[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]
NATIONAL ELECTRICITY POLICY: BARRIERS TO COMPETITIVE GENERATION
SUBCOMMITTEE ON ENERGY AND AIR QUALITY
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
JULY 27, 2001
Serial No. 107-62
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
STEVE LARGENT, Oklahoma BART GORDON, Tennessee
RICHARD BURR, North Carolina PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky BOBBY L. RUSH, Illinois
GREG GANSKE, Iowa ANNA G. ESHOO, California
CHARLIE NORWOOD, Georgia BART STUPAK, Michigan
BARBARA CUBIN, Wyoming ELIOT L. ENGEL, New York
JOHN SHIMKUS, Illinois TOM SAWYER, Ohio
HEATHER WILSON, New Mexico ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York DIANA DeGETTE, Colorado
ROY BLUNT, Missouri THOMAS M. BARRETT, Wisconsin
TOM DAVIS, Virginia BILL LUTHER, Minnesota
ED BRYANT, Tennessee LOIS CAPPS, California
ROBERT L. EHRLICH, Jr., Maryland MICHAEL F. DOYLE, Pennsylvania
STEVE BUYER, Indiana CHRISTOPHER JOHN, Louisiana
GEORGE RADANOVICH, California JANE HARMAN, California
CHARLES F. BASS, New Hampshire
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
Subcommittee on Energy and Air Quality
JOE BARTON, Texas, Chairman
CHRISTOPHER COX, California RICK BOUCHER, Virginia
STEVE LARGENT, Oklahoma RALPH M. HALL, Texas
Vice Chairman TOM SAWYER, Ohio
RICHARD BURR, North Carolina ALBERT R. WYNN, Maryland
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
GREG GANSKE, Iowa CHRISTOPHER JOHN, Louisiana
CHARLIE NORWOOD, Georgia HENRY A. WAXMAN, California
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
HEATHER WILSON, New Mexico BART GORDON, Tennessee
JOHN SHADEGG, Arizona BOBBY L. RUSH, Illinois
CHARLES ``CHIP'' PICKERING, KAREN McCARTHY, Missouri
Mississippi TED STRICKLAND, Ohio
VITO FOSSELLA, New York THOMAS M. BARRETT, Wisconsin
ROY BLUNT, Missouri BILL LUTHER, Minnesota
ED BRYANT, Tennessee JOHN D. DINGELL, Michigan
GEORGE RADANOVICH, California (Ex Officio)
MARY BONO, California
GREG WALDEN, Oregon
W.J. ``BILLY'' TAUZIN, Louisiana
C O N T E N T S
Brent, Richard, Director of Government Affairs, Solar
Turbines Incorporated...................................... 87
Hall, Mark, Vice President of External Affairs, Trigen Energy
Kanner, Martin, Coordinator, Consumers for Fair Competition.. 44
Lane, Thomas, Managing Director, Goldman Sachs............... 52
Levy, Bruce, Senior Vice President and Chief Financial
Officer, GPU, Inc.......................................... 25
Magruder, Kathleen E., Vice President of Law and Government
Affairs, New Power Company................................. 95
Morris, Herman, Jr., President and Chief Executive Officer,
Memphis Light, Gas & Water................................. 31
Priest, Robert D., Manager, Yazoo City Public Service
Sokol, David L., Chairman and CEO, Mid-American Energy
Holdings Company........................................... 18
Starrs, Thomas J., Kelso Starrs and Associates, L.L.C........ 102
Svanda, Hon. David A., Commissioner, Michigan Public Service
Commission, on behalf of National Association of Regulatory
Utility Commissioners...................................... 15
Yacker, Marc, Marc, Director of Government and Public
Affairs, Electricity Consumer Resource Council............. 91
Material submitted for the record by:
Knoxville Utilities Board and Memphis, Light, Gas & Water
Division, prepared statement of............................ 119
Sokol, David L., Chairman and CEO, Mid-American Energy
Holdings Company, letter dated August 29, 2001, enclosing
response for the record.................................... 122
NATIONAL ELECTRICITY POLICY: BARRIERS TO COMPETITIVE GENERATION
FRIDAY, JULY 27, 2001
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Energy and Air Quality,
The subcommittee met, pursuant to notice, at 9:30 a.m., in
room 2123, Rayburn House Office Building, Hon. Joe Barton
Members present: Representatives Barton, Largent, Burr,
Whitfield, Ganske, Wilson, Blunt, Bryant, Bono, Walden, Tauzin
(ex officio), Boucher, Sawyer, Wynn, John, McCarthy,
Strickland, and Luther.
Also present: Representatives Stearns, Terry, and Pallone.
Staff present: Jason Bentley, majority counsel; Sean
Cunningham, majority counsel; Andy Black, policy coordinator;
Peter Kielty, legislative clerk; Sue Sheridan, minority
counsel; and Rick Kessler, minority professional staff.
Mr. Barton. The subcommittee will come to order. The House
is in session and we do expect a number of votes within the
next hour or so. So we want to go ahead and get started. The
Chair recognizes himself for an opening statement. Today the
Energy and Air Quality Subcommittee holds one of a series of
hearings dealing with our national electricity policy. While we
await floor action on the energy package next week, it is time
to get started discussing and hearing the issues of our next
In September, members of this subcommittee can expect
further hearings on electricity as well as a piece of draft
legislation which will be circulated and reviewed for turning
into a vehicle to be introduced as a markup vehicle sometime in
early October. I am hopeful that our process, in fact, I should
say I am certain that our process will be bipartisan, and I
guarantee that it is going to be an open process. The future of
our Nation's electricity system deserves this subcommittee's
attention. Our hearings and meeting in this Congress and the
last Congress have underscored a number of the following
points: One, our Nation needs more participants in wholesale
generation competition so that wholesale prices can, at a
minimum, be stable and hopefully, perhaps, even decrease
somewhat when supply is equal to the demand.
No. 2, our Nation needs more transmission capacity so that
that generated power can go where it needs.
No. 3, this generation network needs to operate more
effectively so that power can move better within and among
regions and that all generators have an opportunity to actually
have access in a free and fair fashion to the transmission
Fourth, and finally, our States need a better functioning
electricity system if more are to give consumers options in
their generation provider. These are just some of the goals I
hope to pursue as we move toward a legislative vehicle in the
Today's hearing deals with the first goal, increasing the
amount of power generated. We are going to hear from witnesses
about barriers to generation competition. Our first panel will
focus on the Public Utility Holding Company Act, which we refer
to as PUHCA. Many believe this Act is no longer necessary and
is in need of reform. I do understand that there are concerns
about generation market power. We are going to try to address
those in this hearing. My personal opinion is that if you get
the transmission rules right, you have enough generation
competitors, the entities with market power will be the
purchasers, not the sellers.
Our second panel today is going to discuss another
important issue dealing with getting more power on the grid.
Varying interconnection rules and standards bedevil independent
power producers as they move from State to State and utility to
utility. I am a very strong supporter of States rights. But I
believe that in the 21st century, it is appropriate to have a
uniform interconnection standard. Distributed generators put
smaller facilities on the grid a lot closer to the load than a
power plant does, thus reducing the need for new transmission
lines, and generate more cleanly than a lot of existing plants.
We should encourage distributed generation and make sure
that there are no unreasonable hurdles in its way. PURPA, the
Public Utility Regulatory Policy Act, also deserves careful
review. We want qualifying facilities contributing their excess
power to the grid and we want them to still have rights to back
up power and all the protection that they have today. I am not
sure however, that the mandatory purchase obligation should
continue in its current form.
Finally, we are going to look at net metering. This issue
is of interest not only to myself, but to numerous other
subcommittee members on both sides of the aisle. More States
allow net metering than they do retail competition. Individuals
with residential renewable generation onsite certainly should
be allowed to have their electric meter run backward when they
are contributing power and not consuming it.
I guess the technical term that I am going to be looking
for as we look at this issue is something really high tech,
like, no brainer. I understand that there are a lot of issues
to address, including the interconnection costs, who is
responsible for buying the meter, who is responsible for
maintaining the meter, which electric service costs get rebated
and what happens when a consumer gives back more power within a
billing period than he or she takes. Those are important
issues. But the concept of net metering really is a no brainer.
I am very confident that that particular concept is going
to be in the bill. Later hearings are going to deal with
transmission and recommendations of the Department of Energy
the Federal Energy Regulatory Commission. Today is the time for
members to begin to focus about today's electricity industry.
It is not the same industry that it was even 2 years ago when
this subcommittee moved a similar piece of legislation. The
electricity industry will not be the same in the future as it
is now. Our job is to see where we want to be and what changes
we need in order to get there.
If this subcommittee does its work successfully, we will
provide an opportunity for our children to have an electric
system that encourages new technology, investment in new
capacity makes reliability problems workable and high prices a
thing of the past.
Chairman Tauzin, Ranking Member Boucher, Mr. Dingell and I
look forward to working with members on both sides of the aisle
to make this goal a reality, legislatively in the next several
months. With that I would recognize my ranking member, Mr.
Boucher for an opening statement.
[The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy
and Air Quality
Today, the Energy & Air Quality Subcommittee holds one of a series
of hearings dealing with our national electricity policy. While we
await floor action on the energy package, it is time we get started
discussing our next major bill. In September, Members of this
Subcommittee should expect further hearings on electricity, as well as
draft legislation to review and discuss. I am hopeful that our process
will be bipartisan, and I promise you it will be open.
The future of our Nation's electric system deserves our attention.
Our hearings and meetings in this Congress and last Congress have
underscored the following:
Our Nation needs more participants in wholesale generation
competition, so that wholesale prices can continue to decrease,
and supply always equals demand.
Our Nation needs more transmission capacity, so that the
generated power can get where it needs to go.
Our Nation needs its transmission networks to operate more
effectively, so that power can flow better within and among
regions, and that all competitors selling power can actually
Finally, our States need a better-functioning electric system
if more are to give consumers options in their generation
provider.These will be my goals as I work with Subcommittee
Members to put together legislation to reform the electricity
Today's hearing deals with my first goal--increasing the amount of
power generated. We will hear from our witnesses about barriers to
generation competition. Our first panel will focus on the Public
Utility Holding Company Act (PUHCA), which many believe is no longer
necessary and in need of reform. I understand concerns about generation
market power, and I want to make sure we address them. My personal
opinion is that if you get transmission rules set right and let enough
people participate in generation, the entities with market power will
be the purchasers, not the sellers.
Our second panel today will discuss other important issues dealing
with getting more power on the grid. Varying interconnection rules and
standards bedevil independent power producers as they move from State
to State and utility to utility. I am a strong supporter of States'
rights, but I believe that in the 21st century it is ok to have a
uniform interconnection standard. Distributed generators put smaller
facilities on the grid a lot closer to the load than a power plant,
reduce the need for new transmission lines, and generate more cleanly
than a lot of new plants. We should encourage distributed generation
and make sure that no unreasonable hurdle is in its way.
PURPA, the Public Utility Regulatory Policies Act, also deserves a
careful review. We want qualifying facilities contributing their excess
power to the grid, and we want them to still have rights to backup
power and all the protections they have today. I am not sure, though,
that the mandatory purchase obligation should continue in its current
Finally, we will look at net metering, which interests me and other
Subcommittee Members greatly. More States allow net metering than do
retail competition. Individuals with residential renewable generation
on-site should certainly be allowed to have their electric meter run
backward when they are contributing power and not consuming it. The
technical term I am looking for is a ``no-brainer.'' I understand there
are issues to address, including interconnection costs, who is
responsible for buying the new meter, what electric service costs get
rebated, and what happens when a consumer gives back more power within
a billing period than he or she takes. I am confident that we can work
these issues out.
Later hearings will deal with transmission and the recommendations
of the Department of Energy and the Federal Energy Regulatory
Commission (FERC). Now is the time for Members to learn what they can
about today's electricity industry. It is not the same industry it was
two years ago when we passed legislation the first time. The electric
industry also will not be the same in the future as it is now. Our job
is to see where we want to be, and what changes we need to make in
order to get there. If our work is successful, we will have provided
for our children an electric system that encourages new technologies,
investment in capacity increases, and makes reliability problems and
high prices a thing of the past. Chairman Tauzin and I look forward to
working with Members and stakeholders on this over the next few months.
Mr. Boucher. Well, thank you very much, Mr. Chairman. I
want to commend you for conducting the hearing this morning as
we begin our examination this year of issues related to
electricity industry restructuring. After the expenditure of a
substantial amount of time earlier this year on the California
electricity situation, I think it is now appropriate that we
return to the larger issue of electricity restructuring. During
the last Congress this subcommittee reported an electricity
measure that focused on a range of complex matters including
State and Federal jurisdiction, transmission concerns,
environmental issues and competition in general. It was an
ambitious effort and Chairman Barton worked with considerable
diligence to have the subcommittee's bill considered at full
While not every member of the subcommittee supported the
bill, it clearly helped to frame the issues that are
fundamental to a refashioning of Federal policy for the
electricity industry. The exercise of the last Congress was a
constructive contribution to our work this year. And I very
much look forward to working with Chairman Barton during this
Congress to determine the level of support which exists for
reporting an electricity bill, and if sufficient support
exists, determining where consensus for that measure might lie.
As the discussion proceeds we may find that some issues
that were very controversial during the course of the last
Congress are generally not before us this year. The concept,
for example, of retail competition and the mandate for a date
certain for access to the national transmission grid for retail
sales, a topic that I know Chairman Barton approached with
caution during the course of the last Congress, seems now to
have little credence as an element of Federal legislation.
Transmission issues, however, will be at the core of our
consideration. In this area, the FERC has been highly active in
recent weeks in ordering the formation of regional transmission
organizations for broad sections of the Nation.
I know the chairman plans to ask the FERC members to appear
before the subcommittee in the very near future in order to
discuss these orders. That discussion will help members
determine what, if any, additional transmission authority the
Congress should be addressing in legislation.
I am particularly pleased to note the presence among our
witnesses this morning of Kathleen Magruder, with the New Power
Company. Her company offers an opportunity to realize broad new
efficiencies and the utilization of electricity-generating
facilities by bringing the benefits of real time metering to
residential and small business consumers. I look forward to
hearing from her about what changes in the law may be necessary
to assure that electricity consumers have the ability to
realize financial savings by diverting more electricity
consumption to off-peak times.
Of course, there are a multitude of other matters relating
to electricity industry restructuring that this subcommittee
will be considering, including the repeal of PUHCA, the reform
of PURPA, transmission reliability and interconnection
standards as the chairman mentioned, just to name a few. I look
forward to the conversation on these measures to the testimony
of the witnesses who are before us today and witnesses who will
appear on our future panels as we address these and other
And I will conclude my opening remarks with the observation
that as we consider Federal legislation for electricity
industry restructuring, I think we must keep our eye primarily
on the interests of electricity consumers. Their interests
should be our guiding principle. And in particular, the
interests of small consumers should be kept at the forefront.
I want to extend a welcome to all of our witnesses this
morning and thank the chairman for scheduling this hearing
which begins us on a very positive track as we consider the
possible need for Federal electricity restructuring
Thank you, Mr. Chairman.
Mr. Barton. I thank the gentleman. We would recognize the
full committee chairman, Mr. Tauzin of Louisiana, for an
Chairman Tauzin. I thank my friend, the chairman. I want to
begin by acknowledging with thanks and appreciation the work of
this subcommittee, and particularly Chairman Barton and Mr.
Boucher over the last several months. If there is any doubt
about it, let me clear it up.
Mr. Barton, working together with Mr. Boucher in this
subcommittee, have the full support and confidence of the full
committee chair. They have done remarkable work already and I
want to highlight that. Just today, I signed and filed H.R. 4,
the combination energy bill which we entitled the Securing
Americans Future Energy Act, a SAFE Act, that is a product of
five committees, but principally, the work of our Energy and
Commerce Committee and most importantly, this subcommittee. It
represents an incredible bipartisan effort.
The fact that this bill passed our full committee by a vote
of 50 to 5, unlike any other committee dealing with these
controversial matters, is a strong indication of the way in
which our two sides have worked on these very difficult energy
issues. But that bill, which is now filed in the House,
contains a number of provisions that will improve hydro,
nuclear, clean coal and renewables, and in addition, more than
half the bill is devoted to improving the Nation's energy
efficiency and conservation.
And when we pass this bill next week on the House floor, as
we expect we will, we will have moved the central piece of the
President's national energy policy in a fashion that builds
upon consensus in this area. But our work is not done, and
Chairman Barton is now charged with completing some of the work
that he so valiantly began in the last session of Congress
under the former chairman. And that is providing for reliable
supply and transmission of electricity as a center piece of our
Nations energy policy. The fact that we need one is underscored
by the crisis in California.
And again, I want to commend Chairman Barton for earlier
this year laying forth some of the solutions that the
California executive and our own executive took seriously and
adopted by executive order, and helped ease the problems of
consumers in California quite dramatically over the last
several months. While we didn't end up passing that bill, so
much of it was adopted by either Presidential or gubernatorial
executive order that this committee deserves a great deal of
credit for helping to relieve that serious problem in
But now we turn to the Nation's electric problems, and
particularly to the disunity that exists in today's electric
power industry. Consider this: There are four types of
utilities in this country, investor-owned, cooperatively owned,
federally owned, and the municipal utilities, all of which
generate, transmit, sell power to each other and to their
customers. There are also independent power producers, the so-
called qualifying facilities, the QFs under PURPA, and
countless sources of distributed generation which also generate
and sell power. The various producers are governed by numerous
laws and regulations at the Federal, State and local levels.
And to make matters even more complex, approximately half of
the States have already passed electricity restructuring
legislation, in essence, opening up the retail electric markets
Such competition requires of course a functioning wholesale
market, and yet States that have not restructured do not have
the same incentive to insure that wholesale markets are open to
all competitors. The result is a patchwork of competing laws,
regulations and interests that stifle the development of power
markets and abundant competitively priced electricity. As a
Nation, our disjointed energy policy seems to be caught between
competing visions, which the chairman has begun to try to sort
out, the competing vision of free markets versus central
What unifies us, however,is the inescapable fact that
affordable reliable electricity is the lifeblood of this
American society. And we want to encourage the cleanest, most
efficient sources of power. That is where markets win, always,
hands down. Central planning we know doesn't foster the one
thing Americans do best, innovate, good old American ingenuity.
You can't plan for innovation, but you can create a marketplace
that rewards those who do things faster, smarter, cheaper,
cleaner, more efficiently and more reliably. In recent years
we've seen tremendous innovation in telecommunications, the
whole digital revolution. And our Nation's economy operates
more efficiently than at any time in our history.
But on the other hand, a recent article in Forbes Magazine,
Mr. Chairman, pointed out that if you take the four boxes of
the Internet community, the new economy: PCs; systems that
transmit the Internet, the routers and the translators, et
cetera; the companies that do business, E-Bays, et cetera, that
power up the systems to do business, and the manufacturers who
put it altogether and the kinds of equipment that runs the
Internet and provides the PC power at home for us and our
businesses, those four boxes now consume as much electricity as
the entire country of Italy.
They consume more electricity, 8 percent of our Nation's
total, than all of the metals manufacturing in our country now.
They consume more electricity than oil and gas production,
forestry and paper products combined. The Internet has become a
huge part of the electric demands of our country. And if we
want to see a revival of the Nation's economy on Wall Street
and in the pocketbooks of Americans who are tired of being laid
off in this new economy, we have got to power up the systems
This committee is going to lead the way to insuring that
this economy takes off again with some good electric power
policy. We can't rely upon the electric system that was
designed for our grandfathers and grandmothers simply to light
light bulbs and run electric motors. Mr. Chairman, I don't know
if I ever told you this. My grandfather had a light plant
behind his house. It was called a light plant.
Mr. Barton. He had a what?
Chairman Tauzin. It was called a light plant. It was an
electric generation facility.
Mr. Barton. L-I-G-H-T.
Chairman Tauzin. L-I-G-H-T. That's the Cajun pronunciation
of light. The bottom line is that he was the first in our
community to have electric lights because he built his own
power plant. He had the first television. He built that thing
to keep his family, you know, comfortable with lights, and
pretty soon he was sharing electricity with his neighbors from
his own light plant. I remember he powered up an electric wire
fence that I once fell upon and when I was a kid, and every
time I touched my hand or my feet, I would get shocked.
Mr. Barton. He told me he kept trying to get you near that
fence, but you just wouldn't go.
Chairman Tauzin. I was out slopping hogs one night and he
moved the fence. And I fell over it, and every time I would
touch my hands on the ground it would hit me, and I would touch
my little feet on the ground I would get hit. I was thinking of
that as sort of an analogy. I hope we don't end up on that
electric fence before we finish with this bill. But the bottom
line is, we can't depend upon systems that were built in that
age for those purposes. And Mr. Chairman, I want to thank you
for beginning this series of hearings because we have now
charged you and Mr. Boucher and your subcommittee with an
enormous responsibility, and that is to build the electric
power system for this century, not the ones our grandfathers
used. Good luck to you.
[The prepared statement of Hon. W.J. ``Billy'' Tauzin
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
I want to thank Chairman Barton this morning for beginning a series
of hearings that will help us determine how to set the proper course
for the future of our Nation's electricity system, which is so vital to
the success of our economy and our quality of life.
Last week, the Energy and Commerce Committee passed the most
comprehensive energy bill in a decade, on a 50 to 5 vote. That bill,
which came out of this Subcommittee, contains a number of provisions
that will improve the availability of various energy sources: hydro,
nuclear, clean-coal, and renewables. In addition, more than half the
bill is devoted to improving our Nation's energy efficiency and
conservation. The legislation, which we hope to pass on the House floor
next week with bipartisan support, will form the central piece of the
President's comprehensive National energy policy.
Our work is not done, however. The reliable supply and transmission
of electricity is another essential element of this energy policy. This
fact is underscored by the crisis in California and the West over the
past year, as well as looming electricity problems elsewhere. The
underlying causes of these problems will not just go away.
To assure, as our economy grows, that the nation's electricity
customers--businesses and consumers a like--will receive the most
reliable power at the lowest possible prices, we must first address a
fundamental disunity that exists in today's electric power industry.
Consider this: There are four types of utilities in this country--
investor-owned, cooperatively-owned, Federally-owned, and municipal
utilities--all of which generate, transmit, and sell power to each
other and to their customers. There are also independent power
producers, so-called qualifying facilities (QFs) under PURPA, and
countless sources of distributed generation, which also generate and
sell power. These various producers are governed by numerous laws and
regulations at the Federal, State, and local levels.
To make matters more complex, approximately half of the States have
passed electricity restructuring legislation, in essence opening up
their retail electricity markets to competition. Such competition
requires a functioning wholesale market. Yet states that have not
restructured do not have the same incentive to ensure that wholesale
markets are open to all competitors. The result is a patchwork of
competing laws, regulations, and interests that stifle the development
of power markets, and abundant, competitively priced electricity.
As a Nation, our disjointed electricity policy seems to be caught
between competing visions: free markets versus central planning. What
unifies us, however, is the inescapable fact that affordable, reliable
electricity is the life-blood of our society. We all also want to
encourage the cleanest, most efficient sources of power. This is where
markets win, hands down. Planning doesn't foster the one thing
American's do best: innovation--good old American ingenuity. You can't
plan for innovation, but you can create a marketplace that rewards
those who do things faster, smarter, cheaper, cleaner, more
efficiently, and more reliably.
In recent years we've seen tremendous innovation in
telecommunications, computers, the whole digital revolution. Our
Nation's economy operates more efficiently than at any time in history.
Why, then, are we relying on the same electricity system our
I look forward to learning our witnesses' views about what can be
done to modernize our Nation's electric power industry. What,
specifically, are the barriers to competitive markets? What prevents
innovative suppliers from selling their power to consumers?
I also look forward to subsequent hearings, which will examine such
topics as the role of the Federal government in ensuring efficient
operation of electricity markets, and ways to improve the regional
organization of the interstate power grid. I believe it will become
clear that federal guidance and legislation are needed to ensure the
continued availability of clean, affordable, and reliable electricity.
I thank Chairman Barton for holding these important hearings, and I
look forward to working with him and my distinguished colleagues, Mr.
Dingell and Mr. Boucher, in the weeks to come as we craft legislation
to provide for our Nation's electricity future.
Mr. Barton. Thank you, Mr. Chairman.
The gentleman from Ohio, Mr. Sawyer, is recognized for an
Mr. Sawyer. Thank you Mr. Chairman. I will make a very
brief opening statement, but if I might, with your permission,
yield to our colleague from New Jersey for a point of personal
Mr. Pallone. Thank you, my colleague from Ohio. And I also
want to thank the chairman for allowing me, if I could, because
I have to run to the floor on an amendment. I just wanted to
take this opportunity to introduce Bruce Levy, who is senior
vice president and chief financial officer of GPU, Inc., which
is an electric utility holding company headquartered in
Morristown, New Jersey, which serves many of my constituents.
He is on the first panel.
Mr. Levy serves as president of GPU Capital Inc., which is
the company's financial subsidiary. And he is also past
president of the Electric Power Supply Association, which of
course a lot of you know as the National Trade Association. GPU
is involved not only in New Jersey, but in other parts of the
country and in other parts of the world as well, and I am very
happy that he is joining this first panel today. And thank you,
Mr. Chairman. And yield back to Mr. Sawyer.
Mr. Sawyer. Mr. Chairman, I'm pleased to join my friend
from New Jersey in welcoming the entire panel and to thank you
for this hearing. The task that we are undertaking is not new,
as you have been leading this effort for some time. It is long,
it is complex, it is difficult, and it is important. We are in
the middle of a fascinating transition from a century of
vertically integrated utilities serving local customers with
rates set by State commissions based on a responsibility to
serve and a rate of return regulation, to an enormously complex
market for which our infrastructure is not well prepared. You
understand that. You know that. And this whole subcommittee,
over the course of the last couple of years, has gained a
vastly more sophisticated appreciation for that.
Acting on that is going to be difficult. California is an
example of the failings that can occur when restructuring an
electrical system in a State gets caught in the position of the
chairman, halfway across that fence and you can't set down on
either side and you're stuck in between. The opportunity that
California has to go back and achieve a measure of stability
and start again is important for them and something we want to
learn from, not replicate on a national level as we build a
framework for the 26 or 27 States that are already into their
processes of deregulation. And to build that broad Federal
framework within which they can act and form regional markets.
The topics that we are going to talk about today, PUHCA and
PURPA, and some more esoteric topics like net metering and
highly efficient new generation technology, are all important.
They will contribute to the solution. And with that I would
yield back the balance of my time, and thank you again for this
Mr. Barton. Thank you, Mr.--Congressman Sawyer and the
Chair wants to commend you on the fine work you did in the last
Congress on the bill and in the working group that helped
prepare the bill and look forward to working with you in this
Let's see. The gentleman from Iowa, Mr. Ganske, is
recognized for an opening statement.
Mr. Ganske. Mr. Chairman, our country depends on a reliable
supply of energy to sustain its economy and to provide
opportunities for that economy to prosper. But the source of
energy isn't enough to power the economy. You have to have a
reliable and a stable system to generate and transmit
electricity from the energy source. The electrical generation
and transmission systems in America are the subject of the next
several hearings of this committee. And I believe they are very
important matters for our attention.
I too am very interested, Mr. Chairman, in the topic of
distributive power generation and the steps this country--this
committee can take to expand and encourage the concept of net
metering. I believe it can provide an opportunity to expand the
use of solar and wind power generation on homes and in farms
around the country. We see a lot of this already developing in
Iowa. And finally, Mr. Chairman, I want to take this
opportunity to welcome all the witnesses for today's hearing,
but in particular, I recognize David Sokol, the chairman and
CEO of Mid-American Energy Holdings Company, which is in my
neck of the woods. Mr. Sokol is quite knowledgeable and will
provide us with important information and perspectives. And I
yield to my colleague from Nebraska, Mr. Terry.
Mr. Terry. Thank you, Mr. Ganske. I appreciate the
opportunity to join in the introduction of my friend David
Sokol as his company, Mid-American Energy, is technically
located in your district, David Sokol is every bit located in
mine. In fact, I welcome my hometown's--one of my home town's
greatest citizens, kind of our local boy made good, a graduate
of Omaha North High, University of Nebraska at Omaha, went on
to run a small company named California Energy, now called Mid-
American Energy. And for this panel, I don't think we could
have a better witness.
I have spent a lot of time with David Sokol over the years,
whether it was that we were working together to get ice at the
civic auditorium so UNO could start a hockey program, which by
the way, is one of the top 15 programs in the Nation now, but
now get to work with him in solving this country's energy
Mr. Barton. What does that have to do with energy?
Mr. Terry. I will tell you. You should see those kids play.
That is a high energy. And I will tell you what, Chairman, you
and I--you are invited to come see UNO hockey any time. But I
appreciate that you invited Mr. Sokol here as the chairman, of
course, of the company that deals or builds power plants. This
man is so passionate about having the right policy for this
Nation, whether--especially passionate about the role of
private capital and solving the needs and solutions and finding
the solutions for this country.
So thank you, Greg, for yielding to me. Thank you, Mr.
Chairman, for allowing me to be a part of the introduction. I
Mr. Barton. Mr. Ganske yields back his time.
Mr. Ganske. I do.
Mr. Barton. Just on Mr. Sokol, he also has one the sweetest
wives on the high plains. Very gentle lady and----
Mr. Terry. Probably his greatest asset.
Mr. Barton. So we need to put that--in addition to the
hockey team and all of that, we ought to put that into the
record. The gentlelady from Missouri is recognized for an
Mrs. McCarthy. I am going to be brief, Mr. Chairman, and
just submit my entire remarks for the record because I want to
get to the important panel that we have here today. I want to
thank you for holding this hearing. I think it's very
appropriate. I note that the transmission issues are not being
covered in today's discussion, but I hope a future hearing will
indeed address them because I think they are an important
component to any restructuring plan. And I look forward to
hearing from the witnesses today regarding the effect that the
Public Utility Holding Company Act and the Public Utility
Regulatory Policies Act will have on consumer protection and
Repealing these two laws absent a comprehensive approach
will remove certain consumer protections which could have
adverse consequences on the market and ultimately the consumer
prices and reliability of electricity. I also think greater
access to information about energy purchases can have many
benefits, consumers can choose to purchase cleaner renewable
energy through green pricing programs and the recent agreement
in bond to adopt the terms of the Kyoto protocol has
intensified our need to the use of alternative sources of
energy to reduce emissions of greenhouse gases.
Real time pricing is also an essential piece of consumer
information that can provide wiser choices about energy
consumption to reduce peak demand and energy costs. We have
heard testimony in this subcommittee earlier this year that
real time pricing could save $14.8 billion annually by giving
consumers proper price signals to their energy consumption. So
if Congress is going to lay the foundation for a competitive
market, we must be diligent in providing certainty to market
participants. Earlier this month when I was home in Kansas City
I toured the trading floor of Aquila, one of the top five gas
power marketers in the country. And I was told that it can take
2 months to 2 years for a utility to get connection rights to
the transmission grid.
To compound the situation there are over 400 utilities all
with different interconnection rules. Adding a power plant to
the power grid has become extremely difficult because
incumbents create barriers of entry to competition. This
creates economic uncertainty, resulting in reduced generation
and higher prices for consumers. I support interconnection
rules to provide certainty to potential new investors and
reliability and affordable prices to consumers.
Again, Mr. Chairman I will put the entire statement in the
record. I thank you for this hearing. I look forward to working
with you on these important issues and I welcome the witnesses
today who will enlighten us.
[The prepared statement of Hon. Karen McCarthy follows:]
Prepared Statement of Hon. Karen McCarthy, a Representative in Congress
from the State of Missouri
Mr. Chairman, thank you for holding this important hearing today on
barriers to competitive generation. I look forward to the testimony of
our witnesses on the legislative and regulatory actions that should be
considered to promote additional generation that will benefit consumers
and provide greater certainty for the electric industry. It is helpful
to have this update on electricity restructuring issues, and I am
pleased that transmission issues will be covered in a separate hearing
because it is one of the most critical components of any restructuring
We have learned valuable lessons from the dysfunctional electricity
market in California and the West. Recent events have taught us that
the benefits of deregulation will only be reaped if regulatory and
legislative policies ensure sufficient competition and reliability.
Competitive generation will benefit consumers if true competition
exists among suppliers. In my state of Missouri, electricity prices
this year have averaged 5.3 cents per kilowatt-hour, 23% below the
national average of 6.9 cents per kilowatt-hour. I fear that enacting
restructuring legislation without carefully considering the effect on
low cost states may harm customers who have benefited from policies
that have promoted affordable energy.
I look forward to hearing from our witnesses today regarding the
effect that the Public Utility Holding Company Act (PUHCA) and the
Public Utility Regulatory Policies Act (PURPA) have on consumer
protection and reliability standards. Repealing these two laws, absent
a comprehensive approach, will remove certain consumer protections
which could have adverse consequences on the market and ultimately the
consumer prices and reliable electricity.
To that end, I support the establishment of provisions that will
give authority to the North American Electric Reliability Council
(NERC) to enforce adequate reliability standards. Lower costs are not
beneficial to consumers if they are accompanied by rolling blackouts
and ineffective service. Retail competition should also be accompanied
by consumer protections to prevent slamming and cramming, while
improving consumer access to information about the energy they are
Greater access to information about energy purchases can have many
benefits. Consumers can choose to purchase cleaner renewable energy
through green pricing programs. The recent agreement in Bonn to adopt
the terms of the Kyoto Protocol has intensified our need to promote the
use of alternative sources of energy that will reduce emissions of
greenhouse gases. Real time pricing is also an essential piece of
consumer information that can provide wiser choices about energy
consumption to reduce peak demand and energy costs. We have heard
testimony in this subcommittee earlier this year that real time pricing
could save $14.8 billion annually by giving consumers proper price
signals to their energy consumption.
If we are to have competitive electric market, we need to ensure
that barriers are removed so that the market can function properly. As
I have stated before, our actions at the Federal level should
compliment the successes of the market which have evolved under natural
gas deregulation and capture the technological advances which have
occurred to make energy more affordable, accessible, and cleaner for
If Congress is to lay the foundation for a competitive market we
must be diligent in providing certainty to market participants. Earlier
this month (July 7th) when I was home in Kansas City, I toured the
trading floor of Aquila Inc., one of the top five gas/power marketers
in the country. I was told that it can take two months to two years for
a utility to get connection rights to the transmission grid. To
compound the situation, there are over 400 utilities, all with
different interconnection rules. Adding new power plants to the power
grid has become extremely difficult because incumbents create barriers
of entry to competition. This creates economic uncertainly resulting in
reduced generation and higher prices for consumers. I support uniform
interconnection rules that provide certainty to potential new investors
and reliability and affordable prices to consumers.
Many of the witness here today will testify about the need to
clarify and expand the Federal Energy Regulatory Commission's (FERC)
jurisdiction. FERC must properly enforce the laws and regulations that
ensure the prevention of market abuses for deregulation to be
successful. However, given its lackluster record at preventing market
abuses in California, I am hesitant to go forward with a deregulation
plan that expands FERC's authority. The progress achieved by Congress
in developing a competitive market will be nullified if the agencies in
charge of ensuring competition do not do fulfill their obligations.
Mr. Chairman, I welcome today's dialogue as another step toward a
measured approach for addressing electricity deregulation. I yield back
Mr. Barton. I thank the gentlelady from Missouri.
The gentleman from Tennessee, Mr. Bryant, is recognized.
Mr. Bryant. Thank you, Mr. Chairman. And I too will be very
brief and thank you for holding these hearings. And thank you
for your help and graciousness over the last couple of years as
we have worked on this issue of electricity deregulation and
the kindness you have showed to us, particularly in the
Tennessee valley as we have worked through some and continue to
work through some very difficult issues. Mr. Herman Morris is
here today and I will say more about him later, but he is a
friend and certainly an acknowledged and proven expert in this
field, and we always look forward to his testimony and having
And as I said, I will introduce him at the appropriate
time. I also want to add my welcome to Mr. Sokol also. I am a
friend of a friend, Mr. Christiansen, who you may or may not
know has now moved to my State and may be moving to my
district, may become a constituent of mine, for the rest of
you, a former member. And I know a lot about your background,
and I certainly can we go with everything that has been said
about you. And again, I am just pleased to have such a
qualified panel of witnesses, both on the first panel and the
second panel. And with that I look forward to hearing from all
of you. And I would yield back the balance of my time.
Mr. Barton. I just hope Mr. Sokol doesn't decide to run for
President of the United States. It looks like he has got
support all over the country on both sides of the aisle. The
gentleman from Louisiana, Mr. John, is recognized for an
Mr. John. Thank you Mr. Chairman. I will pass.
Mr. Barton. The gentleman from Kentucky, Mr. Whitfield is
recognized for an opening statement.
Mr. Whitfield. Mr. Chairman, I have been trying to figure
out a way that I could say something about Mr. Sokol also, but
since I couldn't, I look forward to the testimony. I really
appreciate these witnesses coming in. I notice they are all the
way from New York to Washington State. We appreciate their
effort and I look forward to their testimony.
Mr. Barton. I am sure his plants use Kentucky coal in some
cases. Seeing no other member seeking recognition to make an
opening statement, all members not present shall have the
requisite number days to put their opening statement in the
record. Without objection, so ordered.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. John D. Dingell, a Representative in
Congress from the State of Michigan
Today's witnesses will address a number of issues of importance to
electricity consumers, and I commend the Chairman for holding this
hearing. Recent events in California serve as reminders that tampering
with the electric industry should only be done for good reason, and
only with caution. Just as we hope that California's bad experience
with ``bad deregulation'' proves to be the exception, we must take care
not to induce similar problems in other parts of the country.
As the subcommittee returns to the restructuring debate, it is
worth noting that some of the most prominent issues from last year's
debate have faded. Today there is little interest in enacting a federal
mandate for retail competition, and that is appropriate. I have always
felt this was properly a decision best left to the states. Perhaps the
lessons from California's faulty deregulation plan will benefit others.
With respect to transmission issues, the U.S. Supreme Court will soon
consider a case raising core questions about state and federal
jurisdiction. I sense that this may dampen the enthusiasm of at least
the litigating parties for addressing these difficult issues
legislatively in the near term.
The electric restructuring debate affects the fortunes of many
industry participants and, indeed, the economic well-being of the
country. As the familiar ``It brings good things to life'' commercial
reminds us, electricity reliability and affordability have a profound
impact on the quality of life of every American citizen. For decades,
the U.S. model has been the envy of many other nations and, on balance,
this still holds true. It behooves us to also remember the small
consumer's interests as we proceed and to ensure the reliability of
service at ``just and reasonable'' prices. That focus can get lost in
the shuffle in the rush to ``update'' the law, which is exactly what
happened in California.
Which brings me to the subject of PUHCA repeal. The Public Utility
Holding Company Act of 1935 was enacted, as companion legislation to
the Federal Power Act, in order to address problems that afflicted
consumers and investors alike. At the time, securities regulation was
in its infancy and state utility regulation was not well established.
The regulatory system was no match for the huge holding companies
operating across state borders, which concentrated about 92 percent of
investor-owned electrical capacity in the hands of sixteen holding
companies. Shareholders were deprived of a fair return on their
investment, or suffered outright losses when the collapse of the stock
markets toppled the heavily indebted holding company system. Utility
ratepayers, as captive customers of monopoly utilities, had no
alternative but to pay whatever they were charged.
In the years after enactment, the Securities and Exchange
Commission's administration of PUHCA and the Federal Power Commission's
administration of the Power Act curbed the worst of these abuses. Among
these were the issuance of securities based on paper profits from
inter-company transactions, and the use of the holding company to evade
state regulation. Today, many states have strong utility commissions
which are better able to track the flow of money between utility
affiliates and limit cross-subsidization. Clearly the electric industry
is undergoing massive changes and, while I have often differed with the
SEC regarding its lax administration of PUHCA, novel questions are
being brought before the Commission. As a result, it is fair to ask
whether or not the statute requires modification.
Mr. Chairman, while I do not know the answer to that question, I am
glad that you have raised it. I commend you for holding this hearing to
address PUHCA repeal, and look forward to working with you on this and
other interesting matters that will be discussed today.
I know you would be disappointed, however, if I did not sound my
usual alarm against hasty action in this area. My father, who had a
hand in crafting PUHCA, observed the problems which uncontrolled market
power visited upon shareholders and consumers alike--and which required
enactment of strong federal laws. While I hope that will never recur in
this country, it is up to us to fully consider all the possible
ramifications of repealing PUHCA before we act. It would be an
unmitigated disaster if we were to modify or repeal PUHCA without
ensuring adequate protections for ratepayers and investors. Consumers
throughout the west would be better off today if California lawmakers
had acted with greater deliberation in 1996. That is a lesson we should
bear in mind as we consider changes to this important Federal law.
Mr. Barton. We now want to recognize our first panel. If
you gentlemen would come forward. Several of you have already
been formally introduced to the subcommittee. We have Mr. David
Svanda. Is that right?
Mr. Svanda. Perfect. Yes.
Mr. Barton. Mr. David Svanda. That shows my staff knows how
to spell things phonetically for me. He is here from the
National Association of Regulatory Utility Commissioners. We
have Mr. David Sokol, who needs no introduction. We have Mr.
Bruce Levy, Senior Vice President and Chief Financial Officer
who Mr. Pallone introduced to the committee, of the GPU
Company. We have Mr. Robert priest who is Manager of the Yazoo
City Public Service Commission. Did I miss someone? I missed
Mr. Morris. Mr. Morris is the President and Chief Executive
Officer of Memphis Light, Gas and Water that Mr. Bryant alluded
to I think. We have Mr. Kanner, who is Coordinator for
Consumers for Fair Competition. And we have Mr. Thomas lane,
who is the Managing Director of a struggling investment company
called Goldman Sachs in a place called New York which is
obviously a village in far northeast Texas, I guess. So
gentlemen, welcome. Your statements are in the record in their
entirety. We are going to start with Mr. Svanda and go right
down the line.
We are going to recognize each of you for, let us say, 6
minutes and then we will have some questions. Welcome to the
STATEMENTS OF HON. DAVID A. SVANDA, COMMISSIONER, MICHIGAN
PUBLIC SERVICE COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF
REGULATORY UTILITY COMMISSIONERS; DAVID L. SOKOL, CHAIRMAN AND
CEO, MID-AMERICAN ENERGY HOLDINGS COMPANY; BRUCE LEVY, SENIOR
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, GPU, INC.; HERMAN
MORRIS, JR., PRESIDENT AND CHIEF EXECUTIVE OFFICER, MEMPHIS
LIGHT, GAS & WATER; ROBERT D. PRIEST, MANAGER, YAZOO CITY
PUBLIC SERVICE COMMISSION; MARTY KANNER, COORDINATOR, CONSUMERS
FOR FAIR COMPETITION; AND THOMAS K. LANE, MANAGING DIRECTOR,
Mr. Svanda. Good morning, Mr. Chairman, and members of the
subcommittee. I am Commissioner Dave Svanda. I am a member of
the Michigan Public Service Commission and also second vice
president of the National Association of Regulatory Utility
Commissioners, commonly known to you as NARUC. And I
respectfully request that my full written statement be included
in today's hearing record.
Mr. Barton. Without objection. Two of your former
commissioners are now in the high cotton over at FERC, so y'all
are two short, I guess, in your national organization.
Mr. Svanda. Our loss and certainly your gain. They are
great additions to that organization. I am grateful, truly, to
be here in front of you to speak to some of your issues and
concerns. I will speak to them briefly and also reserve just a
minute of time for some personal comment after my NARUC
comments. High on our list is that of interconnection and net
metering that many of you commented on in your opening
comments. NARUC supports legislation to establish uniform
technical standards for interconnecting new generation to the
grid. Further, we believe that implementation of
interconnection rules, particularly at the distribution level,
should be by State commissions. NARUC also believes that
individual States should not be allowed to implement rules that
would block the good faith effort of neighboring States to move
to a competitive structure.
NARUC supports the deployment of distributive generation
and combined heat and power technologies through State level
decisionmaking on such issues as removal of regulatory
obstacles and the provision of backup power at reasonable
rates. NARUC further supports legislation removing Federal
barriers to State implementation of net metering. With regard
to PUHCA and PURPA, as a general matter, it is a well-stated
and known NARUC policy that neither PUHCA nor PURPA should be
repealed on a stand-alone basis or in a vacuum. NARUC believes
that relief from these statutes should be contingent upon the
development of truly competitive markets as determined through
State commission and supervised restructuring programs.
