate whether you 
believe H.R. 1828 is an improvement over the NERC proposal.
    Answer: The reliability provisions of H.R. 1828 are essentially the 
same as the NERC reliability language, with three significant 
exceptions. (Section 601(a) of H.R. 1828 would add a new section 218, 
dealing with reliability, to the Federal Power Act; the section 
references below are to that new section 218.)
    The first important difference deals with governance of the new 
industry self-regulatory organization. The NERC language provides for 
governance by a ``board wholly comprised of independent directors.'' 
H.R. 1828 (section 218(e)(4)(E)) changes that to governance by a 
``board of no more than eleven members, one of whom shall be appointed 
by the Secretary of Energy.'' That change is unacceptable to NERC and 
the coalition that is supporting the NERC language. The fundamental 
premise of the NERC reliability legislation is to have an industry 
self-regulatory organization operating under government oversight. 
Permitting the Secretary of Energy to designate a representative on the 
board would put the government into the organization itself More 
importantly, the NERC proposal calls for independent directors, that 
is, directors who do not have an interest in other market participants. 
This independence requirement is omitted in H.R. 1828. This omission 
has consequences even beyond the Department of Energy and could 
transform the board for the new reliability organization from an 
independent one to a ``stakeholder'' board--a significant change. The 
Federal power marketing administrations, for example, are part of the 
Department of Energy. The Secretary of Energy, therefore, is not 
``independent'' from other market participants, but is a stakeholder in 
the industry. Finally, the high voltage transmission system is 
international in nature. The proposed new reliability organization 
provides a means for interests from the U.S., Canada, and, as 
appropriate, Mexico, to participate together in reliability standards 
development and enforcement. The provision of H.R. 1828 that would 
place a representative of the United States government in the governing 
structure of the new reliability organization has already raised 
significant questions from Canadian participants.
    The second significant difference between the NERC language and 
H.R. 1828 concerns the treatment accorded Federal power marketing 
administrations, the Tennessee Valley Authority, the Bureau of 
Reclamation, and the Corps of Engineers, as well as requirements of the 
Nuclear Regulatory Commission. Section 218(k) of H.R. 1828 states:
        ``Any actions taken under this section by the Commission, the 
        Electric Reliability Organization, and any Affiliated Regional 
        Reliability Entity shall be consistent with any statutory or 
        treaty obligation of a Federal Power Marketing Administration, 
        the Tennessee Valley Authority, the Bureau of Reclamation and 
        the Corps of Engineers and any Nuclear Regulatory Commission 
        requirements.''
    There is no comparable provision in the NERC language, and NERC 
sees no basis for including such a provision. The provision appears to 
establish an additional substantive standard that any actions by the 
self-regulatory organization must meet for these identified electric 
market participants. NERC knows of no reason why these entities should 
be given special status when it comes to reliability, or why these 
entities should not be bound by the same reliability rules that would 
bind all other participants in the electricity markets. The Commission, 
the Electric Reliability Organization, or an Affiliated Regional 
Reliability Organization cannot change a statutory or treaty obligation 
of these entities, any more than they can change any other law to which 
other electric industry participants may be subject, including, for 
example, clean air laws. NERC therefore recommends that this provision 
not be included in any reliability legislation that moves forward.
    The third significant difference between the NERC language and H.R. 
1828 concerns the application of the antitrust laws. Under the NERC 
language, activities of the Electric Reliability Organization and its 
Affiliated Regional Reliability Entities, as well as the activities 
undertaken in good faith under the rules of those organizations by 
members of those organizations, are rebuttably presumed to be in 
compliance with the antitrust laws. Under the provisions of H.R. 1828 
(section 218(o)), the conduct of the Electric Reliability Organization, 
its Affiliated Regional Reliability Entities, and members of those 
organizations, to the extent that conduct is undertaken to develop or 
implement an Organization Standard that is approved by the Commission 
under other provisions of the legislation, would not be deemed illegal 
per se. Such conduct would be judged on the basis of its 
reasonableness, taking account all relevant factors affecting 
competition.
    NERC believes that the antitrust provisions of H.R. 1828 are too 
restrictive. More than in any other industry, the cooperative actions 
of participants in the electric industry are crucial to being able to 
maintain the reliable operation of the transmission grid. Market 
participants should not have disincentives to engaging in the necessary 
cooperative behavior. By establishing the presumption, although 
rebuttable, that the actions of the reliability organization and its 
regional affiliates are legal, NERC's approach offers the needed 
assurance to industry participants that engaging in the cooperative 
actions necessary to maintain a reliable bulk power system will not 
subject them to antitrust liability. The presumption of antitrust law 
legality is justified by the oversight authority given to FERC over the 
reliability organization's governance procedures and development and 
enforcement of standards.
    NERC therefore recommends that the original antitrust provisions of 
the NERC language be substituted for those in section 218(o) of H.R. 
1828. If this cannot be accomplished, several technical issues in this 
H.R. 1828 language should at least be addressed. These include:

1. Omission of ``enforcement'' from protected activities. The H.R. 1828 
        language states that conduct undertaken to ``develop or 
        implement'' standards is not deemed illegal per se, but it 
        makes no mention of ``enforcement.'' The responsibilities of 
        the Electric Reliability Organization and its affiliates and 
        members are to ``develop, implement, and enforce'' reliability 
        standards. ``Enforcement'' should be included as a protected 
        activity.