Next on market power, many regional electric markets
throughout the country have experienced price spikes of unusual
and unexpected proportions. These price spikes have led to a
curtailment to a shutdown of operations of small large
industrial customers and to increase prices for smaller
commercial and residential customers. This high market price
volatility has raised concerns about the integrity of the
markets leading to calls from numerous participants, consumers
and policymakers for heightened monitoring of these markets by
In order to identify corrective policy, regulatory bodies
need access to data such as production for generation plants,
transmission pass schedules and actual flows. FERC is making
great use of today's technology and data in their brand new
market monitoring room, which I was fortunate enough to visit
just yesterday. The market monitoring effort could be greatly
enhanced if FERC were to make the information that they are now
able to gather on a real-time basis available to entities such
as State commissions and others that would be able to use the
The electric industry restructuring efforts of the Federal
Government and the various States are based on assumptions that
wholesale markets are workably competitive to that end. Policy
makers must have the ability to instill confidence in an
already skeptical public that the market is not being gamed. We
can only instill this confidence if we work with and
disseminate actual information. NARUC supports legislation
introduced this week by Senator Wyden and cosponsored by
Senator Burns as an effective way to insure both Federal and
State regulators have the information necessary to adequately
monitor wholesale electricity markets.
NARUC believes this legislation would provide great
benefits to the market and its customers and should be included
in any comprehensive energy bill. Congress should not preempt
legislation in the States to address market power concerns,
including the authority to require behavioral and structural
remedies is to address successive market power. NARUC advocates
a continuum of options, such as accounting conventions and
codes of conduct for the mitigation of market power, and urges
Congress to preserve State flexibility to use these options as
And now, in conclusion, or as I conclude, I would like to
take off my NARUC hat and to make just a few personal
observations based on my Michigan experience. I'd like to
publicly compliment your entity, the FERC, for earlier this
month, beginning to aggressively pursue the rationalization of
RTO formation. We look forward to many more such aggressive
actions on your part. I would like to encourage a policy that
allocates the full cost of interconnection to the transmission
side of the equation, so that all interconnecting facilities
are treated on an equitable basis.
I would like to indicate to you that wholesale decisions
that are made at the national level can, in fact, kill
overnight retail restructuring efforts at the States if those
decisions that get made nationally send price signals in the
opposite direction from that intended by the State. I have a
very specific Michigan example that I would be happy to share
on questioning if you are interested.
Finally, I would like to emphasize that there are
interstate transmission issues that States simply cannot get
fixed by ourselves. And I would posit to you that if we could
get them fixed by ourselves, then why haven't we up to this
I thank you for this opportunity to appear before you,
happy to answer your questions regarding either my comments on
behalf of NARUC or my personal observations.
[The prepared statement of David A. Svanda follows:]
Prepared Statement of Hon. David A. Svanda, Commissioner, Michigan
Public Service Commission on Behalf of National Association of
Regulatory Utility Commissioners,
Mr. Chairman and Members of the Subcommittee: Good morning. My name
is David A. Svanda. I am a Commissioner on the Michigan Public Service
Commission and First Vice President of the National Association of
Regulatory Utility Commissioners, commonly known as NARUC. I
respectfully request that NARUC's written statement be included in
today's hearing record as if fully read.
NARUC is a quasi-governmental nonprofit organization founded in
1889. Its membership includes the state public utility commissions for
all states and territories. NARUC's mission is to serve the public
interest by improving the quality and effectiveness of public utility
regulation. NARUC's members regulate the retail rates and services of
electric, gas, water and telephone utilities. 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 that are just, reasonable and nondiscriminatory for all
I greatly appreciate the opportunity to appear on behalf of NARUC
before the House Subcommittee on Energy and Air Quality.
INTERCONNECTION AND NET METERING
NARUC supports congressional legislation to establish uniform
technical standards for interconnecting new generators to the grid.
However, we believe that implementation of interconnection rules--
particularly at the distribution level--should be by State commissions.
NARUC further believes that States should not implement rules that
would block the good faith efforts of their neighbors to move to a
Congressional legislation should ensure that States have
flexibility to implement interconnection rules to meet local market
conditions. As an organization, NARUC supports the development of
distributed generation and combined heat and power through state-level
decisionmaking on such issues as removal of regulatory obstacles and
the provision of backup power at reasonable rates.
NARUC further supports legislation removing federal barriers to
State implementation of net metering. The most critical barrier
involves the current lack of jurisdictional clarity over net metering.
The Federal Power Act has been alleged to preempt State net metering
programs, slowing development of this promising new approach to
promoting competition and resource divesting.
PUHCA AND PURPA
NARUC has adopted resolutions that support Congressional action to
address the Public Utility Holding Company Act (PUHCA) and the Public
Utility Regulatory Policies Act (PURPA) provided certain conditions are
met. In the case of PUHCA, we believe that repeal is appropriate, but
only as part of broader legislative aimed at developing workably
competitive wholesale markets and only if States and FERC are provided
guaranteed access to holding company books and records. Additionally,
any repeal must include provisions deemed necessary to assist FERC in
addressing the problem of abuse of market power in generation and
With respect to PURPA, we would support prospectively repealing the
utility mandatory purchase requirements, conditioned upon the
development of competitive electric markets and as part of broader
restructuring legislation, not as a stand alone initiative.
As a general matter, it is NARUC policy that neither PUHCA nor
PURPA should be repealed on a stand-alone basis or in a vacuum. NARUC
believes that relief from these statutes should be contingent upon the
development of competitive markets as determined through a State
commission supervised restructuring program.
A particular concern we have with PURPA repeal is preemption of
State ratemaking authority. Specifically, our concerns focus on repeal
provisions that restrict the ability of State commissions to require
utilities to take steps to mitigate stranded costs that may result from
above-market contracts. These types of provisions would leave little
incentive for utility companies to minimize costs passed through to
customers, thus holding harmless utilities and qualifying facilities.
Many regional electric markets throughout the country have
experienced price spikes of unusual and unexpected proportions. These
price spikes have led to curtailment or shutdown of operations of some
large industrial customers and to increased prices for smaller
commercial and residential customers.
The high market price volatility has raised concerns about the
integrity of the markets, leading to calls from numerous participants,
consumers and policy makers for heightened monitoring of these markets
by regulatory bodies. In order to identify corrective policy options to
assure the public of the competitiveness and efficiency of the
developing wholesale electricity market and its prices, regulatory
bodies need access to data such as production for generating plants,
transmission path schedules and actual flows. FERC is making great use
of today's technology and data in their new ``Market Monitoring Room.''
The market monitoring effort could be greatly enhanced if FERC made
this information more widely available and had access to additional
The electric industry restructuring efforts of the Federal
government and the various States are based upon an assumption that
wholesale markets are workably competitive. To that end, policy makers
must have the ability to provide confidence to an already skeptical and
uneasy public that the market is not being ``gamed.'' This confidence
can only be provided if regulators are able to access the data
necessary to ensure that the market is functioning in a truly
competitive fashion. To the extent data is currently shared among
market participants for purposes of reliability, it should also be
available to regulators and the public.
NARUC supports legislation introduced this week by Senator Wyden
and co-sponsored by Senator Burns (S. 1231) as an effective way to
ensure both Federal and State regulators have the information necessary
to adequately monitor wholesale electricity markets and to assure
proper access to such information. NARUC believes this legislation
would provide great benefits to the market and its customers and should
be included in any comprehensive energy bill.
Congress should not preempt jurisdiction in the States to address
market power concerns, including the authority to require behavioral
and structural remedies to address excessive market power. NARUC
advocates a continuum of options, such as accounting conventions and
codes of conduct, for the mitigation of market power, and urges
Congress to preserve State flexibility to use these options as needed.
Legislation should clarify: 1) the authority of the States to
require and police the separation of utility and nonutility, and
monopoly and competitive businesses, and to impose affiliate
transaction and other rules to assure that electric customers do not
subsidize nonutility ventures; 2) that States have authority to require
the formation of appropriate State, territory, and regional
institutions where necessary to ensure a competitive electricity
market; 3) as market power abuse may require the application of well
tailored structural solutions, legislation should clarify the States
are authorized to require divestiture where appropriate and necessary;
and 4) that State regulators have authority to ensure effective retail
markets and should eliminate any barriers to the exercise of that
authority by the States.
This concludes my remarks. Thank you for giving me this opportunity
to appear before you today. I look forward to answering any questions
you may have.
Mr. Barton. We thank you.
We would now like to welcome Mr. Sokol. Your statement is
in the record in its entirety and you are recognized for 6
minutes to elaborate on it.
STATEMENT OF DAVID L. SOKOL
Mr. Sokol. Thank you Mr. Chairman, members of the
committee. As has been stated, my name is Dave Sokol, chairman,
CEO of Mid-American Energy Company, a diversified international
energy company headquartered in Des Moines, Iowa with
approximately $11 billion in assets. We appreciate very much
this opportunity to testify this morning. This is an extremely
important and timely hearing because if Congress does not
address electricity issues this year, we will not have a truly
comprehensive national energy policy. The quality and
reliability of our electric supply system is critical to our
economy, and Congress cannot wait to act until political
consensus is reached on every issue. That merely works to the
advantage of those who take extreme positions in the policy
arena or who prosper as a result of market failures.
The time has come for Federal action on electricity. Mid-
American has been a leader in building consensus on
electricity, and there are several important issues where
substantive consensus now exists. These include prospective
repeal of the PURPA mandatory purchase obligations,
standardization of interconnection procedures, the
establishment of a mandatory reliability regime and some form
of Federal backstop authority for transmission siting, as well
as support for FERC's ongoing efforts to promote open
Today, however, I would like to focus my remarks in support
of H.R. 1101, which would replace the outdated Public Utility
Holding Company Act of 1935 with a modern workable framework
and broad investigative powers for Federal and State
regulators. PUHCA, as you know, was passed in 1935 to cure
abuses at a time when energy regulation was in its infancy.
Today, all it does is limit investment in energy infrastructure
and distort markets, thus reducing supply options for consumers
just when the industry needs new investments most.
Sixteen months ago, when our largest investor, Warren
Buffet, and I discussed PUHCA repeal with Congressional
leaders, we warned that the electricity sector was headed for a
train wreck, either in California or in the upper midwest. We
don't take any pleasure in being correct in that prediction.
But I hope you fully understand why we believe so strongly that
Congress must act. From my first hand experience in California,
I believe that this electricity crisis can be tied to two core
problems: The lack of adequate investment in infrastructure and
regulatory policies that distorted the energy markets.
PUHCA contributes to both problems. It did not stop the
problems in California from occurring and in certain respects,
it has exacerbated them. Let me give you two examples of how
PUHCA is limiting investment in California. Last year, when we
saw signs of the severe problems in California's electricity
markets, we attempted to invest in existing and new utility
infrastructure. But through PUHCA, we cannot acquire or control
more than 4.9 percent equity in any of the California utilities
or those assets regulated under PUHCA.
Moreover, the integration requirement of the Act would have
required us to demonstrate that we could physically intersect
our Iowa utility system with those in California. This is an
impossible requirement for us, or the other two thirds of
American utilities operating east of the Rockies to meet.
Another PUHCA roadblock would have forced mid America to become
a registered holding company under the Act, which probably
would have required us to separate ourselves from Berkshire
Hathaway, or have Berkshire divest all of their non energy
Obviously, neither option is acceptable. Let me give you a
second example. We own and operate geothermal power plants in
the Imperial Valley of California, which provides California
with 340 megawatts of baseload emission-free renewable
electricity. We want to double the size of these facilities,
but PUHCA stands in the way because a new transmission line is
needed to get this electricity to market. The States utilities
are in no financial condition to do this and we cannot because
building the line would trigger PUHCA registration.
This is completely absurd. A 66-year-old law prevents
Berkshire Hathaway, one of the world's most financially stable
companies, from investing in California's market, when the
State's own utilities can't pay their bills. Moreover, without
PUHCA repeal, foreign companies looking for a foothold in the
U.S. will continue to have a significant advantage over U.S.
utilities. Foreign companies are not restricted by the physical
integration requirements of PUHCA on their first entry into the
U.S. This gives them a substantial advantage over U.S.
companies. And we are not arguing against international
investment. We strongly support it. But an outdated law should
not hamstring American companies and have the perverse effect
of pushing Americans' investment overseas.
PUHCA made sense 66 years ago when there was no other
statutory framework to control the misuse of the holding
company structure. That has changed. Today, the FERC and State
agencies closely regulate utilities. The SEC retains full
authority over securities functions. The FTC and the Justice
Department have well-established, antitrust authority. Are
there any good reasons not to repeal PUHCA? No.
First, the SEC, which enforces PUHCA, has consistently
supported its repeal on a bipartisan basis for nearly 20 years,
calling it the agency's most intrusive and burdensome
regulation. Second, FERC commissioners of both parties have
supported repeal and FERC reaffirmed that position earlier this
year in Senate hearings because PUHCA repeal will enable it to
better promote efficient and competitive wholesale markets.
For example, while PUHCA is premised on geographically
limiting utility companies, FERC is working to reduce market
concentration. PUHCA also inhibits FERC's efforts to implement
order 2000, to establish independent regional transmission
organizations, a goal which is supported by virtually every
Third, PUHCA repeal is pro-consumer. H.R. 1101 has strong
new consumer protections that guarantee State and Federal
regulators full access to the books and records of all utility
companies, not just PUHCA-registered ones. Those elements of
our business that are regulated should be, and must be
available to regulators to insure that our customers are
We support these essential provisions. Moreover, repealing
PUHCA will encourage new investment, new ideas and new
efficiencies in this industry. I provided committee members
with a study we commissioned by a highly respected econometrics
firm that used very conservative estimates in showing that
PUHCA directly costs our economy hundreds of millions of
dollars annually, and other studies have put these costs in the
Last there is strong bipartisan support for PUHCA repeal as
has been demonstrated by the Senate Banking Committee's recent
19-to-1 vote for their PUHCA repeal bill. Why then has PUHCA
not been repealed yet? Because it is being held hostage to
other issues in the larger electricity debate. We believe it is
time to end this stalemate because the losers in this hard-
played game over PUHCA repeal have been America's energy
If Congress fails to act this year, when the need for new
investment in the industry has never been more apparent, a very
strong negative signal will be sent to the financial community.
At the close of the Senate Banking Committee markup of the
PUHCA bill, Delaware Senator Tom Carper said, and I quote, I
have only one question, why hasn't this been done before? It's
Mr. Chairman, PUHCA repeal is a no-brainer. I would be
happy to answer any questions that you may have.
[The prepared statement of David L. Sokol follows:]
Prepared Statement of David L. Sokol, Chairman and CEO, MidAmerican
Energy Holdings Company
Mr. Chairman and members of the Committee, my name is David Sokol,
Chairman and CEO of MidAmerican Energy Holdings Company, a diversified,
international energy company headquartered in Des Moines, Iowa, with
approximately $11 billion in assets. I am here today representing
MidAmerican and other companies that support H.R. 1101 and the
modernization of the electricity industry.
Thank you for the opportunity to testify this morning on an issue
of great importance both to our industry and to American energy
consumers. I would also like to thank Representatives Ganske and Terry
for their very kind introductions.
MidAmerican Energy Holdings Company consists of four major
subsidiaries: CE Generation (CalEnergy), a global energy company that
specializes in renewable energy development in California, New York,
Texas, and the West, as well as the Philippines; MidAmerican Energy
Company, an electric and gas utility serving the states of Iowa, South
Dakota, Illinois and a small part of Nebraska; Northern Electric, a
competitive electric and gas utility in the United Kingdom, and Home
Services.com, a residential real estate company operating throughout
the country. CalEnergy owns and operates geothermal power plants in the
Imperial Valley of Southern California. The company is the largest
employer and taxpayer in Imperial County, one of the most economically
disadvantaged counties in California.
I would like to commend Chairman Barton and the members of the
Committee for holding this important and timely hearing. I believe this
hearing is so important because, at the end of the day, if Congress
does not address electricity issues, the country cannot have a truly
comprehensive National Energy Policy. No other issue impacts Americans
and our economy as pervasively as the quality and reliability of our
electric supply system. Congress cannot afford to wait to act until
some undefined future time when consensus is reached on every
conceivable issue related to electricity. Taking that stance merely
works to the advantage of those who take extreme positions in the
policy arena or who prosper as a result of failures in the markets. The
time for federal action on electricity has come--and maybe gone by a
little; but if Congress moves quickly it can catch up before the type
of damage we have seen in California and the West spreads to other
parts of the country.
MidAmerican has been a leader in efforts to build consensus on
electricity, and there are a number of important issues on which
substantive consensus exists. These include prospective repeal of the
PURPA mandatory purchase obligation, standardization of interconnection
procedures, the establishment of a mandatory reliability regime and
some form of federal backstop authority for transmission siting, as
well as support of FERC's ongoing efforts to promote open access
transmission. I would like to focus my remarks today, however, in
support of MidAmerican's number one legislative priority: replacing the
outdated and counterproductive Public Utility Holding Company Act of
1935 (PUHCA) with a modern framework and broad investigative powers for
federal and state regulators.
PUHCA, a Depression-era law passed to cure abuses at a time when
the SEC and state regulatory bodies were in their infancy, is today
limiting investment in energy infrastructure, thereby reducing the
supply options for consumers at the very time when this industry needs
new investment most.
In his recent testimony before the Senate Banking Committee,
Securities and Exchange Commission Chairman-Designate Harvey L. Pitt
stated that he saw his primary mission as the need to ``nurture a
climate that is conducive to, and encourages, the creation of capital--
the lifeblood of innovation.'' He went on to say that ``our securities
laws are, in the main, nearly seventy years old, and reflect a time,
and a state of technology, light years away from what we now confront
daily.'' Given that previous SEC Commissioners have noted that PUHCA is
the most intrusive and burdensome regulation administered by the
agency, and that the SEC has been recommending its repeal for almost
twenty years, I think we can safely apply those sentiments to this Act.
From my first-hand experience in California, I believe that its
complex problems can be tied to two root causes: 1) lack of adequate
investment and infrastructure in the energy sector, and 2) regulatory
policies that distort energy markets.
As to the first issue, FERC last year found that ``there is little
doubt that the most crucial task ahead is to ensure that a robust
supply enters this market, both now and in response to any future price
signals.'' Nationwide, data from the North American Electric
Reliability Council (NERC) project electric reserves of only 11.48
percent in 2001, with electric demands increasing by more than two
percent per year. Typically, a 15 percent reserve is considered to be
the minimum to ensure reliable service. Moreover, conservative
estimates show that more than $76 billion will need to be invested in
the sector by the end of the decade to assure reliable service.
With regard to the second problem--regulatory policies that distort
energy markets--California's actions proved disastrous. In the name of
reducing concerns about utility market power, the state either
compelled or encouraged large-scale generation divestitures by the
incumbent utilities and required them to purchase power in the volatile
day-ahead spot market. The state restructuring legislation also
mandated significant rate reductions that discouraged new entrants from
competing for retail customers. Combined with PUHCA's limitations on
selling electricity generated by exempt wholesale generators (EWGs) at
retail and the inadequacy of available transmission and generation,
these measures helped smother competition at the retail level in its
infancy. The state also failed to address preemptively the excessive
bureaucracy in its plant siting and environmental review procedures.
As you consider the actions you can take to ease the energy crisis
in California and the West, I believe you will see that PUHCA
contributes to both of these problems. The law can and should be
repealed, and only Congress can do so. To do otherwise would leave a
federal statute on the books that will continue to inhibit investment
and distort markets throughout the country. The results of California's
failure to address these issues in advance of the onset of full retail
competition should be a warning to Congress about the need to move
quickly on removing barriers to investment and market entry.
Let me provide the committee with two concrete examples of how the
Act prevents actions that could help alleviate the California
electricity crisis. Last summer, we at MidAmerican began to see signs
foreshadowing the severe problems that have afflicted the California
electricity market. The investor-owned utilities in the state had
already begun to suffer financially from the impacts of soaring
wholesale electricity costs and capped retail rates, and we gave
serious consideration to a number of options that would have involved
MidAmerican taking an equity position in the California utilities while
working with the state to return the market to long-term viability.
Every scenario we reviewed ran into the same roadblock--the Public
Utility Holding Company Act. MidAmerican is exempt from the most
intrusive regulatory restrictions of the Act because its regulated
utility business is primarily in one state, Iowa. However, MidAmerican
could not acquire more than 4.99 percent of the equity in any of the
California utilities without running afoul of PUHCA on several fronts.
First, the physical integration requirements of PUHCA would have
required MidAmerican to demonstrate that it could physically
interconnect its utility systems in the Midwest with those of the
California utilities. This is an impossible standard for MidAmerican to
meet. Any public utility, registered or exempt, operating within the
eastern two-thirds of the United States would run into the same
Second, even if we could have solved the problem of the physical
integration requirement, MidAmerican would have been forced to become a
registered holding company under the Act. This probably would have
required the company to separate itself from Berkshire Hathaway or have
Berkshire divest itself of all non-energy related assets. For obvious
reasons, neither of those options was acceptable.
Another example pertains to our interest in expanding our Imperial
Valley geothermal operations. These plants currently provide the
California electricity market with approximately 340 megawatts of
baseload, emissions-free, renewable electricity. We would like to
double the size and output of these facilities, providing desperately
needed electricity to the California market. This project will require
the construction of additional transmission lines. As you are well
aware, the state's investor-owned utilities are in no financial
condition to undertake this type of project. The obvious answer would
be for CalEnergy to make the investment in the transmission lines
necessary to connect these plants to electricity consumers.
Unfortunately, PUHCA may stand in our way.
Being an owner of a transmission facility in California creates
similar PUHCA problems to investing in a California utility. Once
again, the company would be faced with maneuvering around the physical
integration standard and dealing with Berkshire Hathaway's diversified
portfolio. There may be some way around these problems, and we will
explore every option to find a way to complete this expansion.
Nonetheless, the existence of this unnecessary, outdated law makes it
far more difficult to invest in this critical industry.
I hope you will take a moment to reflect on the absurdity of this.
Berkshire Hathaway is one of the most financially stable private
entities in the world, with a AAA bond rating. A federal law enacted
more than 65 years ago with the intent of protecting investors keeps
MidAmerican and Berkshire out of California's utility market and almost
prevented Berkshire from investing in MidAmerican. At the same time,
one California utility has declared bankruptcy and the other was
recently unable to complete a bond issue offering junk bond premiums to
refinance its debts because of lack of investor interest.
California's utility companies face a long climb back to fiscal
health and will have a difficult time raising capital for new
infrastructure. Yet, PUHCA will prevent most, if not all, domestic
utilities, and discourage non-utility companies, from making equity
investments in this market. Where will needed capital come from? I
anticipate one of three sources. First, non-utility companies could
make these investments, but these companies will not have the benefit
of prior experience in the industry and will be impeded by PUHCA just
as Berkshire Hathaway is. Federal or state governments are a second
possible source of capital, but the political issues would seem to make
that unlikely. The most likely scenario, I believe, is that foreign
utility companies looking for a foothold in the U.S. market will take
long looks at these companies. Since foreign companies are not
restricted by the physical integration requirement on their ``first
bite'' entry into the American market, they will enjoy a substantial
advantage over U.S. companies in the mergers and acquisitions market.
I'm not making a case against international investment. In fact, I
strongly support it. But outdated, unnecessary laws should not
hamstring American companies in this competition.
PUHCA made sense 66 years ago, when there was no other statutory
framework to control the misuse of the holding company structure. All
that has changed. Today, the FERC and state agencies closely regulate
utilities. The SEC retains full authority over securities functions.
The FTC and the Justice Department have well-established antitrust
authority. And more information is available in the markets, with bond
rating agencies, accounting standards, and financial disclosure
requirements quickly punishing companies that engage in excessive
Are there any good reasons not to repeal PUHCA? I don't believe so.
1) The SEC has consistently supported PUHCA repeal for almost twenty
Speaking on behalf of the SEC before the Senate Banking Committee's
Subcommittee on Securities and Investment, Commissioner Isaac C. Hunt,
Jr. testified: ``By the early 1980's, many aspects of 1935 Act
regulation had become redundant: state regulation had expanded and
strengthened since 1935, and the SEC had enhanced its regulation of all
issuers of securities, including public utility holding companies.
Changes in the accounting profession and the investment banking
industry also had provided investors and consumers with a range of
protections unforeseen in the 1935. The SEC therefore concluded that
the 1935 Act had accomplished its basic purposes, and its remaining
provisions were either duplicative or were no longer necessary to
prevent the recurrence of the abuses that had led to the Act's
enactment. The SEC thus unanimously recommended that Congress repeal
the Act.'' Based on a comprehensive staff report in 1995, the SEC again
recommended repeal of PUHCA, accompanied by the creation of additional
authority to exercise jurisdiction over transactions among holding
company affiliates. That is exactly the approach embodied in H.R. 1101.
2) Federal Energy Regulatory Commissioners have consistently supported
On March 20, 1997 then-FERC Chair Elizabeth Moler, a Democratic
appointee, testified that PUHCA ``inhibits competition. Congress should
eliminate these impediments. Utilities need the freedom to pursue
structural changes without facing antiquated rules that do not easily
accommodate current policies favoring competition.'' Independent
Commissioner Donald Santa, Jr. added that ``this anachronistic federal
statute no longer serves any useful purpose and, in fact, is an
impediment to greater competition in electricity markets.'' The current
FERC Chairman, Curt Hebert, a Republican, is also a strong proponent of
PUHCA repeal will enable FERC to continue policies to promote
efficient, competitive wholesale markets. PUHCA is premised on
geographically limiting utility companies while at the same time FERC
is working to reduce market concentration.
The limits PUHCA places on FERC's ability to promote competitive
wholesale electricity markets are even more apparent today. For
example, PUHCA inhibits utilities' efforts to comply with FERC Order
2000 to establish independent regional transmission organizations
(RTOs), yet every consumer group, industrial user group, public power
entities and rural coops favor the establishment of RTOs to ensure the
most efficient use of the electric transmission system and to guarantee
that utilities do not use control of the transmission system to distort
wholesale electricity markets.
Many utilities, including MidAmerican Energy, are working to
establish independent transmission companies, or ``transcos,'' that
would provide for efficient management of transmission networks in
large regional markets. As FERC strongly prefers that these
organizations be large, multi-state companies, they will be subject to
PUHCA's restrictions. PUHCA is discouraging potential investors in
these new businesses and delaying the day we will see operational
control of transmission fully separated from competitive market
3) PUHCA repeal is pro-consumer.
PUHCA was passed at the height of the Depression to remedy abuses
of holding companies that were taking advantage of lax or non-existent
utility regulation at the state and federal level. Its purpose then was
to preserve and reinforce the model of a regionally vertically
integrated utility monopoly. PUHCA did its job then. The paradigm in
the industry has shifted, but PUHCA has not. As a result, the Act today
narrows the range of market entrants and thereby stifles competition,
which is turn hurts consumers.
H.R. 1101 has strong new consumer protections applicable to more
utilities than are currently subject to the restrictions of PUHCA. It
guarantees state and federal regulators full access to the books and
records of utility holding companies. We strongly support those
provisions. Those elements of our business that are regulated should be
available to the regulators to insure that our customers are protected.
That is absolutely essential.
At the same time, repealing PUHCA will allow new investment, new
ideas and new efficiencies in the electric and gas industries at a time
when these are needed most. Last year, MidAmerican commissioned an
independent study by the highly respected econometrics firm Analysis
Group/Economics. Using the most conservative possible estimates, the
study demonstrated directs costs to the economy of hundreds of millions
of dollars annually from PUHCA. Other surveys that have attempted to
quantify lost opportunity costs in the industry have estimated a multi-
billion dollar annual drag on the economy from PUHCA. I am pleased to
provide our study to members of the committee for your review.
Any claim that Congress should not repeal PUHCA because of events
in California is misleading and specious. All three of California's
utilities are exempt from PUHCA's restrictions under the intrastate
exemption, and the overwhelming majority of generators selling
electricity in California's electric markets are also PUHCA exempt.
California officials made a huge policy mistake in allowing their
utilities to distribute proceeds of their stranded cost settlements
without either requiring that revenues be set aside in some form of
hedge against rising wholesale costs or that these funds not be
distributed until after the rate freeze transition period was complete.
That decision was one of many flawed aspects of the California
restructuring plan, but it has absolutely nothing to do with PUHCA. If
any of these utilities violated California law in their handling of
these matters, they can and should be subject to damages and remedies
under existing state law. Failure to regulate these utilities properly
was may have been poor state policy, but PUHCA has nothing to do with
4) There is strong bipartisan support for PUHCA repeal in the other
On April 24th, the Senate Banking Committee voted 19-1 in support
of PUHCA repeal. Having testified at the hearing on the bill the
previous month, I can assure you that this was no pro forma vote. The
hearing was well attended, particularly by senators new to the
Committee hearing the case for PUHCA repeal for the first time.
Why then has PUHCA not been repealed yet?
Because PUHCA repeal is a hostage to other aspects of the larger
electricity debate. Some stakeholders in the industry have sought to
use PUHCA as leverage to achieve their goals in energy policy. I don't
say that in an accusatory sense. That's the way the game is often
played, and as I said earlier, MidAmerican has taken a leadership role
in trying to resolve policy differences on the full range of these
Those efforts can and should continue, but I believe both Congress
and the stakeholder community need to step forward and focus on what
they support and are willing to help get passed. We need to end the
politics of stalemate where interest groups have focused more on
blocking progress on one another's priorities than on moving forward
with good policy. Unfortunately, the losers in this hard-played game
have been America's energy consumers.
While there has been some new interest in the utility sector in the
last two years, partly as a result of the entry of non-traditional
investors, far more capital is sitting on the sidelines waiting to see
if Congress will move forward with PUHCA repeal and other needed
modernizations. I am concerned that if Congress fails to act this year
when the need for new investment in the industry has never been more
apparent, a strong negative signal will be sent to the financial
community. In view of our undeniable capital needs, that would have
far-reaching negative impacts.
Last year, I joined Mr. Warren Buffet in discussing PUHCA repeal
with House and Senate leaders. In those meetings, we warned that the
energy sector was headed for a train wreck in either California or the
Midwest. I don't take any pleasure in being right in that prediction,
but I hope you will understand why I believe so strongly Congress must
The political game that has held PUHCA repeal hostage has left the
American consumer the loser. It is time to change the way the game is
played. I thank you for the opportunity to testify this morning and ask
you to support H.R. 1101 and other needed industry modernizations.
Mr. Barton. Thank you.
Mr. Levy, we would now like to have your statement. It is
in the record in its entirety, and you are recognized for 6
minutes to elaborate on it.
STATEMENT OF BRUCE LEVY
Mr. Levy. Thank you.
Mr. Barton. You need to put that microphone really close to
you, sir. And push that little--there you go.
Mr. Levy. That works. Thank you, Mr. Chairman, members of
the committee. I am Bruce Levy, senior vice president and chief
financial officer of GPU. GPU, based in Morristown, New Jersey,
is a registered electric holding company. We operate utility
companies in New Jersey and Pennsylvania, two States that have
completed their deregulation process, and we offer our 2
million customers the choice to select their electric supplier.
In addition, GPU owns international utilities in the U.K.,
Argentina and Australia, serving another 2 million customers. I
appreciate the opportunity to appear before you today, and
appreciate Mr. Pallone's kind introduction, and want to
acknowledge, for the record, the hard work he has done with us
in both local reliability issues and in PURPA repeal issues. I
think that the points of today to discuss who to make a better
competitive wholesale electric generation market are important
ones that will determine whether we continue to enjoy adequate
supplies of reliable electric power at fair prices.
The potential upside of this is this new more competitive
market is enormous. But so will be the cost if we fail. I will
focus my remarks today on two Federal statutes, both which have
outlived their usefulness and now serve as impediments to
proper functions of competitive wholesale markets. These States
are the Public Utility Regulatory Policies Act of 1978, PURPA,
and the Public Utility Holding Company Act of 1935, PUHCA. As
someone who is active in the development of PURPA-qualifying
facilities for GPU in the past and now has the responsibility
of over the finances of GPU a PURPA-burdened utility, who has
long-term power contracts with over 1,600 megawatts of QF
projects, I can argue both sides of whether PURPA was a good
thing or a bad thing when Congress enacted it in 1978.
But quite frankly, whether PURPA was a good or bad thing in
1978 is not important at this time. What is important is that
in today's power market, PURPA no longer makes sense. It is not
needed, and in fact creates an impediment to free operation of
the wholesale generation market. Today, electric generators QFs
and non-QFs have access to wholesale customers under the same
terms and conditions applicable to the utilities owning the
transmission wires. This open access has sharply increased
competition for wholesale sales of electricity. But it has also
resulted in a competitive disadvantage for utilities mandated
to purchase wholesale power from QFs at long-term rates, which
are generally above currently prevailing market price.
PURPA also disadvantages non-QF generators who are not
eligible for the privilege of a guaranteed market for their
power. PURPA was premised on utilities continuing to be the
exclusive suppliers of electricity to all consumers within
their franchise territory. It was never imagined that PURPA
would apply to a world of opening transmission access for
wholesale and retail customers.
If a utility exits the generation business, whether by
choice as my company has, or through regulatory order as some
other utilities have, it is unreasonable, unfair and
uncompetitive to require those utilities to continue to make
new commitments to purchase QF generation, as required by
Things get even worse in some States. For example, under a
restructuring plan adopted in New Jersey, all utilities are
required to bid out their provider of last resort obligation,
and thus will have no further supply obligation to customers. A
similar case will exist in Texas when that States plant program
starts. Requiring those utilities to make new--to make any new
QF purchases makes no sense. In these cases, as in any other
State where deregulation has been implemented, continuing PURPA
impedes the transition to a competitive market. PURPA should be
prospectively repealed, that is, existing contract rights
expectations including the expectation of PURPA costs recovered
by utilities, provided by current laws should be honored.
Mr. Stearns has introduced bipartisan legislation, H.R.
381, that would accomplish this. And I urge its inclusion in
any comprehensive legislation you may consider.
Another statute which needs attention is PUHCA. PUHCA has
long outlived its usefulness and its rules are designed for
industry that no longer exists, and may severely limit the
ability of companies to compete in today's fast evolving energy
marketplace. PUHCA restricts the flow of capital into new
generation and transmission facilities and is a significant
factor impeding the development of independent transmission
facilities. There are many new investors anxious to participate
in the funding and expansion of our Nation's transmission
PUHCA has kept these investors away. PUHCA should be
repealed. While PUHCA and PURPA repeal are key elements in
removing impediments to a fully competitive market, there are
other areas where changes are needed. These include extension
of FERC-ordered, nondiscriminatory open access rules to munis,
coops, and federally owned transmission facilities, as well as
provisions to upgrade necessary incentives to expand the
In conclusion, there is much this Congress can and should
do to make the competitive wholesale market function better. I
urge the PURPA prospective repeal preservation of existing
contracts and recovery of costs and PUHCA repeal be high on
your agenda, and that such actions be included in any national
energy policy. Without addressing these issues, we cannot have
a national energy policy. Thank you very much.
[The prepared statement of Bruce Levy follows:]
Prepared Statement of Bruce Levy, Senior Vice President and Chief
Financial Officer, GPU, Inc.
Mr. Chairman and Members of the Subcommittee, I am Bruce Levy,
Senior Vice President and Chief Financial Officer of GPU, Inc. GPU,
Inc., headquartered in Morristown, NJ, is a registered public utility
holding company providing utility and utility-related services to
customers throughout the world. GPU serves 4.6 million customers
directly through its electric companies--GPU Energy in the US, GPU
Power UK in England, and Emdersa in Argentina. GPU has domestic utility
operations serving approximately 2 million customers in Pennsylvania
and New Jersey. The company's independent power project business units
own interests in and operate eight projects in five countries. I am
testifying today on behalf of myself and GPU, Inc., but my views are
consistent with the positions taken by EEI, the Alliance for
Competitive Electricity, the PURPA Reform Group, and Repeal PUHCA Now!,
industry organizations of which GPU is a member.
I am particularly pleased to be here today to talk about how to
make competitive wholesale electric generation markets work better.
This is an important issue in determining whether we continue to enjoy
adequate supplies of reliable electric power at fair prices to the
We are currently about mid-way through the transition of the
electric power industry from a system of defined franchise service
territories, cost-based regulation of generation, and pervasive
regulation of all aspects of the business, to a wholesale market
premised on open, non-discriminatory access, market-determined
generation prices, and independent operation of the transmission grid.
While this transition has not been easy, it is clear that if we
successfully navigate this transition, the industry will be forced to
be more efficient and consumer prices will be less than they otherwise
would have been under the old system. The upside potential of this new,
more competitive electric industry is enormous, but so will be the
costs if we fail.
It is becoming clearer each day that much remains to be done by
regulators, and most importantly, by the Congress, to ensure that this
transition to a more market-oriented electric industry is successful.
The problems that plague the wholesale electric power sector today can
be ignored, but they will not go away and they cannot be entirely
solved by the FERC or state regulators. Congress has an important role
to play and I encourage you to exert the leadership necessary to help
ensure viable, robust, competitive wholesale generation markets. The
following highlights some of the issues that are important to properly
functioning wholesale power markets, and are issues that only the
Congress can address satisfactorily.
Repeal Federal Legislation that Hinders Competition
Legislation enacted in an era of vertically integrated utilities
with defined retail franchise territories makes no sense in today's
world. Legislation is necessary to prospectively repeal section 210 of
the Public Utility Regulatory Policies Act of 1978 (``PURPA'') and to
repeal the Public Utility Holding Company Act of 1935 (``PUHCA''), two
impediments to a more competitive electric industry.
The Public Utility Regulatory Policies Act of 1978 (``PURPA'') was
enacted as part of the Carter Energy Plan to help alleviate the oil and
natural gas shortages of the late 1970s. It failed to achieve these
objectives, and today, it stands as an impediment to more competitive
and efficient wholesale power markets.
PURPA was intended to encourage conservation and promote the
development of renewable fuels in the electric generation sector. It
did this by establishing a special class of power generators, known as
qualifying facilities (``QFs''). In general, a QF must be of a certain
size, burn certain renewable or waste fuels, or produce steam for
commercial or industrial use as well as electricity. PURPA requires
utilities to buy all the electricity these qualifying facilities wish
to sell at the utility's ``avoided cost,'' which is determined by state
regulators under guidelines issued by the FERC.
In drafting PURPA, Congress aimed to ensure that consumers would
pay no more for PURPA power than for other power. Unfortunately, due to
a confluence of factors not foreseen by the authors of PURPA, this has
not been the case. Instead, long-term PURPA contracts continue at above
market prices throughout the United States. And some 65 percent of
PURPA contracts will not expire until after the year 2010.
PURPA is an anachronism in today's power markets. Competition in
electricity generation has been unleashed by the enactment of the
Energy Policy Act of 1992 and the issuance of FERC Order Nos. 888 and
889, providing for open, non-discriminatory access to utility
transmission systems for wholesale transactions. Consequently,
electricity generators and wholesale customers have access to each
other under the same terms and conditions applicable to the utility
owning the transmission wires. This open access has sharply increased
competition for wholesale sales of electricity. But it also has
resulted in a substantial competitive disadvantage for utilities
mandated to purchase wholesale power at rates above currently
prevailing market prices. PURPA also disadvantages non-utility
generators not eligible for the special privileges of a guaranteed
market for their power.
PURPA was premised on utilities continuing to be the exclusive
suppliers of electricity to all consumers within their franchise
territories. It was never imagined that PURPA would apply to a world of
open transmission access for wholesale and retail customers.
Continuation of PURPA's purchased power mandate in this new open access
world distorts competition and denies consumers the benefit of the
lowest cost power. If a utility goes out of the generation business, as
my company and many other utilities have decided to do, requiring those
utilities to continue to make new commitments to purchase QF generation
makes no sense. For example, under the restructuring plan adopted in
New Jersey, all utilities are required to bid out the provider of last
resort obligation and thus will have no further supply obligation to
its customers. Requiring those utilities to make new purchases of QF
power makes no sense. Similarly, if a utility is precluded from
marketing energy, as utilities in Texas have been under that State's
restructuring law, it has no use for energy delivered under a PURPA
contract. Thus, continuing PURPA merely impedes the transition to a
PURPA also has failed to achieve one of its primary goals, to
encourage the development of renewable energy resources. According to
the Department of Energy's Energy Information Administration, as of
December 31, 1998, wind turbines, solar and geothermal units together
comprised only 3.7 percent of all installed non-utility generation
capacity. Biomass and waste comprised another 16.1 percent. On the
other hand, natural gas, coal and oil make up over 75 percent of the
installed non-utility generating capacity. Thus, non-renewable sources
of energy have been the primary beneficiaries of the PURPA mandatory
purchase requirement, not renewables.
PURPA should be prospectively repealed. However, existing
contracts, rights and expectations, including the expectation of PURPA
cost recovery by utilities currently provided by law, should be
honored. Mr. Stearns has introduced bi-partisan legislation (H.R. 381)
that would accomplish this. I urge its inclusion in any comprehensive
legislation you might consider.
The Public Utility Holding Company Act of 1935 (``PUHCA'') was
enacted during the Great Depression with two primary objectives: the
integration and simplification of complex natural gas and electric
utility holding company systems, which then dominated the utility
industry, and protection of investors and consumers through effective
regulation of multi-state utilities operating through subsidiaries.
PUHCA long ago achieved its first objective of restructuring the
electric and natural gas industries. Consumer and investor protection
is now the purview of other regulatory and statutory authorities, which
did not exist 65 years ago.
PUHCA met its first objective by dismantling and simplifying the
organizational structure of the more than 200 complex electric and gas
utility holding company systems in existence in the mid-1930s. These
geographically scattered and diverse businesses were limited to the
operation of a single integrated utility system, plus such other
businesses as were closely related to an integrated utility system. By
the early 1950s, according to the Securities and Exchange Commission
(``SEC''), the agency responsible for administering PUHCA, the
reorganization of the electric and gas utility industries was complete.
The second objective of PUHCA--to protect investors and consumers--
was met by authorizing the SEC to regulate certain holding companies
that remained the owner of utility subsidiaries in more than one state.
This regulation requires advance SEC approval for many business and
financial transactions, including the issuance of debt or equity,
acquiring utility or non-utility assets and entering into service
arrangements with affiliated companies.
Even the SEC has recommended PUHCA's repeal because it is no longer
needed and is largely duplicative of other investor and consumer
protection authority administered by the SEC and the states. As an SEC
report has noted, ``[a]cting under authority in the Securities Act of
1933 and the Securities Exchange Act of 1934, the SEC has, over the
past six decades, created a comprehensive system of investor protection
that obviates the need for many of the specialized provisions of the
Holding Company Act.''
Not only has PUHCA outlived its usefulness, but it also is a
barrier to competition. It requires fewer than 20 out of the nation's
more than 200 electric and natural gas utilities to register and be
subject to pervasive SEC regulations. By significantly limiting
geographic and product diversification, and imposing numerous
burdensome filing requirements, PUHCA severely limits the ability of
companies to compete in today's fast evolving energy marketplace and
deprives consumers of the full range of energy provider services and
choices they would have if the Act were repealed. PUHCA restricts the
flow of capital into new generation and transmission facilities and
limits the number of new suppliers in electricity markets by
prohibiting exempt wholesale generators from selling directly to retail
PUHCA also acts as a perverse impediment to the formation of RTOs.
Shareholder-owned utilities and FERC are working quickly to meet FERC's
goal, established in Order No. 2000, of having RTOs operational by the
end of 2001. However, PUHCA is an impediment to utility efforts to
establish independent transmission companies with the scope and size
desired by FERC. Any such company could be required to become a
registered holding company and subject to the many restrictions and
additional regulation under PUHCA. As our companies attempt to raise
financing for these newly formed RTOs, they are discovering that
PUHCA's restrictions are a significant concern to Wall Street firms and
a barrier to investment by the very non-utility businesses that are
``independent'' of market participants. Mr. Pickering has introduced
bi-partisan legislation (H.R. 1101) that would repeal PUHCA. I urge its
inclusion in any comprehensive electricity legislation that the
Subcommittee might consider.
Extend Non-Discriminatory Open Access Requirements to Municipal,
Cooperatively-Owned and Federally-Owned Transmission Facilities
In 1992, Congress passed the Energy Policy Act (``EPAct''). One of
its most significant provisions is a requirement that, upon request,
utilities must transmit or ``wheel'' wholesale power generated by
others. If a utility fails to wheel when requested to do so on mutually
satisfactory terms, the requesting party can petition the FERC for an
order requiring the wheeling.
In 1996, the FERC issued its landmark decision in Order No. 888,
directing utilities to provide other users with access to their
transmission facilities on the same terms and conditions that they
themselves have. The purpose was to promote wholesale competition by
providing ways for competitive generators to move their power to
wholesale customers through open, non-discriminatory transmission
Order No. 888, however, only applies directly to utilities subject
to FERC's jurisdiction under the Federal Power Act--mostly investor-
owned companies. Almost one-third of transmission facilities in the
U.S. are not subject to FERC jurisdiction, and thus, are beyond the
open access requirements of Order No. 888. Thus, the Order No. 888 open
access requirements are not directly applicable to federally-owned,
municipal, or cooperatively-owned utilities, although the FERC has
imposed a reciprocity requirement on non-jurisdictional utilities that
seek to use the transmission facilities of jurisdictional entities. In
order to promote greater market efficiency, competition and
reliability, FERC's open transmission access requirements should be
extended to all transmission-owning entities. In today's market, it
makes no sense for there to be different rules for different
Upgrade and Provide Necessary Incentives to Expand the Transmission
Generation is of little use if the power that is generated cannot
be moved to where it is needed, and when it is needed, instantaneously.
``Busy'' signals are not acceptable in our business. Our increasingly
interconnected and overloaded transmission system is what makes the
entire electric system work (or not).
All segments of the electricity industry are imposing tremendous
demands on the transmission system to carry more and more transactions
across greater distances. As a result, the transmission system is
facing significant increases in congestion.
On an interstate highway system overloaded with traffic, gridlock
often results. On a transmission system with congestion, transactions
are curtailed to ensure that the system does not become overloaded,
limiting delivery of low-cost power and potentially resulting in a loss
Annual investment in transmission has been declining by almost $120
million a year for the past 25 years. Transmission investment in 1999
was less than half of what it had been 20 years earlier. Maintaining
transmission adequacy at current levels would require about $56 billion
in investment during the present decade. EPRI estimates it will cost up
to $30 billion to bring the western regional transmission system back
to a stable condition and $1 billion to $3 billion a year after that to
maintain this condition in the face of continued growth.
Without adequate transmission capacity to meet growing demand,
reliability will be compromised, prices will increase, overall system
efficiency will decline and the benefits of wholesale generation
competition will not be realized. A regulatory regime that fosters an
economic climate to encourage investment in transmission is necessary.
It is time for innovative, non-cost based forms of regulation to reward
transmission investments and operations that enhance reliability and
greater system efficiency. A bipartisan bill introduced or cosponsored
by six members of this Committee in the last Congress (H.R. 2786)
provides a satisfactory framework for addressing the need for new
investment in transmission. I urge the Subcommittee's careful
consideration of this bill.
Establish Regional RTOs
The biggest gap in FERC's RTO authority remains its inability to
impose the same requirements on federal electric utilities, municipal
utilities and electric cooperatives. These utilities operate important
transmission facilities that are integral to RTOs throughout the
nation. FERC has invited these entities to participate in mediation
talks. However, because FERC lacks jurisdiction over these entities'
transmission systems, it cannot put the same pressure on them to join
RTOs that it has clearly demonstrated it intends to put on shareholder-
owned utilities. FERC's Federal Power Act authority must extend to all
transmitting utilities, regardless of their ownership form.
Tax Code Provisions that Impede the Efficient Restructuring of the
Industry Should be Eliminated
While I realize that tax issues are not jurisdictional to the
Energy and Commerce Committee, I want to encourage your support for a
number of tax law changes that are critical to assuring adequate
investment in transmission infrastructure. With regard to RTOs, these
organizations will succeed only if all transmission owners in a region
join. In some areas of the country, such as the Pacific Northwest, the
participation of all publicly owned transmission entities will be
needed to form an effective RTO. Municipal owners of transmission argue
they cannot join RTOs because tax code provisions preclude the
``private use'' of tax-exempt financed utility property. These
provisions should be modified to allow municipal transmission assets to
be placed into an RTO without violating ``private use'' rules.
We commend the House Ways and Means Committee for reporting
legislation last week that largely reflects the compromise agreement
reached between EEI, LPPC and APPA last year that would address many of
these problems. This agreement would (1) grant ``private use'' relief
for government-owned utilities that provide open access to their
transmission systems, (2) grant tax relief for the sale or spin-off of
transmission facilities to form FERC-approved RTOs or
independent transmission companies that are part of a FERC-approved
RTO, (3) allow continued contributions to nuclear decommissioning trust
funds in a restructured electricity market, and (4) remove the tax on
contributions in aid of construction.
Our country needs a comprehensive national energy policy that
ensures the adequate supply of affordable and reliable electricity. The
removal of barriers to the wholesale generation market will go a long
way to ensuring the supply that is essential to our modern economy that
increasingly depends on adequate supplies of highly reliable, and
reasonably priced electricity. Modern technologies powered by
electricity have been responsible for as much as half of the nation's
economic growth since the 1930s. Electric technologies have improved
our productivity, reduced our overall energy use and enhanced
Americans' quality of life.
Action is needed now to ensure our country has affordable and
reliable electricity for years to come. I look forward to working with
this Subcommittee to achieve these objectives.
Mr. Barton. Thank you, Mr. Levy.
We now want to hear from Mr. Morris. And I believe you
testified for the subcommittee in the last Congress. Is that
correct or not correct?
STATEMENT OF HERMAN MORRIS, JR.
Mr. Morris. Yes.
Mr. Barton. That is correct. I thought I recognized you.
Welcome again to the subcommittee, and your statement is in the
record in its entirety, and we would ask you to elaborate on it
for about 6 minutes.
Mr. Morris. Thank you, Chairman Barton, and Ranking Member
Boucher. On behalf of the Large Public Power Council, I am
happy to appear today to discuss electric restructuring issues.
As you know, my name is Herman Morris, and I am president and
chief executive officer of Memphis Light, Gas & Water Division.
I am testifying today, however, on behalf of the Large Public
Power Council, an association of the 22 largest public power
systems in the United States.
LPPC members are companies that are publicly owned, not-
for-profit entities and are service-focused and committed to
the local residence and communities that we serve. We provide
reliable power and cost-effective affordable power generation
transmission and distribution services that the benefit of
which flows directly to the public power customers and
Mr. Chairman and members of the committee, LPPC appreciates
your efforts to develop comprehensive electric industry
restructuring legislation. I would also like to thank our
Congressman, Ed Bryant, whose congressional district includes
parts of Memphis and the customers that we serve and who has
been a longtime friend of MLGW, and who has been kind enough to
address the Large Public Power Council CEOs at their most
recent meeting in May of this year in Memphis, Tennessee. We
thank him for his interest in these issues. The LPPC supports
the enactment of comprehensive legislation that promotes a
competitive efficient wholesale power market that results in
low cost reliable services to all consumers.
I would like to comment on several issues of particular
import to our members. We believe the reform of private use tax
rules is essential; FERC transmission jurisdiction should be
carefully reviewed to adapt to the unique structure and
responsibilities of public power systems; that any legislation
should ensure market power and merger protection for consumers;
and that TVA's role in our region in the Southeast has to be
addressed; market power to ensure fully competitive wholesale
markets; Federal legislation should protect against
anticompetitive concentration of generation ownership and
against abuse of market power. This is particularly true if
consumer protection laws such as the Public Utility Holding
Company Act is to be repealed. We believe eliminating this law
without updating the Federal Power Act would harm consumers.
We oppose stand-alone repeal of PUHCA, unless other
critical restructuring issues are addressed and FERC is
provided with adequate tools to address the issues associated
with measures, market power and RTO integration.
Mergers. LPP supports legislation that would clarify FERC's
authority over holding-company-to-holding-company and
generation-only mergers and believes that FERC should exercise
the authority necessary to ensure competitive and robust
Private use. Private use rules which made sense in
regulated noncompetitive worlds are problematic in the new
environment in which electric utilities must now work. The
rules make it more difficult for public power to build much-
needed generation and transmission and are a barrier to
enhancing public power's ability to deliver electricity at a
time when our Nation faces power shortages. The Tax Code should
be updated now so that it will help, not hinder, development of
needed electric infrastructure and delivery of power.
FERC transmission jurisdiction in RTOs. We support open
access transmission--FERC-lite, as it has been labeled--as
included in the subcommittee's bill in the last Congress. It
would permit public power entities to provide transmission
service and rates that are not unduly discriminatory and
require the companies of the nonrate terms and conditions to be
comparable to those required of investor-owned utilities. Our
members do not support current proposals to extend FERC
jurisdiction to transmission components of bundled retail
With respect to RTOs, we support a flexible framework for
the creation of RTOs as established under FERC Order 2000 and
believe this committee should adopt this approach. We do not
believe public power systems, however, should be compelled to
join RTOs. We will hear more of this on the transmission issues
a little bit later in hearings by this body.
As noted above, MLGW and LPPC also strongly urge this
committee to remove statutory impediments to a competitive
wholesale power market for TVA distributors like MLGW. But TVA
Fence, much like the fence that Chairman Tauzin recounted from
his youth, has a pretty dramatic impact. Likewise, the anti-
cherry-picking provision of the Energy Policy Act prevents MLGW
and other TVA customers from buying power from other suppliers
and prevents a mature wholesale market from developing in the
valley. We believe as part of a comprehensive energy
legislation package, these provisions need to be repealed
In addition, we believe that FERC jurisdiction standards
should be extended to include regulation and transmission and
wholesale power rates. In addition, we have worked with other
members in the valley to come up with consensus language which
includes much of this, although perhaps not going quite as far
as we would on our own. That is the nature of compromise and
We support distributed generation. We support conservation
and renewable energy resources as they have proven necessary
for national energy supply to help maintain a diverse and
robust supply and source for energy, renewable energy and the
In conclusion, we appreciate the efforts of this committee.
We appreciate the strides that have been made to advance the
debate in the competitive market and benefits that will result
to all consumers. The LPPC stands ready to assist, to aid and
to offer input to this body and facilitate in a workable,
That concludes my comments to you today. I appreciate your
attention, and I will be happy to answer questions.
[The prepared statement of Herman Morris, Jr. follows:]
Prepared Statement of Herman Morris, Jr. on Behalf of The Large Public
My name is Herman Morris, Jr. and I am the President and Chief
Executive Officer of Memphis Light, Gas and Water Division (MLGW). I am
testifying today on behalf of the Large Public Power Council (LPPC).
The LPPC is an association of 22 of the largest public power systems in
the United States. LPPC members directly or indirectly provide
reliable, affordably-priced electricity to approximately 18 million
customers, produce over 11,610,000,000 megawatt hours of generation,
and own and operate approximately 26,000 circuit miles of transmission
lines. LPPC members are located in states and territories representing
every region of the country, including several states represented by
members of this Committee--such as Tennessee, Texas, California, New
York, and Arizona--and include several state public power agencies as
The majority of LPPC companies perform the same functions as
traditional vertically-integrated utilities, however, LPPC members are
publicly-owned, not investor-owned. As a result, LPPC member companies
are not-for-profit entities that are service-focused and committed to
the local residents and communities we serve. Therefore, the benefits
resulting from the reliable and cost-effective provision of generation,
transmission, and distribution service flow directly to public power
customers and communities.
Mr. Chairman and members of the Committee, the LPPC appreciates
your efforts to develop comprehensive electric industry restructuring
legislation. I would also like to thank Congressman Ed Bryant, whose
congressional district includes Memphis and who has been a long-time
friend of MLGW and public power and who was kind enough to address the
LPPC CEOs at their last meeting this past May in Memphis. We thank him
for his interest in these issues. The LPPC supports the enactment of
comprehensive legislation that promotes a competitive, efficient
wholesale power market of benefit to all consumers. We believe that
there is a need for a comprehensive energy strategy, which addresses
market concerns, promotes fuel diversity, promotes energy efficiency
and conservation, and encourages environmentally responsible behavior.
The LPPC supports efforts to increase competition so long as low-cost,
reliable service is ensured for consumers and believes that a robust
wholesale market must be encouraged. We further believe that there
should be environmentally responsible development of all our fuel
sources and that unnecessary constraints on the use of any energy
source should be removed. There is a need for hydro licensing reform,
streamlining of environmental permits and siting decisions, and
incentives for renewable energy, conservation and efficiency. In
addition, my utility, MLGW and another of LPPC's members, the Knoxville
Utilities Board (KUB), are among the largest customers of TVA and we,
and LPPC, believe that any restructuring legislation must include a TVA
title that would remove the many statutory impediments to a competitive
wholesale power market in the Tennessee Valley and bring that part of
the country in step with the rest of America.
We appreciate the efforts this Committee has made to advance the
debate on how to achieve a competitive market that benefits consumers
and we would like to offer the Large Public Power Council's assistance
in crafting legislation to facilitate competitive markets. During the
debate on these issues in the last Congress, the LPPC provided our
input to the Committee and contributed our views to the debate. We
appreciate this opportunity to continue our involvement.
In light of these overarching objectives, I would like to comment
on several issues of particular importance to our members.
FEDERAL LEGISLATION SHOULD ADDRESS RESTRUCTURING AND MARKET FORMATION
Wholesale power markets can deliver reliable, clean and low-cost
power, but only if the FERC, the Congress, and the states do their
jobs. The LPPC believes that competitive regional wholesale electricity
markets can benefit consumers. However, federal protections are
necessary to ensure a level playing field for electric consumers and
producers and to promote effective and sustainable competition. The
benefits are eliminated if one competitor uses its dominant ownership
of generation and/or transmission to stifle competition. Federal
legislation should ensure that a mechanism is in place to protect
against anti-competitive concentration of generation ownership and
against abuse of market power. This is particularly true if consumer
protection laws such the Public Utility Holding Company Act (PUHCA) are
repealed. We believe eliminating this law without updating the Federal
Power Act (FPA) would harm consumers. As such, we oppose stand-alone
repeal of PUHCA if other critical restructuring issues are not also
address and if FERC is not provided with adequate tools to address the
issues associated with market power and holding company mergers.
Specifically, the LPPC supports legislation that would clarify FERC's
authority over holding company-to-holding company and generation-only
mergers. We oppose limiting FERC's current authority to review such
mergers and believe that such authority is necessary to ensure
competitive and robust markets.
In order to effectively bring benefit to the consumer and prevent
market power abuses, the LPPC believes that Congress should take two
additional steps. First, the Congress should confirm the authority FERC
asserted in Order No. 2000 to order jurisdictional public utilities to
participate in RTOs as a remedy for undue discrimination or
anticompetitive effects, where supported by the record in a particular
case. Second, in addition to authority FERC currently has under the
FPA, it should be authorized to require a jurisdictional public utility
having market power in FERC-regulated wholesale markets to submit a
market power mitigation plan that FERC can approve, disapprove or
The LPPC supports the enactment of legislation that ensures
competitive markets and provides benefit to the consumer. Such
legislation must resolve the ``private use'' tax issue and should
recognize the distinct nature of public power and its contribution to
the electricity industry. Without resolution of current tax
restrictions relating to private use, restrictions on tax-exempt bonds
could (1) prevent public power from fully opening up its transmission
and distribution systems for use by investor-owned utilities, (2) could
prevent our participation in Regional Transmission Organizations
(RTOs), and (3) will constrain our ability to make long-term sales of
surplus power. Absent reform of private use, one of the key problems--
how to move electric power from generation to load--will continue to
plague the system, and the objectives of comprehensive legislation, the
development of a robust, competitive, and fair market, will not be
The LPPC supports proposals to ensure that all market participants
have access to the transmission system on a fair and open basis.
``FERC-lite,'' as included in the subcommittee's bill in the last
Congress, is part of such open access. It would require public power
entities to provide transmission services at rates that are not unduly
discriminatory and require the company's non-rate terms and conditions
to be comparable to those required of the investor-owned utilities. We
believe that open transmission access, including the FERC-lite
provision, will encourage a robust and competitive market.
The LPPC does not support unnecessary expansion of FERC
transmission jurisdiction. The LPPC strongly opposes extending full
FERC ratemaking jurisdiction to our public power systems. In addition,
we do not believe that FERC jurisdiction needs to be expanded to cover
the transmission component of our bundled retail sales, as some members
of the Committee have proposed. Because of ``private use'' tax
restrictions, our transmission-owning members have sized their
transmission systems to supply their own wholesale or retail native
loads. We have limited transmission capacity available for other
entities. To the extent we have such capacity, we are willing to make
it available to all comers on a non-discrimination basis, as FERC-lite
would require. But, a rule that required us to make available to others
transmission capacity we need to serve our native load will result in
power curtailments or higher prices to our own customers. Any expansion
of FERC transmission jurisdiction must respect the interests of the
customers for whom the transmission facilities were built. The LPPC
will spell out its approach on these issues in greater detail in its
subsequent testimony on transmission policy before this subcommittee.
The LPPC believes that regional transmission organizations (RTOs)
should have a broad geographic scope, preferably be not-for-profit,
and, in all cases, be fully independent of market participants. This
type of organization will operate more cost-effectively and will more
likely result in the open transmission necessary for a fully
functioning market. The LPPC opposes granting FERC broad new authority
to compel transmitting utilities to join RTOs. However, we support
confirming FERC's authority to order jurisdictional utilities into an
RTO on a case-by-case basis in order to remedy undue discrimination or
anticompetitive conduct. We believe that RTOs should be created to
foster competition and, as a result, the LPPC believes that RTOs must
be independent and must be separate from all market participants.
As noted above, MLGW and LPPC also strongly urge this Committee to
remove the statutory impediments to a competitive wholesale power
market for TVA distributors. The two primary statutory barriers to
wholesale power competition in the Tennessee Valley are popularly known
as the TVA Fence and the anti-cherry picking provisions of the Energy
Policy Act. These provisions prevent MLGW and other TVA customers from
buying power from other suppliers and prevent a mature wholesale market
from developing in the Valley. We believe that, as part of
comprehensive energy legislation, these provisions should be repealed.
In addition, we believe that FERC jurisdiction standards should be
extended to include regulation of TVA's transmission system and of
TVA's wholesale power rates, as well as subjecting TVA's stranded cost
determinations to FERC oversight. To this end, MLGW, TVA, the
distributors and customers of the Valley have agreed to consensus
language which we would urge the Committee to adopt in any legislation
FEDERAL LEGISLATION SHOULD ENCOURAGE EXPANSION OF THE MARKET AND SUPPLY
The LPPC strongly supports an energy policy that encourages
environmentally responsible use and development of the nation's diverse
energy supply, including coal, wind, solar, hydropower, natural gas,
biomass, landfill methane and nuclear energy. We believe that sound
energy and environmental policy should flow from this ``fuel
diversity'' strategy. Fuel diversity means better consumer options,
lower power prices, and a more stable economy.
Plans to encourage fuel diversity include classifying hydro
electric generation as renewable energy, removing regulatory
impediments to power plant or transmission upgrades, providing advanced
coal generation funding, streamlining nuclear plant relicensing,
resolving the issue of nuclear waste, and increased R & D for renewable
energy and advanced coal technologies. Fuel diversity prevents
dependence on one source of fuel and provides supply options from
multiple sources during disruptions or times of price volatility on any
one given source.
For example, coal, is an essential part of this country's fuel mix.
Coal accounts for over 50% of electric generation and approximately 23%
of all the energy consumed. The continued and expanded use of coal
contributes to fuel diversity, dampens prices, decreases reliance on
natural gas and helps stabilize market prices. The LPPC supports the
use of increased incentives and federal funding for more efficient,
clean coal technologies that will lessen the impact of health-based
pollutants and will improve efficiencies in generation.
Hydro-electric generation is another important component in our
fuel mix. It is emission free, has no fuel cost, and because of its
virtually instantaneous start-up capability, provides an invaluable
operating reserve. However, the current federal licensing/relicensing
process for non-federal hydro projects is time-consuming, expensive,
and extremely complex, creating an unworkable framework that imposes
significant costs in terms of time, resources, and capital. The
administrative costs of relicensing proceedings and licensing
conditions imposed in these proceedings threaten to eat up much of the
national economic benefit derived from continued operation of existing
hydro projects. The LPPC believes reform of the current system is
desperately needed and supports the efforts to do so.
Renewable energy resources have proven to be a necessary element of
the national energy supply and help maintain fuel diversity. Renewable
energy resources have a less significant impact on the environment than
other fuels. Renewable energy is becoming increasingly cost competitive
and is a potentially important future resource. The LPPC believes that
the need for federal incentives for renewable energy production is
crucial. We support continued use of such incentives, which will
encourage the quick installation of renewable energy resources and help
additional technologies reach the market. However, it is crucial that
there is parity among incentives such that they can be enjoyed by
public power and investor owned utilities alike. To this end, we
support efforts to develop a tradable or transferable tax credit to
encourage development of renewable energy resources.
The inclusion of nuclear energy is essential to a fuel diversity
strategy. Existing plants must continue to operate safely and
efficiently. The licenses on these facilities should be extended and
the process for doing so should be streamlined. There have been
significant advances in new technologies and the commercialization of
these new options should be encouraged, as should continued R&D.
However, for public health, safety, and economic reasons, the issues of
nuclear waste and its long-term disposal must be addressed. Safe,
publicly acceptable interim and long-term storage and disposal
facilities must be developed.
The increased use of distributed generation (DG) technologies by
users during the West Coast crisis has been a crucial tool to shave
peaks and to mitigate shortages, extending the time that more power is
available between emergencies. The inclusion of distributed generation
resources allows our energy policy to provide energy to the consumer
while contributing to a diverse energy supply. The LPPC recommends that
federal legislation support the use of emerging technologies and the
increased use of established technologies such as DG. A number of LPPC
members have been proactive in the use of this technology. For example,
the New York Power Authority recently installed eleven combustion
turbines (440 MW) in New York City. The purpose was to avoid 308 MW
summer shortfall projected by the New York ISO. In addition, another
LPPC member, the City of Tacoma responded to the energy crisis in the
West by siting 30 diesel micro turbines. This allowed them to better
manage their demand and continue to serve their customers without
interruption. My own company, MLGW has proposed to TVA building new
gas-fired generation to meet its growing demand.
As the House Energy and Commerce Committee prepares to act on
comprehensive restructuring legislation, the LPPC stands ready to offer
our assistance. We would be happy to share proposals to properly tailor
FERC transmission jurisdiction to the unique structures and
responsibilities of public power systems, ensure market power and
merger protections for consumers, and retain the appropriate level of
flexibility for FERC as it approves new RTOs.
In conclusion, the LPPC believes that comprehensive legislation
addressing the deficiencies in the energy sector is necessary. We look
forward to working with the Committee to develop comprehensive electric
restructuring legislation that addresses our concerns, garners wide
support and can ultimately be enacted. I will be happy to answer any
questions you have.
Mr. Barton. Thank you, Mr. Morris. It is a pleasure to have
you before us again. We thank you for that statement.
We would like to hear from Mr. Robert Priest. Your
statement is in the record, and we would ask you to elaborate
on it for about 6 minutes.
STATEMENT OF ROBERT D. PRIEST
Mr. Priest. Mr. Chairman and members of the subcommittee, I
am Bob Priest, manager of the Yazoo City Public Service
Commission in Yazoo, Mississippi. I am testifying this morning
on behalf of the American Public Power Association. I am a
member of the APPA board of directors.
Public power systems' first and only purpose is to provide
reliable, efficient service to their local customers at the
lowest possible cost. Though changes are occurring rapidly in
our industry, publicly owned utilities have retained the
obligation to serve the electric needs of their customers. In
California, for example, municipal utilities retained their
power plants dedicated to serve their native-load customers,
and they engaged in long-term planning to satisfy demands that
exceeded their own generation resources. This gave public power
utilities the ability to mitigate market risk for their
Of the over 2,000 publicly owned utilities in the United
States, less than 400 own any generation. Of these 400, the
vast majority must still purchase power on the wholesale market
in order to meet their customers' demand. Only a handful of
public power systems own enough generation to meet load in
their service territory.
Obviously, public power systems rely heavily on the
wholesale markets. Unfortunately, wholesale markets are not
effectively competitive, and in some cases are clearly
dysfunctional. APPA has been a consistent supporter of efforts
to make the wholesale electric markets more competitive.
Mr. Chairman, I would like to make four central
recommendations in my statement this morning. To remove
barriers to generation competition, we believe Congress should
enact legislation that, one, addresses market power by clearly
articulating FERC's role in monitoring the market; establishing
clear criteria to guide FERC decisions regarding market-based
rate authority for utilities and power marketers; directing
FERC to investigate and mitigate market power; and
strengthening and expanding FERC's merger review process to
allow consideration of the mergers' impact on competition.
Two, considers changes to the Public Utility Holding Act
only in the context of providing reasonable substitutes to
protect consumers and promote competition that include, but are
not limited to, the market power provisions just mentioned.
Three, promotes the use of distributed generation by
establishing transmission and distribution interconnection
policies that streamline and standardize the interconnection
process by balancing Federal, State and local authority.
And four, resolves the dilemma posed by the private use
restrictions on generation and transmission facilities financed
with tax-exempt bonds.
As I said earlier, the wholesale markets are not
competitive, and legislation is needed to require FERC to
promote competitive markets. From our perspective, the
paramount role of the regulatory agency must be to protect the
public interest and the interest of consumers. Competition is a
means to this end, not the end itself.
In California and throughout the West last year, we believe
FERC lost sight of its obligation to permit only just and
reasonable wholesale rates and its responsibility to ensure
consumers were protected from abuses of market power. More
recently, FERC has taken some strong steps to improve market
conditions. At the same time, much more can be done.
Legislation should make clear that if markets are allowed to
set rates, FERC must ensure markets are workably competitive.
This in turn requires clarification of the methodology and
criteria used to make a determination that markets are
competitive and the procedure used to establish rates in
markets that are not competitive.
With regard to the repeal of the Public Utility Holding
Company Act, this should only occur in the context of a
comprehensive energy bill and should include the consumer and
market power protections that I have mentioned, as well as
other preconditions discussed in our statement. We strongly
disagree with the advocates that PUHCA be repealed. That
statute is an impediment to competition. The continued
relevancy and importance of PUHCA was demonstrated recently by
the California attorney general's petition to the Securities
and Exchange Commission to review and revoke PG&E Corporation's
exemption from PUHCA. In its petition, the attorney general
states, PG&E Corporation has now filed for bankruptcy after
upstreaming billions of dollars from the utility to the utility
holding company, the precise type of behavior identified in
PUHCA as a primary basis for the law.
My third recommendation, Mr. Chairman, is to establish
interconnection policies that facilitate the greater use of the
distributed generation. Distributed generation has multiple
benefits, and public power is committed to accelerating its
acceptance and use. We also want to ensure that in developing
interconnection policies, an appropriate level of local
authorities is preserved in order to accommodate local concerns
and distribution systems' characteristics.
Finally, we believe legislation should address the private
use exemption on tax-exempt bonds. These restrictions limit the
use of existing generation and transmission facilities in
competitive markets. Moreover, resolving the private use issue
will clarify how tax-exempt bonds may be used in the future and
thereby give publicly owned facilities greater certainty and
confidence in financing new generation. As you know, provisions
to address this issue were included in the legislation passed
last week by the Ways and Means Committee.
On behalf of APPA, I want to thank you, Mr. Chairman, and
the other members of the subcommittee who supported us in that
effort. Thank you for inviting me to testify. I look forward to
any of your questions.
[The prepared statement of Robert D. Priest follows:]
Prepared Statement of Robert D. Priest, Manager, Yazoo City (MS) Public
Service Commission on Behalf of the American Public Power Association
Thank you, Chairman Barton and Ranking Member Boucher. On behalf of
the American Public Power Association, I am pleased to appear today to
discuss important electricity issues facing the subcommittee.
My name is Bob Priest. I am the Manager of the Yazoo City Public
Service Commission, the local electric utility serving Yazoo City,
Mississippi; I am also a member of the APPA Board of Directors. APPA
represents the interests of more than 2,000 publicly owned electric
utility systems across the country, serving about 40 million customers.
Yazoo City is one of 24 such systems in Mississippi. APPA member
utilities include state public power agencies and municipal electric
utilities that serve some of the nation's largest cities. However, the
vast majority of these publicly owned electric utilities serve small
and medium-sized communities in 49 states, all but Hawaii. In fact, 75
percent of our members are located in cities with populations of 10,000
people or less.
Public power systems' first and only purpose is to provide
reliable, efficient service to their local customers at the lowest
possible cost. Public power exists for a purpose, not a profit. Like
hospitals, public schools, police and fire departments, and publicly
owned water and waste water utilities, public power systems are locally
created governmental institutions that address a basic community need:
they operate to provide an essential public service, reliably and
efficiently at a reasonable, not-for-profit price. Publicly owned
utilities also have an obligation to serve the electricity needs of
their customers. And, because they are governed democratically through
their state and local government structures, public power systems
operate in the sunshine, subject to open meeting laws, public record
laws and conflict of interest rules. Most, especially the smaller
systems, are governed by an elected city council, while an elected or
appointed board independently governs others. Democratically governed,
not-for-profit, obligation to serve--the importance of these unique
characteristics has been highlighted by the recent events in the West.
Under California's restructuring law, public power was able to retain
its obligation to plan for and serve the electricity needs of our
consumer-owners. As a consequence, municipal utilities retained their
power plants dedicated to serve native load customers, and they engaged
in long-range planning to satisfy demands that exceeded their own
generation resources. This gave public power utilities the ability to
mitigate market risk for their customer-owners.
Understanding the underlying structure and mission of public power
is essential in crafting balanced electricity legislation that will
maintain industry diversity. This diversity has helped many public
power communities in the West endure the electricity crisis with bumps
and bruises rather than broken bones. We believe the entire nation has
been well served by this diverse mix of publicly, privately, and
cooperatively owned utilities, combined with federal institutions
including the Tennessee Valley Authority and the federal power
marketing administrations. In restructuring our industry, every effort
should be made to ensure the preservation of this diversity.
wholesale competition first--the role of the federal government
The rush to restructure the electric utility industry in several
states has truly put the cart before the horse. Retail choice programs
adopted by states and localities cannot succeed without truly
competitive wholesale markets. This is certainly one of many lessons
learned in California. The fundamental characteristics of a competitive
market include, among other things: access of buyers to numerous
sellers; mitigation of market power; ease of entry into the market for
new participants; a sufficient number of participants to impose
discipline on all; and transparency of information.
APPA has supported legislative efforts to make the wholesale
electric market more competitive for decades. APPA was one of the major
supporters of the transmission access provisions of the Energy Policy
Act of 1992. On numerous occasions over the past few years, we have
testified in support of additional legislation to ensure that the
promises of wholesale competition become reality. In our view,
comprehensive federal restructuring legislation must, at a minimum,
achieve the following objectives:
Promote more effective wholesale competition by providing
sufficient federal authority to ensure non-discriminatory
access to regional transmission facilities at fair and
Promote the maintenance and expansion of the nation's
transmission facilities including, where necessary and subject
to appropriate limitations, the exercise of federal siting
Establish policies to maintain the reliability of the nation's
electricity industry through competitively neutral means.
Eliminate market power in generation and transmission by: 1)
providing for truly neutral management of the nation's
transmission system, including allowing for federal oversight
to ensure Regional Transmission Organization (RTO) development,
independence and effectiveness; 2) clearly articulating Federal
Energy Regulatory Commission's (FERC) role in monitoring the
wholesale market, directing FERC to investigate and mitigate
market power, and enhancing its power to accomplish this
difficult task; and 3) strengthening FERC's merger review
process to allow for consideration of a proposed merger's
impact on the development of competition.
Eliminate the tax-related impediments to competition for
municipal utilities imposed by the private use restrictions on
tax-exempt bonds while retaining local control over municipal
Consider changes to Public Utility Holding Company Act (PUHCA)
only in the context of providing reasonable substitutes to
protect consumers and promote competition.
appa comments on issues critical to effective wholesale competition
We commend the subcommittee for its focus on barriers to
competitive generation in the wholesale market and look forward to
working with the panel in developing comprehensive legislation.
Market Power, Market Transparency Rules and PUHCA
APPA believes these three critical issues are interrelated and must
be addressed simultaneously to achieve the goal of a workable
competitive wholesale market. These issues highlight the important
lessons learned from the California experience, including:
Market structure is critical to market performance.
Market power is a very real problem that must be addressed.
Markets need rules and market monitors to enforce them.
Market monitors need data.
The paramount role of a regulatory agency must be to protect the
public interest and the interests of consumers. Competition is a means
to this end, not the end itself. In California and throughout the West
over the last year, APPA believes FERC was so focused on promoting
competition that it completely lost sight of its obligation to permit
just and reasonable wholesale rates only after considering its
responsibility to ensure consumers were protected from abuses of market
power. We hope that, in clarifying FERC's mission, Congress will
provide that, first and foremost, FERC must protect the public interest
and the interests of all consumers.
If markets are allowed to set rates, FERC must ensure that such
markets are workably competitive. This begs the question, however, with
respect to the methodology used to make such a determination, and also
doesn't specify how rates should be established in markets that are not
competitive. APPA believes market based rates for jurisdictional
utilities should only be approved on a finding that the applicant will
not possess market power and that effective and sustainable competition
will exist in that market. The analysis must include an examination not
only of the resources available to individual applicants and whether
such assets could be used to set the market clearing price, but also of
the effect of transmission constraints and how those assets fit into
the broader market structure. Location-specific constraints must be
taken into account, as should requirements for grid reliability.
Further, and frequently ignored in traditional market analysis, is the
time-sensitive nature of electricity. In some markets, an entity
controlling a very small amount of generation can exercise market
FERC should be given other ``tools'' in addition to those it
already has to address market power problems. It should, for example,
require jurisdictional utilities to submit market power mitigation
plans for approval or modification. Its merger review process should be
revised to require that merger approval be granted on an affirmative
finding that the proposed merger is in the public interest as opposed
to the current standard which only requires that the merger be
consistent with the public interest. In reviewing mergers, FERC should
be required to consider whether they will promote effective wholesale
competition, or undermine it. FERC should also have the authority to
require shared access to essential assets, including reserve/risk
sharing mechanisms, on a non-discriminatory basis and with just and
reasonable rates. Further, FERC should be able to preserve the
integrity of the market through preliminary relief in order to prevent
irreparable harm pending issuance of a final order.
As consumer-owned utilities, APPA's members certainly believe that
no market participant should be able to abuse market power to the
detriment of end users. Until the debacle in the West, application of
this principle to public power systems in wholesale markets has not
been an issue, and therefore this specific issue has not been addressed
by APPA. However, publicly owned utilities in California and elsewhere
in the West have stated that they would voluntarily abide by market
rules applicable to jurisdictional utilities. The exclusion for
``normal'' transactions is clearly appropriate, but the extent to which
sales by public power systems into market institutions would be subject
to FERC oversight is unclear and could be problematic. APPA is
confident that, if FERC clearly defines in advance the rules applicable
to jurisdictional utilities who are responsible for the vast majority
of all such transactions, public power systems will live within that
framework without the need for any expansion of FERC jurisdiction.
APPA believes that legislation should ensure transparent
information on market transactions and should grant clear authority to
the Energy Information Administration (EIA) and the FERC to collect and
publish appropriate data while protecting proprietary information.
While ``proprietary information'' warranting protection must be
narrowly circumscribed, APPA would encourage that congressional
direction be absolutely clear that data must be collected and made
public. Claims of confidentiality of data based on commercial
sensitivity are already being made to limit data collection or
dissemination. There is a danger that commercial sensitivity arguments
will completely undermine the legitimate right of the public to this
data. Transparency of market information is a fundamental prerequisite
of competitive markets and necessary to protect consumers. (We would
note that disclosure is required under the security laws, and such
disclosure has had a salutary effect on the markets. If the SEC's rules
did not exist today, almost every company that is subject to SEC
regulation would claim that much of the information they are required
to disclose today is in fact proprietary.) Congress should be very
clear in telling EIA and FERC that close calls should be resolved in
favor of transparency, not secrecy.
APPA believes PUHCA repeal should logically be undertaken within
the broader context of addressing market power concerns. PUHCA
established a structure for the electric utility industry in ways that
were intended to limit if not eliminate the abuse of market power.
Unfortunately, debates over PUHCA repeal today suggest that consumers
can be adequately protected if FERC and the states are given greater
access to books and records for the limited purpose of reviewing
electric utility rates. While such expanded authority is appropriate,
it is by no means an adequate substitute for the protections afforded
by PUHCA. Before PUHCA is repealed, there must be strong market power
protections in place, regulatory gaps must be filled, and opportunities
must be provided to ensure that transactions across the entire utility
holding company and all of its subsidiaries can be carefully examined.
APPA recommends giving specific authority to FERC to review mergers
of utility holding companies as well as the disposition of generation
assets by jurisdictional utilities and acquisition of natural gas
companies. The FERC lacks the clear authority to review the former.
While we believe it has the authority and responsibility to review the
latter, it has recently declined to do so. This action has come at
precisely the same time that utilities and utility holding companies
are swapping assets like trading cards. A utility with a significant
presence in generation in one region sells those assets, then buys
similar assets in another region. Such transactions can clearly lead to
the concentration of significant amounts of generation in specific
geographic markets, yet no one is examining what consequences these
asset trades will have on competition.
FERC and state commission access to books and records of holding
companies to prevent affiliate abuses is an inadequate substitute for
the protections provided consumers, state commissions and others under
PUHCA. As a practical matter, many state commissions don't have the
resources to examine the books and records of today's extremely complex
utility holding companies and all of their subsidiary companies. And
even if they do, it isn't clear what remedies they can impose when the
keeper of the funds--the parent holding company--may exist outside the
jurisdiction of a specific state utility commission.
Advocates of PUHCA repeal have argued that the statute is no longer
necessary, that it is redundant with other statutes, and, incredibly,
that it is an impediment to competition. H.R. 1101, the Public Utility
Holding Company Act of 2001, introduced earlier this year, provides, in
the statement of findings and purposes, the following:
Developments since 1935, including changes in other regulation
and in the electric and gas industries, have called into
question the continued relevance of the model of regulation
established by that Act.
Limited Federal regulation is necessary to supplement the work
of State commissions for the continued rate protection of
electric and gas utility customers.
The Attorney General of California strongly disagrees with these
two statements. On July 5 he filed a petition with the Securities and
Exchange Commission (the agency with responsibility to enforce PUHCA)
for review and revocation of PG&E Corporation's exemption from PUHCA.
As stated in the petition, ``PG&E Co. [the electric operating utility]
has now filed for bankruptcy after upstreaming billions of dollars from
the utility to the utility holding company--the precise type of
behavior identified in PUHCA as a primary basis for the law.'' He
concludes his petition as follows: ``All of the primary evils addressed
by PUHCA are relevant to PG&E Corp. [the utility holding company],
including movement of capital and assets from its utilities to the
holding company and affiliated, wholly-owned subsidiaries as well as
massive investments in out-of-state non-utility activities and
properties. The Commission has the chance, indeed the obligation, to
address potential holding company abuses by PG&E Corp. before
additional damage is done. The current crisis in California has been a
catalyst for closer scrutiny of federal and state regulation of the
utility industry. This crisis highlights the fact that Commission
enforcement of PUHCA is still needed.''
Clearly times have changed since PUHCA was enacted in 1935.
Utilities have changed. But human nature hasn't. The abusive practices
that gave rise to PUHCA more than 65 years ago have been more difficult
to accomplish, because of the existence of PUHCA's restraint on
corporate structure and behavior, but have not disappeared entirely. It
may be that some elements of PUHCA need to be revised. But the
opportunity for the California Attorney General, and perhaps others
similarly situated in the future, to have a forum at FERC or the SEC in
which they can examine the financial transactions within a monstrously
complex interstate holding company structure to determine whether
electric consumers have been abused, must not be eliminated.
Distributed resources, typically small generation units located
close to the load they serve, offer a variety of benefits for
consumers, communities, the environment, and utilities. Efforts are
currently underway to develop new distributed generation technologies,
enhance existing technologies, and address various technical and policy
issues that may be hindering the deployment of distributed resources.
Congress has taken an active interest in this issue and several
industry restructuring proposals have included provisions to give the
Federal Energy Regulatory Commission additional authority to order
interconnection of distributed resources to transmission and
distribution facilities using a uniform technical standard. Public
power supports efforts to promote greater use of distributed resources
so long as those efforts respect local authority and recognize the
diverse characteristics of local electric systems.
APPA believes distributed resources not only increases overall
production and generation, but decreases constraints placed on
transmission facilities, and tends to reduce problems encountered by
vertical market power situations. While APPA supports bringing
distributed generation facilities on line as quickly as possible, we
remain concerned about the myths of the ``plug and play'' attitude so
prevalent today. We support a more streamlined, simplistic approach to
distributed generation, but not at the expense of public health and
safety, cost-shifting, and potential reliability problems.
APPA believes Congress should adopt transmission and distribution
interconnection policies that provide FERC the authority to order the
use of standardized technical interconnections. At the same time,
Congress must preserve local authority to require any additional
measures necessary for system reliability, safety, or other factors
deemed to be in the public interest. That is, interconnection standards
for distributed resources, while removing barriers to competition,
should remain flexible. APPA has already agreed to accept additional
FERC jurisdiction for a standardized interconnection policy; we believe
in the appropriate amount of jurisdiction for public power distributed
generation facilities, but, again, not at the expense of the system's
reliability. A positive step has been taken with the introduction of
H.R. 1945 by Representative Quinn, which, for the first time, addresses
the concern of local utilities. (Attached is APPA's policy resolution
supporting interconnection standards for distributed generation,
approved by our membership June 19, 2001.)
The concept of aggregation is generally more relevant to retail
competition programs, but should be encouraged by federal legislation.
Aggregation, however, offers an opportunity for smaller consumers in
particular to shield themselves from wholesale market abuses and to
promote generation competition by increasing these customers' clout in
The early results of state retail electricity deregulation
experiments across the country present a mixed bag for consumers, but
one thing is already clear--consumers demand that the lower electricity
prices and other promised benefits of competition benefit all
customers, not just the large users. One demonstrated means of ensuring
residential customers' participation in a competitive market is by
establishing their right to be represented by their local government
through community or municipal aggregation. By themselves, small-load
or residential customers lack the power and resources to negotiate
better deals; banding together through aggregation programs, local
governments can wield purchasing clout on behalf of their residents for
APPA believes aggregation increases participation in restructuring
efforts at the state level for smaller customers, creating a more
robust market and therefore lowering electricity costs for all
consumers. Further, APPA believes that aggregation of small-load
customers is essential, and that municipalities and local governments--
the ones in the best position to look after the social and economic
welfare of the community--are well suited for the job and should not be
restricted from performing this service. APPA realizes there are still
several obstacles to aggregation efforts in the details of the
legislative process, including restrictions on local government
authority, ``slamming'' or other fraudulent issues, and whether
consumers should opt-in to a program rather than opt-out, but supports
a strong aggregation provision in any federal legislation aimed at
improving wholesale electricity competition. Finally, APPA believes
that federal legislation should ensure that states do not impose any
barriers to the formation of municipal aggregation programs.
APPA has no formal policy on net metering at this time, but
realizes its potential to increase the use of renewable resources and
provide generation alternatives, thus promoting competition. Several
general principles should be followed when developing legislation. For
example, APPA believes net metering is best applied to residential and
small customers; larger and industrial customers can have more
significant impacts on a utility's distribution system reliability. In
addition, a qualified generating facility should utilize only renewable
energy resources, such as solar, wind, geothermal or biomass, and
should be considered a small facility. In addition, when applied, APPA
believes net metering customers still retain their full obligations on
transmission and distribution charges, and the necessary backup or
Since more than 30 states have already adopted net metering
programs, states should have the authority to establish a different
program, including further incentives and limitations, and states and
local communities should be provided flexibility to allow additional
control and testing requirements.
Public Utility Regulatory Policies Act (PURPA)
APPA does not oppose PURPA's mandatory purchase provisions, as long
as this is considered under a comprehensive energy bill. In addition,
we believe stranded cost recovery under PURPA should only be addressed
by using FERC's current process.
Private use tax restrictions
One issue directly related to public power utilities that, if
resolved, would improve and facilitate electricity competition is
``private use'' tax restrictions imposed on municipal electric systems.
Rapid changes in wholesale electricity markets have created a need to
update private use restrictions on tax-exempt bonds used by public
power systems to finance their electric facilities. These restrictions
hamper public power's ability to provide access to their transmission
lines, adjust to evolving energy policies and adapt to a volatile
energy market, just as the nation faces power shortages, transmission
constraints and increased reliance on electricity to fuel the nation's
economy. These rules form a barrier to open and efficient electricity
markets at both the wholesale and retail level, making it impossible
for community-owned utilities to open up their transmission and
distribution facilities to third parties.
Bipartisan legislation (H.R. 1459), which offers a fair and
balanced approach to several critical energy-related tax issues, has
been introduced in the House to correct this situation. A version of
H.R. 1459 was recently included in the Ways and Means Committee's own
energy bill. The electricity industry understands that removing the
private use restrictions will provide the necessary flexibility for
those generation facilities financed with tax-exempt bonds. In
addition, legislation is needed to clarify the rules for public power
on the use of tax-exempt bonds for new generation facilities or
upgrades without running afoul of the private use test. APPA
appreciates this subcommittee's understanding of this complex issue,
and knows this panel has always been supportive of viable solutions.