2. Focusing the ``reasonableness'' language exclusively on effects on 
        competition. H.R. 1828 specifies that conduct is to be ``judged 
        on its reasonableness, taking into account all relevant factors 
        affecting competition (emphasis added).'' Some of the 
        activities of the Electric Reliability Organization, its 
        affiliates and members in setting and enforcing standards for 
        the reliable operation of the grid will likely have the effect 
        of restricting competition, because that is necessary in order 
        to maintain reliability. Having such activity judged based only 
        on matters affecting competition eliminates half the equation. 
        While we recommend retention of the original NERC language, if 
        any 66 reasonableness'' standard is to be included, NERC 
        strongly recommends that the language be revised to include 
        impacts both on competition and reliability. Alternatively, the 
        standard could be one of ``reasonableness, taking account of 
        all relevant factors,'' without highlighting any particular 
        factor.
3. Limitation of antitrust protection to actions ``approved by the 
        Commission under subsection (O).'' NERC recommends that this 
        clause be deleted. Otherwise, this language raises at least two 
        significant issues. First, what are the implications of this 
        language for standards that are adopted and enforced on an 
        emergency basis prior to ``approval'' by FERC? Second, is any 
        antitrust protection available under the language of H.R. 1828 
        for an existing Organization Standard that is suspended under 
        subsection (0(3)(b)?
    In addition to these three significant differences, H.R. 1828 
provides for an Electricity Outage Investigation Board within the 
Department of Energy (section 602 of H.R. 1828). This additional 
governmental agency is unnecessary. Both the NERC language and H.R. 
1828 would establish the Electric Reliability Organization as an 
independent, industry self-regulatory organization, with FERC 
overseeing that organization. An Electricity Outage Investigation Board 
within DOE would simply duplicate the efforts of the new reliability 
organization and FERC.
    The remainder of the differences between the NERC language and the 
reliability provisions of H.R. 1828 are of either a clarifying or 
conforming nature. NERC has no objection to those other changes.
    Question No. 3: There are concerns about how transmission 
constraints impede interstate electric sales. Where are the major 
constraints--which States and regions have the worst constraints? How 
do these transmission constraints limit interstate commerce in 
electricity?
    Answer: Transmission constraints limit interstate commerce in 
electricity because they restrict the amount of power that can be moved 
from one part of the country to another at a particular time. The 
constraints arise from the physical configuration of the generation and 
transmission facilities. The constraints can be one of three different 
kinds--thermal limits, voltage limits, or stability limits.

 Thermal Limits: Thermal limits establish the maximum amount of 
        electrical current that a transmission line or electric 
        facility can conduct over a specified time period before it 
        sustains permanent damage by overheating or before it violates 
        public safety requirements. System operators must constantly 
        monitor actual flows throughout the network to ensure that the 
        power flows do not exceed these limits. Operators must also 
        monitor for ``contingency'' limits, that is, to ensure that the 
        power flow on any one facility will not exceed its limit 
        following the sudden loss (outage) of any other facility. 
        (Since electrical power flows readjust instantaneously, the 
        system must at all times be operated in this preventive mode.)
 Voltage Limits: System voltages and changes in voltages must 
        be maintained within a range of minimum and maximum limits. 
        Voltage limits establish the maximum amount of electric power 
        that can be transferred without causing damage to the electric 
        system or customer facilities. A widespread collapse of system 
        voltage can result in a collapse of portions or all of the 
        interconnected network.
 Stability Limits: The transmission network must be capable of 
        surviving disturbances (e.g., generators tripping off, 
        lightening strikes, wind damage to conductors) through the 
        transient and dynamic time periods (ranging from milliseconds 
        to several minutes) following a disturbance. All generators 
        connected to ac interconnected transmission systems operate in 
        synchronism with each other at the same frequency (nominally 60 
        Hertz). Immediately following a system disturbance, generators 
        begin to oscillate relative to each other, causing fluctuations 
        in system frequency, line loadings, and system voltages. For 
        the system to be stable, the oscillations must diminish as the 
        electric systems attain a new, stable operating point. If a 
        new, stable operating point is not quickly established, the 
        generators will likely lose synchronism with one another, and 
        all or a portion of the interconnected electric systems may 
        become unstable. The results of generator instability may 
        damage equipment and cause uncontrolled, widespread 
        interruption of electric supply to customers.
    NERC's Planning Standards and Operating Policies set parameters 
within which the system must be designed and operated in order to avoid 
exceeding any of these limits.
    Twice a year, NERC reports on its assessment of the reliability of 
the electric system for the upcoming season, examining both generation 
adequacy and transmission adequacy. While the location of transmission 
constraints can vary from time to time, depending upon how the system 
is configured, what load is being served, and what generators are 
online, the NERC reliability assessments give a general picture of 
where transmission constraints are likely to occur. I have attached a 
copy of NERC's 1999 Summer Assessment (released June 1999) to my 
answers. The summaries of the Regional assessments, beginning at page 
21 of the Summer Assessment, give a general indication of where 
transmission constraints can be expected under base case conditions, 
However, as conditions depart from the base case either because of 
equipment outages or higher-than-expected demand, transmission 
constraints may be more severe or arise in other areas than indicated 
in the report. As stated in the Executive Summary of the 1999 Summer 
Assessment, ``[i]mprovements to the transmission system are not keeping 
pace with the demands being placed on the system.''
    Question No. 4: What is your position on the FERC proposed rules on 
RTOs? In particular, do you think the pricing provisions will encourage 
expansion of transmission and remove constraints?