Incentives for renewable resources
In preparing its recently-published report on public power's
renewable profile, entitled ``Shades of Green'' (copies of which were
previously sent to all members of this subcommittee), APPA discovered
that public power systems have a higher proportion of renewable, non-
hydropower generation than other segments of the industry--but we still
have more work to do. APPA applauds the idea of creating market-based
incentives for all segments of the industry. The goal is not simply
more generation, but a diversity of generation resources. Today,
renewable resources remain at above-market prices; appropriate
incentives are necessary so that all consumers benefit.
While it is clear that additional generation is needed in this
country, it is also clear that such generation should come from non-
traditional renewable energy sources as well as from better and cleaner
utilization of our nation's most abundant resource, coal.
Traditionally, Congress has turned to tax credits to provide incentives
to industry to achieve socially desirable goals. If the goal is to
promote renewable energy and clean coal technology development and
utilization by the electric utility industry, then incentives must be
provided that work for all elements of the industry.
Tax credits can be utilized by for-profit, investor owned
utilities, which serve about 75 percent of the nation's electric
consumers, but cannot be used by not-for-profit publicly and
cooperatively owned utilities that serve the balance. As a policy
matter, it seems to make little sense to refuse to provide comparable
incentives to ensure that 100 percent of the nation's utilities are
encouraged to develop these resources. We have recommended ``tradable
tax credits'' for publicly and cooperatively owned utilities. These
tradable credits could be sold to tax paying entities at a discount to
help them reduce their own tax liability. This concept has been
developed by public power systems and the rural electric cooperatives
and is supported by the entire electric utility industry; we hope this
proposal receives favorable action in the House.
APPA urges the subcommittee to require mandatory involvement by all
industry participants in a national compliance program to ensure
continued reliability of the high voltage electric transmission grid.
The Administration's National Energy Policy report also calls for
enactment of mandatory reliability standards by an independent body and
overseen by FERC to ``address the problems created by increased demands
on the transmission system that have resulted from changes within the
industry brought on by wholesale competition.'' Even though the United
States has the most reliable electric system in the world, the crisis
in the West has demonstrated the delicate balance between reliability
and the markets within which the electric grid must operate.
Consequently, great care needs to be taken to ensure that the current
level of reliability is not sacrificed in any restructuring of the
As the industry has become more competitive, more participants have
been executing an increasingly larger number of transactions every day.
The focus of most of these transactions is on short-term costs rather
than system stability. While the current voluntary system of compliance
with reliability standards worked reasonably well in the regulated
environment in which the industry previously operated, it will not
continue to provide the necessary safeguards in a competitive market.
Currently, reliability standards are established and monitored by
the North American Electric Reliability Council (NERC), which is a non-
profit organization that monitors the electric utility industry's
voluntary compliance with policies, standards, principles, and guides,
and assesses the future reliability of the bulk electric systems. The
NERC Board of Trustees has approved and begun the transformation of
NERC to the North American Electric Reliability Organization (NAERO),
in which participation and adherence to standards and practices would
be mandatory. Federal legislation is required to give NAERO the
enforcement tools necessary to ensure compliance and achieve a system
that properly balances reliability with market pressures and decisions.
APPA has worked actively on the NERC consensus proposal, and we
continue to support it. However, we could also support simplifying that
proposal so long as the basic tenets are adhered to. We do have
concerns about reliability being delegated exclusively to RTOs, some of
which may be for-profit entities, that would not only set the rules,
but must comply with them.
An item of particular importance to APPA in the consensus
reliability legislation is a sentence developed during negotiations in
late 2000. The sentence would clarify that FERC is granted oversight
authority over public power systems in the regulatory title only for
the purposes of enforcement of reliability standards. Public power
systems support oversight with regard to reliability standards but this
provision should not be used by FERC to impose additional regulation at
a later date. Through an oversight, this sentence was not included in
reliability legislation currently pending in Congress; APPA supports
inclusion of the sentence in any House subcommittee draft legislation.
Mr. Barton. Thank you, sir.
We now would like to hear from Mr. Kanner.
Your statement is in the record, and you are recognized for
6 minutes. Well, I know you worked with our working groups, and
I think you probably testified before the subcommittee before.
STATEMENT OF MARTY KANNER
Mr. Kanner. That is right, I have.
Thank you very much, Mr. Chairman. I want to commend you
for focusing the first electricity hearing on barriers to
competition, because that really is the proper focus of
electricity legislation, ensuring that we have a wholesale
competitive market. Using that as the screen, I would submit
that PUHCA itself is not a barrier to competitive generation
As you know, in 1992, as part of the Energy Policy Act,
Congress amended PUHCA to allow any company, any utility, to
build, operate and invest in generation facilities anywhere in
the country. In terms of competitive generation markets, again,
I would submit, PUHCA is not the impediment.
But using that focus, the question of barriers to
competition and the relation to PUHCA is, I think, very
instructive. If we look back to what precipitated PUHCA, one of
the main factors was the 1929 stock market crash. Utilities had
engaged in corporate pyramid structures, watered transactions,
interaffiliate deals that were one of the contributing factors
to the 1929 stock market crash. In response to that, Congress
adopted PUHCA, in essence saying this is a regulated monopoly.
We need to create a market structure that will facilitate
effective competition. And at the same time, Congress passed
the Federal Power Act setting up that regulatory structure.
At the same time, virtually the same time, and in response
to the same event, Congress also adopted the securities laws,
taking a different approach. Rather than saying, we need to
create a structure to facilitate a regulated market, Congress
said we have to make sure we create a structure that supports a
competitive market, but a competitive market that is free and
fair. A free market is not the same thing as a free-for-all.
So when Congress adopted the securities laws, they included
a number of provisions. As you all know, the stock, bond and
commodity exchanges essentially are among the best examples of
free enterprise anywhere in the world, but they are not immune
from regulation. Rather, there are rules designed to prevent
hoarding and manipulation and systems to provide market
monitoring; in fact, the sort of information disclosure that
the gentlemen from Michigan suggested. There are also circuit-
breakers to prevent unexplainable, unreasonable and
uncontrolled price fluctuations. And then there are enforcement
actions designed to ensure that all parts uphold those rules.
Without that sort of system, I would suggest that none of us as
individual investors would have the confidence in the system
that all of us do today.
Today there is not consumer confidence in the electricity
market, and that is, in part, what we need to address. We need
to establish the same sort of structural protections that are
needed to facilitate a competitive market structure in the
electric utility industry.
So we had one precipitating event, the stock market crash;
two different structural paths, regulated market for the
utility industry, competitive market for the securities
industry. And it is my view that if we are going to change from
a regulated market structure for the utility industry to a
competitive market structure, then we need to put in place
those same sort of rules, those same structural protections and
institutions that are needed to support and sustain effective
Contrary to the assertion of Mr. Sokol, this isn't holding
PUHCA hostage. This is making sure that we achieve the intent
that this hearing is set to achieve, competitive markets.
Let me outline for you briefly the changes that Consumers
for Fair Competition would suggest.
First of all, FERC needs to establish clear rules and
procedures for deciding when a market is competitive and under
what conditions market-based rates can be granted. What are the
rules of the road?
Second, FERC needs to perform the needed market monitoring
to ensure just and reasonable wholesale rates by identifying
market design flaws, market manipulation or market power
abuses. I suggest this is comparable to the sort of daily
transactional review and long-term review that the exchanges
themselves and the SEC perform.
Third, we need to give FERC clear authority and direction
to take appropriate actions to mitigate and remedy market
abuses. Again, the rare case when an Ivan Boesky or a Mike
Milken is hauled off to jail gives us, all of us, as investors
confidence that the system works.
Fourth, Congress needs to preserve--to make sure that
generation markets are competitive, needs to preserve the role
of the States in the spin-off of rate-based generation
unregulated subsidiaries; needs to clarify FERC's authority to
review disposition of generation assets; needs to strengthen
and clarify FERC's merger roles, as others have suggested.
Fifth, Congress needs to support development of effective
RTOs that provide true independence, proper scope and
configuration. RTOs must possess a strong planning and system
expansion responsibility role as well.
Sixth, Congress must ensure that transactions between
regulated and unregulated utility affiliates do not result in
consumer abuse and unfair competition.
Mr. Chairman, members of the subcommittee, I would suggest
that if Congress takes these steps, then we will have the
confidence of both the public and market participants that the
system is, in fact, fair and workably competitive, and have the
same confidence in electric markets as we have today in
Look forward to working with all of you in drafting and
advancing legislation that achieves these objectives and
ensures that we have eliminated the barriers to competitive
generation markets and provides the type of structure that
consumers, market participants and investors all need and
deserve. Thank you.
[The prepared statement of Marty Kanner follows:]
Prepared Statement of Marty Kanner on Behalf of Consumers for Fair
Mr. Chairman, members of the Subcommittee, I am Marty Kanner. I am
testifying today on behalf of the Consumers for Fair Competition (CFC),
an ad hoc coalition of consumer and investor owned utilities, small and
large electric consumer representatives, small business interests, and
others. While the interests of these organizations are diverse, we are
unified in the belief that effective competition in wholesale electric
markets, and its associated consumer benefits, will not emerge and be
sustainable if market power issues are not adequately addressed.
Consumers for Fair Competition was formed to advance policies
necessary to promote effective wholesale competition and has been
active in the restructuring debate and efforts to block stand-alone
repeal of the Public Utility Holding Company Act (PUHCA). CFC strongly
believes that effective competition can provide lower rates, increases
in efficiencies and innovation, and diversity of supply options. The
coalition believes that these benefits will not reach consumers,
however, if steps are not taken to properly structure wholesale power
markets, actively monitor these markets, prevent and remedy market
manipulation and abuse, and provide public confidence in the system.
Electricity markets, like other competitive markets, have
experienced price fluctuations and supply shortages. Electricity,
however, is different. Electricity is an essential service imbued with
a public interest. As consumers and businesses, we cannot simply decide
to defer purchase--like we would a new car--if prices go up. Nor can we
simply do without if there is insufficient supply. The fact that
electricity cannot be economically stored--yet requires instantaneous
availability--is another important distinction.
There is another key difference between electricity and other
``markets'': the electricity industry has a more than 100 year history
of monopoly service. The structure, vertical integration, concentration
of ownership--and continued monopoly status of transmission and
distribution service (in most locales)--is a significant challenge to
formation of a competitive wholesale power market.
In 1935, Congress passed PUHCA to create the structural framework
needed to support effective state and federal rate regulation. As we
move away from wholesale rate regulation, Congress must again enact
legislation to foster the structural framework needed for effectively
functioning competitive wholesale power markets.
FOSTERING EFFECTIVE COMPETITION
California has shown us the cost of getting it wrong. But unless we
learn from the California experience, we are bound to repeat it. The
California energy crisis has many contributing factors and responsible
parties. Rather than pointing fingers, however, I want to point out the
clear lessons that can be learned--and must be acted upon:
Market-based rate authority cannot be granted in instances
where competitive markets do not exist. Sales under market-
based rates can only be ``just and reasonable'' when
competitive market conditions exist. As recognized by a
majority of the sitting FERC Commissioners, the current rules
for defining markets and determining whether market-based rates
can be allowed is outdated and ineffective. While FERC appears
to be on the verge of revising its rules, this is too important
to be left to happenstance. Commissioners--and Commission
majorities--can change, and legal challenges can delay
implementation. Congress must direct FERC to establish clear
rules and procedures for defining competitive markets and
determining when, and under what conditions, market-based rates
can be authorized.
Competitive markets require active market monitoring. There
were numerous warning signs that California's market was
dysfunctional. Regrettably, FERC ignored these signs and
protestations. Moreover, FERC failed to collect and analyze
market data and behavior in order to identify and correct
market design flaws. For instance, a June, 2001 report by the
General Accounting Office (GAO) concluded that FERC's study of
alleged physical withholding of electricity from the California
market ``was not thorough enough to support the overall
conclusion'' that withholding had not occurred. FERC must
perform the needed market monitoring to ensure just and
reasonable wholesale rates by identifying any market design
flaws, market manipulation or market power abuses.
Market power abuses must be fully mitigated and remedied in a
timely manner. Allegations of market power abuse were raised
throughout the last two years. Had FERC acted in a timely
fashion, the current debate over refunds would be moot--with
FERC having taken remedial action to correct market design
flaws and mitigate market power long before the current crisis.
FERC must be given clear authority and direction to take
appropriate actions to mitigate and remedy market abuses.
Generation concentration effects competition. California's
``tight'' market showcases the ways in which concentration in
ownership of generation can be manipulated to reduce supplies
and increase prices. Economic and physical withholding of
generation and selective dispatch was cited by many parties as
a significant contributing factor to the run-up in prices. The
growth of the independent power producer (IPP) market has
provided an important infusion of competition and ``new
players'' into the market. However, many regions of the country
still have dominant utility generators, the IPP market is
consolidating, and utility generating assets are being sold
with little attention paid to the impact on concentration in
generation markets. Moreover, pending bills to repeal PUHCA
would compound this problem by eliminating the current
requirement, adopted by Congress in 1992, that state
commissions approve proposed sales or spin-offs of utility
rate-based generation assets. In addition to the steps outlined
above, Congress should (1) preserve the state role in approving
the sale or spin-off of rate-based generation assets, (2)
clarify FERC's authority to review the sale of generation
assets, (3) close gaps in FERC's merger review authority, and
(4) strengthen the FERC merger standard to ensure the proposed
merger will produce competitive benefits in the wholesale power
Transmission constraints impede competition. By now, Path 15
and its market and operational effects are legendary.
Regrettably, Path 15 is not the only transmission constraint in
the country, and transmission owners have little incentive to
relieve these constraints. Transmission siting and construction
is laborious--and frequently impossible. But even if those
problems are resolved (and they should be), transmission
constraints will not magically disappear. Transmission
constraints create smaller markets where the generation in that
market can extract a higher price. Relieving the constraint
produces more participants, more competition and lower prices.
Congress must support development of effective RTOs that
provide true independence and proper scope and configuration.
RTOs must possess a strong planning and system expansion
responsibility to ensure that constraints are expeditiously
relieved at the lowest possible cost.
The straddling of regulated and unregulated businesses--and
the resulting potential for abusive inter-affiliate
transactions--remains problematic. According to the California
Attorney General, the transfer of billions of dollars by
Pacific Gas & Electric to the corporate parent contributed to
the utility's current bankruptcy. The California Attorney
General has petitioned the Securities and Exchange Commission
to investigate the matter and revoke PG&E's PUHCA exemption.
PUHCA is the only federal statute addressing utility inter-
affiliate transactions--not only transactions between energy
affiliates, but also utility affiliates engaged in ``unrelated
activities'' such as heating and cooling, construction trades,
alarm systems, telecommunications, etc. Congress must ensure
that transactions between regulated and unregulated utility
affiliates do not result in consumer abuse and unfair
The system must be properly structured, monitored and
``policed'' if participants--and more importantly, the public--
are to have confidence in the system. The stock, bond and
commodity exchanges are among the best examples of free
enterprise in the world. But they are not immune from
regulation. There are structured to facilitate free and fair
competition. There are rules to prevent hording, systems to
provide market monitoring, ``circuit breakers'' to prevent
uncontrolled and extreme price fluctuations and enforcement
actions against those parties that break the rules. It is the
combination of these factors that provide public confidence in
the system. We must establish similar public confidence in the
wholesale electricity market.
CALIFORNIA IS NOT AN ISOLATED PROBLEM
Some might feel that California is an isolated problem, that if
used as the basis for congressional action will merely hinder what is
``right'' elsewhere. Unfortunately, California is not unique.
It must be remembered that the California ``crisis'' is not limited
to California, having spread throughout the Western United States.
Wholesale prices in the Pacific Northwest, the Desert Southwest and
elsewhere have closely tracked prices in California--and consumers have
suffered rate increases as a result.
But it's not just the West, either. In New York, New England, and
PJM either the market institution--the ISO/RTO--or market participants
have raised concerns about market abuse and proposed market monitoring
and mitigation rules to remedy these problems.
REFUTING THE MYTHS
A number of popular myths have arisen challenging the need for
congressional action to adopt the positions outlined above. I would
like to briefly respond to some of those assertions.
1. Federal action isn't needed; the states can prevent market power
Some have argued that states--through their legislature and
commission--can take adequate steps to protect consumers and prevent
abuse. However, the wholesale power market is subject to the
jurisdiction of FERC--not the states--and power markets are regional in
nature, exceeding the reach of any one state.
2. The anti-trust laws are sufficient to prevent market power abuses.
Some have questioned the need for FERC authority on market power,
believing that the anti-trust laws are adequate to correct abuses.
However, the anti-trust laws alone are inadequate to foster a
competitive wholesale market. First, the anti-trust laws are not
designed to address market power lawfully acquired through state-
sanctioned monopolies nor to address ``transitioning'', but
uncompetitive market structures. Moreover, it appears that the ``filed
rate doctrine'' could immunize private utilities with FERC--approved
market based rates from anti-trust judgments--a protection that no
other player in a competitive market receives.
3. FERC's actions in responding to the California crisis suggest that
some other agency--rather than FERC--should be given the
authority and responsibility to oversee electricity markets.
FERC's handling of the California crisis is certainly ripe for
criticism. However, rather than suggesting that the agency is ill-
equipped, FERC's response highlights the importance of providing
additional guidance--and political affirmation--to the agency. FERC has
the needed experience to oversee wholesale markets and ensure that they
4. FERC is already on the right path, and Congress need not do any
We have seen a refocusing of the agency in the past few weeks, but
that action should not lead Congress to conclude that legislation is
unnecessary. First, FERC membership can change--and these issues are
too important to be left to a whim. Second, FERC's actions are certain
to face legal challenge. Congress can avoid this lengthy entanglement
by providing clear guidance and authority. Third, FERC's recent
proposals--such as reforming market definitions--are positive, but
those proposals can be significantly weakened as the effort proceeds.
5. Congress should repeal regulations--like PUHCA--rather than create
First, with the possible exception of the impact of PUHCA on RTO
formation, no clear and compelling case has been made for the
impediment to competitive markets caused by PUHCA. Under PUHCA, any
utility and any company can build, own and operate a merchant power
plant anywhere in the country. All PUHCA restricts is further industry
consolidation through limits on acquisition of utility distribution
companies and anti-competitive cross-subsidization. I fail to see the
competitive benefits of repealing these restrictions without
simultaneously taking steps to promote the market structure necessary
to support effective competition. I have attached to my statement a CFC
document that outlines the specific conditions that we would seek to
accompany PUHCA repeal.
I want to emphasize that CFC's legislative suggestions, seek to
refocus FERC. In general, we are not creating ``new'' regulatory
authority. The majority of these actions can be done by FERC today. The
legislative prescriptions supported by CFC are intended to eliminate
legal uncertainty and provide a new course for FERC to meet the
evolving shape of the industry and to restore public confidence in the
Consumers for Fair Competition believes that modest legislative
steps will translate into giant leaps forward for the development of
effective wholesale competition. We stand ready to work with you, Mr.
Chairman, and the members of the Subcommittee in crafting legislation
that advances the interests of consumers and the proper functioning of
the wholesale electricity market.
Recommended Conditions for Repeal of the Public Utility Holding Company
Consumers for Fair Competition (CFC) believes that PUHCA can be
repealed only if accompanied by appropriate structural and regulatory
safeguards designed to promote a competitive market structure for the
utility industry and satisfy the underlying purposes of the Holding
Company Act: consumer protection, effective oversight and
accountability, prevention of undue market concentration and fair
CFC welcomes the opportunity to engage in a thoughtful discussion
of PUHCA repeal and any effort to determine if repeal can be
accomplished in a manner that advances the needs of electric consumers
and utility competitors.
Following is an outline of the amendments that CFC recommends.
These amendments are directly tied to the underlying purposes of PUHCA
and the market implications that PUHCA repeal portends.
MERGERS--THRESHOLD FOR APPROVAL
PUHCA has a higher statutory threshold for merger approval than
exists under the Federal Power Act. Under the Act, the SEC ``shall not
approve [a merger] unless the Commission finds that such acquisition
will serve the public interest by tending towards the economical and
efficient development of an integrated public-utility system.'' In
contrast to PUHCA's requirement that a proposed merger benefit the
public interest, under the Federal Power Act, FERC must approve a
proposed merger unless it finds that the proposal is inconsistent with
the public interest.
While the SEC has been less than rigorous in enforcing this higher
standard, we believe that, in light of the increasing consolidation
occurring in the utility industry, it is appropriate to (1) require
that proposed mergers result in demonstrable consumer benefit, and (2)
place the burden on the applicants to demonstrate that benefit.
CFC proposal: Amend the Federal Power Act to condition merger
approval on an affirmative finding that the proposed merger will
benefit the public interest.
MERGERS--STANDARD FOR APPROVAL
As noted above, PUHCA provides guidance to the SEC in determining
whether a proposed merger is in the public interest. Specifically, the
Act requires that it foster ``economical and efficient development of
an integrated public-utility system.''
While the Federal Power Act's broad ``public interest'' test
provides the FERC with considerable latitude, we believe that the
merger review process would benefit from specific guidance. This is
particularly important because PUHCA currently includes a geographic
interconnection requirement that currently prevents a number of
potential merger combinations. We can expect to see many new, large
mergers proposed if PUHCA is repealed. The impact of this added
consolidation in the industry must be reconciled with Congress' broader
goals of increased competitiveness in the electricity industry.
Given this evolution of the industry, with an increasing reliance
on market forces, as well as the anticompetitive impacts that broad
interstate mergers could have on the emergence of competition in
regional markets, we believe it is appropriate for that guidance to
focus on the needs of an effectively competitive market. Such guidance
will prompt FERC to consider conditioning mergers, as necessary, to
promote effective competition (such actions could include participation
in RTOs, conditions on use of generation in wholesale markets, or other
CFC proposal: Amend the Federal Power Act to expressly consider the
effect of proposed mergers on the promotion of effective wholesale
competition in electric markets.
PUHCA restricts consolidations between electric and gas utilities
operating in the same market (again, the SEC has been lax in enforcing
this restriction). These ``convergence'' mergers are increasingly
common and pose a new risk to consumers and other market participants:
the merged utility may have an ability to influence the availability of
fuel--natural gas--for competing generators.
In contrast to the SEC under PUHCA, FERC's ability to review such
convergence mergers is limited.
CFC proposal: Amend the Federal Power Act to grant FERC clear
authority to review convergence mergers.
MERGERS--HOLDING COMPANY MERGERS
In the 1980s, in a case involving a proposed merger between two
Iowa holding companies, FERC determined that it only had jurisdiction
over the proposed merger of operating utilities--not mergers between
holding companies. While the FERC later reversed its position in
establishing its merger policy, that revision has not been tested in
If PUHCA is repealed, and if FERC's original policy is upheld by
the courts, a significant regulatory gap would ensue--with significant
utility mergers able to escape review by any federal utility regulatory
CFC proposal: Amend the Federal Power Act to provide clear FERC
jurisdiction over mergers between holding companies.
MARKET POWER PROTECTIONS
The Holding Company Act addresses market power--the ability of a
market participant to set and sustain prices above competitive levels--
by placing limits on industry consolidation. As the industry
transitions away from cost-of-service rate regulation, it becomes
critical that effective competition exists. Without such competition,
we will have ``unregulated monopolies'' with consumers exposed to
market manipulation and price gouging.
While FERC has a variety of tools as its disposal, it does not have
specific statutory directives to provide the guidance and legal
certainty that is needed to ensure timely and effective action.
Moreover, some of the regulatory standards adopted by FERC--such as the
methodology for defining relevant markets--are outdated and
CFC proposal: Amend the Federal Power Act to (1) direct FERC to
establish standards and methods for assessing competitive markets (and
allowing market based rates), (2) provide for market transparency and
effective market monitoring, and (3) direct FERC to take action to
mitigate and remedy market power.
DEREGULATION OF RATE-BASED GENERATION PLANTS
Private utilities traditionally built electric generation plants to
serve retail customers within their ``state-sanction exclusive service
territory. Power from these plants is sold at cost-based rates
determined by the relevant state utility commission. As the wholesale
electricity market is deregulated, some traditional utilities are
interested in converting these existing, rate-based generation plants
into unregulated, merchant plants that can sell power at market rates.
Under the 1992 Energy Policy Act, utilities can convert existing
generation plants into ``exempt wholesale generators''--but only if
approved by the relevant state commission. The state review is intended
to ensure that retail electric consumers--who paid for the plant--are
appropriately protected in any asset transfer.
Current proposals to repeal or ``reform'' PUHCA do not retain this
requirement for state approval for deregulating existing rate-based
CFC Proposal: Retain the 1992 requirements for state approval for
deregulation of existing, rate-based generation plants.
Under PUHCA, diversification into unrelated business lines may be
limited for large, multi-state utilities. PUHCA repeal will result in
an expansion of utility diversification, which poses problems for both
utility consumers and unaffiliated businesses competing against utility
affiliates. Utilities frequently seek to diversify into businesses
which utilize utility assets, including labor, paid for by ratepayers
without obtaining compensation from the unregulated affiliate for such
use. This shifts the true costs of the unregulated operation to the
ratepayers and subsidizes the non-utility business thereby harming
competition. Without proper safeguards such abuses can go undetected
and both consumers and unaffiliated competitors will be harmed. State
utility commissions are ill-equipped to police utility affiliates and
prevent cross-subsidization, since the affiliate can operate in a
different state and most state commissions lack authority to review
non-utility business practices. Further, repealing PUHCA will eliminate
the only federal statute that requires the true costs of affiliate
transactions to be paid. This would leave enforcement to the states
that may not be able to effectively police interstate operations of
utilities and their unregulated affiliates and, at best, result in
unequal treatment for even the utilities themselves.
CFC Proposal: Create an effective, uniform federal standard and
remedy to prevent utility affiliate cross-subsidization.
REGIONAL TRANSMISSION ORGANIZATIONS
Ownership and operational control of interstate transmission
facilities by multi-state, vertically integrated utilities creates
opportunities for market manipulation and competitive and consumer
abuses. Utilities have effectively denied access, provided inferior
service, interrupted sales for alleged reliability concerns, and
otherwise provided themselves preferential use of the highways of
FERC Order 2000 has advanced discussions and development of RTOs.
However, given its ``voluntary'' approach and potentially challengeable
legal basis, we believe it is necessary to both affirm and strengthen
the action taken by FERC in Order 2000.
CFC Proposal: Require registered holding companies to join a FERC-
approved RTO as a condition of PUHCA repeal and amend the Federal Power
Act to (1) affirm FERC's legal authority to issue and enforce Order
2000, (2) strengthen provisions in Order 2000 with regard to
independent governance and ``scope and configuration''; of RTOs, (3)
direct FERC to require private utility RTO participation to remedy
undue discrimination or as a condition for approval of a merger or
market based rate request, 4) enable FERC to require public power
systems to participate in RTOs based on a finding that the utility has
engaged in undue discrimination to disadvantage competitors, and open
access transmission tariffs are not likely to remedy the problem, and
5) enable FERC to mandate federal utilities to participate in an RTO to
remedy undue discrimination.
As currently drafted, the effective date for the legislation would
be 18 months after the date of enactment. As you know, advocates of
PUHCA repeal argue that the legislation will promote competition. In
contrast, CFC believes that PUHCA repeal will thwart, rather than
hasten, effective competition. We have outlined a number of amendments
intended to promote effective competition. However, we believe the
efficient implementation and use of these additional provisions will be
greatly aided by the addition of a ``carrot''--tying repeal to a FERC
finding that effective and sustainable competition exists in the
wholesale electricity markets.
CFC Proposal: Amend the effective date in the legislation to
``trigger'' repeal upon an affirmative FERC finding that effective and
sustainable competition exists in the wholesale electricity markets.
Mr. Barton. Thank you, Mr. Kanner.
We now would like to hear Mr. Lane.
Your statement is in the record in its entirety, and ask
that you elaborate on it for about 6 minutes.
STATEMENT OF THOMAS K. LANE
Mr. Lane. Thank you, Mr. Chairman and members of the
subcommittee for allowing me to address you today. My name is
Tom Lane. I am a managing director at Goldman Sachs, and I work
in the Energy and Power Group there. And I have been involved
working with the power industry and advising the power industry
for over 10 years now. Needless to say, the industry has gone
through some very dramatic change over that period of time, and
it is in the midst of its most dynamic environment currently.
The change and restructuring, we believe, will continue,
and the evolving trend toward deregulation of the wholesale
energy market, we believe, has many benefits for all classes of
customers. It will enhance competition. It will lead over time
to lower energy prices and allow participants in the industry
to continue to attract investor capital, which is critical to
further building out our energy infrastructure as a country.
Elements that will continue to enhance competition over
time are the further deregulation of generation and enhanced
supply of generation, which is well underway; price
transparency in wholesale and retail markets; adequate
transmission capacity; and a regulatory environment that
promotes growth and consolidation.
There continue to be impediments to achieving these
enhanced levels of competition in the nearer term; the State by
State nature of our regulation; the California crisis has
stalled a lot of deregulation initiatives around the country;
and PUHCA, which has been talked about a great deal here this
morning, continues to put a damper on activity that will lead
to the building of stronger enterprises that will be needed in
a more active wholesale market that will be a more challenging
market as the electric industry becomes more commoditized over
Referring to the deregulation trends to date, as you know,
about half of the States around the country have accomplished
some form of deregulation. There is increased customer choice.
There has been a shifting of generation, both in terms of its
unregulated status and in the ownership of those assets. There
has been an entire new sector of participant in this industry
over the past number of years that we refer to as the power
growth sector, companies such as Calpine, AES, Mirant and
Dynegy, which have been able to attract capital and build
significant unrelated businesses that are providing an enhanced
level of services to the wholesale market and helping to create
a more open and liquid regional trading market. They have
captured the interest of the financial markets. They have
allowed new capital to come into this sector, which is
providing the necessary capital to enhance the supply of our
generation, which, as you all know, has been desperately
There are also a number of unregulated subsidiaries of
electric utilities that are building unregulated businesses as
well. Between these two categories of participants, they have
raised approximately $18 billion of equity capital just in the
past 18 months, $7 of that through IPOs.
We believe that the shifting of generation, particularly in
the Mid-Atlantic region has been very helpful and constructive
as well in allowing a number of participants such as Allegheny,
Constellation, PPL, PSEG in providing a base to further build a
more competitive business in the future.
With respect to M&A activity, there continues to be
industry consolidation. We think it is inevitable going
forward. We think it is a positive for the industry in creating
enhanced levels of competition. Investors prefer larger market
cap companies that offer greater financial scope and liquidity.
The current regulatory approvals, however, do take a lot of
time, are costly or distracting to management teams. And PUHCA
prohibits many transactions from occurring because of its
integration requirements. These constraints are impacting the
pace of competition in this industry and create an uneven
playing field. The unregulated power growth companies, for
example, do not have a lot of these restrictions, and a number
of them avoid transactions that would put them underneath and
subject to these restrictions. Investors often punish companies
that announce transactions because of these lengthy approval
processes and the new PUHCA restrictions that sometimes come
with certain transactions that have taken place. We believe to
create a truly competitive, vibrant energy industry, these
constraints should be removed.
A couple of quick thoughts on transmission. As has been
said, our country lacks sufficient capacity today. Electricity,
as we know, can't be stored. There are a number of bottlenecks
around the country. We believe this prohibits generation
development in certain areas, and certainly results in the less
than efficient use of our current and existing generation base.
Expanding the system, we think, is critical. And a comment that
I would make as it relates to the formation of these regional
transmission entities, that the framework should ensure
adequate returns so that they will have the ability to raise
capital to build out and address these essential growth
In summary, the electric industry, as we all know, has gone
through significant transformation already. The wholesale
market is moving toward a more competitive market-oriented
industry. The pace of progress, however, has been incremental
because of the State by State nature of regulation and the
overlay of PUHCA. We believe allowing industry participants to
have these artificial restrictions removed will allow them to
grow, combine and create actually enhanced competition in the
wholesale market. And we think it is critically important in
allowing these companies to attract the necessary capital to
further build out our energy infrastructure that our country
desperately needs. Thank you.
[The prepared statement of Thomas K. Lane follows:]
Prepared Statement of Thomas K. Lane, Managing Director, Goldman Sachs
The electric utility industry is in the midst of its most dynamic
time in recent history. It is going through significant change and
restructuring. The evolving trend toward deregulation of the wholesale
energy market will have many benefits for all classes of customers. It
will enhance competition, lead to lower energy prices and allow
participants to continue to attract investor capital. The key elements
that will enhance competition are the deregulation of generation,
enhanced supply of generation, price transparency in the wholesale and
retail markets, adequate transmission capacity and a regulatory
environment that promotes growth and consolidation. There continue to
be impediments to achieving enhanced levels of competition in the
nearer term. The state by state nature of regulation, the California
crisis which has stalled momentum at the state level in many places,
and PUHCA which has continued to put a damper on M&A activity conducive
to building larger stronger enterprises that will be positive for more
active, competitive wholesale markets.
CURRENT INDUSTRY DYNAMICS:
The electric utility industry is going through rapid
transformation. About half of the states have accomplished some level
of deregulation, providing many customers with the ability to chose
their energy provider. The status of generation is shifting both in
terms of its now unregulated status in many jurisdictions and in the
ownership of the assets. Unregulated Power Growth companies, such as
Calpine, AES, Mirant and Dynegy, are building substantial unregulated
businesses that are providing an enhanced level of services to the
wholesale market and helping to create more liquid regional trading
markets. These companies have captured the interest of the financial
markets. They are positioned in the market as ``old economy'' growth
companies characterized by high growth (25% EPS growth on average),
broad geographic reach (many have a national or global footprint), no
dividend, and entrepreneurial management teams. These companies have
been accessing significant capital to build out additional generation
and expand unregulated operations. Many are as large as the largest
electric utility companies. They are helping to create enhanced supply
of generation, greater industry competition and have been successful in
drawing new equity and debt capital to the industry. There are also a
number of unregulated subsidiaries of electric utilities that are
rapidly growing their businesses as well. Many have shifted their
formerly regulated generation into unregulated status (Allegheny,
Constellation, PPL, and PSEG are examples), serving as a substantial
base to build a larger, more competitive business in the future. Many
investors who previously had not participated in the sector have put
capital to work to help these higher growth entities fund needed
incremental generation and other energy infrastructure. As a result of
this renewed expansion of generation, most forecasts indicate that the
country will be in balance in most regions of the country within a two
to three year timeframe, with some regions sooner.
IMPACT OF M&A ACTIVITY:
This industry has been and will continue to go through significant
consolidation. Merger activity began in earnest in the early 1990's and
has been consistently steady in the late 1990's and the early years of
this decade. Further deregulation and consolidation are inevitable. The
industry would benefit by a smaller number of larger, financially
stronger companies. Business conditions will become more challenging in
the years to come and having a strong financial base and financial
capacity will be critical. Investors in particular prefer larger market
cap companies that offer financial scope and liquidity. Current
regulatory approvals take a lot of time and are costly and distracting
to management teams. Further, PUHCA prohibits many transactions from
occurring because of its integration requirements. These constraints
are impacting the pace of competition in the industry, and create an
uneven playing field. The unregulated Power Growth companies for
example do not have the same restrictions that the regulated utilities
have under PUHCA. A number of Power Growth and exempt utilities will
not consider certain transactions to avoid becoming subject to PUHCA
restrictions. Investors often punish companies on announcement of a
transaction because of the lengthy approval process, which prohibits
other strategic initiatives while waiting for necessary approvals to
close a deal. To create a truly competitive, vibrant energy industry,
these constraints should be removed.
PERSPECTIVES ON TRANSMISSION:
The current transmission infrastructure lacks sufficient capacity
and has numerous bottlenecks. This can prohibit generation development
in certain areas, and can result in less than efficient use of
currently existing generation. Expanding the system and resolving a
number of the bottlenecking issues will enhance competition and use
existing generation more efficiently. It will also create more
competitive dynamics in all regions of the country. It is important
therefore that as regional transmission entities are formed, that they
earn adequate returns sufficient to raise capital to address these
essential growth initiatives. Expanding generation without coincident
expansion of transmission would prohibit the full benefits of a more
robust wholesale market.
The electric industry has come a long way in its transformation to
a competitive, market-oriented wholesale industry. The progress has
been incremental given the state by state nature of the industry
structure. The pace of progress has been hindered by the overlay of
PUHCA, which has prevented in certain cases a nimbleness managements
need in a competitive, commodity-oriented industry. It has also
prohibited merger activity, which will promote larger, stronger
entities, and in turn promote greater competition. This is a dynamic
time in the industry and an opportunity for industry participants to
strengthen their financial positions and competitive skills. This will
in turn help to enhance the overall competitiveness of the wholesale
energy and power industry, and ensure the ability to continue to
attract the required capital to further build out our country's
Mr. Barton. Thank you.
The Chair would recognize himself for 5 minutes for
Mr. Svanda, if I heard your testimony correctly, you said
the States should set the interconnection standard. How could
we do that without having the Federal Government set at least
some general minimum standards? I thought the whole point of an
interconnection standard was to have it kind of uniform on a
Mr. Svanda. Absolutely. And NARUC, and in my personal
comments as well, support the concept of national standards.
What I had hoped to say with regard to the States was to let us
implement them, because at the standards level, we also
intersect with building codes and other pieces that would be
important for overall implementation.
Mr. Barton. Mr. Levy, you talked in your statement at some
length about the need for PURPA repeal, but you did say that
existing contracts should be honored. What if the existing
contract has an automatic rollover clause? How would you honor
Mr. Levy. Well, I think if the contract has an existing
automatic rollover, then it is truly an automatic rollover as
opposed to an option. It would need to be honored simply
because that rollover was probably considered in the financing
of the original----
Mr. Barton. So you envision a situation where there are
some PURPA contracts that conceivably could be honored in
perpetuity? Hopefully not many.
Mr. Levy. I guess my reaction was more related to a
contract--and you have seen some with 10-year terms with an
extension for 5 more or 10 more. I imagine ones----
Mr. Barton. So an option contract, you would say you don't
have to honor the option?
Mr. Levy. Again, it depends on the contract.
Mr. Barton. I guarantee you when we get around to writing
the bill, I am going to be beseiged by representatives of PURPA
contractors who claim they have this need to have these
contracts extended for long, long time periods, so I just need
to know, a finality. How many years is enough before we put
those folks into the open market?
Mr. Levy. Well, having seen hundreds of PURPA contracts,
some are not very clearly written. And I think there would need
to be some measure to address contracts that have no term.
Mr. Barton. So we would need a transition rule or
Chairman Tauzin. Mr. Chairman. Would the chairman yield? I
wanted to point out Mr. Blunt said that this is a problem of
Mr. Barton. We appreciate--first we appreciate Mr. Blunt's
attendance. It shows that the negotiations on next week's
energy bill are going well.
Mr. Blunt. They are going well, Mr. Chairman, and it just
shows how you can get recognized as a poor attender by just
Mr. Barton. You have not missed a roll call vote when it
counted. I want to go to--I want to go to Mr. Sokol since you
talked about PUHCA repeal, but you also talked about the
California market. We have had several of our panelists today
talk about the need for market power protection. It is my
understanding that the California bill, the State restructuring
bill, one of its principal goals was to prevent market power,
and as a consequence of that, there was forced divestiture
requirements that the incumbent utilities in California had to
sell their generating plants in order to get certain tax
treatments. So given the fact that the California restructuring
bill was designed to prevent market power, and, in fact, when
the incumbent utilities sold to numerous companies around the
country, in your mind is market power an issue that we need to
worry about if we get the rules of the road right so that there
are numerous suppliers in any given market?
Mr. Sokol. Mr. Chairman, let me answer that in several ways
because I think it gets to the crux of a number of these issues
as it relates to PUHCA as well.
Market power is an important issue. And let me be clear. We
nor, I think, any of our associated companies have any interest
in taking away any consumer protections. Those portions of the
electric and gas industry that remain regulated because they
are a monopoly must have market power considerations, and they
must protect consumers. Access to books and records, the
ability of State regulators to properly and fully enforce the
rules and regulations against us or any of our competitors are
absolutely essential. We have no interest in removing them.
And, in fact, H.R. 1101 enhances them.
As you stated, in California PUHCA neither stopped that
problem from happening nor encouraged it. It is a State piece
of regulation, bill AB 1890--it was enacted in 1996--that we as
a company opposed because it made two fundamental mistakes. One
of them is it locked in retail rates while leaving the
wholesale rates open, and it did that for a very real purpose.
The State and the utilities of that State made a decision that
they believed that wholesale rates were going to stay very low.
The retail rates were already among the highest in the country.
And therefore, there was an opportunity for them to arbitrage
between low spot market prices and the high retail prices to
hopefully, in their mind, pay down some of their stranded cost.
That was a State decision made in complete cooperation with the
three utilities and State government and, in fact, a unanimous
vote of the assembly of the senate in the State of California.
PUHCA could do nothing to stop them for doing that. PUHCA
in a way has exacerbated the problem, because those utilities,
Pacific Gas and Electric is an example, are intrastate-exempt
utilities. They are exempt in the State of California under
PUHCA by Federal law. This claim by the Attorney General, which
is nothing more than a political game to have the SEC look at
Mr. Barton. They play political games in California?
Mr. Sokol. Sometimes in Iowa as well.
Mr. Barton. Sometimes in Texas a lot.
Mr. Sokol. It is nothing but a game, because that exemption
is a Federal exemption. Their utility assets are intrastate;
therefore, they are exempt from PUHCA.
But the issue that was raised about them dividending
dollars out again was a State regulatory issue. In fact, when
PG&E and Edison under 1890 were established, and their
exemptions established under PUHCA, the State required that
they maintain their capital structure. Now, this is an
important issue because when they then passed AB 1890 requiring
them to divest their generation, the utilities had a huge
inflow of capital. Had that capital been kept in the company,
it could have been used as an offset against this very risky
position they were taking between spot market and retail rates.
Mr. Barton. I think that is Mr. Priest's basic point, that
the money went upstream. It didn't stay to build more power
Mr. Sokol. But the State required it to go upstream. The
State utility board did not allow that money to stay in those
companies because it would have increased the amount of equity
in the company under which they were allowed to recover 11\1/2\
percent return on equity. They wanted the equity level kept
lower because it would be better for consumers. PUHCA did not
allow or inhibit that transfer of capital. It was the State
utility board that established them doing that.
So this whole notion that PUHCA either would have protected
them or done something to stop it is just absolutely not
correct. What is important is the recognition----
Mr. Barton. Finish up. My time expired about 4 minutes ago.
Mr. Sokol. What is important is the Federal overlay setting
the rules fairly, then the States have to enforce them
appropriately and be responsible for the actions within their
State. Then you will have a healthy market both between the
States and intrastate.
Mr. Barton. My time has expired, and the Chair recognizes
Mr. Priest. Mr. Chairman, may I make a comment? That was
not my comment. That was the politician's comment from
California. I never question any comments from politicians.
Mr. Barton. I understand that. I did not imply that. I
thought that your statement talked about--you weren't really
all that excited about PUHCA repeal. And isn't there something
in your statement?
Mr. Priest. Not totally excited about it.
Mr. Barton. We got plenty of people who are willing to make
political statements. We do not need anybody at the panel to do
that. In Texas, former Senator Lloyd Bentsen said politics is a
contact sport, so we are understanding of that.
Mr. Boucher is recognized for 5 minutes.
Mr. Boucher. Well, thank you very much, Mr. Chairman. I am
going to pick up with questions to Mr. Sokol also.
I acknowledge that under the proper circumstances, it is
appropriate for the registered companies to engage in
businesses that are not related to the core utility business.
As a matter of fact, I proposed the last change to PUHCA, which
was to enable the registered companies to offer commercial
telecommunication services, and that change was made by the
Congress during the last decade.
I think as we examine the question of PUHCA repeal
prospectively, it is very important that we keep the interest
of electricity consumers in the forefront, and I think that
their interests should guide our decisions.
And so let me ask you a question. I will ask it in two
ways, and you can answer this question either way you choose.
The first question is is PUHCA, as currently being interpreted
by the FERC and by the SEC, in some way adverse to the
interests of electricity consumers? Are the interests of
electricity consumers being injured in some way by current
PUHCA interpretation and its application in accordance with
those interpretations? And the other side of that question if
you choose to answer it this way is would the interests of
electricity consumers in some way be advanced if PUHCA were to
So address the question of PUHCA appeal, if you would, from
the vantage point of electricity consumers, and after you
provide an answer, I am going to ask Mr. Kanner and perhaps
others to comment as well.
Mr. Sokol. Thank you, Commissioner.
Mr. Boucher. Did you say ``Commissioner''? I will take the
Mr. Sokol. I think PUHCA, in fact, does harm the consumer,
and that is why we are specifically interested in it in
addition to our ability to invest.
No. 1, I will give you a simple example. PUHCA wants to
concentrate market power, not distribute it. FERC has attempted
to repeal portions of PUHCA on that very basis, that they are
trying to distribute market power. And I will give you a
We are an intrastate utility holding company in the State
of Iowa. The only acquisition that we can make today that is
exempt from PUHCA--we represent 60 percent of the consumers in
the State of Iowa--is to acquire the company that represents
the other 30. We do not think forcing market concentration is
in any way in the consumers' interest. And PUHCA absolutely
does do that.
PUHCA, second, absolutely restricts investment in this
sector, which we think is clearly not in the consumers'
interest, because as California has demonstrated, when a
utility that was a AA-rated utility now has to go out and raise
capital at 14 percent interest rates because people like us
can't make the investment we would like to make to help that
utility get through its issues, that clearly will get passed on
to the consumer.
The other--this last point I would make is PUHCA repeal is
probably the wrong term. We are not in favor of removing any of
the consumer protections under PUHCA. We are merely asking that
the investment limitations with all of the appropriate
oversight of the FERC, the SEC, FTC and the Justice Department
stay in place, but there not be an arbitrary limitation, as an
example in our case, where we can make investments that are
clearly in the consumers' interest. Even if the SEC, which has
told us they would be happy to let us do it, PUHCA, by law,
won't allow us to do it.
Mr. Boucher. Thank you, Mr. Sokol.
Mr. Kanner, let me get your response, please.
Mr. Kanner. Thank you very much, Mr. Congressman. I would
like to answer it in a couple of ways. The first is to note
that there is no legitimate consumer group, not Consumer
Federation of America, Consumers Union, AARP, National Consumer
League, et cetera, that supports stand-alone PUHCA repeal. So I
think your answer is in part answered in that way.
But let me address some of what Mr. Sokol raised. What
PUHCA restricts in terms of the integration requirement is the
acquisition of another vertically integrated or, frankly,
distribution utility. In my view, the growth of the
distribution utility does not inherently lead to greater
competition. We are talking about competitive generation
markets, and simply acquiring another vertically integrated or
distribution utility in the case in California isn't going to
result in greater competitive wholesale markets. It may lead to
economies of scale and scope, and that is something that is
worth looking at.
However, what we are talking about--our coalition is
saying, we can look at PUHCA repeal. We can look at eliminating
the integration requirement as long as we put in place other
substitute provisions that protect the interests of consumers.
Let us take mergers as an example--to have an affirmative
screen that proposed mergers result in net benefits and that
they enhance competition to make sure that disposition of
generation assets are reviewable and reviewed by FERC. Mr.
Barton asked before about California's actions with divestiture
of generation assets. In fact, it is my understanding that
California's divestiture effort was not designed to address
market power. Rather, it was designed to value those assets for
stranded cost recovery. Had market power been the screen, we
could have resulted in a different outcome. Had FERC had
jurisdiction to review asset distribution, maybe that would
Mr. Boucher. Thank you very much.
Mr. Chairman, my time has expired.
Mr. Whitfield [presiding]. At this time, I recognize the
chairman of the full committee Mr. Tauzin.
Chairman Tauzin. Mr. Sokol, I am well acquainted with your
views on PUHCA, and you and I had some long conversations about
them. And I want to be specific. I enjoy this give and take on
it with Mr. Kanner, but in your case your testimony basically
tells a story. You were prepared, in effect, to consider making
equity investments in California in the middle of this crisis
and helping restore long-term viability to the California
electric markets, but you basically didn't do it. You basically
looked at PUHCA as the biggest stumbling block; was that not
Mr. Sokol. In three separate instances, the transmission
line to get new generation that was requested by the State of
California and in a personal meeting with Governor Gray Davis
where he asked me, couldn't you possibly set up a revolving
credit facility to help our utilities and help the State
weather this crisis? And Mr. Buffet responded through me, we
will be glad to do that if we can get some way around PUHCA,
because we can't do it and have any security that would secure
our $3 or $5 billion loan by the assets or the stock of the
Chairman Tauzin. So you couldn't be of help when you wanted
to be. In fact, don't you have a geothermal plant in
Mr. Sokol. Yes.
Chairman Tauzin. PUHCA stands in the way of your investing
in the transmission lines that would bring that electricity to
consumers in California around that geothermal plant; does it
Mr. Sokol. Correct.
Chairman Tauzin. Could you explain that; how it prevents
Mr. Sokol. None of the utilities in the State can afford to
put in the transmission line. We have actually requested the
extension for going on 5 years. We can't build the transmission
line ourselves, because we can only own 4.9 percent of it
because we can't demonstrate either interconnection with the
State of Iowa or any of the other exemptions, if you will,
under the statute--under PUHCA, so that a transmission line
that we were prepared to build, turn over full authority to the
ISO, accept the FERC level rate of return so we can deliver
another 340 megawatts of renewable energy----
Chairman Tauzin. So we have got a case where a law that
contains some good consumer protections, which you concede
shouldn't be repealed, but also is designed in a fashion that
prevents those who are willing to make investments to deliver
more power, more reliable power with better transmission
facilities, prevents you from making those investments when you
are not only requested to sometimes, but you are eager to do it
on other occasions; is that right?
Mr. Sokol. Correct. There are numerous examples around the
Chairman Tauzin. I want to do something with all of you who
might want to participate with the time I have remaining. You
have all made a case for this Congress acting to change some of
the laws and rules on the electric markets. You all support
different elements, obviously. But what I would like any of you
to do for me today is make the case on the basis of what
happens if we do nothing. If this committee fails to address
some of the concerns you have raised here today, what does
One of the problems we have got, Americans do not really
believe there is a problem until the prices are going crazy,
until the lines are forming at the gas station, until there are
blackouts. And they do not see those right now, so they don't
think really we have a crisis.
Make the case for me. What happens if this Congress, this
committee, fails to deliver on some of your recommendations?
What are some of the consequences to American consumers? Anyone
who wants to take that?
Mr. Levy. Well, I would like to just start with an example
of other markets that have deregulated. We participate in
several international markets, and the United States so far is
the only market that, when it went to a deregulated State, saw
prices go up. Every other single market, whether it is South
America, Europe, Australia, some were long on power, some were
short on power, but every single one of those markets saw
prices drop immediately upon deregulation because many of those
markets do not have the types of barriers to entry that we
So I think the experience we have had over the last year
with energy prices spiking, lots of volatility, are basically a
measure of the inefficiencies and blockades built into our
market. I think we will see a terrible cyclical experience in
prices. There will be spikes. There will be drops.
Chairman Tauzin. So your prediction is that the experiment
to move to more competitive retail markets is going to fail if
we do not get these barriers out of the way. We will get higher
prices and spikes and dislocations as a result? Is that your
Mr. Levy. That will discourage investment.
Chairman Tauzin. Anyone else--give me a prediction. Yes,
Mr. Sokol. If Congress doesn't act--it, quite honestly,
should have acted--and you have heard me say this 8, 10 years
ago. We are in an industry right now where public power and
best-run utilities, State jurisdictional levels and Federal
jurisdictional levels are all combating each other. That is
silliness. We have no issue that the municipal co-ops and large
power producers, public power producers and investor-run
utilities, we all have to solve this problem, and we have to
work together. If we do not, what happened in California is
going to happen elsewhere, because we have this fragmented
quilt-like set of Federal and State rules that are not being--
Chairman Tauzin. Tell me where it starts happening.
Mr. Sokol. It could happen in the New York area next, part
of the Northeast. It will happen in the upper Midwest, and it
will continue to happen in parts of the West. And I would ask
you to think about who has lost in California. The consumer has
lost. Two companies have serious financial problems, but the
consumer has lost. That is who is not being protected by doing
Chairman Tauzin. My time is up, but if anybody wants to add
anything, you are certainly welcome.
Mr. Priest. I think probably the second most important bill
that Congress ever passed was the Energy Policy Act of 1992.
But unfortunately, it was that act that probably made
California's problems possible. Now, it didn't cause them, but
made it possible because it started the process. But the act
was not fleshed out enough to really describe what was needed
to happen in terms of several elements.
Now, the things we are talking about today are extremely
important, but the critical item in making the system work and
protecting consumers and protecting investors and protecting
everybody is the transmission side. The 1992 Act made it
possible for little Yazoo City to go out in the market and buy
power from wherever they wanted to buy it, and we buy a lot on
the spot market. We have saved a tremendous amount of money
because of it. But it also creates problems when transmission
gets constrained and you can't go out and buy when you need to
buy. We paid over $2,000 a megawatt hour. We do not average
anywhere close to that, though. Recent months, we have averaged
about $30 of megawatt hour buying on the spot market.
That act needs to be looked, at and the job started in 1992
needs to be completed on it.
Mr. Svanda. If I could, from the perspective of a State
commissioner, what you would cause by not getting legislation
enacted is a continuation of lack of direction across the
spectrum on energy policy, and that lack of direction affects
us dramatically at the State level.
For example, the Telecommunications Act of 1996 set
direction that we could all understand, and we all had some
agreements or disagreements about where we are today in
response to that. But nonetheless, we knew what the national
goals were, and we could begin to march forward in tandem. And
we lack that in energy policy today. At least bifurcation of
directions that are taken across the country by various States
with differing objectives just adds confusion to a whole number
of issues, from investments to diversity of our national
portfolios. And so it just all becomes very confusing without
that very specific national direction that would guide all of
Mr. Whitfield. Is there anyone else on the panel that would
like to respond to Mr. Tauzin's comment?
Mr. Morris. The LPPC has taken a position that it is really
the consumer protections and safeguards that are critical. And
the discussion this morning seems to reflect that PUHCA, while
doing some things that others may take issue with, that there
is a profound respect for those consumer safeguards. We believe
that if those tools can remain in place, that it will go a long
way toward alleviating some of our concerns about an ultimate
repeal of PUHCA. We look forward to a fully competitive market.
And there are some other details that would need to be
addressed. But primarily, it would seem that if we can ensure
that the consumer is protected--the customers that we serve at
the end of the line, that we can make progress on this issue.
But I would caution that our perspective is that first we
ought to ensure that whatever we do does not inflict more harm.
And I think that is part of the lesson from California, that
whatever we do does not inflict more harm than the--that the
medicine doesn't inflict more harm than the disease.
Mr. Whitfield. We have gone over about 4 minutes, so at
this time I would recognize Mr. Sawyer for 5 minutes.
Mr. Sawyer. Thank you, Mr. Chairman.
Let me make a quick observation. We demonize PUHCA and
PURPA and I think perhaps by overstatement rather than intent.
From what I hear, I hear thoughtful people talking about the
importance of carving out elements of PUHCA that today stand in
the way of a transition that is going on across the country.
Many of the protections that we have in law and policy and
precedent and practice have evolved over the last 85 or 100
years to create a system that worked well at the time that it
was working. It was not perfect by any means, but it got us to
where we are today. And today we are on the threshold of a
major national shift because for the first time, we have
reached a point where it can happen, and presumably we have the
technology to make it happen.
So what we are looking for as much as anything is to find
the places to do the kind of surgical carve-outs rather than
trying to repeal lots of things and then trying to reenact the
protections that might have gone with it. I may be wrong about
that, but it seems to me there is an enormous amount of what
has evolved over the last many decades that we want to leave in
Having said that, I just think this has been one of the
most extraordinary panels, Mr. Chairman, that we have had in
the several years that we have been considering this topic.
I would like to return to a topic that many of you have
touched on and many of my colleagues know that I have worked
with for several years, and that is to try to elevate and focus
attention on the pivotal role that transmission systems will
play in making possible the development of regional markets the
way we all envision and hope to achieve.
Mr. Kanner, you mentioned in your testimony that the FERC
should ensure that RTOs have true independence from other
market participants. I would like you to comment on the job
that FERC has done to date in achieving that goal. Are they
falling short of achieving the independence principle that they
laid out in Order 2000, or are they making progress toward
Mr. Lane, you testified that in order to resolve the
bottlenecks in the transmission system, it is important for
RTOs to earn returns sufficient to attract the capital
necessary for new transmission projects. In a disaggregated set
of electricity suppliers and market participants, I worry that
transmission may itself be the most fragile element in
attracting the kind of investment, in competing for money that
it will require to build that interstate highway system that
working regional markets will require so that Mr. Priest
doesn't get isolated in Yazoo City, or any of the other cases
of isolation that I think are likely across the country in a
Those two questions for you two gentlemen. And then if
others would care to add to it, I would appreciate it.
Mr. Kanner. Thank you, Congressman Sawyer, and it is an
important question. As I am sure as you and other members of
the subcommittee are aware, in recent weeks the FERC has sent
some RTO folks back to the drawing board in some cases to look
at the scope of the RTO and other cases to address the level of
independence of the governing board. We are certainly heartened
by that. I think that the new set of Commissioners take
seriously the functions and characteristics laid out in RTO
2000 and are taking the steps to ensure that those are upheld.
Our view is Congress is appropriate in reenforcing that
role in showing, in essence, the political support, but also
the legal clarity so that the good efforts of the Commission
aren't undone by legal challenges. And if I could take a second
to preempt Mr. Lane.
Mr. Sawyer. I am going to run out of time.
Mr. Kanner. We need to have sufficient returns to attract
capital for investment and transmission, but no more.
Mr. Sawyer. Mr. Lane?
Mr. Lane. Well, I do agree with your comments. If you think
about how this industry is being restructured from an investor
perspective is kind of the least sexy part of the industry that
is out there.
Mr. Sawyer. Least sexy and perhaps most pivotal.
Mr. Lane. Yes. And I do not disagree with that as well. And
so the characteristics of transmission by definition will be a
lower-growth type of business. And if you think of the return
that investors have kind of gotten used to in the last 5 years
in particular, the last 9 months notwithstanding, this kind of
slow growth business is difficult to attract capital. We do
think, however, there is a security that can attract capital.
It is going to be yield-orientation to it. It has to have the
ability to have a formulaic element to it so as you build out
necessary additional transmission capacity, that gets
incorporated into that return so that people are comfortable--
these organizations are comfortable that as they spend capital,
they can earn that incremental return on that incremental
Mr. Sokol. I would like to make a quick comment. You
focused on the right area. Generation, given that it is
unregulated at this point, will solve itself. It is a supply
demand issue. Transmission cannot solve itself, and it is one
of the most critical issues out there. And again, it is limited
by a whole number of inconsistent Federal regulatory regimes
and State implementation.
Mr. Svanda. If I may, I would certainly support that theme
and just reemphasize the point that I made earlier. There are
certain issues in interstate transmission that the States
simply cannot get fixed by ourselves. We work carefully. We in
Michigan work carefully with your home State in Ohio and view
this issue in much the same terms and have made those comments
very publicly in the past.
Mr. Sawyer. Thank you for your flexibility, Mr. Chairman.
Mr. Whitfield. At this time, we will recognize Mr. Burr for
Mr. Burr. Mr. Lane, you talked about adequate returns
earlier. What is an adequate return?
Mr. Lane. With respect to transmission I am assuming that
you are referring to, or more broadly based?
Mr. Burr. I would say more broadly based. If you want to
address it with transmissions specifically, I will be happy to
have that one.
Mr. Lane. All of us in this room are investors of some sort
or another. And obviously, there is a risk-reward, risk-return
element to any investment that you make.
So as an example, if you look at the higher growth--higher
growth entities that I referred to earlier in my comments that
have been created, the returns that investors are anticipating
and investing in those types of entities are far higher than a
distribution and transmission company or in some of these other
transmission entities that are going to be formed. In the D and
T world, investor returns have been kind of in the low double-
digit range, and on the power growth companies, they have been
high teens to mid-20's have been the investor expectations.
Mr. Burr. When expectations were of 30 percent return, if
you invested in technology companies, did that alter what
people would look at the industry sector, transmission or any
sector of it, and change their expectations of what it would
require for them to make a decision to pump capital into that
Mr. Lane. No doubt about it. Last year there was a very
significant shift of investor dollars into the generation
players of this industry. Telecom kind of fell out of bed last
Mr. Burr. So the perception was there was not a capitated
return on the generation side; therefore, Wall Street began to
respond to it?
Mr. Lane. I agree with your comment, yeah.
Mr. Burr. Would it be safe to then say that Wall Street is
driven by an unlimited opportunity versus a predetermined fixed
Mr. Lane. I am not sure I understood your question exactly.
Why don't you phrase it one more time.
Mr. Burr. If we said that we guaranteed 11 percent return
for an investment in the transmission, does that attract the
capital that we are going to need to upgrade our transmission
Mr. Lane. It is somewhere in that neighborhood.
Mr. Burr. What if we return to the 1990's of anything with
dot com almost guaranteeing 30 percent. Would we see the
capital flow to the upgrade of our transmission grid?
Mr. Lane. If you guaranteed the 30 percent?
Mr. Burr. No. If they were competing with the 1990 craze.
Mr. Lane. The answer is yes. There is definitely a role in
the markets for a lower-risk, lower-return investment, which is
what transmission represents.
Mr. Burr. Some estimates----
Mr. Lane. Whether it is 11 percent, 12 percent, somewhere
in that neighborhood is what we still need to ferret out with
the investor base.
Mr. Burr. It is driven by what investors are looking for.
If we haven't met their threshold, the capital won't flow?
Mr. Lane. Correct.
Mr. Burr. Mr. Priest, let me ask you a question. Tell me
your definition of market power, would you?
Mr. Priest. Market power is, I guess in the simplest terms,
the ability to increase the price above what it would otherwise
be if people could freely go out and buy when and what they
Mr. Burr. So State of California, are they a market power
Mr. Priest. Well, State of California created a number of
problems. They shot themselves in the foot, as we would say in
the South. But forcing everybody to sell their generation, No.
1, and then buy all the energy they needed either in the hourly
or daily market was destined to disaster. The first time you
had major equipment outages or a pipeline explode going into
southern California, and as soon as those events happened,
there was such a critical shortage that anybody who had some
capacity available could charge anything on the market.
Mr. Burr. California has an unbelievable regulatory scheme
for their deregulation or reregulation or controlled
competition model depending upon what ultimately they ended up
with. They have a tremendous regulatory scheme for it, but yet
people believed that market powers were at play; am I correct?
Mr. Priest. Market powers appeared to have been in play.
Mr. Burr. Could one assume from that that since California
took the consumer out of it, that, in fact, the consumer is the
key to holding any market powers in check--consumers and
Mr. Priest. There is probably several legs on the stool,
and obviously consumers is one of them. Choice is probably one
of them. But having the rules designed for all the participants
to play by is probably another one.
And you know, if the three major IOUs in California had
been able to manage their risks--they were prohibited by law
from managing their risks. They were prohibited by law from
managing their risks, and when they were unable to manage that
risk, that is when it made it possible for people to take
advantage of the conditions in the State.
Mr. Burr. Is it safe to say that in California, the market
was not allowed to be a market?
Mr. Priest. That is probably true. There is probably a lot
of things you could write in a book about what was wrong in
Mr. Burr. Well, the one thing we can rest assured,
California is usually the first. We learn a lot from it, and we
never want to replicate it.
I would yield back, Mr. Chairman.
Mr. Barton. The gentleman's time has expired.
The gentlemen from Maryland Mr. Wynn is recognized for
questions for 5 minutes.
Mr. Wynn. Thank you, Mr. Chairman.
Mr. Kanner raised a couple of interesting propositions, and
I wanted comments from the other panel members to that. He
observed that Congress should preserve the State role in
approving the sale or spin-off of rate-based generation assets.
Is there anyone on the panel that has substantial disagreement
with that proposition?
Mr. Sokol. The proposition that the States should retain--
Mr. Wynn. Retain the role of approving the sale or spin-off
of rate-based generation assets.
Mr. Sokol. I think that is appropriate. One of the comments
I heard Mr. Kanner say was that he thought that FERC should
also have a role in determining this spin-off of State-
regulated assets. I do not----
Mr. Wynn. You are correct. He goes on to say that we should
clarify FERC's authority to review the sale of generation
assets, and I am not sure if those two concepts are in
Mr. Sokol. I would agree that the State should retain that
Mr. Wynn. There is a statement that we should close the
gaps in FERC's merger review authority and strengthen FERC's
merger standard to ensure the market will produce competitive
benefits in a wholesale power market. I would like to get the
reaction of the panel members to that proposition.
Mr. Sokol. I would agree. We do not, in any way, recommend
that mergers that concentrate market power, and they could
inflict negative confidence on consumers, we do not agree that
they should be approved. I would point out that the SEC today,
by the rules under PUHCA, actually in a way forces that problem
to happen where FERC, in fact, would like to cause it not to
happen, and the two bodies are at odds, and changing parts of
PUHCA would, in fact, put them on both the same page.
Mr. Wynn. I take it, then, there is pretty good consensus
that we ought to do that in terms of strengthening FERC's
Mr. Levy. Yes. Being in the middle of a merger, I think
FERC already has that authority. When we were negotiating our
merger, we went through the various regulatory hurdles we were
going to have to address, And one of them was having FERC
approve the transaction for market power and those related
issues. And they have done it, and they have been fairly
thorough in their review.
Mr. Wynn. I ask these questions because we are in an
interesting environment where we are going toward Big
Government and strengthening then FERC's role and the Federal
role. If this is a consensus, that is great, but I would hate
in a few years for people to come back and say, the Federal
Government's role is far too intrusive.
Clear rules and procedures for defining competitive markets
and determining when and under what conditions market-based
rates can be authorized. Now, we have debated this quite a bit
up here. Again, is there a consensus that that is a proper role
for FERC, and that FERC ought to have clearer and stronger
rules for when they move in with market-based rates?
Mr. Levy. You know, I think FERC has the rules. And I think
what FERC is learning, as we are all learning as this industry
deregulates, is how a generator that has only one generator and
a short market could operate that generator in a way that
creates market power. So I think that FERC needs to evolve its
rules as we all learn how the markets work. I believe they have
all the powers they need.
Mr. Wynn. But no objection to market-based rate setting?
Mr. Kanner. Congressman, if I could just amplify
momentarily, I think Mr. Levy and I agree on this. FERC has
that authority and in fact as we speak is in the process of
redefining market rules. What we are suggesting is that
Congress, in essence, affirm that so that it is not subject to
whim, so that the current effort isn't altered or shuttled
aside with a change in commission personnel or a legal
Mr. Wynn. I think that is a very good point. I mean, we
wrangle quite a bit in the kind of public domain about this
issue. We finally kind of got there with some sort of soft
rates regulation, but--or price regulation. But it is good to
see this consensus.
Finally Mr. Kanner, you said that FERC must perform the
needed market monitoring to assure just and reasonable
wholesale rights by identifying any market design flaws, market
manipulation or market power abuse.
When we begin the debate over price caps, FERC came in and
all they would say is, it is a dysfunctional market. Many of
us, on this side of the aisle particularly, were saying, and
what are you going to do about it? And we advocated, you know,
market-based rates; and that did not happen. So my question is,
if we, you know, give them this authority or mandate that they
have this authority to do the monitoring and they in fact find
a dysfunctional market or market manipulation, what would you
have them do? I guess my question is, and then what?
Mr. Kanner. I guess, Congressman, I would resist the effort
to prescribe in statute what steps to take because it is a
dynamic market and you want FERC to be able to respond to the
actual circumstances. In some cases, it might be changing rules
or--for instance, a number of years ago the SEC put in place
price circuit breakers, where they would halt trade in a given
stock if there was a sudden run-up. That might be an
appropriate step. An equivalent step could be taken in
electricity markets. In other cases, it might be defining
different rules in terms of the scope configuration or
authority of an RTO.
But you are exactly right, that we first need to insure
that FERC is gathering and analyzing market data to determine
whether a problem exists.
It was disturbing that the GAO reviewed FERC's analysis of
whether there had been economic withholding in California and
GAO determined that FERC hadn't done a rigorous enough analysis
to make that determination. I am not suggesting that there was,
in fact, mischief or misdeeds in California. It is that we
don't know, and that takes away the consumer and the
participant confidence in the system.
Mr. Wynn. Thank you. And to kind of bring it to a----
Mr. Barton. Yes. The gentleman's time has expired.
Mr. Wynn. If I could have 15 seconds, Mr. Chairman.
Mr. Barton. You can have 15 seconds.
Mr. Wynn. Thank you.
I just want to know, are you then saying that you believe
FERC has adequate authority to address this market manipulation
or market power abuses once they find them? Or do we need to
provide some tools that are optional for them to utilize in
Mr. Kanner. I think that FERC probably has the tools within
its statute, but if we say--if Congress says, FERC, take the
steps necessary to remedy market power, then we have affirmed
that authority and we have given the direction, the confidence
and the--frankly, the political backing to take the steps
Mr. Wynn. Thank you very much.
Thank you, Mr. Chairman.
Mr. Barton. Thank you. We are always impressed by the
gentleman from Maryland. He actually seems to understand the
questions that he is asking, which is----
Mr. Wynn. You are very kind, Mr. Chairman. That is not
necessarily accurate, but you are very kind.
Mr. Barton. The gentleman from Kentucky, Mr. Whitfield, is
recognized for 5 minutes.
Mr. Whitfield. Thank you, Mr. Chairman.
Mr. Sokol, you had mentioned just a few minutes ago when I
think Mr. Sawyer was talking about transmission being one of
the key problem areas as we try to deal with our energy
problems; and you said there were several contradictory laws
that provide obstacles on transmission, solving transmission
problems. Could you just specifically talk a little bit about
which particular laws you are talking about?
Mr. Sokol. Again, I will focus--I think the one that
certainly causes us and many others the greatest issue is the
Public Utility Holding Company Act.
And actually, in response to also Congressman Wynn, I will
give you an example where two utilities were merging. I don't
think any consumer, consumers had any serious issues with them,
nor did industry participants like ourselves, until, because of
PUHCA, they had to demonstrate their interconnection
capability, which FERC did not require but the SEC must require
because of the statute on the books by those two utilities
creating a transmission corridor by contract, by buying up
transmission capacity between each other.
It then created for several of us serious transmission
issues and indirectly enhanced that merger's market power
control because, by having that control of that transmission
system when power is needed in a market, which means by
definition prices are higher because it is short, they get to
transmit power before other market participants do. And this is
a function that both of the primary State regulatory bodies
were opposed to that interconnection but to get the transaction
done because of PURPA's existence had to be in place and
ultimately got approved and went forward.
Second, dollars need to flow into transmission. As I said
before, generation is a commodity. It will happen if the market
signals are there. But if the generation can't get to where it
is needed because of transmission, that is where the real
bottlenecks happen. That is what caused some of the upper
Midwest problems 2 years ago.
Mr. Buffet has made it clear he would intend to invest $10
to $15 billion in rectifying those problems. But we cannot own
more than 4.9 percent of any single asset under PUHCA. So,
again, States that have asked us to come in and invest the
dollars, we are prohibited by Federal law from doing that.
I think the other issue is, without FERC having the clear
authority and open transmission access rights in place, the
State regulatory bodies are conflicted because they don't know
what their neighboring States are necessarily going to do and
how they are going to allow recovery for interconnections in
their State that actually benefit consumers in another State.
So I think there are a number of ways where the consumer is
not benefited by today's inconsistent regulation.
Mr. Whitfield. Thank you.
The times we have discussed the problems in California,
someone always brings up, I think, this pathway 15, which is a
problem. Could some of you elaborate? I mean, is that a
capacity problem or is that a maintenance problem or is it
Mr. Sokol. It is capacity. It is the ability to transmit
An important note I would make, and it is true in our own
system and I know in many other systems, probably GPU has some
as well. You know, we built out the transmission and grid
system in this country pretty much through the early 1970's. We
have been living on that capacity ever since. We now have power
flowing on transmission systems in the opposite direction the
system was designed to have the power flow on. And because of
the 1992 act, which I think made a very important step toward
wholesale open transmission access, very little investment has
taken place since then, though, because none of us really know
what the rules are.
Mr. Whitfield. All right. So we have this capacity problem.
So, obviously, we are going to need to build some new
transmission lines, I am assuming. Now, on natural gas
pipelines there is Federal eminent domain authority, but we
don't have that in the transmission area for electricity. How
many of you feel like there should be Federal eminent domain
authority? Or do all of you feel that way?
Mr. Priest. Well, I think, obviously, there is going to be
some sort of problems. Just for an example, one line that keeps
popping up in the news from time to time is Wisconsin has been
trying to build a line into eastern Minnesota for years, and
they can't get it built because they are dealing with two
different States' regulations on how it is done. So it is going
to have to be some of that. But still the States are going to
have to be involved with that in some way, I think.
One of the biggest problems on getting the transmission
built is having the system where it can be managed once it is
built. There is more than ample reason not to build a lot of
generation. If you have got a lot of generation that you own
and your generation is expensive, then weak transmission links
protect you from the outside world. So there is a strong
economic incentive not to jeopardize your generation
investments. And good, functioning RTOs, properly structured
with the rights to either build or force the construction of
transmission, would solve most of those problems.
Mr. Whitfield. Mr. Chairman, my time has expired.
Mr. Barton. Thank the gentleman.
The gentleman from Oklahoma, Mr. Largent, the vice chairman
of the subcommittee, is recognized for questions for 5 minutes.
Mr. Largent. Thank you, Mr. Chairman.
Once again, we are at another electricity restructuring
hearing, and we hear from our entire panel that we really need
to do something. The Federal Government needs to act on
electricity. The consequences, if we don't, are dire. We hear
voices saying that we can do this. It can be done.
Yet, in expressing a little of my own frustration, I also
understand that those of you at the table and in the room and
around Washington are saying, we need to act. It is bad if we
don't. We can do it.
I am here to make sure that my constituency gets everything
they want, and essentially killing any possibility that we
really can get this done because not everybody can get
everything they want and us to pass electricity restriction
Mr. Lane, I wanted to ask you, first of all, has the fact
that the Federal Government not acted and yet held the specter
that we are going to do something eventually frozen any
investment in transmission or generation?
Mr. Lane. Well, it certainly has not frozen investment in
generation. In fact, I mentioned this whole new sector of
companies that have developed and have become, frankly, quite
large in terms of size that are very active in the development
of generation that don't have these PUHCA restrictions. So, in
many respects, PUHCA does create kind of an uneven playing
field, because some have the restrictions, some don't.
With respect to transmission, though, there has been a host
of issues, not just the return element but also just
environmental issues and the kind of State-by-State approval
processes that have caused a lack of investment in
transmission. But certainly there has been just overall
uncertainty with respect to how that is going to get resolved.
That has created a lack of investor enthusiasm in what we refer
to as D&T companies, the distribution and transmission
companies. You have seen their stock struggle in the last
several years and their PE ratios, the evaluation metrics that
investors use to value stocks at the very low end of the
Mr. Largent. Thank you, Mr. Lane. That is a good segue into
my next question and what I consider--you know, everybody here
is also in agreement that the real issue is transmission and
what do we do on transmission. And I view transmission in this
battle to find an answer, a solution, from the Federal
Government as kind of the Little Ram Top or Normandy or Pork
Chop Hill or Tripoli of the entire electric restructuring bill
that we are dealing with. And, to me, we all agree that we need
The other problem that we have currently, particularly in
the wholesale sale area of transmission, is we have to define
and clear up the rules of the road because that is really
creating a lot of the complications, especially in light of the
Northern State Power decision by the courts.
So, my question and, really, the frustration and issue that
I would like to put out there--I mean, how do we clearly define
the rules of the road as it relates to bundled and unbundled
sales? Because electricity doesn't discriminate whether it is a
bundled or unbundled sale. Once it is--you know, the physics of
it just don't--you can't discriminate what is bundled and
unbundled. How do we do that, define, have clear rules of the
road of bundled and unbundled sales without giving FERC
additional authority? How do we do that?
I would ask that question to any of the panelists.
Mr. Sokol. Congressman, first of all, I agree with many of
your comments; and transmission is where the dollars are going
to be needed most and are lacking most. I think there is
consensus on the bulk of these issues. I don't mean to in any
way unfairly burden the committee, but I think what the
committee needs to do is move industry restructuring forward,
first of all, in a real fashion and force all the participants
at the table to say what they have been saying. Because we
don't actually have substantive disagreement with 90 percent of
what is being said at this table from my standpoint and I think
our industry's standpoint. But somebody needs to force us into
the mode because we do have divergent, if you will, clients,
and we need to be forced to actually put our real issues on the
table. So I think that is one.
The second issue is I think FERC largely does have that
authority if it has the full direction to enforce it, implement
it, monitor it and police it. But today that enforcement is
largely shared with the SEC in a, frankly, very I think
inconsistent way; and it needs to be more clarified. I think
FERC needs more clarification than they do guidelines to a
large extent because they have got the powers under the Federal
Mr. Largent. Okay.
Mr. Levy. I agree that FERC has sufficient powers to
control their jurisdictional areas, but there are many areas
that fall outside of FERC control, mostly the federally owned
municipal and cooperatively owned transmission companies; and I
think there will need to be, if we want to make this a seamless
blanket across the country, an expansion of FERC authority or
at least, I guess, a parallel level of rules that would apply
to Federal muni and co-op transmission companies to make sure
that the rules are the same for all players.
Mr. Largent. Okay. Well, let me just say I want to go to
Mr. Svanda because I want to get your response to this issue.
But also say that I don't think FERC's authority is sufficient,
and I think the Northern States Power decision definitely
complicated the issue of FERC authority. It didn't define it or
clear it up. It made it more complicated and less sure.
Mr. Svanda, I want to ask you about FERC authority over
transmission but also see if you would respond to Mr.
Whitfield's question about FERC citing authority and where you
come down on that.
Mr. Svanda. Sure. On the last issue first, I--and I may not
be joined by a lot of my NARUC brethren, but I would support
the concept of eminent domain at the national level. And I say
that just not to beat the dead horse that I have said a few
times in the course of this hearing, but there are issues that
simply, in interstate transmission, that the State simply
cannot get solved by ourselves. And that is a way to get to the
solution. It has worked well in pipeline siting; and we would
ask from the State level--I would ask, again, because this is
not a NARUC position but it comes with me with my commissioner
hat on, that we have a role in that process, that deference be
paid to what the States have accumulated by way of knowledge on
siting issues, that any eminent domain powers be used in a way
that is sensitive to the issues that I think only the States
But, with that said, we need ways to also get the job done
and just get on with it.
On the issue of transmission, well, if you could give me
the first question again, please.
Mr. Largent. Well, I see my time has expired. If he just
would respond to the question. It is, basically, how do we
clear up the rules of the road without giving FERC more
authority than it currently has?
Mr. Svanda. Okay. When you initially asked the question I
was not even going to respond, because I am not certain that it
can be done without giving some additional authority to FERC.
When the other respondents started to add on in the direction
of maybe we do need some additional authority there, then I got
comfortable and raised my hand.
I did indicate in my earlier comments again that there are
decisions that get made, however, at the national level that
can kill some State efforts in moving to a restructured
And you are out of time, so I am out of time. I do have a
real specific Michigan example in that regard that I would be
happy to share at a later time.
Mr. Largent. Yield back, Mr. Chairman.
Mr. Barton. The gentleman yields back the balance of his
The Chair would--Mr. Luther, wish to ask questions?
Mr. Luther. No.
Mr. Barton. Mr. Stearns, a member of the full committee and
a distinguished subcommittee chairman who has a number of bills
on this issue, is not a member of the subcommittee but is
recognized for 5 minutes for questions.
Mr. Stearns. Thank you, Mr. Chairman. I appreciate your
courtesy. Although I am not a member in the 107th Congress of
this subcommittee, I was in the 106th; and I wanted to
encourage you, too, on these hearings. I think you are doing a
terrific job. I think you have been told that.
But my point in coming down here is to talk a little bit
about PURPA. As you know, Mr. Chairman, I have a bill which is
H.R. 381. I have offered this same bill in the 104th, 5th, 6th
and 7th Congress. You had my entire language made a part of
your bill in the 106th Congress, and I think that was
excellent. So I am down here to perhaps ask a question to Mr.
It indicates, some of the information we have, that the
cost of PURPA is costing electricity consumers about $8 billion
a year in excess power costs; and the Resources Data
International, RDI, places the above-market cost of purchase
power contracts, most of which are PURPA obligations, at about
$50 billion since PURPA has passed legislatively. So the
argument is that, if it has cost electricity consumers $8
billion a year in excess power costs and, in fact, the Utility
Data Institute found that PURPA was the single largest factor
in explaining the regional disparity in electric prices, thus
the facts are clear that PURPA has harmed and continues to harm
consumers with excess costs. So, Mr. Levy, we have heard
arguments that PURPA should not occur in the absence of a
I believe Mr. Morris earlier mentioned that a competitive
market is not yet realized and during the consideration of the
California emergency bill QF supported a proposal to not only
sell into the market for nonpayment but also to sell any excess
power they may produce. In your opinion, does this indicate a
sufficient wholesale market for QFs to sell their power?
Mr. Levy. There is no doubt that in every market that is
currently competitive QFs could sell their power into the
market without limit. California was an example where we
actually saw QFs trying to get out of their existing contracts
so they can sell into the free market. But I know of no market
where a--because of the 1992 Energy Policy Act, which created
the opportunity for generators to sell to the market, I know of
no market where a QF needs the protections of PURPA anymore to
sell into the market.
Mr. Stearns. So, in fact, it is an impediment to the
competitive market. And does it make sense to condition repeal
of a Federal mandate which impedes a competitive market only
upon the realization of this competitive market at a later
Mr. Levy. Well, I believe the--again, there is the line you
draw between previous obligations that were entered into prior
to the market developing and new obligations. There is no
reason to have PURPA around anymore, probably hasn't been for
many years. So we certainly believe it is appropriate to repeal
the mandatory purchase obligations of PURPA prospectively.
Mr. Stearns. Mr. Morris, I mentioned your name. You are
welcome to provide any comments that you like.
Mr. Morris. On that particular item I don't have any
specific comments at this time, Congressman.
Mr. Stearns. Okay. Now, Mr. Chairman, I think my point in
being offered the opportunity to speak is just to indicate,
which I am sure you will agree with, is the idea of the
immediate repeal of PURPA is necessary, and I hope that the
subcommittee will continue.
Thank you very much, Mr. Chairman; and I yield back the
balance of my time.
Mr. Barton. Thank you. The ranking member says we are not--
he hopes I don't agree too quickly to that. There may be some
constraints, but, in general, I am very much where the
gentleman from Florida is.
Okay, does Mr. Walden wish to ask questions of this panel?
Mr. Walden. No, Mr. Chairman. Not at this time.
Mr. Barton. Seeing no other member present, we want to
thank you, gentlemen. We may have written questions for the
record. If we do, we hope you reply quickly.
We are going to be drafting a bill in the next 2 to 3
weeks, and we are going to circulate that bill for discussion
in early September. We hope to finish our other hearings and
begin to mark the bill up in late September or early October.
So thank you for your commentary, and we look forward to
working with you.
We would like to have our next panel come forward as soon
as the first panel vacates the table.
Mr. Luther, I was correct that you did not want to ask
questions, is that correct? My staff thought I skipped you.
We want to welcome our second panel. We have Mr. Mark Hall,
who is the Vice President of External Affairs for Trigen Energy
Corporation. We have Mr. Richard Brent, the Director of
Government Affairs for Solar Turbines, who is here on behalf of
the Distributed Power Coalition of America. We have Mr. Marc
Yacker, who is Director of Government and Public Affairs for
Electricity Consumers Resource Council. We have Ms. Kathleen
Magruder, who is the Vice President of Law and Government
Affairs for New Power Company. And we have Mr. Thomas Starrs,
who is with Kelso Starrs and Associates.
Welcome, gentlemen and lady. Your statements are in the
We are going to start with Mr. Hall. We recognize you for 6
minutes to elaborate on it.
STATEMENTS OF MARK HALL, VICE PRESIDENT OF EXTERNAL AFFAIRS,
TRIGEN ENERGY CORPORATION; RICHARD BRENT, DIRECTOR OF
GOVERNMENT AFFAIRS, SOLAR TURBINES INCORPORATED; MARC YACKER,
DIRECTOR OF GOVERNMENT AND PUBLIC AFFAIRS, ELECTRICITY CONSUMER
RESOURCE COUNCIL; KATHLEEN E. MAGRUDER, VICE PRESIDENT OF LAW
AND GOVERNMENT AFFAIRS, NEW POWER COMPANY; AND THOMAS J.
STARRS, KELSO STARRS AND ASSOCIATES, L.L.C.
Mr. Hall. Thank you, Mr. Chairman. It is a pleasure to be
My name is Mark Hall with Trigen Energy Corporation based
in White Plains, New York. If New York City is a small village
north of here, then White Plains is a remote outpost. Certainly
appreciate your comments and your opening statement in support
of the notion that uniform interconnection standards will be
included in a markup to be coming forward.
Trigen is an owner, operator and developer of combined
heat, power and distribute generation projects across the
country. We have operations in 22 States.
And to the point that Chairman Tauzin raised in his
remarks, I think our company is emblematic, as is many of the
others at this table today, of this notion that we have moved
away from a time when we had the new light plant of the
chairman's grandfather to a time where we need to be moving
forward with innovative technology, where we need to be pushing
new technologies into the market place. And this hearing and
its focus on the need to address barriers that exist to
competitive supply of energy very much and rightly so focuses
on the issues of moving and the problems of moving modern
innovative technology into the marketplace.
It is for that reason that we are pleased to support H.R.
1945, which establishes uniform interconnection standards at
both the distribution and the transmission levels. This bill, I
think, very much represents a consensus position that you heard
reflected on the first panel this morning that it strikes a
balance between the need for uniform technical standards but
that rightly allows the States to implement those standards,
that allows them to determine the most appropriate way to
insure that those standards are implemented.
Also, the bill, H.R. 1945, includes the provision of back-
up power at just and reasonable rates for all facilities, not
just facilities that may be QFs or small power production
facilities under PURPA currently, but all facilities that might
participate in a market, to allow that marketplace to be more
competitive and to allow everyone to participate, and to the
extent that the back-up power provisions in H.R. 1945, along
with the interconnection provisions were adopted.
One of the very important elements that people are trying
to protect in PURPA would be addressed in another fashion, thus
taking a lot of the pressure off the concerns over the
prospective repeal of the must-sell provision of PURPA, which
many of us are concerned with in the smaller power development
community is the current obligation for utilities to sell back-
up power in some cases, back-up power that they don't even
So as we move into these emerging and changing markets it
is a bit complicated, and we need to think about modernizing
our energy regulations to fit and work in concert with more
modern energy technologies that can move into that marketplace.
I would also just like to note in my testimony, address a
number of other barriers that exist to competitive supply.
There have been several bills that include, and I believe that
H.R. 4 that was mentioned this morning also includes the sort
of the full characterization of those barriers and insuring
that agencies on an ongoing basis look at those barriers to the
deployment of technologies such as the technologies that we use
in our projects. We strongly encourage that kind of ongoing
assessment of barriers and systematic addressment of those
Thank you for having me here this morning.
[The prepared statement of Mark Hall follows:]
Prepared Statement of Mark Hall, VP, External Affairs, Trigen Energy
Mr. Chairman and members of the Committee, thank you for allowing
me to testify before you today on barriers to competitive generation
and in particular in support of this committees desire to address
legislative proposals to remove barriers to combined heat and power
(CHP) and other forms of distributed generation (DG). My name is Mark
Hall, and I am the Vice President of External Affairs for Trigen Energy
Corporation, based in White Plains, NY. Trigen owns and operates some
of the most efficient power plants in the world. We accomplish this by
deploying CHP, DG and leveraging other modern technologies in
Trigen currently owns, operates or otherwise manages fifty-one
plants located in twenty-two states, and the District of Columbia.
Trigen is the proud recipient of many prestigious awards recognizing
our innovation, leadership in the energy industry and commitment to
environmental protection. This includes two awards from U.S agencies:
the Energy Star Award from the U.S. EPA in recognition of our
leadership in CHP projects and the Climate Protection Award from the
U.S. EPA for corporate leadership in reducing greenhouse gas emissions.
But more important than awards recognizing our environmental
stewardship is the fact that we would not be selected to design, build
own or operate on-site CHP projects for our customers if we were not
able to provide substantial economic and reliability benefits in
addition to outstanding environmental performance.
The nearby University of Maryland College Park is an excellent
example. Trigen and a partner were selected by the University to build
and operate a new state-of-the-art CHP facility for the campus as well
as to manage the on-site utilities while working with the campus staff
to improve overall efficiency. The project is expected to save the
University of Maryland system $6 million dollars per year while
reducing regional nitrogen-oxide emissions by 9,800 tons per year and
carbon dioxide emissions by 3.5 million tons over the 20 year life of
the contract. We were the recipient of the 1999 Project Award from the
National Council for Public-Private Partnerships because of our ability
leverage technology in ways that were both economically and
environmentally beneficial to all parties.