    Answer: NERC told FERC in comments filed August 23, 1999, that 
properly functioning RTOs could help the industry deal with the 
challenges it faces, but that RTOs were not the whole answer. NERC 
identified four challenges facing the electric industry: the current 
balkanization of the transmission grid; the mismatch between how 
business is arranged and how power actually flows; transmission pricing 
and compensation issues, and the huge increase in the number and 
complexity of transactions. With regard to transmission pricing, NERC 
said the following:
        ``Transmission rates must provide incentives to get the right 
        amount of transmission infrastructure built. The cost of 
        transmission is a relatively small part of the overall price of 
        delivered power. We must make sure that shortages of 
        transmission capacity do not restrict power flows and limit the 
        benefits that otherwise could be achieved from competitive 
        electricity markets.''
    In the notice of proposed rulemaking, FERC expressed a willingness 
to be flexible about transmission rates and to entertain incentive 
rates as an inducement to get companies to join an RTO. The Commission 
did not directly take on the linkage between transmission rate reform 
and needed expansion of the transmission system. NERC believes that 
this is a subject that the Commission will need to take on directly. I 
have attached a copy of NERC's comments to these answers.
    Question No. 5: H.R. 1828 and H.R. 2050 authorize compacts to plan 
and site transmission lines. Do you think States will delegate their 
siting authority to such regional bodies?
    Answer: NERC thinks it unlikely that states will delegate their 
siting authority to regional bodies in a way that effectively deals 
with siting new transmission, although regional planning efforts may be 
productive. In certain parts of the country (New England, for example) 
there is considerable experience in states working together to address 
regional problems. But the problems facing the industry today are often 
siting new lines between what have been traditional regions. NERC's 
Annual Ten-Year Reliability Assessments cite a number of examples of 
these difficulties. I have attached a copy of NERC's Ten-Year 
Reliability Assessment for the period 1998-2007 to these answers. 
Unless the regional bodies were sufficiently large to include what are 
now ``boundary'' problems, giving a regional body siting authority may 
not be effective.
    Moreover, siting new transmission lines has become one of the most 
contentious issues facing state authorities. NERC does not believe that 
state authorities would willingly give up control over matters that 
their citizens feel so strongly about.
    One additional factor is increasingly present. Federal land 
management and resource agencies are playing a growing role, for 
example under the Federal Land Management Policies Act, in deciding 
whether and where additional transmission facilities can be built. 
Regional compacts would not be effective in these circumstances unless 
federal agencies are willing and able to turn over their own siting 
authorities.
                                 ______
                                 
 Responses of Glenn English, CEO, National Rural Electric Cooperative 
             Association to Questions from Hon. Joe Barton
    Question 1. You propose removing limits on cooperative business 
activity. My understanding is Federal law imposes no limits on 
cooperative business activity, and any limits are set by State law. Do 
you agree? If so, aren't you really asking Congress to preempt State 
cooperative laws?
    Answer. The Public Utilities Holding Company Act (PUHCA) places 
federal barriers on the diversification activities of investor-owned-
utilities. State laws tend to provide the barriers to the 
diversification activities of electric cooperatives. If Congress is 
going to remove the barriers provided by PUCHA for the largest 
utilities in the land, it should also remove the barriers for the 
electric cooperatives.
    Question 2. One thing we have heard loud and clear the past four 
years is the need to respect the States. States have authority to 
remove limits on cooperative business activity. If States have the 
authority and the willingness to address this issue, why should 
Congress preempt them?
    Answer. State laws limiting electric cooperative business activity 
were created for an earlier time. If there is to be no changes to 
federal laws governing the electric industry, there is no need to 
change state laws limiting electric cooperative business activity. 
However, if competition is to be the result of changed federal laws, 
then it makes no sense to allow barriers to continue to exist to 
prevent members of electric cooperatives from providing themselves with 
the diversified services they want through their cooperative. 
Cooperatives are an important segment of the electric industry, and 
thus, an important constituency for the Commerce Committee. To make 
competition truly vigorous, people will need the authority to provide 
the level of service they want for themselves through an electric 
cooperative.
    Question 3. Do you believe only cooperatives should qualify for an 
exemption from FERC transmission regulation or should municipal 
utilities or IOUs with small transmission systems also be eligible for 
an exemption?
    Answer. Electric cooperatives are consumer-owned. If you take 
service from an electric cooperative, you are a member-owner of that 
cooperative, and have a voice in the operation of it. That is 
completely different from investor-owned-utilities that are operated to 
make a profit from customers for the benefit of absentee stockholders. 
The difference is truly significant for the concept of regulation. 
Courts and Public Service Commissions across the nation have repeatedly 
held that consumers can operate their own consumer-owned systems 
according to their own needs without the necessity of being protected 
by an agency of the Government. Local ownership, local control and 
local autonomy are a more powerful force for consumer protection than 
absentee regulators.
    Additionally, true, effective competition for retail electric 
service cannot be imposed by a remote, heavy handed, federal 
bureaucracy attempting to force every supplier to be the same as every 
other supplier. Retail competition will come from differences among 
participants, and from the ability of participants to be different and 
to offer different and new ideas, and from the ability of participants 
to appeal to different market niches and to address unique local 
circumstances. Size is definitely a significant consideration; other 
issues are the extent of integration of the transmission facilities 
with the bulk power system and the ownership structure.
    Question 4. You propose exempting cooperatives from FERC merger 
review because cooperatives are so small that mergers are unlikely to 
raise market power issues. Should mergers involving other small 
electric utilities also be exempt from FERC review?