Despite these economic and environmental benefits, there are a
variety of institutional and regulatory barriers that prevent CHP from
achieving its full competitive potential. These barriers
inappropriately reduce the economic viability of CHP projects, slow
their development and implementation and in some cases simply make them
impossible to complete. H.R. 1945 is an attempt to remove the
interconnection and backup power barriers and allow Trigen and other
companies to increase the beneficial application of CHP. Although H.R.
1945, introduced by Rep. Jack Quinn and with an additional 13
cosponsors covers some of the issues, there are additional factors that
must be addressed to fully remove the barriers.
Mr. Chairman, Trigen's plants and employees are at work every day
showing how efficient energy production is both good for business and
good for the environment. By removing the barriers to utilizing CHP and
other highly efficient DG, Congress can reward investors, benefit
consumers, strengthen our economy and clean up our air.
The issues you have asked this panel to address are of critical
importance to all of us. Energy sector competition is already upon us,
with the States leading the way. The Federal government must rise to
the task of addressing the barriers to competition that inherently lend
themselves to national legislation, matters that cannot be responsibly
dealt with in a piecemeal, State-by-State manner.
H.R. 1945 is the result of many months of thoughtful work that
reflects the benefit of numerous parties working together to arrive at
consensus language that addresses the need for a uniform nationwide
interconnect standard. H.R. 1945 marks a critical step in efforts to
improve the environment and electricity markets by encouraging the
deployment of CHP and other DG. I would like to point out that S. 933
is the Senate companion bill to H.R. 1945. The only difference between
the two is that H.R. 1945 includes a provision addressing tax
depreciation that does not exist in S. 933. Trigen offers its full
support of both.
In addition to addressing why there is a critical need for uniform
nationwide interconnection standards, I would also like to highlight
four other issues that must be addressed if we want to remove the most
formidable barriers to deploying CHP and other highly efficient DG
technologies. They are: Backup power as related to PURPA repeal,
clarifying tax depreciation schedules, rethinking new source review and
establishing output-based standards. First, I will address interconnect
standards and the immediate need for H.R. 1945.
The National Energy Policy proposal recently released by the White
House, like similar proposals of the last Administration, recognizes
the economic and environmental benefits of CHP and other highly
efficient DG systems. One formidable barrier to taking advantage of
those benefits is the lack of uniform nationwide interconnection
The current process for determining the appropriate technical
requirements for the interconnection of new energy projects with the
distribution or transmission system is often unnecessarily lengthy and
expensive and the specific requirements can vary arbitrarily from state
to state, utility to utility, site to site. Incumbent utilities that
may not want to face competition may attempt to cloak anticompetitive
behavior in the guise of technical disagreement over interconnection.
We recognize that it is essential for interconnections to be safe and
reliable, but interconnection standards can be both safe and reliable,
and uniform. Bringing uniformity to interconnection through a uniform
nationwide technical standard will reduce uncertainty, lower costs, and
facilitate deployment of modern CHP technology, across the country.
Interconnection language must be sufficiently broad to help all
generators connect to the distribution and/or transmission grids. H.R.
1945 provides for interconnections at both levels. The language does
not pick winners and losers, but maximizes flexibility for determining
whether the facility is connected to the transmission grid or the
distribution grid. In addition, it is important that the language does
not unnecessarily infringe upon States' rights to manage their
respective distribution grids. The benefits of uniformity require that
the standards apply to all states.
I think it is important to give you an example of the
interconnection problem. Trigen has a great deal of experience
interconnecting various sized generators with the distribution and
transmission grid. We have done it literally dozens of times.
Technically, it is a pretty straightforward task but in practice it can
be a slow painful process that raises costs and delays projects that
otherwise could be delivering important economic and environmental
benefits. In 1998, Trigen approached a utility to request
interconnection for a 703 kW generator to be installed in a downtown
office building. The small system would supply the building's electric
load and air conditioning. Yet, two years later, we were still
negotiating 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 a significant
additional cost. 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. It took over two years to resolve this
issue. The barrier related costs of completion were over $ 88,000.
One would strongly suspect that this was anti-competitive behavior
masquerading as technical disagreement which successfully prevented the
unit from operating for two years. This is but one of countless
examples. In fact, DOE published a report in May of 2000 entitled
Making Connections that memorialized this example and numerous others
from across the country. H.R. 1945 will address many of the
interconnection barriers highlighted in that report. Passage of H.R.
1945 will help manufacturers of CHP and DG technology achieve a plug
and play economy of scale, lower costs and encourage investment in CHP
and DG technology.
THE SHORTCOMINGS OF H.R. 1045 REGARDING INTERCONNECT
Like H.R. 1945 and S. 933, H.R. 1045 recognizes the need for a
uniform interconnect standard. However, H.R. 1045 falls short of
addressing the entire scope of that need. H.R. 1045 calls only for a
standard for interconnect to the distribution grid. Failure to address
transmission interconnect would result in an enormous lost opportunity
to ensure all the same benefits H.R. 1045 seeks to achieve at the
distribution level. Addressing only distribution would create winners
and losers by giving utilities the ability to game the system by
reclassifying distribution as transmission, thereby avoiding the
uniform standards requirement. Providing standards for distribution
only would also result in inefficient choices in that generators may
opt for distribution interconnection only because uniform standards are
available. Stream-lining interconnect at the transmission level will be
one more encouragement to investing in larger scale DG like on-site CHP
plants whose efficiencies can bring immediate large scale reductions in
fuel consumption and emissions.
In addition, H.R. 1045 does not include a provision addressing the
right to back-up power at just and reasonable rates. Most CHP and DG
assets require back-up power as insurance to the DG/CHP customer that
they will have electricity in the event the DG/CHP asset has scheduled
or unscheduled down time. Without a guaranty of affordable back-up
power many DG/CHP projects will never get off the ground. I will
address this issue in more detail below.
Finally, H.R. 1045 includes limiting language that the DG asset
must be designed to serve ``retail electric customers at or near the
point of consumption''. H.R. 1945 does not include any such limitation.
If we want to encourage the deployment of highly efficient CHP and DG
assets we should not place any limitation on what customers are served
or where it can be located in order to take advantage of uniformity.
This provision would limit competition to a small range of DG assets to
the exclusion of many others. This is the very problem Congress should
be seeking to eliminate.
CONCERNS REGARDING H.R. 2460, THE ``COMPREHENSIVE ENERGY RESEARCH AND
In H.R. 2460, a bill passed by the House Science Committee last
week, a provision on interconnection standards for distribution was
added during the mark up. This language raises concerns in that it has
not been studied or analyzed by most in the distributed power and CHP
community. In addition, the amendment does not address transmission
BACKUP POWER AND THE PROSPECTIVE REPEAL OF PURPA'S ``MUST-SELL''
Hand-in-glove with the issue of interconnection standards is the
availability of reasonably-priced back-up power. Historically, back-up
power was guaranteed at just and reasonable rates to facilities that
met either the Qualifying Facility or Small Power Production Facility
definitions under PURPA. However, as technology and markets have
evolved, the need for back-up power at rates that are just, reasonable
and not unduly discriminatory is important to a wide-range of projects
that might not meet these historic definitions, regardless of whether
the project is interconnected to the transmission or distribution grid.
H.R. 1945 remains respectful of state authority by allowing States to
determine the just and reasonable rate for back-up power at the
distribution level. The Bill also ensures that until there are open
markets where a facility can competitively purchase backup power, the
local utility must provide such backup power at nondiscriminatory
CHP and other DG systems rely on the ability to purchase backup
power from the grid in the event that they temporarily fail to operate
or must shut down for maintenance. Under current PURPA laws the local
utility ``must sell'' backup power to qualified stand alone CHP
facilities. Many proposed restructuring bills would repeal both the
``must buy'' and the ``must sell'' requirements of Section 210 of
PURPA. The ``Right to Back-up Power'' provision of H.R. 1945 is a
safety measure that will ensure back-up power at just and reasonable
rates if the ``must sell'' provision of PURPA is repealed and there is
no open access to purchase of electricity in a given state. Elimination
of PURPA's ``must sell'' requirement without the protection of the
right to back-up power will leave new entrants and existing DG at the
mercy of the local utility, subject to discriminatory pricing or
outright denial of back-up power.
TAX DEPRECIATION SCHEDULES
The current tax code, based on a somewhat obsolete view of the
energy industry, currently does not allow depreciation of CHP and DG
technologies in ways that reflect those assets' physical and economic
lives. This inappropriate treatment can discourage investments in CHP
and DG technology. 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 while the same gas turbine 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 five 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.
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.
Congress should direct the Internal Revenue Service (IRS) to set a
depreciation schedule of seven (7) years for industrial and utility
facilities and ten (10) years on Building CHP (BCHP) assets, which
reflects the true technical and economic life of most systems. I have
attached to this testimony recommended modifications to the Internal
Revenue Code from the US Combined Heat and Power Association
(Attachment A). Trigen is a member of the USCHPA and supports all of
NEW SOURCE REVIEW
The new source permitting program known as New Source Review (NSR)
was developed over 20 years ago to reduce air pollutant emissions. At
the time the focus was on reducing smokestack emissions and NSR focuses
primarily on requirements for end-of-pipe, add-on control technologies.
Add-on controls reduce emissions but add cost and reduce efficiency.
Over the last 20 years, we have learned that a much better approach
to pollution control is to avoid entirely the generation of pollution
through lower emitting processes and reduce their impact through
increased efficiency. Pollution prevention (P2) and increased
efficiency reduce emissions while also reducing capital and operating
costs. They result in processes that are cleaner and cheaper with lower
demand on all natural resources. This is clearly the direction that we
need to move in order to achieve a vital economy and a healthy
environment and CHP is perhaps the best example of this opportunity.
Unfortunately, NSR does not give any credit for efficiency and
gives little or no credit for pollution prevention. It is constantly
driving projects away from these positive approaches and back to the
old sidetrack of add-on controls. It discourages the application of
existing P2 technologies and the development of new technologies. U.S.
companies have learned that they should not invest in the development
of cleaner and higher efficiency technologies because they will not be
able to permit them. This is a multidimensional loss to the U.S.
economy. In contrast, our foreign competitors have made great strides
in these areas, which are reflected in their high efficiency use of
As an example, several of our recent projects have been based on a
particular small gas turbine generator. As an electric generator only,
the turbine is less than 30 percent efficient. However, our CHP
applications using that same piece of equipment are anywhere from 80 to
over 90 percent efficient. Put another way, we provide more than three
times as much energy to the customer from the system for the same
amount of emissions and energy input.
It is only common sense that our regulatory system should recognize
this energy and environmental benefit. But it doesn't. In the eyes of
NSR, there is no difference between the two systems. Since NSR is a
cost-based system, it is requiring us to duplicate capital investment
to use add-on controls where we have already provided a reduction
through efficiency. In many cases, the project ``won't pencil'' if we
have to pay twice, and a beneficial project is cancelled.
This fundamental flaw of NSR is only one of several ways in which
the regulation has outlived its usefulness. The program relies on a
variety of highly technical standards to determine which new or
existing units will be required to apply emission controls. Over the
years, these standards have become more and more arcane and
contentious. The very high cost and uncertainty involved in the
application of NSR to both new and existing units has created a huge
disincentive for operators to maintain and improve the performance of
these units. By holding out for the maximum possible improvement at all
times, the program has discouraged even the normal improvement that
should happen without regulation. By excluding the effects of pollution
prevention and efficiency, it has excluded the best possible solutions
from consideration and left us with proliferating lawsuits as the only
Because CHP, by definition, produces two types of energy output
(steam & electricity) from one fuel input, its treatment under NSR is
especially difficult. The system sometimes tries to force us to combine
our facilities with those of our clients in ways that are commercially
impossible. In other cases it deprives us of credit for emission
reductions that are legally verifiable and creditable.
Output-based regulation, which relates the emissions to the useful
energy produced is another regulatory concept that would help to
address these problems. There has been growing acceptance of this
approach as a way to send the proper signals through environmental
regulation. Unfortunately, it seems to be difficult to integrate this
approach into the structure of NSR.
We have been working with the EPA for more than three years to find
appropriate ways to achieve the universally recognized benefits of CHP
within the NSR structure. I am sorry to report that our progress to
date has been limited. In large part this is due to the fundamental
structure of the program. In the end, we are forced to conclude that,
at least for the generation of heat and power, the NSR program is a
grandfathered regulation that has outlived its usefulness and needs to
be replaced with a more modern and efficient regulatory structure. We
believe that a properly designed cap and trade program that provides
guaranteed emission reductions over the entire sector would provide
better environmental results and encourage new, more efficient
technology. I have attached a copy of a multi-pollutant strategy
(Attachment B) that Trigen and four other energy companies have
developed as a substitute for NSR as it applies to heat and power
Currently, efficiency is measured by an input-based standard that
measures fuel consumption as opposed to energy output. Under this
approach, the efficiency of CHP is not recognized. By way of example,
for every one unit of fuel consumed by a CHP plant two units of energy
are produced steam and electricity. CHP is twice to three times more
efficient than a typical central generation plant that only produces
one unit of energy for every one unit of fuel consumed because it is
not capturing the heat off the combustion process.
The establishment of output-based standards would allow facilities
to count their fuel to end use energy efficiency toward their
environmental compliance requirements. Output-based standards encourage
efficient and inherently cleaner plants. Trigen has been an active
participant in numerous venues established to develop output-based
standards. Trigen seeks establishment of progressive regulations that
replace BACT and LAER with a cap and trade program coupled with a
universal allowance allocation of pounds of pollution per megawatt hour
of electricity produced and pounds per megawatt hour of thermal energy
encouraging competitive generation through investment tax credits
Tax credits are typically offered by the Federal government to
obtain public benefits by prompting private parties to make capital
investments that they would not so readily make otherwise or to
overcome other short-term barriers to otherwise feasible activities. As
such, an investment tax credit (ITC) 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
H.R. 2511-Section 113 proposes to amend the IRC to provide a tax
credit for CHP property. While the general proposition is laudable, the
language of Section 113 has two significant shortcomings and one that
defeats the purpose of offering a tax credit from the outset. The first
is it limits the eligible equipment to those with an electrical
capacity of more than 50 kW. We applaud requirements for output
efficiency but see no reasonable explanation for limiting the size of
eligible equipment. Second, it fails to offer any credit for the
equipment used to deliver energy output of CHP systems. In the case of
district energy systems, the steam distribution pipes are one of the
most capital intensive parts of the overall investment. Third, and most
importantly, Section 113 extends the tax credit only to companies that
use a ``normalized method of accounting''. This requirement would mean
that Trigen would not be eligible to use these tax credits in fifty of
our fifty-two plants. A ``normalized method of accounting'' is the
method of accounting used by regulated power plants, very few of which
utilize CHP and DG. This accounting limitation defeats the purpose for
offering the tax credit in the first place. The very companies who will
deploy CHP and DG assets are precluded from taking advantage of this
Congress should direct the IRS to provide a ten (10) percent ITC
for new thermal energy distribution systems at district energy CHP
facilities. I have attached to this testimony recommended modifications
to the Internal Revenue Code from the US Combined Heat and Power
Association (Attachment A). Trigen supports all of its recommendations.
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 committee to
pass H.R. 1945 and to take a proactive stance on addressing the other
concerns I have raised here today. I thank the subcommittee for the
opportunity to appear before you. Thank you, Mr. Chairman.
us combined heat and power association
Memo Committee on Ways & Means--Dated July 5, 2001
U.S. Combined Heat and Power Association
July 5, 2001
The Honorable William M. Thomas
Committee on Ways & Means
U.S. House of Representatives
Washington, DC 20515
Dear Mr. Chairman: I am writing on behalf of the U.S. Combined Heat
and Power Association (USCHPA) to express support for the inclusion of
tax credits and shortened depreciation for combined heat and power
(CHP) systems in the energy tax incentive legislation now under
development by the Ways and Means Committee.
A wide range of interests has identified CHP as an important
component in the United States energy future. By using an integrated
system to meet heating, cooling and power needs, CHP can achieve much
greater efficiencies and lower pollution than can be achieved with
conventional, separate systems. The Bush administration has singled out
CHP as an important efficiency technology in the National Energy Policy
Report. The American Chemistry Council provided comments to the
Committee on June 19, 2001 supporting CHP. The American Council for an
Energy-Efficient Economy, working in concert with other public interest
groups, has identified CHP as an important energy efficiency strategy.
The members of USCHPA have worked for many years on programs and
policies to promote CHP in industrial facilities, commercial and
residential buildings and district energy systems. We view CHP in these
three market segments as key to achieving the CHP Challenge of doubling
installed capacity by 2010, committed to by both the Department of
Energy and the Environmental Protection Agency, and recently reaffirmed
in the Bush Administration's National Climate Change Technology
Initiative. We have also worked with Congressional offices on the
development of tax proposals for highly efficient CHP, including H.R.
1045 (Wilson), H.R. 1945 (Quinn), and H.R. 2108 (Matsui). These bills
all seek the same goal of encouraging clean and efficient CHP, but each
takes different approaches. We have received requests for our
association to address these differences. We hope that this response
will be helpful as the Committee prepares to take up an energy tax
We recommend that tax policies for new CHP include the following
1. Allow a seven (7) year tax depreciation schedule for industrial and
utility CHP assets. The current depreciation schedules of between
ten and twenty-years for energy assets do not fairly reflect the
useful life of most modern CHP technologies. A seven-year schedule
is more realistic. We expect that CHP generating assets 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. This is an entirely different
situation from the regulated monopoly environment in which
economically non-competitive, but physically sound plants remain in
service for decades with no improved efficiency.
2. Allow a ten (10) year depreciation on Building CHP (BCHP) assets.
These assets are currently depreciated at 27\1/2\ years for
residential property and 39 years for commercial buildings. The
energy needs in buildings are rapidly changing as the market and
technology evolves. Modern BCHP systems integrate power, heating
and cooling using equipment for greater efficiency and reduced
costs. These technologies are rapidly evolving, and advances are
likely to make equipment obsolete before it is depreciated under
current schedules, discouraging its replacement with cleaner and
more efficient, advanced systems.
3. Provide a ten (10) percent investment tax credit (ITC) for CHP
thermal energy distribution property, which we recommend be
excluded from the shortened depreciation treatment above. This
thermal energy distribution infrastructure is an important element
in district energy systems, which supply heating and cooling for
buildings and industry. District energy systems, with an estimated
year 2010 potential of 19 Giga-Watts of CHP, are critical to
achieving the goal of doubling CHP by 2010. The proposed thermal
energy distribution investment tax credit, combined with adjustment
of depreciation lives for CHP production equipment in #1 and #2
above, encourage the implementation and expansion of CHP in
district energy systems.
4. Provide that the ITC noted in #3 above be assignable. Governments or
non-profit entities such as universities, schools and hospitals
that would not benefit from the revised tax treatment own many
district energy systems. By making the credit assignable, the
credit could be transferred to an entity that could make use of the
benefit, thus allowing the project to receive the incentive.
5. That the Federal income tax laws be amended to require that only
``Qualified CHP Assets'' are eligible to take advantage of the
depreciation schedules noted in #1 and #2 above, and ITCs noted in
#3 above. For tax purposes the term ``Qualified CHP Assets''
(QCHPA) should include equipment and related facilities used to
produce usable energy products through CHP, excluding assets used
to transport fuel to the generating facility. QCHPA should include
all equipment necessary to generate and deliver usable energy
products through CHP, including, but not limited to, prime movers
such as engines and turbines, boilers, air and water filtration,
pollution- and noise-control, pumps, steam delivery pipes and
electrical switchgear. To further define criteria to be a QCHPA,
the association proposes the following restrictions:
The term ``qualified CHP asset'' refers to applications of
technologies that achieve an average annual fuel-conversion efficiency
meeting or exceeding the following levels:
For systems with a total usable energy output of less than 1
MW per hour of power output, an efficiency of 60%,
For systems with a total used power output of 1 MW, but less
than 50 MW, an efficiency of 63%, and
For systems with a total used power output of 50 MW or
greater, an efficiency of 66%.
In addition, ``qualified CHP asset'' must meet the following
Sum of all used thermal energy products must constitute at
least 20 percent of the technology's total usable energy
Sum of all used power must constitute at least 20 percent of
the technology's total usable energy output,
The term ``used power'' refers to electric or mechanical
energy generated by a technology that is used to do work. These
energy forms include, but are not limited to, electricity,
shaft power, and compressed air.
The term used thermal products refers to any media generated
by a technology that transports energy in the form of a
difference between its temperature and that of the surrounds in
a useful manner. Thermal energy media include, but are not
limited to, hot gases, steam, hot water, chilled water, and
However, in the following special cases, systems do not need to
meet the minimum, fuel-conversion efficiency requirement above:
Retroflt technologies that generate electricity using back-
pressure steam turbines in place of existing pressure-reducing
Technologies that recover waste heat from industrial process.
In the event that the cost to the Treasury of these proposed
measures exceeds acceptable levels, we recommend restricting the
maximum size of the CHP systems that would qualify for this tax
treatment rather than modifying other provisions.
Thank you for your attention to these views.
R. Neal Elliott, Ph.D., P.E.
Chair, USCHPA Policy Committee
cc: The Hon. Charles B. Rangel
The Hon. Jim McCrery
The Hon. Michael McNulty
clean power group multi-emission control strategy materials
Clean Power Group's Multi-Pollutant Emission Control Strategy
The power generation sector is a major contributor to U.S. air
pollution. This situation has persisted for many years despite
regulatory efforts to address it. Although older plants contribute most
of the emissions, attempts to remedy the problem by regulating them
have created increasing legal problems and contention between industry
and regulators with relatively little environmental benefit. The
uncertainty created by this situation has made it difficult for power
generators to make rational business decisions about future investments
in both old and new power equipment. The existing regulatory program
encourages traditional add-on controls rather than new plants,
efficiency and pollution prevention approaches that are more desirable.
Neither does it encourage renewables or conservation.
The combination of the shortcomings of current regulatory programs,
the need for certainty, and knowledge of upcoming requirements for
mercury and CO2 reductions have resulted in agreement
between industry, regulators, and environmental groups that an
alternative multipollutant regulatory approach is needed. The broad
parameters of such a program are generally agreed to be:
Commitment to future emission caps on multiple pollutants.
Implementation through a cap and trade program.
Relief from NSR requirements.
The Bush campaign platform included these and added support for
renewables and other new, clean technologies.
A number of multi-pollutant proposals have been put forward by
entities including the EPA, industry and Congress. None to date however
meet all of the requirements. Most focus on cleaning up and providing
regulatory relief to the old plants while giving little economic or
regulatory support to new cleaner plants or renewables. Many also have
little focus on NSR reform. Focusing only on the old plants will result
in some emission reductions but will further extend the life of old
inefficient plants and slow the needed capital turnover to new
technologies. The long term solution to air pollution problems requires
a transition to cleaner and more efficient technologies, which may
actually be delayed by the focus on old plants. What is needed is a
program that provides both regulatory and economic change.
The Clean Power Group has developed a comprehensive multipollutant
approach for power generation that addresses all of these issues. It
uses a cap and trade regulatory approach that includes old and new
sources, renewables and conservation and replaces existing command and
control structures with flexible market-based approaches that provide
the same environmental benefits with greater economic and regulatory
Structure of the Proposal:
We propose continuous declining caps for SO2,
NOX, mercury and possibly CO2 with the ``glide
slope'' of the decline known well in advance. The caps for each
pollutant become tighter each year. With the continuous declining cap
we propose a cost ``circuit breaker'' that stops the tightening for
each pollutant if the average cost of allowances exceeds a
predetermined cost threshold. This approach provides real, measurable
emission reductions that continue to promote new generation and
emission control technologies. The economy is protected from
unreasonable costs of control while environmental performance
improvement will continue indefinitely as long as costs of reductions
(allowances) are reasonable. BACT and LAER are replaced for all covered
sources because the declining caps provide a better form of progressive
emission reduction. Review of local impacts will be maintained to
prevent hot spots. New Source Performance Standards (NSPS) will be
maintained to ensure that there is some emission rate ``backstop''.
Allocation of allowances will be made on a consistent output basis
to all generators and for end use efficiency measures. Allocation in
this manner equally rewards highly controlled and highly efficient
generators as well as renewables and conservation, which encourages
modernization of our nation's energy infrastructure.
The replacement of disjointed and conflicting emission control
policies and initiatives with a coordinated multi-pollutant
emission control strategy provides better environmental
performance at a lower cost.
A viable multi-pollutant approach must address and encourage
the development of modern, cleaner, and more efficient energy
generation using all fuels as well as the control of emissions
from existing power generation sources.
Higher efficiency and lower emitting generators using all
available energy sources are key to meeting long-term emissions
A cap and trade, multi-pollutant approach can be better for
the environment than command and control regulations as well as
economically more efficient.
Appropriately designed cap and trade programs can provide the
same or better environmental protection and technology-forcing
function as traditional New Source Review (NSR) while reducing
regulatory overhead, reducing total control costs and promoting
investment in modern, efficient energy systems.
The gradual approach spurs the development of new
The declining cap with a cost circuit breaker could provide an
alternative approach to carbon mitigation that provides real
reductions, without a link to Kyoto and without economic risk
to the U.S.
The Clean Power Group is: Calpine, El Paso, Enron, NiSource,
For more information contact: Joel Bluestein, (703) 528-1900,
the clean power group's declining cap/circuit breaker approach
The Clean Power Group approach builds on many of the concepts of
current cap and trade programs while replacing some outmoded aspects of
existing environmental regulation and incorporating components to
encourage new technologies, efficiency and pollution prevention. The
proposed approach is a multipollutant cap and trade approach. A cap is
set for each pollutant and each cap declines continuously at a preset
rate, say 10 percent per year. The approach could be applied to three
for four pollutants.
Figure 1 shows a hypothetical example for SO2 emissions.
The solid blocks show the commonly proposed multipollutant approach in
which reductions take place in large cuts. These ``over the cliff'
reductions are very disruptive to mechanical and economic systems. It
is difficult for many sources to comply at the same time and the result
is labor and equipment constraints, which then cause problems in energy
markets as well as compliance problems. At these discontinuities, the
emission trading markets that are supposed to help the sources weather
the change also become disrupted and are of little value.
The glideslope approach allows compliance to take place gradually.
The lowest cost reductions are made first and ``shared'' around the
sector through emission trading. Compliance installations can be made
gradually and the vendors can gear up for the demand. Emissions markets
are established early and can provide accurate price signals to all
involved. Not least of all, emission reductions are made earlier than
under the ``cliff' approach.
Perhaps the most important effect, however is the effect on
technology development. The U.S. experience in every pollution control
program ever instituted has been that the cost of control has been less
than estimated in advance. This has been due to the decreasing cost of
technology, the development of better technology, and other market
factors (such as railroad industry changes affecting the cost of low
sulfur coal) that were not even considered in the pre-regulation
The continuously declining cap approach takes advantage of this
effect. By instituting a known glideslope, it provides an economic
driver for new technology to be developed and brought to market and it
allows time for the technology to be implemented. The expectation
therefore is that the cost of control will continue to decline. For
this reason, there is no predetermined limit to the level of emission
reductions. The cap continues to decline as long as reductions can be
made within a preset cost criterion (discussed below). If history is
any guide, we will be able to ride this technology curve to emission
levels well below those we would dare to predict today.
The other critical advantage is that the source of potential
improvement is broadened by including all sources of generation. Unlike
current emission trading programs, which include and provide allowance
allocations only to old fossil generators, this program would allocate
allowances on an output basis to all electric generators including new
clean generators and renewables. Equal allocation to new generators is
critical to support the development and commercialization of new
technologies of all fuel types. The system would also provide
allocations to end-use efficiency projects on an equal basis to
generation projects. A project that reduced consumption by 10,000 MWh
would get the same allowance allocation as a project that generated
10,000 MWh. Allocations would also be included for the full thermal
plus electric output of CHP facilities. Thus the market forces would
encourage technology improvements on all technology fronts and on all
pollutants at once.
For sources in the program the declining cap would replace the
existing command and control new source permitting requirements (BACT/
LAER). In the first place, these requirements do not provide
environmental value for sources that are under a cap. Incremental
emission reductions under an emission cap simply get shifted to be
emitted somewhere else under a cap. Moreover, the continuously
declining cap provides the driver for continuing reductions in the
sector overall without prescriptive technology requirements. It does so
more effectively and cost effectively than the existing new source
review system, which is not doing a good job. One of the first things
that the proposed approach does is reduce emissions from
``grandfathered'' plants since they are typically the lowest cost
reductions available and will be ``squeezed'' out of the cap first.
Some control requirements (new source performance standards) will
be maintained as a safeguard. Review of local impacts and maintenance
of the National Ambient Air Quality Standards will also be required to
prevent local ``hot spots''.
As described above, each pollutant cap will be reduced by a preset
percentage each year. The expectation is that improving technology will
allow this to continue at a reasonable cost. However, the program
includes a cost ``circuit breaker'' for each pollutant. The circuit
breaker operation is illustrated in Figure 2. The circuit breaker is
expressed as a $/ton cost. As the cap tightens, we expect allowance
prices eventually to increase. When the allowance price (averaged over
a year) increases to exceed the circuit breaker level, the cap stops
tightening. The cap does not increase but stays fixed. Over time, we
expect that technology will improve and the allowance price will drop
below the circuit breaker level. At that time, the cap starts to
tighten again. In this way, the system continues to push technology and
reduce emissions within a preset cost. At the same time it gives the
regulated community certainty over the cost of required reductions,
since the cost of allowances will be close to the circuit breaker level
The declining cap/circuit breaker approach provides a simpler
approach to regulating emissions from the power generation sector. It
is also an approach that encourages the use of cleaner, more efficient
technology. Most important, it provides better environmental
performance better than existing regulatory programs. The end result is
a diverse, stable power sector with lower emissions and lower cost than
achievable under other approaches.
The Clean power Group is: Calpine, Enron, Trigen, El Paso, and
For more information contact: Joel Bluestein, 703-528-1900,
[email protected], www.eea-inc.com/cleanpower/index.htm]
[GRAPHIC] [TIFF OMITTED] T4848.001
Mr. Barton. Thank you, Mr. Hall.
We would now like to hear from Mr. Brent for 6 minutes.
STATEMENT OF RICHARD BRENT
Mr. Brent. Good afternoon, Mr. Chairman, distinguished
members of the committee. Thank you for inviting me to speak to
My name is Richard Brent, and I am the Director of
Government Affairs for Solar Turbines, a manufacturer
headquartered in California, the once great and now humbled
State. We are a wholly owned subsidiary of Caterpillar and
consider ourselves one of the leading manufacturers of
distributed general technology.
In my testimony today I am also representing the
Distributed Power Coalition of America as a member of its
I would like to thank you for the opportunity again to be
here to speak on the topic of barriers to competitive
generation which is very important to both Solar Turbines, to
the Distributed Power Coalition and a number of panelists that
are here today.
Distributed generation is a highly competitive technology
that can efficiently contribute to increasing the Nation's
energy supply, reduce the demand on a constrained system and
add substantial benefits to the power grid. However,
distributed generation must overcome numerous legal, regulatory
and institutional barriers that currently interfere with the
realization of its true economic potential for consumers across
the United States.
Distributed generation is the name given to small
electricity generation facilities, including micro-turbines,
fuel cells, internal combustion engines and small gas turbines
located generally on the distribution system close to the point
of consumption. Distributed generation can help reduce the cost
and enhance the efficiency of our electrical system. It can
lower the demand for the construction of large central station
generation facilities, reduce the need for the siting of the
difficult transmission facilities and substitute and/or
supplement distribution facilities and reduce overall
emissions. However, today barriers stand in the way of the
development of this technology.
Many of the barriers facing distributed generation are
State-level barriers, such as discriminatory rate structures
for standby power and exit fees designed to recover so-called
``stranded costs'' to which the subcommittee cannot necessarily
address directly. However, the U.S. Congress does possess the
power to overturn some of the more important barriers facing
distributed generation. It is in regards to those barriers that
I have come to speak to you today.
A number of positive legislation pieces have been
introduced in this session of Congress, which if enacted would
eliminate some of the barriers facing distributed generation.
House Resolution 1045, introduced by Congresswoman Heather
Wilson of your committee, co-authored by Mr. Issa and Mr.
Hunter, would, amongst other things, require the Federal Energy
Regulatory Commission to determine standards governing the
costs, terms and conditions of interconnections between
distributed generation and the local utility distribution
facility. Today, development of distributed generation is
thwarted, in part, because the potential developers do not have
the resources to navigate the crazy quilt of varying standards
found across jurisdictions and across utilities. Nationally
uniform interconnection standards would go a long way toward
helping distributed generation reach its potential.
The method developed and adopted under the Public Utility
Regulatory Policies Act of 1978 to establish standards for the
regulation of rates charged by qualifying facilities should
also be used to establish interconnection standards for
distributed generation. That is, under PURPA, FERC promulgated
guidelines that each State was required to follow, but State-
by-State implementation of those guidelines was left up to the
individual States. This delegation makes sense.
Interconnection standards should follow a similar path.
Distributed generation offers the very real prospect of ``plug
and play'' technology. Many distributed generation resource
technologies have become modular and standardized as well as
relatively easy to transport. It would be--and today is--an
enormous waste of resources for prospective generation
developers and end users to go from State to State to persuade
legislators and regulators one at a time of the benefits and
appropriate designs of standardized interconnection procedures.
As a first step, FERC should be required to work with
industry experts to design fair interconnection standards. The
Institute of Electrical and Electronic Engineers has already
begun the process of designing those uniform interconnection
standards. Members of the Distributed Power Coalition of
America are active participants in that collaborative process,
which has been extremely productive. We recommend that, upon
the enactment of some of these legislations on interconnection
such as H.R. 1045, FERC piggyback on IEEE's efforts and appoint
the existing IEEE working group to lead the effort to complete
their effort and produce nationally uniform interconnection
standards. Subject to strict time limits, FERC should then be
required to promulgate interconnection guidelines which States
must then be required to implement, subject to FERC's
The technical aspects of interconnection are critically
important. No less important are the standardized procedures
and cost allocation rules that all parties involved should be
required to follow when determining what resources will be
required to interconnect distributed generation to the
distribution network and how the cost of those facilities
should be shared between the distributed generation developer,
the end user and the utility.
DPCA suggests two simple rules. First, when a distributed
generation facility requests interconnection to a utility's
facilities, the utility should not be allowed to study the
request to death, as is often the case today. Utilities must be
placed under strictly enforced timelines. We recommend that
each utility be required to complete all required studies
within 30 days of receiving an appropriately filled out
interconnection request. Each utility must have in place
transparent interconnection guidelines requiring the
distributed generation developer to submit only that
information that is necessary for the utility to determine the
resource requirements necessary for the interconnection.
Second, the distributed generation developer should only be
required to pay for the interconnection facilities necessary to
interconnect it to the grid.
Mr. Barton. We didn't start your clock till after you had
been talking for 2 minutes, and the other panelists to your
left have already pointed that out. So if you could--could you
wrap it up in the next 30 seconds? You know, even though your
light still shows green, if you could summarize.
Mr. Brent. I kept looking, sir. I apologize.
Mr. Barton. I understand.
Mr. Brent. If I may, sir, I am just about done. I lost my
place. Okay, let me pick up----
These facilities would include the facilities running
between the DG facility and the point of interconnection.
Bloated interconnection cost estimates erode the economic
benefits DG could otherwise offer. In the exceedingly rare
circumstances when upgrades were required to the utility's
network beyond the point of interconnection, the distributed
generation developer should only be required to pay his fair
share of that cost of such network upgrades. Other users of
those network facilities should also be required to pay their
fair share of those costs.
I commend to the subcommittee's attention an Arthur D.
Little White Paper entitled Distributed Generation: Policy
Framework For Regulators and suggest that that be considered
part of the record.
The subcommittee invited comments on net metering. While
DPCA believes net metering is an important topic, we have not
taken a position on any legislation on this issue; and so I
will not address that today.
Thank you for the opportunity to testify. I look forward to
[The prepared statement of Richard Brent follows:]
Prepared Statement of Richard Brent, Director, Government Affairs,
Solar Turbines Incorporated
Good morning, Mr. Chairman and distinguished members of the
Subcommittee, my name is Richard Brent. I am Director of Government
Affairs for Solar Turbines, a manufacturer of Distributed Generation
technology. In my testimony today I am also representing the
Distributed Power Coalition of America (DPCA) as a member of the
Executive Committee. I would like to thank you for the opportunity to
be here today, to speak on this topic, which is very important to Solar
Turbines and to the DPCA. Distributed Generation is a highly
competitive technology that can efficiently increase the nation's
energy supply, reduce the demand on a constrained system, and add
substantial benefits to the power grid. However, Distributed Generation
must overcome numerous legal, regulatory and institutional barriers
that currently interfere with the realization of its true economic
Distributed Generation is the name given to small (up to 50 MW)
electricity generation facilities, including micro-turbines, fuel cells
and small gas turbines, located on the distribution system, close to
the point of consumption. Distributed Generation can help reduce the
cost and enhance the efficiency of our electrical system. It can lower
the demand for the construction of large central station generation
facilities, reduce the need for difficult to site transmission
facilities, substitute and/or supplement distribution facilities, and
reduce overall emissions. However, today barriers stand in the way of
the development of Distributed Generation.
Many of the barriers facing Distributed Generation are state-level
barriers, such as discriminatory rate structures for standby power and
exit fees designed to recover so-called ``stranded costs,'' which this
Subcommittee can not directly address. However, the U.S. Congress does
possess the power to overturn some of the most important barriers
facing Distributed Generation today. It is regarding those barriers
that I have come to speak to you.
Legislation has been introduced in this session of Congress which,
if enacted, would help eliminate some of the barriers facing
Distributed Generation. H.R. 1045, introduced by Congresswoman Heather
Wilson would, among other things, require the Federal Energy Regulatory
Commission to determine standards governing the costs, terms and
conditions of interconnections between Distributed Generation and local
utility companies' distribution facilities. Today, development of
Distributed Generation is thwarted, in part, because potential
developers do not have the resources to navigate the crazy quilt of
varying standards found across jurisdictions and across utilities.
Uniform interconnection standards would go a long way toward helping
Distributed Generation reach its potential.
The method used by the Public Utility Regulatory Policies Act of
1978 (PURPA) to establish standards for the regulation of the rates
charged by Qualifying Facilities should also be used to establish
interconnection standards for Distributed Generation. Under PURPA, FERC
promulgated guidelines that each state was required to follow, but
state-by-state implementation of those guidelines was left to each
individual state. This delegation makes sense.
Interconnection standards should follow a similar path. Distributed
Generation offers the very real prospect of ``plug and play''
technology. Many Distributed Generation resource technologies have
become modular and standardized as well as relatively easy to
transport. It would be--and today is--an enormous waste of resources
for prospective Distributed Generation developers to go from state to
state to persuade legislatures, one at a time, of the benefits and
appropriate designs of standardized interconnection procedures. As a
first step, FERC should be required to work with industry experts to
design fair interconnection standards. The Institute of Electrical and
Electronics Engineers (IEEE) has already begun the process of designing
uniform interconnection standards. Members of DPCA are active
participant in that collaborative process, which has been extremely
productive. We recommend that, upon enactment of H.R. 1045, FERC
piggyback on IEEE's efforts and appoint the existing IEEE working group
to lead the effort to produce uniform interconnection standards.
Subject to strict time limits, FERC should then be required to
promulgate interconnection guidelines, which states must then be
required to implement, subject to FERC's oversight.
The technical aspects of interconnection are critically important.
No less important are the standardized procedural and cost allocation
rules that all parties involved should be required to follow when
determining what resources will be required to interconnect Distributed
Generation to the distribution network, and how the costs of those
facilities should be shared between the Distributed Generation
developer and the utility. DPCA suggests two simple rules. First, when
a Distributed Generation facility requests interconnection to a
utility's facilities, the utility should not be allowed to study the
request to death, as is often the case today. Utilities must be placed
under strictly enforced timelines. We recommend that each utility be
required to complete all required studies within 30 days of receiving
an interconnection request. Each utility must have in place transparent
interconnection guidelines, requiring the Distributed Generation
developer to submit only that information that is necessary for the
utility to determine the resource requirements necessary for the
interconnection. Second, the Distributed Generation developer should
only be required to pay for the interconnection facilities necessary to
interconnect it to the grid. These facilities generally will include
the facilities running between the Distributed Generation facility and
the point of interconnection with the utility. Bloated interconnection
cost estimates erode any economic benefits that Distributed Generation
could otherwise offer. In the exceedingly rare circumstances when
upgrades are required to the utility's network beyond that point of
interconnection, the Distributed Generation developer should only be
required to pay his fair share of the cost of such network upgrades.
Other users of those network facilities should also be required to pay
their fair share of those costs.
Besides interconnection, there is another important advancement
that can be instituted at a federal level. The DPCA believes that the
owner of a Distributed Generation facility should be able to sell the
energy from that facility to any willing buyer. The owner ought to be
allowed to buy, sell and consume electricity as necessary, free from
artificial limitations. We recommend that legislation include
provisions that ensure that right to Distributed Generation facilities.
I commend to the Subcommittee's attention an Arthur D. Little White
Paper entitled ``Distributed Generation: Policy Framework for
Regulators''. The Paper clearly, effectively and concisely discusses
the primary policy questions that are raised by Distributed Generation,
and provides a useful framework for resolving those questions.
The Subcommittee invited comment on net metering. While we believe
net metering is an important topic, the DPCA has not taken any position
on legislation on this issue; so I will not address it today.
Thank you again for the opportunity to testify before your
Subcommittee. I would be pleased to answer any questions you may have.
Mr. Barton. Thank you.
We now want to hear from Mr. Yacker. Since the gentleman
before you took 8 minutes, we are going to give you 3 minutes.
Mr. Yacker. As always, Mr. Chairman----
Mr. Barton. No, actually----
Mr. Yacker. [continuing] you are prescient in your
Mr. Barton. No. You are allowed 6 minutes to elaborate on
your written statement.
STATEMENT OF MARC YACKER
Mr. Yacker. Okay. Thank you, Mr. Chairman.
I am Marc Yacker, Director of Government and Public Affairs
for the Electricity Consumers Resource Council, or ELCON. ELCON
was established in 1976 and is the national association
representing large industrial users of electricity. ELCON
members come from virtually every segment of the manufacturing
Simply put, ELCON and its member companies favor
competition over regulation. Along those lines, industrial
electricity users have recently experienced some good news and
some less than good news. The good news is that competition in
electricity is coming. It is inevitable. Well over 60 percent
of the population live in States that have already decided to
create competitive markets. The less than good news is that
many people view the recent California crisis as an experiment
in competition that has failed. In fact, it has failed. But the
California experiment was an experiment in reregulation, not an
experiment in competition. It was doomed to failure from the
Today's hearing is on PUHCA, PURPA, interconnection and net
metering, which I think is a no brainer. Many industry
stakeholders attempt to portray these issues as relatively
noncontroversial. I disagree, at least in part.
For the past several Congresses, there has been legislation
such as H.R. 381 introduced by Mr. Stearns, discussed earlier,
to repeal the mandatory purchase and sale requirements in
section 210 of the Public Utility Regulatory Policies Act, or
PURPA. Many ELCON members cogenerate and sell electricity as
qualifying facilities, or QFs, pursuant to PURPA. All ELCON
members, by definition, are large electricity consumers and
seek a varied and reliable generation base. PURPA contributes
to that broader generation base. Accordingly, ELCON members do
not seek legislation to repeal those PURPA Section 210
requirements at this time.
PURPA has succeeded in demonstrating that electricity can
be generated by nonutility sources in an energy-efficient,
reliable and an environmentally favorable manner. Just 23 years
ago, utilities vehemently disputed what is now fact.
Though PURPA has gotten some bad press, I would like to
emphasize that PURPA's much-maligned avoided cost concept is
not to blame. If properly implemented by State utility
commissions, the avoided cost concept cannot cost consumers
anything. The problem with PURPA was that utilities in the
1980's, believing that fuel prices would increase, entered into
long-term contracts, many for 30 years, locking them into
fixed-price purchase agreements with cogenerators. Many shorter
contracts were also signed. Nothing in PURPA required such
long-term contracts. All PURPA contracts were approved by the
appropriate State utility commissions.
When fuel prices went down, utilities found they had
guessed wrong and that they had above-markets contracts. This
was not the fault of PURPA.
I might add Mr. Stearns cited the RDI survey. Utilities
have more above-market contracts with our utilities than they
do with cogenerators. Until we have competitive wholesale
markets, including fully open access to the transmission grid,
the mandatory purchase requirements are necessary if we are to
fully realize the potential for cogenerated power.