    Answer. Electric cooperatives should be exempt from FERC merger 
review in part because they are small; in part because they are 
consumer-owned, and in part because they are subject to merger review 
at the Rural Utilities Service (RUS), a federal agency within the U.S. 
Department of Agriculture, as a consequence of loan funds for the 
construction of electric facilities in rural areas. As the mortgage 
holder, RUS has the ability to prevent a merger, or suggest alterations 
to merger terms. Subjecting electric cooperatives to merger review by 
two federal agencies with dissimilar agendas is a prescription for 
trouble.
    As regards FERC's responsibility for protecting against market 
power, NRECA and the American Public Power Association (APPA) jointly 
filed a petition at FERC suggesting a moratorium on investor-owned-
utility mergers in excess of 1,000,000 customers until Congress 
completes its work in creating a competitive environment for retail 
electric sales. FERC did not act on the petition. Small system mergers 
are of much less risk to the market than large system mergers and 
should be subject to different standards of review.
    If two consumer-owned systems want to merge, why should FERC be 
involved? Consumers do not need FERC to protect them from themselves in 
a merger case.
    Question 5. RUS does review cooperative mergers, but my 
understanding is they do so from the point of view of a banker and are 
only concerned about loan recovery. Does RUS consider market power 
issues when they review cooperative mergers?
    Answer. The principle focus of RUS in a merger case seems to be the 
repayment of the loan, the value of the mortgage and, furthering the 
objectives of the rural electric Act, which is intended to insure 
affordable, reliable electricity to consumers. Moreover, additional 
federal review of cooperative mergers, focused on market power, is 
unnecessary in part because cooperatives are so small. RUS is the 
mortgage holder on about $32 billion in loans to electric cooperatives 
to provide facilities to serve people in rural areas. The American 
Electric Power Company (AEP) sold more electric power last year than 
all the electric cooperatives in the nation combined. The repayment of 
the RUS loan and the value of the mortgage is affected by market power 
in that electric cooperatives do not have market power in the sense 
that they can dominate a market.
    Question 6. You express concern about the States setting individual 
transmission reliability standards. Would 50 different transmission 
reliability standards improve reliability? Would 50 different standards 
burden interstate commerce?
    Answer. Fifty different bulk transmission system reliability 
standards would not accommodate reliability or interstate commerce. 
NRECA supports a continued state role in preserving reliability of the 
local distribution systems
                                 ______
                                 
Responses of Lynne H. Church, Executive Director, Electric Power Supply 
             Association to Questions from Hon. Joe Barton
    Question 1. You propose granting FERC jurisdiction over 
transmission used to make bundled retail sales. What is the position of 
the States on this issue?
    Response. We presume that the states' position on this issue will 
vary from state to state, with some opposing and some supporting. In 24 
states, for example, retail competition in electricity markets has 
already been embraced. A key element of this process is the decision to 
``unbundle'' the components of electricity transactions and separate 
the costs of generation from those associated with transmission and 
distribution services. For these 24 states, therefore, there will be no 
direct long-term impact from the change in legislative policy that we 
propose.
    The lack of direct impact, however, does not imply that these 24 
states or the remaining states will be indifferent to this issue. In 
many states, the cost of power to consumers will be increasingly and 
directly linked to access to a viable, robust wholesale power market. A 
state that relies on an interstate wholesale market has to be vitally 
concerned about the codification of rights for other states to place 
the equivalent of toll booths on the interstate electricity grid. Thus, 
any state that has come to rely on competitive wholesale markets should 
be very concerned by the bill's clear split in regulatory authority 
over the interstate grid.
    Experience has shown that even small disruptions or curtailments of 
transmission at distant locations can result in dramatic price impacts. 
During the hearing process, one Subcommittee member stated that he 
trusted his own state's public utility commission more than he trusted 
FERC. This is not a correct reflection of the issue at hand. The proper 
question is whether a policymaker trusts another state's public service 
commission more than the FERC.
    Many states, we believe, are coming to recognize the value of a 
single regulatory body to have oversight responsibility and set 
consistent ``rules-of-the-road'' for the interstate grid. At an earlier 
Subcommittee hearing, representatives from Ohio and Pennsylvania said 
as much in response to members' questions. What these states are 
realizing is that; without consistency, there will be no investor 
confidence; without confidence, there will be no robust, competitive 
wholesale power market; and without a robust, competitive wholesale 
market, many of the consumer benefits promised during the state's 
debate over retail restructuring will not appear.
    Question 2. You say H.R. 2944 interjects States into FERC 
determinations of transmission and distribution facilities, by 
providing deference to State views. Don't States already have a role in 
such determinations? FERC granted them a role 3 years ago in Order 888, 
but providing for deference to State views.
    Response. EPSA believes absolutely that the States have a role to 
play in these determinations. However, whether the states have a role 
is not the critical issue for EPSA members. Our concerns center on the 
extent of this involvement and, most critically, whether local 
interests and issues will be allowed through a legal guarantee of 
``deference'' to trump the general, national interest. As a simple way 
to address these concerns we have suggested that the legislation be 
amended to include the phrase ``provided such action is not contrary to 
the public interest'' at the end of Section 101 (e).
    It is true that FERC agreed to grant deference to the states on 
these issues in Order 888. However, we believe that there is an 
enormous qualitative difference between a decision made by an 
independent regulatory body to grant deference to an entity and a 
requirement of deference included in public law. In general, EPSA would 
express concern or opposition to the specific language of Orders 888 
and 889, were the Subcommittee to choose to codify the decisions 
embodied in those orders as law. These orders are complex and the 
public context is evolving. In the gas industry, for example, the 
Commission's Special Marketing Programs led to Orders 436 and 451, 
which led in turn to Order 636. Law, on the other hand, is often 
relatively static and inflexible. EPSA is concerned that legislating 
deference to the states, as drafted, will create a legal straightjacket 
for FERC and obstruct the public interest.
    Question 3. You oppose FERC deference to the States in 
determination of transmission and distribution facilities, which is the 
approach FERC laid out in Order 888. Is FERC giving too much deference 
to the States. Can you give examples? You indicate utilities are trying 
to reclassify facilities. Is FERC agreeing to this reclassification?
    Response. As stated above, EPSA does not oppose some deference by 
the FERC to state commissions. The question centers on the degree of 
deference and whether local issues are allowed to trump the national 
interest.
    It is impossible today to answer the question as to whether FERC is 
giving ``too much'' deference to the states. The issue of 
``refunctionalizing'' transmission assets is a relatively new one and 
is currently before the Commission in at least one case. Until FERC 
acts, we cannot say.
    However, we strongly believe that this is a very significant issue 
and threat to the interstate grid. As competition takes hold, utilities 
may attempt to shift assets between state and federal jurisdiction as 
one way to exercise market power.
    Evidence is mounting that transmitting utilities have already begun 
to abuse FERC's ``seven part test.'' The American Public Power 
Association recently released a report by Whitfield Russell Associates 
with some troubling statistical information on this new trend. 
According to the report, commonwealth Edison of Chicago recently 
refunctionalized 40% of its net transmission plant, almost all of it to 
distribution, including some 345 kV facilities. Sierra Pacific Power 
has refunctionalized 50% of its transmission system, while Wisconsin 
Public Service Corporation (WPS) recently filed with the state public 
service commission to classify virtually all of its transmission assets 
as distribution. If accepted by the Wisconsin Public Service 
Commission, only 124 pole miles of facilities, out of 1,474 pole miles 
reported on WPS's 1998 FERC Form 1, will remain subject to the 
Commission's open access tariff.
    FERC may or may not agree with these efforts to refunctonalize 
transmission assets. However, regardless of the specific decisions 
ultimately made, it makes little sense to codify an unqualified policy 
of deference to state decisions. If such language were in the Federal 
Power Act today, we would have no doubt that its effect would be to 
tilt the decision making process further away from the pursuit of 
positive, national policy.
    Question 4. You say ``States acting on their own'' can't address 
generation market power? Did the New England States reduce generation 
market power? Did Texas reduce generation market power?
    Response. Many states have attempted to address market power 
issues. Some plans have been more effective than others. In New England 
and in California, state action has resulted in the divestiture of 
significant electric power generation capacity, which has broadened the 
ownership base of the existing asset base and reduced vertical 
integration in local power markets. In Texas, there was an attempt to 
reduce the concentration of ownership of generation assets, but the 
effort may fail. While the intention was to limit generation ownership 
to no more than 20% of the market, loopholes included in the 
legislation seem to permit at least one utility to continue to own 
almost 40% of the current installed capacity in ERCOT with little 
likelihood that significant divestiture will occur.
    Notwithstanding the success (or lack thereof) of state attempts to 
mitigate market power, there were always be a need for a multi-state or 
national authority. Without question, the electricity grid is 
interstate. For the foreseeable future, the grid will be composed of 
regulated monopoly companies, many of which are and will continue to be 
vertically integrated with generation capacity. Actions taken in one 
state can directly affect the price paid for power in another state. 
For example, the dramatic price spikes in the Midwest wholesale market 
this past summer were linked to a curtailment of transmission capacity 
along the U.S.-Canadian border.
    Given the rapidly evolving nature of the electric power industry, 
it is impossible to predict where and how market power will be 
exercised. However, as long as the grid and wholesale markets are 
interstate, it will be impossible for any state to fully protect its 
customers from anti-competitive out-of-state activity. In fact, a state 
may find itself unable even to identify or document the use of market 
power from events beyond its boundaries, much less counter or remedy 
it. As a result, we have endorsed the Administration's legislative 
language as an appropriate, minimalist legislative solution to the 
general issue of market power.
    Question 5. You testify EPSA members do not see the courts or 
antitrust laws as a viable approach to resolving market power issues. 
What do you mean? Are you saying the market power problems you are 
worried about don't rise to the level of antitrust law violations or it 
takes too long to bring an antitrust action?
    Response. Antitrust laws represent a powerful tool to address 
market power. However, this tool, in general, is extraordinarily 
expensive to apply and, when used, slow to achieve results. For 
example, the electricity trade press reported last summer about a court 
decision supporting a group of municipal utilities in an antitrust 
action against an investor-owned utility on an allegation of 
discriminatory access to the grid. When you read the article, you 
discover that (1) the order to open the utility's system originated in 
1980, (2) the discriminatory activity occurred in 1989, (3) an earlier 
court agreed with the municipalities in 1993, and (4) notwithstanding 
the latest court action, the investor-owned utility is still denying 
that the recent decision is final.
    Subcommittee members need to understand that the electric power 
industry is rapidly and dramatically changing. Companies are entering 
and exiting the industry on an almost daily basis. These companies 
cannot rely a process that takes a decade or more for justice to 
unfold.