It is important to note that PURPA and Section 210 are much
more than just mandatory purchases. I cannot overemphasize the
importance of the PURPA guarantee for back-up power during
periods of scheduled maintenance or repair at just and
reasonable rates, especially in States that remain
noncompetitive. Without such a guarantee, cogenerators would be
captive to monopolies that could charge what they wish, and the
cogenerators would have no alternative. In States without
customer choice, retaining the Federal guarantee for back-up
power now in PURPA is essential if there is to be any
investment in cogeneration capacity. Once there is a truly
competitive retail market and cogenerators have the opportunity
to buy back-up power in an unregulated environment, the back-up
guarantee will no longer be necessary.
Before I leave PURPA, I would like to make one more point.
When Congress enacted PURPA in 1978, cogenerators and other
qualifying facilities took Congress at its word. Significant
investments were made based on existing Federal guarantees.
Repealing parts of PURPA puts those who made such investments
in good faith at a disadvantage.
Related to PURPA is the issue of interconnection. Under
PURPA, qualifying facilities were guaranteed the right to
interconnect at the transmission level. But through the years,
QFs and other nonutility generators have found that
transmission owners often engaged in lengthy and expensive
delaying tactics. If Congress truly wants to diversify the
generation base to bring on new efficient, technologically
advanced equipment and processes, for example, distributed
generation, uniform interconnection standards at the
transmission and distribution levels such as those in 1945 are
not just desirable, they are essential.
Now let me turn to the issue of PUHCA. PUHCA is the only
Federal consumer protection statute for electricity customers
and that is why--Marty Kanner stole my line--no bona fide
consumer group supports repeal of PUHCA on a stand-alone basis.
We believe that, if PUHCA is repealed, we need clear
authority vested in the Federal Energy Regulatory Commission to
prohibit potential anti-competitive practices involving
regulated utilities and unregulated affiliates. Rules are
needed to address the operational unbundling of generation,
transmission, system control, marketing and local distribution
functions. State and Federal regulators must have complete
access to all books and records of all regulated entities and
entities owned or controlled by regulated entities.
In conclusion, ELCON and its member companies favor a broad
Federal bill so that all electricity consumers can enjoy the
benefits of competition under similar rulings. Interconnection
rights and net metering must be part of that bill. Modification
to PURPA and PUHCA are also essential, but they should be
considered at the end of the process when we have a competitive
and functioning wholesale and retail market, so we have a
better idea of how to protect consumers from potentially anti-
ELCON appreciates the opportunity to testify, and we look
forward to continued constructive dialog with the subcommittee.
[The prepared statement of Marc Yacker follows:]
Prepared Statement of Marc Yacker, Director of Government and Public
Affairs, Electricity Consumers Resource Council
Mr. Chairman, I am Marc Yacker, Director of Government and Public
Affairs for the Electricity Consumers Resource Council, or ELCON.
ELCON, established in 1976, is the national association representing
large industrial users of electricity. ELCON's member companies come
from virtually every segment of the manufacturing community.
ELCON's members operate in competitive, international markets. They
require an adequate and reliable supply of electricity at competitive
prices in a vibrant interstate marketplace. Large users of electricity
know very well that the decisions made in this Subcommittee and by
Congress will have a direct impact on their businesses' well being as
well as their business decisions. ELCON greatly appreciates the
opportunity to testify.
ELCON and its member companies favor competition over regulation.
They have long advocated truly open and fully competitive electricity
markets, including retail access guaranteeing that all consumers have
the right to choose their supplier of electricity and electricity
services. We also believe that, just as is true for other energy
products, a large national or even international market with consistent
rules and standards is optimal for the sale and purchase of
electricity. Market rules for goods produced by any manufacturer do not
change as we move from state to state. The same should be true for
Recently, industrial electricity users have experienced some good
news and some less than good news. The good news is that competition in
electricity is coming. It is inevitable. Well over sixty percent of the
population live in states that have already decided to create
competitive markets to the extent that they can absent federal
legislation. We at ELCON believe that these competitive markets should
come as soon as possible. The less than good news is that many people
view California as an experiment in competition and that it has failed.
In fact it has failed--but the California experiment was an experiment
in reregulation, not competition. It was doomed to failure from the
Today's hearing is on PUHCA, PURPA, interconnection and net
metering. Many industry stakeholders view these issues as relatively
non-controversial. I disagree, at least in part.
For the past several Congresses, there has been legislation
introduced by Congressman Stearns and others to repeal the mandatory
purchase and sale requirements in Section 210 of the Public Utility
Regulatory Policies Act (or PURPA) of 1978. Many ELCON members
cogenerate and sell electricity to utilities as Qualifying Facilities
(or QFs) pursuant to PURPA. All ELCON members, by definition, are large
consumers of electricity and seek a varied generation base. ELCON
members, therefore, do not seek legislation to repeal those PURPA
Section 210 requirements at this time.
PURPA has succeeded in demonstrating that electricity can be
generated by non-utility sources in an energy-efficient, reliable, and
environmentally favorable manner. Just 23 years ago utilities
vehemently disputed what is now fact.
Despite PURPA's bad press, as long as consumers are held captive to
monopoly utilities, it is an essential law. It has produced a broader,
more efficient, more environmentally favorable base of electricity
generation. Due to PURPA, electricity capacity was added in smaller
increments, thus not burdening users with paying for generators that
proved to be much larger than necessary. And generation was funded by
entrepreneurs with private non-regulated capital.
I would like to emphasize that the much-maligned avoided cost
concept is not to blame. If properly implemented by state utility
commissions, the avoided cost concept cannot cost consumers anything.
The problem with PURPA was that utilities in the 1980s, believing that
fuel prices would increase, entered into long-term contracts, many for
30 years, locking them into fixed-price purchase agreements with
cogenerators. Nothing in PURPA required such long-term contracts. It
should be noted that all PURPA contracts were approved by the
appropriate state utility commission. This is another failure of
regulation, not of competition.1When fuel prices went down, utilities
found they had guessed wrong, and they then had above-market contracts.
Interestingly, had PURPA not been enacted, consumers would not have
saved any money, because utilities would have entered into similar,
long-term contracts with other utility generators. In fact, a study
released a few years ago showed the utilities had more above market
contracts with other utilities than with cogenerators pursuant to
PURPA. I have no reason to believe that data is any different today.
That having been said, the ``mandatory purchase'' provisions of
PURPA will be an anachronism when we finally achieve a truly
competitive wholesale market. With regard to existing PURPA contracts,
be they at market or above today's market, no one is suggesting that
such contracts be rescinded. Existing PURPA contracts are and should be
a non-issue. Similarly, those above-market contracts utilities have
with other utilities should be protected as well. That simply reflects
the sanctity of contracts.
The impact of repealing the mandatory purchase provisions of PURPA
on a prospective basis, as proposed in legislation, is virtually non-
existent. The number of new, uneconomic PURPA-based contracts being
signed today is close to nil. The mandatory purchase provisions of
PURPA clearly will not be needed in a truly competitive wholesale
electricity market. But we do not yet have that.
In discussing competitive wholesale markets, an objective Congress
set forth in the Energy Policy Act (or EPAct) of 1992, it is important
to note what is theory and what is fact. FERC, in Order 888, again in
Order 2000, and once again in its RTO order earlier in July, clearly
recognized that an open, non-discriminatory transmission system is the
lynchpin of a competitive wholesale market. Unfortunately we are not
there yet. Transmission owners still attempt to utilize the grid to the
benefit of their own generation and to the detriment of others.
In a monopoly market, or in a market in transition from monopoly to
competition as is true for the wholesale electricity market today,
mandatory purchase requirements are necessary if there is to be a
market for cogenerated power. I know that this hearing is not on
transmission issues, but I need to state, until the transmission system
is truly open, we will not have a competitive wholesale market.
However it is important to note that PURPA and Section 210 are much
more than mandatory purchase. I cannot overemphasize the importance of
a federal guarantee for back-up power--during periods of scheduled
maintenance or repair--at just and reasonable rates in states that
remain non-competitive. Without such a guarantee, cogenerators would be
captive to unregulated monopolies that could charge what they wish, and
the cogenerators would have no alternative. In states without customer
choice, retaining the federal guarantee for back-up power now in PURPA
is essential if there is to be any investment in cogeneration capacity.
Once there is a truly competitive retail market, cogenerators can buy
back-up power in the open market and the back-up power guarantee will
not longer be essential.
Before I leave PURPA, I would like to make one more point. When
Congress enacted PURPA in 1978, cogenerators and other Qualifying
Facilities took Congress at its word. Significant investments were made
based on existing federal statute. Repealing parts of PURPA puts those
who made such investments at a disadvantage.
Related to PURPA is the issue of interconnection. Under PURPA,
Qualifying Facilities were guaranteed the right to interconnect at the
transmission level. But through the years, QFs and Exempt Wholesale
Generators established pursuant to EPAct have found that transmission
owners often engaged in lengthy and expensive delaying tactics. If
Congress truly wants to diversify the generation base to bring on new
efficient, technologically advanced equipment and processes, uniform
interconnection standards at the transmission and distribution levels,
with a guaranteed timetable, are not just desirable, they are
With regard to net metering, the practice of net metering is not
new. Many industrials with cogeneration capacity have had net metering
at their facilities for years. Objection comes from those who want to
keep the generation base narrow and who utilize their monopoly power in
any way possible to perpetuate their profitable monopoly status. I do
not fault them. Given their responsibility to shareholders to maximize
profits, it is an understandable course of action. But such
exclusionary tactics are not in the best interest of consumers. And
they are not in the best interest of our nation if we do indeed want a
more modern electricity system.
Regarding the repeal of PUHCA, we emphasize that PUHCA is the only
federal consumer protection statute for electric utility customers.
That is why no bona fide consumer group supports repeal of PUHCA either
on a stand-alone basis or until we have truly competitive markets.
We believe that, if PUHCA is repealed, we need clear authority
vested in the Federal Energy Regulatory Commission to prohibit
potential anti-competitive practices involving regulated utilities and
unregulated affiliates. Rules are needed to address the operational
unbundling of generation, transmission, system control, marketing and
local distribution functions. State and Federal regulators must have
complete access to all books and records of all regulated entities and
entities owned or controlled by regulated entities. In addition, PUHCA
repeal should not be effective until all states have retail access or
until competition on a nation-wide basis is otherwise achieved. The
need for federal regulatory authority--in FERC, the Department of
Justice, or the Federal Trade Commission--to address market power and
anti-competitive activities is recognized by virtually every
stakeholder involved in electricity policy issues. Events in California
have clearly demonstrated that short-term market power abuse can cause
markets to quickly become dysfunctional.
We need strong, but not excessive, federal regulatory authority to
guarantee that electricity is available throughout the nation on a non-
discriminatory basis. It is up to this Committee and other oversight
bodies to ensure that such regulation is not over-reaching, that it is
encouraging and not hindering true competition.
In conclusion, ELCON and its member companies favor a strong
federal bill so that all electricity consumers can enjoy the benefits
of competition. Interconnection rights and net metering must be part of
that bill. Modification to PURPA and PUHCA are also essential, but they
should be considered at the end of the process, when we have
competitive and functioning wholesale and retail markets, so we have a
better idea of how to protect consumers from potentially anti-
ELCON appreciates the opportunity to testify and we look forward to
continued constructive dialog with this Subcommittee.
Mr. Barton. Thank you, Mr. Yacker.
We now want to hear from Ms. Magruder. Your statement is in
the record. You are recognized for 6 minutes to elaborate.
Welcome to the subcommittee.
STATEMENT OF KATHLEEN E. MAGRUDER
Ms. Magruder. Thank you Mr. Chairman, members.
My name is Kathleen Magruder. I am Vice President of Law
and Government Affairs for the New Power Company.
The New Power Company is an entity of the likes of which
you have not heard from before. We are a retail supplier of
natural gas and electricity to residential and small commercial
customers only. We do not serve large customers. We are
headquartered in Purchase, New York, which is a suburb of White
Plains, but we have offices in Texas, where we have our trading
floor; and our customer care center is located in North
Carolina. We currently serve more than 700,000 residential and
small commercial customers in 10 different States, and we look
forward to growing our customer base with your help.
I think, as Mr. Hall observed, that Chairman Tauzin started
us off on the right foot today when he talked about building an
electric system for this century, as opposed to the one that we
built for the last century. There are tools that are available
today that will modernize this electric system and let the
benefits of competition flow through all the way to residential
consumers, homeowners, renters or folks that y'all call voters.
It is time of use metering. Time of use metering is
something that is available today. It could be installed today,
except for a patchwork of legislation and regulation across the
country that makes it, A, exceedingly difficult to install; B,
exceedingly difficult to create a product to use around; and,
C, just basically prevents the benefits of competition flowing
fully through to the customer.
What can you do to help? Congress can assure that customers
can have these meters installed at their homes if they so
desire. Equally important, you can assure that customers have
the right to be billed on the data that are produced by those
meters and that the utilities be required to settle on the data
that come from those meters. And equally important, too, is the
requirement that the utilities must strip out of their costs or
unbundle from those costs metering costs for the old artifacts
that come from that system that was created by Chairman
Tauzin's grandfather years and years ago.
Let me back up a little bit and tell you about this.
This is not net metering. This is a device that regulates
or, excuse me, records the amount of electricity that is used
by a customer in increments of about 15 minutes. Why is that
important? Well, right now, the old meters that are on your
home currently record how much electricity you use during the
period that the meter is read. Typically, your meter is read
once a month, so you know how much electricity you use in a
month, but you don't know when you use it. Why is that
important? It is important because electricity costs different
amounts to produce during the course of the day; and if you
were able to shift your use of electricity to a time when
electricity was cheaper, you would be able to, A, conserve; B,
lower your bill; and, C, obviate the need for more generation
to be built.
That doesn't mean that generation won't have to be built,
but it means it doesn't have to be built just to be able to
serve the customer on the peak.
Mr. Lane from Goldman Sachs alluded to the fact that there
is a State-by-State patchwork means of implementing
restructuring or deregulation for residential customers across
the country; and you taking steps to make sure that these time
of use meters are available to residential customers would help
to make it clear that, at least in those States where
competition has come, customers should have the right to have
those meters installed.
Something else that you can do to help with this State-to-
State patchwork approach is to require that uniform business
rules be put into place. We currently serve customers behind
three electric utilities in Pennsylvania. We had to build three
different computer systems in order to be able to get bills out
to our customers in those three different utilities. What does
this do? Well, it leads to lower customer service because we
have to build a different system every time we go someplace. It
leads to higher costs because every time we build a new
computer system it costs more money. And it keeps us out of
districts that might otherwise want folks in there offering
I am often asked as I travel around the country, well, you
know, I represent a rural State or I represent a rural
district. I don't have a Manhattan in my district. I don't have
a Dallas, Texas, in my district. How am I going to get
competition now to my customers?
Well, one way to do it is uniform business rules. Because
if we don't have to recreate the wheel each time we go into a
new market, we can get into those smaller markets at lower
costs and a little bit quicker. So that helps the folks who are
in rural west Texas, and it helps the folks who are in rural
Uniform business rules, as you have heard, on the wholesale
side are equally important on the retail side; and as we look
toward uniformity across the country we should make sure that
it exists for retail customers as well as for wholesale
One other point that I would make is, as I said, you have
never heard from an entity like the New Power Company. What we
find as we come to these entrenched bodies that make decisions
like independent system operators and regional transmission
organizations is that we are not permitted a seat at the table.
It would be great if, as you clarified the FERC's jurisdiction
to do a number of things, you also clarify that parties such as
the New Power Company and any other interested and affected
party in this debate be permitted a seat at the table. Unless
and until you hear from providers who serve your voters, you
are not going to have the full panoply of needs fully flowing
all the way through to the customers.
The New Power Company intends to be around for a long time.
The sorts of help that I have asked you for today will help
make sure that we are able to make it into your district in a
reasonable amount of time. We intend to continue to deal with
the barriers to entry that are out there, but many of these
barriers are artificially erected, and you can do a lot to help
us knock them down.
I look forward to your questions.
[The prepared statement of Kathleen E. Magruder follows:]
Prepared Statement of Kathleen Magruder, The New Power Company
Mr. Chairman, Members of the Subcommittee, I am Kathleen Magruder.
I am the Vice President of Government Affairs for The New Power
Company. NewPower is a retail marketer of natural gas and electricity
to residential and small commercial customers. We currently serve more
than 700,000 customers in ten states. My testimony today will focus on
the benefits that residential customers currently realize when they
have the ability to choose a competitive provider of energy, the need
for uniform business rules across the many states to help achieve the
goal of the best possible products and services for energy consumers,
and the value of time of use metering for small consumers.
NewPower is living proof that small customers truly can benefit
from competitive retail energy markets. Our customers enjoy a variety
of product terms and prices which permit them to choose the package
which best suits their energy needs. This is true despite the lack of
any uniformity across states--or even across utilities within a state--
and the dysfunctional rules which govern the operation of the wholesale
market. Our market presence is demonstrated in the map attached hereto
as Attachment 1.
While many decisions concerning restructuring of the energy
industry are best left to state public utility commissions, there are
several areas where Congress can be of assistance. Chief among them
Clarify that the FERC's jurisdiction flows all the way to the
meter at each customer's house; mandate that no utility can
prohibit the installation of a qualified metering device which
provides time of use data; and require that utilities settle
and render bills based upon the data produce by time of use
Mandate that the Federal Energy Regulatory Commission, in
consultation with the Federal Trade Commission, promulgate a
final rule establishing uniform business standards for both
wholesale and retail energy sales in competitive markets.
Support the Federal Energy Regulatory Commission (``FERC'') in
its attempt to create four large Regional Transmission
Organizations (``RTOs'') which will govern the flow of
electricity across the continent.
While this testimony addresses electric markets only, many of these
principles apply equally to natural gas markets.
Technology has provided tools in the form of time of use meters and
remote management of home energy use that will give customers the power
to manage their electricity usage and expenditures. The banking world
provides a good analogy of how putting proper technology in customers'
hands will lead them to adapt their behavior and better manage their
money. Twenty years ago, the ATM card was introduced to banking
customers and the banking world changed dramatically. In that time
frame, individual bank customers adapted their behavior such that in
the year 2000, more than 85% of the banking transactions which
occurred, were achieved through some use of technology--either through
use of an ATM card or through the internet. Time of use metering is a
similar application of technology which will better help electric
customers understand when they use electricity, the price consequences
thereof, and ways to save money.
Residential customers in this country are generally charged an
average rate for the electricity they use. That rate is calculated
based on a number of factors including an average cost of the
electricity purchased over several months and an average ``load
profile'' for residential customers in their service territory.
Unfortunately, electricity is not generally sold in wholesale markets
at average prices. Rather, it is sold in increments as small as 15
minutes, each increment of which can be priced differently. For
example, on Wednesday of this week, electricity traded in Texas for as
little as $42.00 per MWh and much as $53.00 MWh--a 21 percent
differential. Similarly, on Wednesday of this week, electricity in
Pennsylvania traded for prices between $67.50 and $74.50 per MWh--a 10
In the same vein, there is probably no customer whose actual usage
patterns are exactly the same as the load profile upon which customers'
bills are calculated. Current utility meters tell a customer how much
electricity he used over the period of a month. They do not reveal when
that power was used--either all in the evening, all in the morning,
evenly spaced across the 24 hours in a day, or all on the weekend. It
is assumed that each customer is ``average'' and regardless of how much
power he uses when prices are high, he is charged exactly the same as
all his neighbors.
Installation of advanced metering technology in the form of time of
use meters will permit customers to know when they are using
electricity, compare that usage data to the actual prices for usage at
that time, and shift their usage, if they desire, to minimize their
electric bill. By shifting some uses, such as dishwashing or clothes
drying, to off peak periods when power is cheaper, customers can
minimize their electric bills without any significant change in their
lifestyle. Add to that, the capability now provided by the internet to
control home appliances remotely, and very real load shifting can be
achieved--if you are able to install such a meter at your home and if
your utility is required to settle based upon the readings from that
Imagine that you are a customer in PJM West. If you could avoid
using power at $74.50 instead of $67.50, wouldn't you like to be able
to make that choice? Under existing law in most states, that option is
On another front, NewPower is currently conducting two pilots--one
in Houston and one in Philadelphia--where customers have volunteered to
have devices installed in their home which permit them to control their
thermostats over the internet. This device will permit the customer to
sit at her desk in her office, access her home thermostat from her
computer terminal at work, and adjust the thermostat setting for her
home. If you forgot to turn your thermostat up this morning before you
left for work, this would give you the opportunity to make sure you are
not air conditioning an empty house.
Encouraging use of demand management techniques through deployment
of this technology will provide a larger societal benefit than just
lower bills. Each megawatt of usage which is shifted off the peak means
another megawatt of usage can be added without the need for building a
new power plant. Much focus has been placed on conservation of
electricity this year. An equally important focus, perhaps, should be
in shifting usage off the peak. Time of use metering and settlement on
those meters to permit customers to enjoy the benefits of lower prices
will help achieve both goals.
So what can Congress do to make sure customers have the benefit of
this new technology and to put the power into customers' hands to
better manage their electric usage? First, Congress can clarify that
the jurisdiction of the Federal Energy Regulatory Commission really
does run all the way to the meter at a customer's home. That is
important for two reasons. First, the meter at a resident's home is the
last piece of the wholesale transaction that results in the delivery of
electricity to a home. It is upon the readings from that meter that
wholesale purchases and settlements are finally tallied and billed. It
should be made clear that the FERC has the authority to order that
qualified time of use meters may be installed at the home of any
requesting customer. Second, settlement should be made on the basis of
those meters. Utilities should not be permitted to force the usage of
average load profiles on customers who choose to make use of this new
UNIFORM BUSINESS RULES
Many barriers to entry exist for competitive marketers preparing to
enter competitive electric markets. Customer education, brand
awareness, credit requirements, licensing obligations, tax filings, are
but a few of the items with which a new market entrant must deal. Layer
upon top of that different business rules for each utility in each
state and in many instances, the barriers become insurmountable. Texas
has made a positive step by requiring that all utilities use the same
protocols for enrollment, billing, and other necessary processes. That
model should be mandated for all other states.
As an anecdote, NewPower is currently serving customers behind
three electric utilities in Pennsylvania. Each utility has required the
building of a completely different billing system for its customers,
none of which can be used in any other venue. The cost of this lack of
uniformity, of course, flows through to the customer and limits the
savings a competitive market should be able to offer him. At the end of
the day, marketers will evaluate the point at which further investment
in new systems becomes intolerable and opt not to serve in that
territory. This is especially true for utilities with small service
territories with relatively few customers.
An issue of specific import to marketers who serve residential
customers is scale. Achieving scale is absolutely critical to being
able to offer world class service and savings. Serving small customer
accounts, which in many instances are less than $100 per month,
requires the ability of a marketer to be able to acquire large numbers
of customers to defray costs. The ability to spread costs over a large
number of consumers, thus, reduces the ultimate cost to each consumer.
Inconsistency or lack of uniformity in the business rules across
utilities and across states only adds costs for the ultimate consumer.
It can also lead to customer confusion as lack of uniformity compounds
different interpretations and treatments to different marketers.
Congress should encourage the development of uniform business standards
in the following areas, at a minimum:
Consumer protection rules and requirements
Transactional and operational models
Utility certification and testing (e.g. aggregation, EDI,
What would uniform retail business rules mean for customers? First,
the customer should see some degree of consistency regardless of the
marketer with whom he deals. Uniform rules would ensure that a marketer
who had been operating in Ohio brought the same customer experience to
Texas as the marketer who had been operating in Pennsylvania. It should
result in increased customer service quality because training for each
state and each utility service territory could be consistent and, thus,
more effective. It should increase the speed of market entry for
marketers which result in increased market competitiveness for
customers. Bottom line--it should result in lower cost and higher
quality service for customers.
Why would uniform business rules matter to a marketer? Put very
simply, uniformity means a more streamlined process and lower costs
which translates to better customer service, better products, and lower
prices. Residential marketers exist to serve their customers. If they
cannot offer customers innovative products and better prices, there is
no reason for them to be there. Lowering this barrier to entry makes
competition available to more customers. A NewPower customer who moves
from Pennsylvania to New Jersey should not be faced with a
significantly different customer proposition just because he has
crossed the state line. His method of enrollment should not be
different, the types of products available to him should not be
different, and his method of payment should not be different--unless
that is what he demands. Regulation and legislation should not impose
these differences on the customer experience.
Several groups have struggled over the last two years with the
issue of uniform business rules. Because there is no mandate for a
deliverable, and because retail issues have never been seriously
discussed, NewPower is today asking that Congress insert itself into
this process. We ask that you mandate that the FERC, in consultation
with the Federal Trade Commission, promulgate a final rule to establish
uniform business standards for wholesale and retail electric sales in
competitive markets. The work of the organizations which have dealt
with these issues over the last years need not be ignored. We would
encourage the FERC and the FTC to impanel a stakeholder group to begin
with the work that has already been done and proceed from there. We
would, however, ask that the stakeholder group be comprised of
representatives from all affected industry sectors. Too often,
marketers who serve residential customers do not get a seat at the
table. We should ensure that such a result does not occur this time.
REGIONAL TRANSMISSION ORGANIZATIONS
On July 12, 2001, the Federal Energy Regulatory Commission issued a
number of orders which advanced the concept of the formation of four
large regional transmission organizations (in addition to ERCOT in
Texas) to better facilitate the movement of electricity within the
continental United States. NewPower applauds the Commission's
initiative and hopes that these efforts will finally bring some
uniformity and consistency to wholesale transactions across the
country. Congress could help in the effort by addressing governance
issues within the regional transmission organizations which are to be
It has been NewPower's experience that residential marketers, being
new players in the game and owning no hard assets, rarely have a voice
in governance of regional transmission organizations. Ultimately, we,
who serve the homeowner, have perhaps the most vital interest in how
these rules develop. For example, in PJM, NewPower is the largest
residential marketer not affiliated with a utility in the territory.
Because it has an affiliation to another member of PJM, however,
NewPower is denied a full membership and has no voice on the board.
Neither is there any similarly situated party who represents our point
of view--or our customers' view--on the board. Congress should mandate
that governance of regional transmission organizations should reflect
all affected and interested parties.
NewPower knows that residential and small commercial customers can
benefit from a well structured competitive energy market. Congress can
do several things to assure that those benefits be made available to
customers in the quickest possible time by taking action to ensure
that: (a) customers have the right to have time of use meters installed
at their homes and to pay for their electricity based on the data
produced by those meters; (b) uniform business rules be promulgated and
implemented to facilitate uniformity for business processes in both
retail and wholesale markets so that processes are the same across
state lines and among utilities within a state; and (c) the four large
RTOs proposed by the FERC be adopted with governance that adequately
reflects all the affected players in the wholesale markets they serve.
NewPower has attached to this document proposed legislative language to
implement these goals and we stand ready to work with you, Mr.
Chairman, and the members of the Subcommittee to craft legislation that
advances the interests of end use customers in workably competitive
wholesale and retail markets.
[GRAPHIC] [TIFF OMITTED] T4848.002
Mr. Barton. Thank you.
We now want to hear from Mr. Starrs. Your statement is in
the record, and you are welcome to elaborate for 6 minutes.
STATEMENT OF THOMAS J. STARRS
Mr. Starrs. Thank you, Mr. Chairman, members of the
My name is Tom Starrs. I am a senior partner in the energy
and environmental consulting firm of Kelso Starrs and
Associates LLC, based on Vashon island in Washington. My
consulting practice focuses on the design, analysis and
implementation of legal and regulatory incentives for the
development of distributed generation technologies, with a
focus on renewable technologies such as solar and wind energy.
I also serve on the board of directors of both the American
Solar Energy Society, which is a national non-profit membership
organization dedicated to advancing the use of renewable
energy, and the Schott Applied Power Corporation, which is one
of the largest distributors of renewable energy equipment in
the United States. I very much appreciate the opportunity to
testify this afternoon on removing barriers on competitive
I should also say that I am here on my own behalf and not
on behalf of my company or any of the organizations with which
I am associated.
I am going to focus my testimony this afternoon on three
areas: the development and adoption of uniform standardized
interconnection requirements for distributed technologies, the
use of net metering to encourage small-scale distributed
generation, and the use of consumer friendly contracts to
streamline and simplify the process of interconnecting
distributed generating facilities.
We have heard a lot about the standardized interconnection,
so I won't belabor the point. But I will emphasize that this
is, in my view, one of the most significant barriers to the
broader commercialization of distributed technologies. The
problem arises because utilities historically have had
substantial discretion over interconnection requirements and
have often used that discretion to develop requirements that
vary considerably from one to the next without appropriate
technical or economic justification.
I will note that these utilities' specific requirements
were of relative little concern for the developers of large-
scale generating facilities, for example, those large
facilities developed under PURPA whose projects were big enough
that they could justify the cost of hiring consulting engineers
and attorneys to negotiate projects' specific interconnection
requirements for their facilities. But many of the folks that I
work with develop smaller scale facilities such as residential
rooftop solar electric cells, residential scale fuel cells or
farm scale wind energy systems; and for these smaller scale
facilities these costs are an absolute deal breaker.
Utilities play a tremendously important role in our society
by maintaining the safety and reliability of the grid, and they
do have legitimate concerns about the interconnection of
nonutility equipment to their networks. But they face a
conflict of interest because they have an economic incentive to
discourage customers from generating their own electricity. The
more customers self-generate the less they are buying from the
The solution, as we have already heard this afternoon, is
the adoption of national standards. In my view, the best way to
go, as we have already heard this afternoon, is relying on
appropriate authorities such as the Institute of Electrical and
Electronics Engineers, the IEEE; the Underwriters Laboratories,
or UL; and the National Fire Protection Association, which
writes the national-electrical-code, or NEC.
The States are already pursuing this approach. As figure
one, which is included in my written testimony, indicates, over
20 States have passed laws or enacted regulations requiring the
development of standardized interconnection requirements for at
least some categories of distributed generating facilities.
However, as Chairman Barton already noted, you know, this helps
by moving in the direction of uniformity within the States. But
we still have the problem of State-to-State variability, and
that is where our national standard comes into play.
A final note on interconnection. I would like to encourage
the committee to specifically consider different degrees of
standardization for different size facilities, with a goal of
plug and play simplicity for the smallest scale facilities for
the reasons that I mentioned earlier in terms of the relative
affordability of these costs between large and small
With respect to net metering, net metering is a simple,
inexpensive and easily administered mechanism for encouraging
the use of small scale distributed generation. As Chairman
Barton said, it is a no brainer. Net metering allows utility
customers to spin their meter backwards when they produce more
electricity than they need for their own lights and appliances.
Net metering policies have been tremendously popular at the
State level. Just 5 years ago, only 14 States allowed net
metering; and most of these requirements were adopted pursuant
to State implementation of the Federal PURPA law. Today, the
total stands at 34 States, with four new States--Arkansas,
Georgia, Hawaii and Wyoming--enacting net metering laws just
this year. And that is reflected in figure two, which is also
attached to my testimony.
In most cases, these laws were enacted by legislation,
although a few States have adopted it by regulation and in most
cases with broad bipartisan support. I will note that in my
home State of Washington, for example, the 1998 net metering
law passed unanimously in a then Republican controlled
legislature and was signed into law by a Democratic Governor.
It also worth noting that both the National Association of
Regulatory Utility Commissioners and the National Association
of State Utility Consumer Advocates have passed resolutions
endorsing net metering.
One final note on net metering. There is a little-known
fact that is fundamental to the appeal of net metering, and
that is that the vast majority of meters that are installed on
residential and small commercial customers property today are
bidirectional. They are capable of measuring the flow of energy
in either direction, and that reduces additional costs by
allowing customers to use their existing meters.
I am running out of time, so I am just going to mention
briefly my third point, which is the failure to adopt
simplified interconnection agreements and simplified procedures
for processing interconnection requests. Again, particularly
for small scale facilities, the goal should be to attain plug
and play simplicity that eliminates unnecessary delays and
inappropriate expenses. Unfortunately, many utility customers
across the country have had the experience of contacting their
local utility seeking information on interconnection procedures
only to be ignored or rebuffed or otherwise discouraged. In
response, some States have explicitly required the development
of simplified agreements and specific timelines for the
processing of interconnection requests.
I thank you for the opportunity to be before you today, and
I would be happy to answer any questions. Thank you.
[The prepared statement of Thomas J. Starrs follows:]
Prepared Statement of Thomas J. Starrs, Kelso Starrs & Associates LLC
Mr. Chairman, members of the committee, ladies and gentlemen: My
name is Thomas Starrs. I am a senior partner in the energy and
environmental consulting firm of Kelso Starrs & Associates LLC, based
on Vashon Island, Washington. My consulting practice focuses on the
design, analysis and implementation of legal and regulatory incentives
for the development of distributed generation technologies, with a
focus on solar and wind energy. I also serve on the Board of Directors
of both the American Solar Energy Society, a national non-profit
membership organization dedicated to advancing the use of renewable
energy; and the Schott Applied Power Corporation, one of the largest
distributors of renewable energy equipment in the United States. I am
the author of over thirty publications regarding renewable energy and
distributed energy policy. In addition, I have made invited
presentations on energy policy to numerous national organizations, and
to legislative committees, public utility commissions, and state energy
offices in over a dozen states. This is my first time testifying before
the U.S. House. The opinions I offer here are my own and not
necessarily those of any of the organizations with which I am
associated. I very much appreciate the opportunity to testify this
morning on removing barriers to competitive generation, which is an
important element of our nation's path to greater energy diversity,
energy independence, and energy security.
OVERVIEW OF DISTRIBUTED GENERATION
Continuing technology innovation is creating new market
opportunities for decentralized or `distributed' power generation. The
distributed generation paradigm emerged in the early 1990s out of
research suggesting that the use of small-scale electric generating
facilities dispersed or ``distributed'' throughout the utility network
provided technical and economic benefits to the electricity system that
were not available from traditional central-station generation.
A number of studies--including several sponsored by utilities--have
identified direct, measurable economic benefits of having generation
sources located close to the end user.1 Distributed
generation reduces energy losses in transmission and distribution
lines, provides voltage support, reduces reactive power losses, defers
substation upgrades, defers the need for new transmission and
distribution capacity, increases reliability of electricity supply and
reduces the demand for spinning reserve capacity.2 In fact,
several studies have concluded that under many circumstances
(particularly where the utility's distribution system is operating near
capacity) non-traditional distributed benefits are comparable in scale
to traditional energy and capacity benefits.3
\1\ See D. Shugar, Photovoltaics in the Utility Distribution
System: The Evaluation of System and Distributed Benefits, Pacific Gas
& Electric (July 1991); R. Lambeth & T. Lepley, Distributed
Photovoltaic Evaluation by Arizona Public Service, 23rd IEEE PV
Specialists Conference (May 1993).
\2\ Howard J. Wenger, Thomas E. Hoff & Brian K. Farmer, Measuring
the Value of Distributed Photovoltaic Generation: Final Results of the
Kerman Grid-Support Project, Conference Proceedings, First World
Conference on Photovoltaic Energy Conversion (December 1994), p. 793.
\3\ See E. Prabhu, Finding High Value for Grid-Connected PV:
Southern California Edison's Innovative Solar Neighborhood Program,
American Solar Energy Society Annual Conference (1995); J. Oppenheim,
PV Value Analysis: Progress Report on PV-COMPACT Coordinating Council's
Consensus Research Agenda, American Solar Energy Society Annual
Conference (1995); H. Wenger, T. Hoff & B. Farmer, Measuring the Value
of Distributed Photovoltaic Generation: Final Results of the Kerman
Grid-Support Project, First World Conference on Photovoltaic Energy
Conversion (1994); D. Keane, Grid-Support Photovoltaics: Summary of
Case Studies, Pacific Gas & Electric (1994).
The increasing availability of distributed technologies will
provide residential, commercial and industrial customers with
economically viable options for using locally-available energy
resources to meet their own electricity needs. In addition, I believe
the public interest is best served by encouraging the use of solar
energy, wind energy, and other environmentally-preferred renewable
energy resources in distributed applications.
Where the distributed technology is fueled by a renewable resource,
it offers the additional benefit of displacing fossil-fuel generation
or other generation technologies with greater environmental impacts.
Solar and wind energy are the quintessential distributed resources,
allowing homeowners, businesses and industries to capture additional
economic value from two natural resources that flow freely and nearly
ubiquitously over the Earth. The use of solar and wind energy requires
no mining or processing of natural resources, no shipping or pipelining
of a fuel, no combustion, and no pollution control. Rather, these
resources require only the technology needed to capture and convert the
available sun or wind into electricity or other forms of useable
energy. Solar electric and wind energy technologies can be located
anywhere the sun shines or the wind blows, and can be used to generate
power on any scale, from watts to megawatts.
From its modest start in the research and development departments
of utilities a decade ago, distributed generation has emerged as one of
the most-discussed aspects of the electricity industry. Electric and
gas utilities are investing in distributed technologies; venture
capital is pouring into companies focusing on distributed generation;
and utility regulators are exploring the policy implications of
integrating distributed generation into existing electric utility
ADVANTAGES AND DISADVANTAGES OF DISTRIBUTED GENERATION
A recent report from the Worldwatch Institute lists eight benefits
of distributed generation (which it refers to as ``micropower''
technologies). The following table describing these benefits is from
the Worldwatch paper, with an additional column I prepared explaining
their applicability to solar and wind energy.
Eight Hidden Benefits of Micropower
Modularity..................... By adding or Solar and wind
removing units, technologies are
micropower system among the most
size can be modular, available
adjusted to match from watts to
Short Lead Time................ Small-scale power Solar and wind
can be planned, systems have
sited and built shorter lead times
more quickly than than any other
larger systems, generating
reducing the technologies.
Fuel Diversity and Reduced Micropower's more As non-depletable
Price Volatility. diverse, renewable
renewables-based resources, solar
mix of energy and wind energy
sources lessens are freely
exposure to available and
fossil fuel price cannot be
``Load-Growth Insurance'' and Some types of Solar energy is
Load Matching. small-scale well correlated
power, such as with electricity
cogeneration and demand,
end-use particularly for
expand with utilities whose
growing loads; peak is driven by
the flow of other air conditioning
resources, like demand.
solar and wind,
Reliability and Resilience..... Small plants are Solar and wind
unlikely to all energy systems use
fail modular components
simultaneously; that are easy to
they have shorter repair and
outages, are replace, and can
easier to repair, be dispersed over
and are more the landscape.
Avoided Plant and Grid Small-scale power Solar energy
Construction, and Grid Losses. can displace systems can be
construction of sited in locations
new plants, designed to
reduce grid maximize these
losses, and delay benefits.
or avoid adding
new grid capacity
Local and Community Choice and Micropower Solar and wind
Control. provides local energy development
choice and is usually the
control and the preferred choice
option of relying of local
on local fuels communities, and
and spurring small-scale
community applications often
economic can be permitted
Avoided Emissions and Other Small-scale power Solar and wind
Environmental Impacts. generally emits energy systems
lower amounts of produce no
particulates, emissions and have
sulfur dioxide a minimal
and nitrogen environmental
oxides, heavy impact.
metals and carbon
dioxide, and has
impact on land
and water supply
Source: Seth Dunn, Micropower: The Next Electrical Era, Worldwatch Paper
No. 151 (Worldwatch Institute, July 2000), p. 33 (first two columns);
third column by Thomas J. Starrs.
By contrast, there are relatively few disadvantages of distributed
generation. The principal one is that distributed generation remains
more expensive than central-station generation. For example, while
installed cost of new central-station generating facilities is between
$500 and $1,000 per kW, the cost of combustion-based distributed
technologies ranges from $600 to $1,500 per kW, and the cost of cleaner
non-combustion technologies such as solar cells, wind turbines, and
fuel cells range from $900 to $10,000 per kW.4 It appears
likely, however, that with mass production the cost of many distributed
technologies will drop significantly, making them more competitive with
\4\ S. Dunn, Micropower: The Next Electrical Era, Worldwatch Paper
No. 151 (July 2000), pp. 19 & 24.
The second disadvantage of distributed generation is that most
fossil-fueled distributed technologies are not currently as clean as
their central-station counterparts, which means that distributed
generation does not necessarily represent an improvement in the
environmental characteristics of the electricity industry. According to
the U.S. Environmental Protection Agency, the electricity industry in
the mid-1990s was responsible for approximately:
72% of sulfur dioxide (SO2) emissions;
33% of nitrogen oxide (NOX) emissions;
32% of particulate matter (PM) emissions;
23% of emissions of mercury, a toxic heavy metal, and
36% of all human-caused emissions of carbon dioxide, the most
dominant `greenhouse' gas.5
\5\ Comments of the U.S. Environmental Protection Agency to the
Federal Energy Regulatory Commission, Promoting Wholesale Competition
Through Open Access Non-Discriminatory Transmission Services by Public
Utilities, August 7, 1995, p. 7.
Innovations in larger-scale generating facilities, such as
combined-cycle gas turbines (CCGTs), have resulted in substantial
reduction in emissions per kilowatt-hour from these facilities. Unless
and until distributed technologies can match the environmental
performance of these larger-scale facilities, increased use of
distributed generation may not provide any incremental improvement in
the environmental characteristics of the electricity industry. For
example, recent studies prepared for the California Air Resources Board
and the Energy Foundation 6 indicate that the diesel-fueled
internal combustion engines used in some distributed applications are
60-100 times more polluting than CCGTs. Even fuel cells, when powered
by hydrogen extracted from natural gas, may offer little if any
environmental advantage over CCGTs.
\6\ See Air Pollution Emission Impacts Associated with Economic
Market Potential of Distributed Generation in California, Prepared for
the California Air Resources Board and the California Environmental
Protection Agency by Joseph Iannucci et al., Distributed Utility
Associates (June 2000); and Can We Have Our Cake and Eat It Too?:
Creating Distributed Generation Policy to Improve Air Quality, Prepared
for the Energy Foundation by James Lents, Center for Environmental
Research and Technology, University of California, Riverside
(Distribution Draft November 2000).
It is important for policymakers to understand that not all
distributed technologies are equal from an environmental perspective,
and that among distributed generating technologies, only solar
photovoltaic and wind energy systems currently offer clear
environmental benefits compared to other newer, more efficient
generating resources. Policymakers should recognize and account for the
significant differences in the environmental characteristics of various
distributed technologies in determining to what extent these
technologies deserve support. Rules encouraging the use of distributed
technologies without regard for their environmental performance may do
a disservice to the public. As a result, public policies should favor
those distributed technologies that offer significant environmental
benefits relative to other generating technologies.
THE PUBLIC INTEREST IN A DISTRIBUTED ENERGY FUTURE
The transition to a distributed energy future is likely to result
in an electricity system that is less polluting and more efficient,
reliable, and resilient.
Distributed technologies are the electrical equivalent of the
personal computer. Computing power used to be concentrated in large-
scale mainframe computers with access via ``dumb'' terminals at the
end-user's location. The last two decades have seen a near-complete
transition to microcomputers or minicomputers, each able to operate
independently but also frequently linked to other computers to create
electronic networks of information. Similarly, the generation of
electric power has been concentrated in large-scale central-station
facilities with the power transmitted, for the most part
unidirectionally, to end-users. Increased reliance on distributed
generation ultimately will result in a complex web of generating
sources, with power flowing in multiple directions through the
distribution system. Although for the foreseeable future this
transition will not be complete, in that distributed generation will
supplement rather than replace existing central-station generation,
some industry analysts believe that new central-station plants on the
order of 1,000 MW (typical of large nuclear and coal-fired power
plants) will soon be unheard of.
Much of the promise of the transition to a distributed energy
future stems from potential improvements in the efficiency of energy
conversion and in the environmental performance of the energy supply
system. On-site generation allows the capture of waste heat, increasing
the overall systems efficiencies of many combustion and non-combustion
distributed technologies, including fuel cells, to as much as 80-90
percent. In addition, some distributed technologies--with the
exceptions noted earlier--offer substantial environmental benefits
relative to existing energy conversion technologies. The Worldwatch
Institute notes that micropower technologies that rely on cogeneration
and cleaner fuels--either renewable energy or the cleanest of the
fossil fuels, natural gas--have 50 to 100 percent fewer emissions, on a
per-kilowatt basis, of particulates, nitrogen and sulfur oxides,
mercury, and carbon dioxide than traditional fossil-fuel
\7\ Micropower, pp. 36-37.
The threat of human-caused climate change alone is reason enough to
encourage the structural changes necessary to support a distributed
energy system. Under a business-as-usual approach, the construction of
new generating facilities would triple the carbon emissions from the
electricity sector in developing nations alone. Widespread adoption of
distributed renewable generation could reduce these projected emissions
by 42 percent.8
\8\ Micropower, p. 37.
A distributed energy future also will help to resolve reliability
and power quality concerns. Electricity reliability problems recently
have reached crisis proportions, turning energy issues into front-page
headlines for the first time in over two decades. Transmission
constraints and capacity shortages in some regions have resulted in
power disturbances and outages. An outage in Chicago during the summer
of 1999 cut power to 2,300 businesses, including the entire Board of
Trade on a mid-week afternoon.9 Supply problems in San Diego
contributed to a doubling and even tripling of electricity prices
during the summer of 2000.10 These problems increasingly are
seen not as isolated instances, but as indications of a power supply
system that has eroded as demand has grown.