    In addition, we do not expect that every instance where the issue 
of market power raised to require a court suit for resolution. In some 
instances, the issues may be minor and need only a modest regulatory 
intervention to address. Some anti-competitive activities may be, 
frankly, inadvertent and more a result of mindset (``this is the way 
we've always done it'') than a conscious decision to advantage the 
monopoly provider. Without flexibility in policy and the ability to 
resolve these issues in near ``real-time,'' the advantage of those with 
potential market power will only increase. If one company understands 
that its competitor lacks the financial wherewithal to survive a 
lengthy legal battle, a clear advantage lies with the stronger company.
                                 ______
                                 
Responses of Jack Brice, Member, Board of Directors, AARP to Questions 
                           of Hon. Joe Barton
    Question 1. Some propose deleting the consumer protection 
provisions from H.R. 2944, arguing State have authority to address 
these issues. Should consumer protection provisions be included in 
Federal legislation?
    Response. Unquestionably, consumer protection provisions should 
remain in Federal legislation. In testimony before your Subcommittee, 
AARP stressed the importance of consumer protection provisions in 
federal electric utility restructuring legislation. We view the Title 
III provisions in H.R. 2944 that address ``slamming,'' ``cramming,'' 
information disclosure and privacy as a necessary consumer protection 
floor. Absent federal guidelines, consumers could be subjected to the 
types of deceptive and misleading practices that have plagued the 
telecommunications industry. Further, we hope that states will act 
independently to strengthen the provisions you have introduced in the 
federal bill.
    AARP is not alone in its support of federal consumer protection 
provisions. Both federal and state-based consumer advocacy groups have 
publicly stated the need for a federal role in this area. For example, 
at the October 5 & 6 hearings on H.R. 2944, the National Association of 
State Utility Consumer Advocates (NASSUCA), the Consumer Federation of 
America (CFA) and the Regulatory Assistance Project (RAP) all testified 
in support of Title III.
    AARP believes that for competition in the electric utility industry 
to work, strong federal consumer protection laws must be applied to the 
sale and service of electricity in a restructured environment to 
prevent abuse in the marketplace. Title III of H.R. 2944 supports that 
belief and should be retained in any subsequent versions of the bill.
    Question 2. You support municipal opt outs, or forced aggregation, 
such as proposed by Mr. Brown. Why should municipalities have a 
preference in aggregation?
    Response. AARP supports the residential opt-out aggregation concept 
in Mr. Brown's (D-OH) legislation, H.R. 2734. We do not however, 
embrace the exclusivity givens to municipalities in the bill. In 
actuality, AARP prefers the language currently in H.R. 2944. In 
discussions with Members of the Subcommittee and staff over the past 
two months, we have been promoting a more expansive definition of 
aggregation than the one proposed by Mr. Brown. We believe that Title V 
of H.R. 2944 achieves that goal by allowing ``any entity that 
aggregates consumers'' to acquire retail electric energy on an 
aggregate basis.
    However, as we testified on October 6, we would like to see opt-out 
aggregation facilitated rather than an opt-in plan. Opt-out aggregation 
would ensure that a majority of underserved consumers could reap the 
benefits of lower rates. Both opt-out aggregation and expanding the 
number of groups eligible to aggregate are consistent with AARP's 
overall goal of ensuring that residential customers benefit from 
competition in the electric utility industry.
    Question 3. You say that H.R. 2944 places the ``full burden'' of 
universal service programs on the States. Isn't that where the burden 
is now? Outside of programs like LIHEAP and weatherization, isn't 
universal service a State responsibility?
    Response. You are correct, Mr. Barton. Currently, the burden of 
maintaining universal service programs is fully on the shoulders of the 
states. While not necessarily ideal, ensuring electric service to all 
has been manageable in large part due to the monopolistic nature of the 
industry. AARP is concerned that a competitive marketplace will 
displace the existing ``obligation to serve,'' putting more pressure on 
the states to monitor the delivery of power to all residents.
    Federal programs like LIHEAP and weatherization do provide some 
needed assistance in today's utility environment. However, the annual 
battles over adequate appropriations for these necessary programs 
leaves doubt that the programs can continue to exist in their current 
forms. More certainty is needed. AARP supports a universal service 
program, administered by a Joint Federal-State Board and funded by a 
per kilowatt hour charge that is assessed to all providers of 
electricity. We strongly suggest that this assessment come from general 
revenues and not become a line-item on consumers monthly billing 
statements.
                      Truth-in-Billing Requirement
    This section is in response to your question to Jack Brice at the 
October 6 hearing. You inquired as to what AARP meant by ``truth-in-
billing'' as neither you nor Mr. Hall ``could be opposed to `truth-in-
billing.' ''
    As AARP has testified to previously, we envision that a ``Truth-in-
Billing'' requirement will make it easier for consumers to read their 
monthly billing statements, recognize who is providing service, what 
they are paying for it and who they can call if they have questions. We 
believe that such a provision will reduce the incidences of 
``slamming'' and ``cramming'' and that it will complement the 
information disclosure provisions of H.R. 2944 nicely.
                                 ______
                                 
 Responses of Raj Rao, Indiana Municipal Power Agency to Questions of 
                            Hon. Joe Barton
    Question 1. You propose ``complete separation of transmission 
control from generation interests.'' Do you propose mandatory 
divestiture of transmission?
    Response. TAPS does not propose mandatory divestiture of 
transmission. Rather, TAPS proposes that FERC be given the authority to 
require transfer of the control of transmission facilities (along with 
sufficient control over generation to permit reliable operation of such 
transmission facilities) to an RTO with broad regional scope. TAPS 
proposes that FERC be empowered to require divestiture of transmission 
only if it finds it necessary to achieve truly independent RTOs.