\9\ Micropower, p. 38.
\10\ Testimony of San Diego Mayor Susan Golding to the Board of
Governors of the California Independent Systems Operator (ISO)
Regarding Wholesale Electricity Rate Price Caps (August 1, 2000).
Contributing to reliability and power quality concerns are the
increasing demands placed on the electricity system by the digital
economy. Utilities traditionally sought to provide ``three 9's'' of
reliability--99.9 percent availability, equivalent to about eight hours
per year of outages. However, the proliferation of computers and other
electronic equipment that is highly sensitive to even momentary
disruptions in power has created a demand for ``six 9's'' or even
``nine 9's'' of reliability. The existing distribution system is unable
to provide this level of performance, forcing e-commerce companies and
other participants in the digital economy to look elsewhere for their
reliability needs. Among the options to which they turn is distributed
generation, where innovations in power electronics, storage systems,
and communications networks have enabled distributed technologies to
meet the most stringent needs for power quality and reliability.
BARRIERS TO INCREASED USE OF DISTRIBUTED GENERATION
A recent report prepared for the National Renewable Energy
Laboratory describes the barriers to distributed generation encountered
in 65 different case studies, ranging from a 300 Watt solar electric
system to a 26 MW gas turbine project.11 I was one of the
authors of that report. In it, we identified and described a wide range
of technical, business practice, and regulatory barriers encountered by
the developers and owners of the distributed generation facilities.
\11\ B. Alderfer, M. Eldridge and T. Starrs, Making Connections:
Case Studies of Interconnection Barriers and Their Impact on
Distributed Power Projects, National Renewable Energy Laboratory,
Publication NREL/SR-200-28053 (May 2000).
Technical barriers arise from utility requirements intended to
ensure engineering and operational compatibility between the utility
grid and the distributed generator. Most of these requirements focus on
the utilities' safety, power quality, and power reliability concerns.
The dominant technical barrier for most distributed generating
technologies is the failure to adopt uniform standards for
interconnection to the utility grid. Applicable standards for solar
photovoltaic systems have been approved by the Institute of Electrical
and Electronics Engineers (IEEE 929-2000), the Underwriters
Laboratories (UL 1741), and the National Fire Protection Association
(NEC Article 690), and these standards have been adopted in over a
dozen states, not only for solar electric systems but also in some
cases for other inverter-based technologies such as small wind systems,
fuel cells, and microturbines. Comprehensive standards for a broader
array of distributed technologies have been developed and adopted by
several states, including California, Delaware, New York, and Texas.
The IEEE is in the process of developing a broader technical standard
encompassing all distributed technologies, 12 but this
standard is a year or more away from being approved.
\12\ Institute of Electrical and Electronics Engineers, IEEE P1547
Draft Standard for Distributed Resources Interconnected with Electric
Power Systems. See http://grouper.ieee.org/groups/scc21/1547/.
Business practice barriers consist of contractual and procedural
requirements for interconnection of distributed generation facilities.
Among the most common complaints of owners and developers of
distributed generation facilities is the absence of simple,
standardized procedures among local jurisdictions and utilities for
processing permitting and interconnection requests. According to the
NREL study, more than 25% of the case studies cited project delays
greater than four months. Many facility owners and developers also
objected to application and interconnection fees that were seen as
arbitrary and disproportionate. In one extreme case, the owner of a
single-module solar electric system expected to produce approximately
$40 per year worth of electricity was asked to pay up to $400 in
application and processing/inspection fees, thereby offsetting ten
years' worth of anticipated energy savings.13
\13\ Making Connections Report, Case #26, pp. 77-78.
Regulatory barriers include rate and tariff issues, including the
imposition by utility regulators of backup or standby charges on
distributed generation facilities; distribution wheeling charges for
the delivery of power to wholesale or retail customers other than the
utility itself; exit fees to discourage efforts to reduce dependence on
utility power through self-generation or even demand-side management;
and administratively determined buyback rates that do not reflect the
economic benefits of distributed generation or clean power generation.
For example, solar energy advocates had to appeal to the California
Public Utilities Commission to prevent a utility from imposing a
standby charge on net metering customers that would have offset nearly
90 percent of the anticipated energy savings from a 1 kilowatt solar
\14\ Making Connections Report, p. 24.
Another fundamental barrier to a distributed energy future is the
apparent absence among U.S. policymakers of the political will needed
to support the infrastructure investments necessary to enable the
widespread adoption of distributed technologies. Upgrades to the
distribution system are essential for proper integration of distributed
technologies into existing electricity networks. However, many
utilities, instead of embracing the opportunity to create the
electrical equivalent of an ``open architecture'' system, hesitate to
make the necessary utility investments, perhaps fearing the loss of
physical or economic control over the electricity system. Similarly,
many utility regulators appear reluctant to allocate the costs of
bolstering the distribution system among all customers, perhaps fearing
the lack of public support for such expenditures. Although these issues
are just starting to be addressed among the states, early evidence
suggests that much of the cost of making the transition to a
distributed energy future will be shouldered by private developers of
distributed generation facilities, even while the benefits of a
renewed, more resilient distribution system accrue to the public.
COMMENTS ON INTERCONNECTION AND NET METERING ISSUES
My oral testimony this morning will focus on three specific areas:
the development and adoption of uniform, standardized interconnection
requirements for distributed generation facilities; the use of `net
metering' to encourage small-scale distributed generation; and the use
of `consumer friendly contracts' to streamline and simplify the process
of interconnecting distributed generating facilities.
Standardized Interconnection Requirements
One of the most significant barriers to the broader
commercialization of distributed technologies is the absence of
uniform, national technical standards for the interconnection of
distributed generating facilities. The problem arises because utilities
historically have had substantial discretion over interconnection
requirements, and have often used that discretion to develop
requirements that vary considerably from one utility to the next
without appropriate technical or economic justification. These utility-
specific requirements were of relatively little concern for the
developers of larger-scale generating facilities, whose projects were
big enough that they could justify the cost of hiring consulting
engineers and attorneys to negotiate project-specific interconnection
requirements for their facilities. For smaller systems such as
residential `rooftop' solar electric systems or farm-scale wind energy
systems, these costs are an absolute deal-breaker.
Utilities play a tremendously important role in our society by
maintaining the safety and reliability of the grid, and as a result
they have legitimate concerns about the interconnection of non-utility
generating equipment to their networks. On the other hand, utilities
face a conflict of interest because they have an economic incentive to
discourage customers from generating their own electricity: the more
customers self-generate, the less those customers are buying from the
The solution to this problem is the adoption of national standards
developed by appropriate authorities, such as the Institute of
Electrical and Electronics Engineers (IEEE), Underwriters Laboratories
(UL), and the National Fire Protection Association (which writes the
National Electrical Code, or NEC). The states are already pursuing this
approach: As Figure 1 indicates, over 20 states have passed laws or
enacted regulations requiring the development of standardized
interconnection requirements for at least some categories of
distributed generating facilities.
Net metering is a simple, inexpensive, and easily-administered
mechanism for encouraging the use of small-scale distributed
generation. Net metering allows utility customers to spin their meter
backwards when they produce more electricity than they need for their
own lights and appliances.
Under existing federal law (the Public Utility Regulatory Policies
Act of 1978), utilities are required to interconnect with certain
distributed generating facilities, and to purchase the excess
electricity produced by those facilities. But under PURPA, the utility
purchases that excess electricity at an administratively-determined
`avoided cost' price, which is usually a fraction of the retail price
the customer pays for power. Net metering provides a modest economic
incentive for eligible facilities by crediting them for this excess
electricity at the retail rate.
Net metering policies have been tremendously popular at the state
level. Just five years ago, only 14 states allowed net metering, and
most of those requirements were adopted pursuant to state
implementation of the federal PURPA law. Today the total stands at 34
states, with four new states--Arkansas, Georgia, Hawaii and Wyoming--
enacting net metering laws just this year (see Figure 2). In most
cases, these laws were enacted by legislation (although in a few cases
net metering policies were adopted by regulation), and in most cases
with broad bipartisan support. In my home state of Washington, for
example, the 1998 net metering law passed unanimously in a then-
Republican controlled legislature and was signed into law by a
Another fundamental barrier to the interconnection of distributed
generating facilities is the failure to adopt simplified
interconnection agreements and routine procedures for processing
interconnection requests. Again, particularly for small-scale
facilities, the goal should be to attain ``plug and play'' simplicity
that eliminates unnecessary delays and inappropriate expenses.
Unfortunately, many utility customers across the country have had the
experience of contacting their local utility seeking information on
interconnection procedures, only to be ignored or rebuffed or otherwise
discouraged. In response, some states have explicitly required the
development of simplified agreements and specific timelines for the
processing of interconnection requests.
COMMENTS ON PROPOSALS CURRENTLY BEFORE THE HOUSE
Although today's witnesses have not been asked to focus their
testimony on any particular bills currently in the House of
Representatives, I am aware of several bills that contain provisions
relating to distributed generation, interconnection standards, and net
metering. These include:
H.R. 1045--``Energy Self-Sufficiency Act for the 21st
Century'' (Mrs. Wilson). Title I of this bill requires the
Federal Energy Regulatory Commission (FERC) to adopt safety-
reliability, and power quality standards for distributed
generation facilities, and requires utility distribution
companies to interconnect distributed generation facilities
that meet the standards and pays the direct costs of
interconnection. It also requires the costs, terms and
conditions of interconnection and subsequent service to be
just, reasonable and non-discriminatory, as determined by the
Commission. This is a simple and logical approach to creating
uniform, standardized interconnection requirements for
distributed generation facilities. I believe the enactment of
this provision would have a positive, market-enhancing effect
on the commercialization of distributed technologies.
Title II of this bill contains an investment tax credit for
distributed power property or combined heat and power system
property. However, the definitions appear to be narrowly drawn
to exclude residential property (except rental property). These
definitions would exclude residential fuel cell systems, solar
electric systems, and wind energy systems on farms or ranches
that are metered and billed as residential customers. I see no
justification for excluding such facilities, which offer
substantial distributed benefits and environmental benefits,
from investment tax credits that are available to other
distributed generation facilities.
Title III of this bill provides for research and development on
new distributed generating technologies, including various non-
renewable technologies such as advanced natural gas turbines,
advanced internal combustion engines, fuel cells, and
microturbines but not including renewable technologies such as
solar, wind, and biomass technologies. Again, I see no
justification for excluding technologies that offer significant
potential for diversifying our energy resources, improving our
energy security, and protecting our natural environment.
H.R. 1945--``Combined Heat and Power Advancement Act of 2001''
(Mr. Quinn). Title I of this bill requires the FERC to adopt
rules establishing reasonable and appropriate technical
standards for the interconnection of a generating facility at
the distribution level. Generating facilities that comply with
the relevant rules are entitled to interconnection with the
distribution facilities of the local distribution utility. The
rules are to be administered and enforced primarily by non-
Federal regulatory authorities. The Title also requires local
distribution utilities to provide backup power (or to enable
another entity to provide backup power using the distribution
utility's facilities) under just and reasonable, and non-
discriminatory, terms and conditions. Title I also contains
comparable provisions for interconnection of generating
facilities at the transmission level.
Title II of this bill contains an investment tax credit for
combined heat and power system property. This tax credit is
even more narrowly drawn than the proposed tax credit in H.R.
1045 (above), since it excludes all distributed generating
facilities that are not also combined heat and power
facilities. These definitions would exclude most fuel cell
systems, most biomass facilities, and all solar electric and
wind energy systems. Because these technologies can contribute
substantially to our nation's energy independence and energy
security, I see no reason to exclude them from the favorable
H.R. 954--``Home Energy Generation Act'' (Mr. Inslee). This
bill requires retail electric suppliers to offer `net metering'
arrangements to customers with eligible generating facilities,
including fuel cells and solar, wind or biomass facilities with
a generating capacity of up to 100--kilowatts. The bill defines
the terms and conditions under which net metering calculations
shall be made, including a non-discrimination provision
prohibiting the imposition of additional fees and charges on
net metering customers. It also limits the total capacity of
net metering facilities to two percent of the utility
distribution company's aggregate peak demand. Net metering
facilities are required to meet applicable safety, performance,
and power quality requirements established by certain national
standards-setting authorities. In addition, the bill requires
the FERC to develop broader standards for the interconnection
of distributed generation facilities up to 250--kilowatts. A
non-preemption provision grants states the authority to
establish or impose additional incentives for qualified
generation and net metering, beyond those in the bill. Finally,
the bill requires the FERC to develop simplified, ``consumer-
friendly contracts'' for the interconnection of distributed
generation facilities up to 250--kilowatts.
The language in this bill closely resembles the language enacted
in over a dozen states in recent years, relating to net
metering and interconnection of distributed generating
facilities. Although these state laws have varied significantly
in certain elements of their policies, they have been
remarkably uniform in extending net metering eligibility to
certain small-scale, renewable-fueled, customer-sited
generating facilities and in adopting uniform, standardized
interconnection requirements based on applicable IEEE, UL and
NEC standards. The enactment of federal legislation along these
lines would be the least disruptive to states that have already
implemented comparable legislation.
Twenty years ago, the telecommunications industry in the U.S. was a
cumbersome, heavily regulated business dominated by regulated
monopolies that demonstrated little appetite for innovation. Today, the
telecommunications industry is highly competitive and highly
innovative, with consumers able to choose among a remarkable array of
products offered by many different manufacturers. One of the key
elements in that transformation was overcoming the telephone utilities'
institutional resistance to interconnecting facilities and equipment
from competing providers into the wireline network under fair, non-
discriminatory terms and conditions.
The electricity industry in the U.S. is in the early stages of a
similar transformation. The traditional paradigm of large, central-
station generating plants feeding a network of high-voltage
transmission lines and local distribution systems in a geographic
region, all owned by a single, vertically-integrated company, will
evolve in the coming decades to a complex web of interconnected
facilities for generating and storing electricity, owned by many
different companies and even individuals. The utilities' role will
shift to the management of electricity flowing in every direction
through the network. Fortunately, this transition has the potential to
provide substantial benefits for all Americans, including a more
efficient, more responsive, more reliable, and more environmentally-
benign electricity system. But our nation's ability to make this
transition efficiently and smoothly is threatened by the same
reluctance on the utilities' part--except that it is the electric
utilities this time--to integrating these facilities into their
distribution networks. The bills currently in the House can help
overcome this reluctance and encourage the utilities to embrace this
I would like to thank Congressman Barton and the others members of
the Committee for their interest in removing barriers to competitive
generation and for considering initiatives to encourage the development
of viable, competitive markets for distributed generation technologies
Thank you for the invitation to appear before you today. I would be
happy to answer any questions the Committee may have.
[GRAPHIC] [TIFF OMITTED] T4848.003
[GRAPHIC] [TIFF OMITTED] T4848.004
Mr. Barton. Thank you.
The Chair will recognize himself for the first question
period. We are only going to have one question period because
if we are really, really lucky we can get the questions in
before we have to go vote; and once we go vote there is
probably going to be 5 or 6 votes. So we may be able to let
everybody go have lunch in the next 20 to 25 minutes.
I am going to ask Mr. Brent--I believe it is either Mr.
Brent or Mr. Hall that talked about a consensus, a working
group that is working within IEEE to come up with some national
interconnection standards. Which of you talked about that? Mr.
Hall or Mr. Brent?
Mr. Brent. Mr. Hall talked about consensus. I talked about
the IEEE as the working body doing the work on interconnection
Mr. Barton. Well, my question to both of you, how close are
you all, this group, to consensus that actually could be put
into legislative language if necessary to be put into a statute
to help FERC?
Mr. Brent. On technical standards I would propose that we
are extremely close, and on some of the more esoteric I would
say we are coming to closure rapidly.
Mr. Barton. Okay. Mr. Hall.
Mr. Hall. I think there is two different issues here. One
is, what are the actual standards; and the IEEE is working on a
set of technical uniform interconnection standards. It is
important to note that the IEEE is a body made up of voluntary
participants based on----
Mr. Barton. I am very aware of that.
Mr. Hall. [continuing] on consensus. And we heard testimony
from Assistant Secretary Garmon last week on the Senate side
that the IEEE process is not likely to complete their
deliberations this year. However, some of the legislation that
is before you in the bills, particularly in H.R. 1945,
contemplates giving FERC the authority to convene bodies or use
standards that are developed by a voluntary body like IEEE. So
I think we are in a position right now where we have got
consensus that establishing an authority to have uniform
technical interconnection standards is appropriate now.
It is also worthy to note that the language that Mr. Brent
talked about in H.R. 1045, all of the issues addressed in that
piece are also addressed in H.R. 1945. It just happens to also
address transmission interconnection as well as opposed to only
being limited to distribution levels.
Mr. Barton. We do not have to put in the statute to the
degree of specificity that might be necessary to actually enact
the standard, but if we are going to draft a bill and pass bill
in the next 2 months, and we are going to have an
interconnection requirement, I guess my question is, how close
are the groups that are working on this to getting their
squabbles squabbled so that we can move forward? Are there any
major technical outstanding issues that are not doable?
Mr. Hall. I know specifically on H.R. 1945, practically--we
have been working with practically every group that has any
interest in interconnection, and I would submit that this is as
close to a consensus piece of language as you are going to
Mr. Barton. Well, when you go back, encourage more
consensus more quickly so that we can use your work product.
Mr. Hall. It would certainly be helpful if you had--if you
were hearing directly from people that weren't before you,
because what I heard this morning from the first panel and
certainly from the second is that everybody seems to agree with
this. So it would be helpful to the extent that you are hearing
Mr. Barton. I always hear about the disagreements. There is
no lack of people willing to tell me what they are unhappy
Ms. Magruder, you talk about time-of-use metering. Who is
going to pay for these time-of-use meters, and how expensive
are they compared to existing meters there in peoples' homes?
Ms. Magruder. I can't address the question of how they
compare to the cost of existing meters. I can tell you that if
you can get a full truckload--if you can get your truck loaded
up and send your guy out to install them, technology has gotten
the cost down to about $100 installed now.
Mr. Barton. These horror stories of $2,000 meters are just
Ms. Magruder. There may be a $2,000 meter. It is not one
that we would propose to put on someone's home.
Mr. Barton. A meter you would propose to put on somebody's
home is equivalent in cost to the existing meter, and the cost
of the meter can be spread out over time if that were a
consideration. So that is not a reason not to do it.
Ms. Magruder. It is not a reason not to do it. And
depending on the circumstances of the State restructuring law,
it might even be something that a marketer would bear himself,
just like MCI or some of these folks who will give you a free
cell phone if you sign up for a year's worth of service from
Mr. Barton. Mr. Starrs, my time is about to expire right
now, but this is a little off the subject. But since you are
our renewable guy and our solar guy, what is the latest cost
number for a solar panel to put on your home in terms of
kilowatt per hour if you wanted to run a water heater or
something at that level? What is your kilowatt-per-hour charge
Mr. Starrs. It is still considerably more expensive than
the average retail rates that customers pay. Systems are
available on an installed cost of little as, say, $2,000 and as
much as, say, $20,000 to $50,000 depending on how much of your
electricity you want to offset. And those figures translate
roughly, obviously depending on the financing, to a per-
kilowatt-hour cost of between 20 to 25 cents a kilowatt.
Mr. Barton. Even in California or some high-cost State,
unless you are in a remote area----
Mr. Starrs. That was the short answer. These systems are
basically cost-effective in California today because of
additional incentives that California has put in place.
California has a pretty substantial rebate program that returns
to the customer about half the cost of the system when it is
installed. So that, along with other incentives that have been
enacted at the State level in California, frankly means that if
you are building a new home in California, it doesn't make
sense not to install a solar system.
Mr. Barton. Thank you. My time has expired.
The gentleman from Virginia is recognized for 5 minutes.
Mr. Boucher. Thank you very much, Mr. Chairman.
Mr. Hall, Mr. Brent and others who may want to comment on
the question, if we proceed to adopt an interconnection
standard for distributed generation, I would like your advice
on whether we should address a couple of concerns. The first of
those would be whether there is any limitation in size of the
generating unit that would qualify as a distributed generation
unit for purposes of accessing this interconnection standard.
And the second question is whether we should have any
particular requirements with regard to emissions or the type of
fuel that is used in that unit.
We do not have any definition of distributed generation
today, not in a legal sense. I mean, we know what it means to
talk about distributed generation with a consumer putting the
source of his electricity very near the point of consumption.
That is what we mean by it, but we don't have a legal
definition, and as we draft one, should we address these
concerns? Should we talk about the size of the unit? Should we
talk about emissions from it? These units presumably would have
to comply with the new source performance standards and meet
all of the requirements of current law with regard to
emissions. But some people, when they talk about distributed go
beyond that. They talk about the need to have superclean units
and green units. And I would like your advice on that set of
If we write a definition, if we adopt an interconnection
standard, to what extent should we address these other
elements? Mr. Hall?
Mr. Hall. I would be happy to address it. The short answer
to both is no. It is unnecessary to either define or limit in
any way, shape or form the size, nor is it necessary to limit
the performance, specifically in establishing uniform
interconnection standards. Everybody needs a set of uniform
technical interconnection standards that they can rely on in
interacting with our distribution and our transmission system.
There are varying--different definitions that people might
propose of what is distributed generation versus what is not.
I think the future is a continuum of technologies, burning
a variety of fuels in a whole range of settings, all of which
should have equal opportunity to participate in the market as
long as they are also capable of satisfying other objectives
that we have, clean air being one, but using a limiting
definition of a distributed generation facility. Having to meet
a particular environmental standard is, in my mind, not the
role of energy legislation. It is the role of environmental
legislation and regulation.
Mr. Boucher. Let me ask you the question, do you have----
Mr. Barton. Would the gentleman yield just on that?
Mr. Boucher. I would be happy to yield.
Mr. Barton. In our bill in the last Congress, we had a size
limitation. I don't remember exactly, but it was either 10 or
50 megawatts, but it was not unlimited, and we had some
opposition to that, but not a lot. We don't want to you build a
500-baseload megawatt power plant and call it distributed
Mr. Hall. There are two issues that we are mixing together
here. I think that if you are limiting your interconnection
only to the distribution system, then you may find that there
is an upper bound on the size that is appropriate to connect it
to a distribution system. Is that necessary for us to, A, limit
interconnection only at the distribution level? I would say no.
Is it clear, the line between distribution and transmission?
No. There are plenty of cases before FERC where various lines
are being refunctionalized from transmission to distribution
and distribution to transmission.
Mr. Barton. There is probably going to be--in fact, I would
say there is almost a certainty there will be some size
limitation on distributed generation.
Mr. Boucher. Mr. Brent, would you care to comment?
Mr. Brent. Yes. My testimony called for distributed
generation and is generally considered to be up to around 50
megawatts in size.
I agree with Mr. Hall in terms of the answer of no relative
to emissions. We are of the opinion that we need to be as clean
as we can going in and be as inclined as we are to the
regulations in place coming down the road. Technologies will
allow us to raise higher efficiencies. Efficiencies today are
not considered in environmental compliance. We need to look at
output-based standards. And I think, depending upon whatever
fuel you use, as you meet the emerging regulations and
guidelines for distributed generation and combined heat and
power, we are going to answer the environmental responsibility
for distributed generation. It is not the fuel. It is the
ability of the technology to convert the fuel cleanly.
Mr. Boucher. Educate me about the fuel and emissions
generally. My understanding is that, generally speaking, new
sources have to meet very stringent requirements for new
sources under the 1977 Clean Air Act. If somebody wants to put
a diesel generator on their parking lot and supplement their
power today, can they do that? It probably doesn't meet the new
source performance standards. So can somebody put a diesel
generator in their parking lot under current law today? And if
the answer to that is yes, and, in fact, that doesn't meet the
new source performance standard, do we have to be concerned
about people using diesel or something else that is not
particularly clean if we are going to have a broad
encouragement for more distributed generation by providing this
Mr. Brent. If I may, sir, we would prefer to be called
reciprocating engines that burn distillate fuel. And we would
also suggest to you that that individual who puts the
reciprocating engine on the back of his parking lot is limited
by the number of hours that they can run because of the amount
of emissions that they produce. So there are already
regulations in place today through the State regulatory and the
Federal guidelines on how many hours they can run before they
hit the total ton limit.
I would suggest, again, it is not the technology. It is a
matter of complying to the statutes that are in place today.
There are many times when we can't get gas through a particular
distributed generation end user, who is very concerned about
the reliability of supply, as we have seen, unfortunately,
happen in California with a plethora of distributed generation
technologies going in because we have people who have suffered
great loss for lack of electricity and are willing to put up--
Mr. Boucher. We will digest that answer. I think we need to
be cognizant of what the effect of a lot of distributed
generation might be on air quality.
Mr. Boucher. May I ask for 2 additional minutes? My time is
Mr. Barton. Without objection.
Mr. Boucher. Mr. Yacker?
Mr. Yacker. If I could respond to that briefly. Given the
Cheney report, it talked about--I think it was 1,300 new power
plants over a period of years. I would like you to reconsider
the size limit. In particular, a concept growing in popularity
is the idea of industrial parks, cogeneration parks--some
people call them power parks--that would have either in whole
or in part a generation base for that facility. It would make
Mr. Boucher. Mr. Starrs?
Mr. Starrs. As a designated renewables guy here, I largely
agree with Mr. Hall and Mr. Brent, but with a couple of
qualifications. On the emissions issue--by the way, there is a
fair amount in my written testimony that does relate to these
issues. I think that it is a very important issue from a public
policy perspective. But I think we should be developing--this
committee's jurisdiction is over the technical and nontechnical
interconnection requirements, and those are issues for energy,
legislative and regulatory committees. I think the air quality
issues are very important. And frankly, I think there are going
to be significant constraints placed on distributed
technologies that are not currently in place now. But those
issues are now being addressed by air quality regulators and
other environmental regulators.
Right now, for example, it is clearly the case that some of
these facilities, like the diesel generators that you
discussed, have been largely exempted from the air permitting
requirements because typically they are used just as emergency
backup generators, and their run times are very short. But I
think those issues will be revisited if and when you start
seeing those kinds of facilities for distributed applications
where they are starting to press the limit on those run times.
Mr. Boucher. Well, we are the people who have the
responsibility for revisiting. Part of this subcommittee's
jurisdiction is air quality. And so we have to consider the
broad range of issues.
Let me thank this panel of witnesses. I would personally
like to spend a little more time with you--actually, they have
been by the office. But let me conclude by saying----
Mr. Barton. I am sure they are available for lunch.
Mr. Boucher. That is right, but I am out of money this
week, Mr. Chairman. But let me conclude with two comments.
First of all, Mr. Yacker, I very much appreciate your
recommendations to us on the question of PURPA. I agree with
what you have said. I personally think that the interconnection
right, the right to buy power from the grid and sell power into
the grid, will have to be retained for qualified facilities
until we have a fully competitive market locally where they can
meet those needs on the open market if circumstances require.
And my goal, as we consider PURPA in this subcommittee, will be
to adhere to those principles.
Ms. Magruder, I want to commend you also. I think the
realtime metering that your technology affords brings to
consumers of electricity the opportunity to save substantially
on their bills by consuming power during times of lower overall
demand. That also produces the benefit of perhaps lessening the
number of new generating units that will have to be built by
flattening out peaks. And you might want to supply this
subcommittee with any estimates that you have of two things,
and you can do this sometime in writing later.
One would be the amount of electricity savings in terms of
bills paid by the typical consumer if that consumer is able to
use realtime metering. And the second would be any estimate you
would care to make of the new generating capacity that would
not have to be built; in other words, the avoided cost of new
generating capacity that might arise from a broad use in the
United States of realtime metering.
The other thing I would suggest is that you supply to us a
very precise set of recommendations for what we need to do to
change the law in order to make sure that consumers have access
to the technology that you are putting forth.
Thank you very much. The gentleman from Oregon is
recognized for 5 minutes.
Mr. Walden. I have no other questions at this time.
Mr. Barton. Seeing no other members present, again, we may
have a few questions for the record. We hope that you would
reply quickly, because we are going to begin drafting a draft
in the next couple of weeks.
This hearing is adjourned.
[Whereupon, at 12:45 p.m., the subcommittee was adjourned.]
[Additional material submitted for the record follows:]
Prepared Statement of Knoxville Utilities Board and Memphis, Light, Gas
& Water DiVision
INTRODUCTION AND SUMMARY
Memphis Light Gas and Water (``Memphis'') and Knoxville Utilities
Board (``Knoxville'') submit this statement for the record of the
Committee's hearings on electric industry restructuring issues to set
forth their views on the need for legislation related to the Tennessee
Valley Authority (``TVA''). Knoxville and Memphis are two of TVA's
largest customers, accounting for approximately 16 percent of TVA's
power sales for resale and serving more than half a million customers.
As distributors of electricity, Memphis and Knoxville are committed
to providing their customers with reliable service at the lowest
reasonable cost. Currently, however, TVA's wholesale rates to
distributors are sometimes higher than those offered by other power
suppliers outside of the Tennessee Valley. Yet, federal law effectively
prohibits TVA distributors, like Knoxville and Memphis, from purchasing
power from wholesale suppliers outside of the TVA service area. Without
action by Congress to change this legal framework governing TVA in a
comprehensive way, consumers within the Tennessee Valley region will
not even have the opportunity to benefit from alternative electric
supplies available in today's more competitive bulk power markets.
It is certainly true that TVA is a federal public works success
story, and Memphis and Knoxville recognize the infrastructure and
economic benefits that TVA has contributed to the Tennessee Valley over
many decades. It is also true that the electric industry has changed
dramatically since TVA was created in the 1930s, and it is now time to
reform TVA to equip it and its customers to meet the challenges and
opportunities of the 21st century. Unlike other electric systems across
the country as to which the Federal Energy Regulatory Commission (FERC)
or state and local regulatory bodies can facilitate change in response
to changing market conditions, only Congress can take the necessary
steps to facilitate change as to TVA. TVA is a creature of federal law,
and only federal law can change it. Accordingly, Knoxville and Memphis
respectfully urge Congress to take the actions necessary to restructure
TVA and extend the potential benefits of wholesale electric competition
to the people of the Tennessee Valley region.
More specifically, Memphis and Knoxville support the so-called
``Consensus'' legislation developed over months of negotiations by TVA,
municipal and cooperative electric distributors, and industrial users
in the Tennessee Valley. Further, Memphis and Knoxville support with
the addition of FERC jurisdiction over TVA's wholesale rates.
Accordingly, Knoxville and Memphis respectfully request the Committee's
consideration of the Consensus legislation and the additional provision
regarding FERC jurisdiction over TVA's wholesale rates, which is
essential for public accountability of TVA's rates and service and for
fairness to consumers and other industry participants alike.
FERC Regulation of TVA Wholesale Sales
In addition to the provisions set forth in the Consensus, Memphis
and Knoxville urge Congress to include FERC regulation of TVA wholesale
sales in any TVA reform legislation. Under existing law, TVA's
wholesale power sales are not subject to any oversight by FERC or any
other regulatory authority. The only entity with the power to oversee
TVA is the United States Congress, and its exercise of that function as
to core commercial matters such as the rates, terms, and conditions for
wholesale power sales is nonexistent. TVA is a completely self-
regulated entity that sets its own rates, terms, and conditions for
wholesale power sales without any independent review of any sort at any
The Federal Power Act grants FERC jurisdiction over wholesale power
sales in interstate commerce by public utilities. Rates, terms, and
conditions of service are required to be just, reasonable, and not
unduly preferential or discriminatory. In addition, customers have the
right to file a complaint with FERC challenging rates or contracts as
unjust, unreasonable, or unduly preferential or discriminatory.
Knoxville and Memphis strongly believe that this regulatory structure
should be applied to TVA.
Without oversight by an independent regulatory authority, like
FERC, TVA could charge whatever rates it wanted to charge, set terms
and conditions of service in whatever manner it wanted to set terms and
conditions, and otherwise use its market power in a wholly unrestrained
fashion in its wholesale sales business. It is true that provisions in
the Consensus legislation, such as removing the anti-cherrypicking
provision and requiring TVA to provide open access nondiscriminatory
transmission service, will produce some competitive options for TVA's
wholesale customers, but it is also true that TVA will continue to
possess market power in the wholesale sales market with respect to
many, if not all, of its distributor customers. Thus, it is critical
that Congress include in any legislation to reform TVA FERC regulation
of TVA's wholesale sales rates and service.
Fair Competition and Transmission Regulation
Foremost in any consideration of opening the Tennessee Valley to
electric competition is the notion that TVA will have an unfair
advantage over other wholesale power suppliers. The Consensus addresses
this concern by removing the TVA ``Fence,'' which prohibits TVA from
selling electricity outside of its existing service area, and the
``anti-cherrypicking'' provision, which prohibits open access
transmission on the TVA system into the TVA service territory.
The Fence restriction was established when TVA was granted the
authority to issue bonds to finance capital expenditures for its power
programs. TVA's legal ability to compete was so restricted because of
concerns that TVA's unique status could give it an unfair advantage
over other wholesale power suppliers. However, under the Consensus
legislation with FERC wholesale sales jurisdiction, the Fence would no
longer be necessary. TVA would be subject to the same regulatory
scrutiny as other public utilities making wholesale sales, including
FERC and the federal antitrust laws, and would be on a similar
competitive footing as others.
Hand in hand with removal of the Fence, Memphis and Knoxville
support the position set forth in the Consensus legislation that TVA
provide the kind of open access, nondiscriminatory transmission service
that is required today throughout the rest of the country. Current
law--the ``anti-cherrypicking'' provision--prohibits FERC from
requiring TVA to provide open access nondiscriminatory transmission
service within the TVA service territory. Thus, power distributors in
the Tennessee Valley, like Knoxville and Memphis, cannot access power
from suppliers outside of the TVA region, and TVA remains insulated
from the market for competitive electric supplies.
There are also concerns with respect to TVA competing with power
suppliers outside of the region. For example, TVA sales outside of the
region could denigrate TVA's capacity to meet the requirements of its
principal mission--serving the electric power needs within the
Tennessee Valley. Further, potential competitors of TVA have asserted
that TVA may have an unfair advantage when competing against suppliers
that do not have the funding and support of the federal government.
Therefore, the Consensus legislation provides that TVA will only be
permitted to sell electricity outside of the Fence in excess of the
demand of its customers inside the TVA service area. Moreover, FERC
jurisdiction over TVA's wholesale sales would require TVA to abide by
the same cost and rate rules as other wholesale sellers and would
provide a knowledgeable forum for resolution of any complaints about
TVA's rates and service.
Memphis and Knoxville fully support repealing the TVA Fence and the
anti-cherrypicking provisions. These Fence and anti-cherrypicking
provisions have become anachronisms in this day and age of competitive
wholesale power markets and should be repealed as set forth in the
Consensus legislation, thereby permitting TVA to sell power outside of
the Fence to a certain extent and permitting TVA distributors to access
power from suppliers other than TVA. These components of the Consensus
legislation, along with FERC jurisdiction over TVA's wholesale sales,
are essential to bring electric industry competition to the Tennessee
Valley and should be incorporated into any legislation on TVA reform.
Knoxville, Memphis and every other retail electric distributor in
the Tennessee Valley are currently parties to long-term power supply
contracts with TVA. These contracts require no less than five, and
often ten years advance notice for termination; otherwise they continue
in perpetuity. Thus, even if a TVA supplied distributor were to give
notice of contract termination today, it may not be able to purchase
power from alternative sources until 2010. To provide competitive
options that can actually be used by distributors in the Tennessee
Valley, TVA restructuring legislation must include mechanisms to reform
Under the Consensus proposal, distributors of TVA power, such as
Memphis and Knoxville, will be permitted to renegotiate their existing
power contracts in conformance with a more competitive market and to
facilitate access to alternative power supply options, including self-
generation, provided in a restructured TVA environment. For those
distributors who are unable to reach an agreement with TVA, the
Consensus provides distributors with the opportunity to cancel their
contracts on three years notice. Additionally, each year distributors
may, on two years notice, elect to purchase ten percent or less of
their power requirements from another supplier. These options,
including the three-year notice provision, provide TVA ample time to
obtain other buyers for the power made available by a distributor's
contract termination or reduction and, of course, allow distributors to
take advantage of new competitive power supply options that would
otherwise not be available as a practical matter.
TVA Debt, New Generation, and Stranded Costs
TVA has significant debt, and consideration of TVA reforms will
surely generate debate about how to deal with that debt, how to
decrease it, and how to prevent TVA from increasing it unnecessarily in
a competitive environment. The Consensus proposal addresses this
specifically by providing electric distributors in the Tennessee Valley
with forty-five days to review and provide comments on all TVA plans
and projections for new electric generating facilities prior to
acquisition. The notion here is that electric supply and disposition
will be harmonized through a supplier/market consultative process.
Further, the application of FERC regulation to TVA's wholesale rates
will not permit unjustifiable increases in costs, like new TVA
generation, where alternatives are available.
Potential stranded TVA costs are another area of concern. The
Consensus proposal deals with this subject in several ways. First, it
authorizes TVA to recover stranded costs that may arise from the
exercise by distributors of their contract reformation rights under the
same FERC stranded cost recovery rules applicable to other wholesale
sellers of power. This stranded cost recovery opportunity is, as
already committed to by TVA, strictly limited to the pre-September 30,
2007 time frame. Second, any stranded costs authorized to be recovered
by TVA must be used in the first instance to pay down TVA's debt. And,
finally, TVA is prohibited from using any stranded cost recovery
revenues to pay for additions to its generation capacity.
Application of Antitrust Laws to TVA
TVA is now exempt from the antitrust laws, yet it is clear that TVA
has enormous market power within the Tennessee Valley. Thus, in a
competitive power market, there would be no antitrust law protection
for TVA customers or competitors alike from potential antitrust
violations by TVA. Therefore, pursuant to the Consensus, TVA would be
subject to the federal antitrust laws to the same extent as other
governmental entities are subject to such laws--that is, injunctive
relief would be available through a successful court action, but treble
damages and attorney fees would not.
Repeal of TVA Regulation of Distributors
Currently, retail distributors of electricity in the Tennessee
Valley are regulated by TVA instead of by local governing bodies or
state public service commissions, as is the practice elsewhere in the
country. This means that TVA sets rates for distributors and thereby
controls the essence of the distributors' business relationships with
their retail customers. In a competitive electric market, it would be
viewed as anticompetitive for a wholesale supplier to regulate retail
distributors. To remedy this situation, the Consensus repeals TVA
regulation of distributors subject to the election of individual
In conclusion, Knoxville and Memphis strongly urge Congress to
enact fundamental reforms to TVA as described above. The Consensus
proposal was reached only after very intensive efforts on the part of
the entities most directly affected by reform of TVA, and it is
supported by the Tennessee Valley Public Power Association, the
Tennessee Valley Industrial Coalition, Memphis, Knoxville, and TVA
itself. All parties, including distributors such as Knoxville and
Memphis, worked diligently to develop a fair and pragmatic proposal for
reform of TVA that would best serve the interests of citizens and
businesses in the TVA service territory. Now, however, congressional
action is necessary. Otherwise, the Tennessee Valley region will remain
an island of federal monopoly in a sea of competition, which does not
bode well for electric consumers or economic development generally in
Mid-American Energy Holdings Company
August 29, 2001
The Honorable Joe Barton, Chairman
Subcommittee on Energy and Air Quality
2123 Rayburn House Office Building
Washington, DC 20515
Dear Chairman Barton: Thank you again for inviting me to
participate in the Energy and Air Quality Subcommittee's hearing on
National Electricity Policy: Barriers to Competitive Generation. It was
a pleasure to testify before the subcommittee, and I particularly
appreciated your gracious introduction and kind words about my wife,
Attached is my response to the question submitted for the record by
Members of the Subcommittee. I hope this serves to educate members of
the subcommittee on the extensive regulatory scheme that will remain in
place after passage of legislation that includes the provisions of H.R.
Please feel free to contact me with any other questions about my
testimony, PUHCA repeal or other important issues facing your
David L. Sokol
Chairman and Chief Executive Officer
Response of David Sokol to the Question from the House Subcommittee on
Energy and Air Quality
The Subcommittee has requested a description of federal and state
oversight of several topics: utility mergers, consumer protection,
wholesale and retail electric rates and market power. In response to
this question, I am very pleased to provide the Subcommittee with the
The primary authorities over a merger, acquisition, sale or
combination of investor-owned utility assets are the Federal Energy
Regulatory Commission (``FERC'') and the utility regulatory commissions
in the state or states where the affected assets are located. FERC's
standard in approving a merger, as stated in the Federal Power Act, is
that the merger must be ``consistent with the public interest.''
Federal Power Act Sec. 203(a), 16 U.S.C. sec. 824b(a). FERC has
implemented this standard by examining how the merger affects rates,
competition and regulation. If these effects are negative, FERC will
not find that the merger is consistent with (i.e., in) the public
interest, and the merger will not occur. Even if FERC approves a
merger, it may impose conditions before the transaction can proceed.
While statutory and regulatory requirements differ from state to
state, review of a merger, acquisition or sale of investor-owned
utility assets by state regulators generally seeks to ensure that
assets that are used to meet a public service obligation continue to be
used in such a manner. If the relevant state regulatory authority does
not approve the transaction, it will not occur.
Two additional reviews are necessary for utility mergers. Either
the Federal Trade Commission (``FTC'') or the U.S. Department of
Justice (``DOJ'') review mergers from a perspective of protecting
consumers from anticompetitive harms and antitrust abuses. The
objectives of both the Sherman Act and the Clayton Act are to preserve
and promote competition, not competitors. Their further objectives are
to protect the public from any failings in the market and to preserve
competition unfettered by any restraints of trade. These statutes
provide severe penalties, fines of up to $10 million and imprisonment
of up to three years, for their violation. See 15 U.S.C. secs. 1-7 and
45. Additionally, the Securities and Exchange Commission (``SEC'')
reviews the mergers of registered holding companies but has generally
been deferential to the decisions of FERC and the state regulators
(``watchful deference doctrine''). Madison Gas and Electric Co. v. SEC,
168 F.3d 1337 (D.C.Cir. 1999); Holyoke Gas & Electric Co. v. SEC, 972
F2d 358 (D.C.Cir. 1992). Again, if a merger fails to win the approval
of the FTC, the DOJ or the SEC, the transaction will not occur.
II. CONSUMER PROTECTIONS
The consumer protections that apply to all aspects of a
competitive, free-market economy also apply with equal force to
electricity sales. The FTC protects consumers from misleading or
deceitful advertising. State utility commissions, in their oversight of
the safety and reliability of electric service, assure the public that
meters are accurate, that utilities honor their statutory and tariff
obligations, that restoration of service is consistent with the public
interest, and that consumers have fair processes available to dispute
their bills. The DOJ's antitrust authority also protects consumers from
failures of the market in the course of its review of pending mergers.
See 15 U.S.C. secs 1-7 and 45. Many states also have antitrust
statutes. Under those statutes, state attorneys general have price
oversight to assure that no market participant is selling at below-cost
prices in order to drive a competitor out of the market. Attorneys
general also enforce state deceptive advertising laws, as well as laws
intended to thwart pyramid schemes and fly-by-night sellers.
III. RATE REGULATION
With respect to rate regulation, the jurisdiction is divided
between federal authority over wholesale rates (rates for sales for
resale and transmission in interstate commerce) and state authority
over retail rates (rates for end-use). The overall standard for
ratemaking is that rates, no matter how they are calculated or
determined, must be just and reasonable. 16 U.S.C. secs. 824d(a) and
IV. MARKET POWER
Market power is generally defined as the ability to sustain higher
than market prices over time. In a merger context, a wide variety of
behavioral and even structural conditions may be imposed by the FERC,
applicable state commissions, FTC or DOJ to mitigate and prevent market
power abuse. These remedies range from affiliate codes of conduct that
specify the pricing of transactions between a utility and its affiliate
(and require public disclosure of market information to competitors on
the same basis as that information is provided to affiliates) to
structural actions, such as excluding certain participants from certain
V. H.R. 1101
H.R. 1101 preserves this entire myriad of consumer and investor
protections (except for the SEC) and even strengthens regulatory access
to books and records by both federal and state regulators in sections 5
and 6, respectively. Additionally, under H.R. 1101, mergers will remain
subject to the same level of scrutiny, wholesale and retail rates will
be subject to the existing levels of oversight, and all market power
protections are completely unchanged.
The only real change in the legal landscape as a result of the
repeal of the Holding Company Act will be the elimination of that Act's
restrictions on investments, delays or actual prevention of the
offering of new products and services to consumers, barriers to the
development of regional transmission organizations, and the elimination
of a duplicative layer of federal regulation.