    The complete separation of transmission from generation interests 
discussed in TAPS' testimony refers to the critical RTO characteristic 
of independence, not particular corporate forms. We feel strongly that 
the RTO must be structured so that no transmission owners (or other 
market participants) can control or influence the RTO. Thus, we oppose 
the provisions in H.R. 2944 that permit market participants to retain 
up to 10% of voting interests and unlimited ``passive'' interests 
(which include a voice in certain decisions) as severely undermining 
the fundamental concept of an independent regional grid.
    TAPS has not taken a position on the transco vs. ISO debate. Both 
structures can work if they are truly independent, have the appropriate 
and broad geographic scope, and have authority to operate, plan and 
expand the transmission system.
    Question 2. You propose granting RTOs authority to require 
construction. Do you propose giving RTOs authority to site transmission 
lines?
    Response. While TAPS would not object to giving RTOs authority to 
site transmission lines, RTO siting authority is not a part TAPS' RTO 
proposal, nor is it necessary to the TAPS proposal. Rather, what is 
critical is that the RTOs have the authority to identify the 
transmission upgrades necessary to meet the needs of all users and for 
system reliability, and to require implementation of those upgrades by 
the existing transmission owners or others, e.g., by bidding out 
construction to third parties (a non-regulatory, market-based solution 
to ensuring construction of needed transmission). The RTO or the entity 
responsible for construction would need to obtain whatever siting 
approvals are required. TAPS assumes that the RTOs finding that an 
addition was necessary to meet regional needs would assist in the 
siting process.
    I note that while TAPS does not now have a position on siting 
authority, I personally believe that federal siting authority could 
assist in assuring that the transmission needed to support competitive 
interstate power markets is constructed.
    Question 3. You propose granting FERC jurisdiction over 
transmission used to make bundled retail sales. What is the position of 
the States on this issue?
    Response. TAPS believes that it is essential to the bill's intent 
of facilitating retail competition that FERC be clearly given authority 
over all transmission service, whether bundled or unbundled. As 
explained in our testimony, competition cannot develop on a state by 
state basis if one state has the authority to grant a higher priority 
to ``bundled'' power deliveries to its citizens, while relegating 
unbundled transmission to out-of-staters to second class status. TAPS 
recognizes that some states are seeking this authority, but we believe 
such efforts are short-sighted. At its core, this issue is not a state 
vs. federal matter, but rather a state vs. state issue that demands a 
federal solution.
    Question 4. You say H.R. 2944 allows large incumbent utilities to 
foreclose competition. Can utilities foreclose competition without 
violating antitrust law?
    Response. Yes, as A. Douglas Melamed, Principal Deputy Assistant 
Attorney General, Antitrust Division, Department of Justice, testified 
before your Subcommittee on May 6, 1999 (at 6):
          Let me now turn to the issue of market power. Because of the 
        existing structure of the electric power industry, there are 
        likely to remain significant market power problems in the 
        transmission and generation of electricity, even as the 
        industry is restructured to increase the role of competitive 
        market forces.
          The authority of the Department of Justice to enforce the 
        antitrust laws with respect to the electric power industry does 
        not sufficiently address the ability of electric utilities to 
        exercise market power that can thwart free competition within 
        the industry. The antitrust laws do not outlaw the mere 
        possession of monopoly power that is the result of skill, 
        accident or a previous regulatory regime. Antitrust remedies 
        are thus not well-suited to address problems of market power in 
        the electric power industry that result from existing high 
        levels of concentration in generation or vertical integration.
    For example, if one utility, by virtue of its history as a state-
sanctioned monopolist, owned most of the generation within a market 
area, and there was limited transmission capacity to import power from 
alternative sources, merely declaring there to be choice would relegate 
consumers to purchasing their essential electricity requirements from 
the worst of all worlds--a deregulated monopolist that would be free to 
increase price above the level that would result from effective 
competition. Foreclosure of competitors would result from past 
regulatory regimens and past decisions about the siting and 
construction of generation and transmission that created the current 
topography of the transmission grid, not necessarily a violation of the 
antitrust laws.
    Indeed, market power can be conferred by ownership of 
strategically-located generating units which, because of the 
configuration of the transmission system and the location of generation 
in a given area, ``must run'' for reliability purposes (e.g., to 
maintain voltage levels under particular conditions). Without violating 
the antitrust laws, the owner of such ``must run'' units is in a 
position to take advantage of its market power by ``naming its price'' 
(acting as a monopolistic ``pricing maker,'' instead of a competitive 
``price taker'') during time periods when the unit ``must run'' units 
even in otherwise deregulated generation markets.
    Question 5. You testify that ``individual states will be powerless 
to effectively address this problem.'' Did California reduce generation 
market power? Did the New England States reduce generation market 
power? Did Texas reduce generation market power?
    Response. Mere divestiture of one utility's generation, in bulk, to 
a different owner in an effort to quantify and reduce stranded costs 
does not reduce generation market power. While the presence of the 
California ISO and ISO-New England have the effect of reducing market 
power, significant generation market power remains. Indeed, reports 
submitted to or by the new institutions illustrate that neither 
California nor the New England States, acting individually or in 
concert, have eliminated the generation market power that threatens to 
deprive consumers of the benefits of competition.
    For example, the March 9, 1999 ``Second Report on Market Issues in 
the California Power Exchange Energy Markets,'' prepared by the Market 
Monitoring Committee of the California Power Exchange, and filed at 
FERC in AES Redondo Beach, L.L.C., et al., Docket Nos. ER98-2843, et 
al., reports continuing exercise of market power. See, for example, the 
report's description of bidding behavior (at 57, emphasis in original):
          [M]any of the generators sometimes bid as if they have market 
        power, rather than as price-taking competitors. To put this 
        another way, not only did the generators have the ability to 
        affect the market price at times, but they also acted to 
        exercise that market power
    The report also states (at 64) that ``at various times most of the 
new owners of generation divested by the California investor-owned 
utilities ``held back substantial amounts of capacity from the PX Day-
Ahead market. The amount offered (at any price) in the PX market was 
often much less than the firm's effective capacity.'' While the authors 
of the report did not have enough information to identify precisely why 
capacity was withheld, the report observes (at 64): ``To the extent 
that there was withholding of capacity from the PX market, whether to 
meet anticipated ISO demands or deliberately to raise prices, it would 
have the effect of further raising prices in the PX market.'' The 
report concluded (at 66-67) that ``during some hours there was 
considerable potential for generators to exercise market power in the 
PX market . . . At these and other times, some [generation owners] bid 
in a way that is consistent with an attempt to exercise market power, 
and prices were high at these times.'' The report warned (at 68) that 
forces ``if not countered, may lead to more frequent and more severe 
episodes of high prices in the future.'' Significantly, as reported in 
the oral testimony before the Subcommittee of Marty Kanner on behalf of 
the Consumers for Fair Competition, investor-owned utilities in 
California have sought FERC assistance in restraining the exercise of 
market power in California.
    Similarly, notwithstanding deregulated generation markets, ISO-New 
England had to invoke Market Rule 15 (imposing temporary price caps) 
more than 100 times this past summer to correct market deficiencies. At 
the request of ISO-New England, FERC recently approved ISO-NE authority 
to impose interim price caps to correct market flaws during periods of 
capacity shortage, noting (at 4): ``Generators, it appears, are bidding 
strategically to set the market clearing price during [capacity 
shortage] conditions. At these times, all bids must be selected so 
there is no effective price limit on the bids.'' \1\ ISO New England, 
Inc., FERC docket No. ER99-4002-000, issued September 30, 1999. 
Significantly, the New England Conference of Public Utilities 
Commissioners submitted comments on September 22, 1999 supporting the 
interim caps, explaining (at 1-2): ``NECPUC has worked hard to ensure 
that ISO New England has the authority and tools necessary to monitor 
the electricity markets for design flaws, competitiveness and 
efficiency.''
---------------------------------------------------------------------------
    \1\ The portion of the underlying report that describes ``bidding 
behavior'' has been withheld from the public at this time on grounds of 
confidentiality. See Review of Reserves and Operable Capability 
Markets: ``New England's Experience in the First Four Months, 
Preliminary Draft dated October 1, 1999, by Peter Cramton, Professor of 
Economics, University of Maryland and President of Market Design Inc.
---------------------------------------------------------------------------
    The recognition by the New England States that they cannot alone 
``solve'' continuing and significant generation market power problems 
is further highlighted by NECPUC's August 23, 1999 comments to FEC in 
the RTO rulemaking proceeding, FERC Docket No. RM99-2-000 (at 17-18, 
emphasis added, footnote omitted):
          Th[e market monitoring] function should be expanded to 
        include mitigation of market flaws and power, and not be 
        limited merely to monitoring the markets. The Commission 
        proposes that the RTO be required to monitor markets for 
        transmission services, ancillary services and bulk power to 
        identify design flaws add market power and propose appropriate 
        remedial actions . . .
          We agree that it is essential for an RTO to monitor the 
        markets. However, to be effective, RTOs must have unequivocal 
        authority to enforce violations of market standards and back 
        those findings with real sanctions and penalties. Failure to 
        have such authority will, at best permit, and at worst 
        encourage, anti-competitive activities by market participants. 
        Those anti-competitive activities could easily negate the 
        efficiency and cost savings gained by opening up competitive 
        wholesale markets.
          Therefore, in addition to the monitoring requirements 
        proposed by the Commission, NECPUC strongly recommends the 
        adoption by RTOs of formalized market power monitoring and 
        mitigation rules such as those available to ISO New England. 
        Market Rule 13 authorizes ISO New England to impose sanctions 
        when market participants, through their actions, threaten to 
        impair short-term reliability or competitiveness of the 
        regional market, and Market Rule 15 allows ISO New England to 
        use emergency corrective actions to remedy market design and 
        implementation flaws. Adoption of such rules by an RTO will . . 
        . help assure that RTOs meet the Commission's goal of a 
        competitive market.
    As the NECPUC comments highlight, generation markets are regional 
and, with limited exceptions, are not confined to a single state. A 
state has limited ability to address what is necessarily a multi-state 
problem. Indeed, a growing number of utilities span multiple states and 
even multiple regions. No one state has jurisdiction to solve the 
problem. By analogy, assuming the big three automobile manufacturers 
were engaged in price fixing, you wouldn't want to deny the Department 
of Justice the authority to sue because a single state could do so. The 
same is true here.
    The portion of Texas covered by the Electric Reliability Council of 
Texas, which is connected to the integrated North American grid only by 
DC ties, is one of those exceptional circumstances where the 
electricity market is more confided. Some of the approaches adopted in 
the Texas legislation, such as the provisions for divestiture and 
capacity auctions, could be effective tools to reduce market power. 
However, for those states that are part of the Eastern or Western 
Interconnections, state efforts to address what are inherently regional 
market power problems (as acknowledged by NECPUC) are likely to be far 
less effective than federal authority to address market power.
