[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
ELECTRIC TRANSMISSION POLICY: REGIONAL TRANSMISSION ORGANIZATIONS, OPEN 
                    ACCESS, AND FEDERAL JURISDICTION
=======================================================================



                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION
                               __________

                            OCTOBER 10, 2001
                               __________

                           Serial No. 107-64
                               __________

       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
  (Ex Officio)

                                  (ii)















                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Anderson, John, Executive Director, Electricity Consumers 
      Resource Council...........................................    58
    Bennett, James D., Commissioner, New York State Public 
      Service Commission on behalf of National Association of 
      Regulatory Utility Commissioners...........................    93
    Cook, David N., General Counsel, North American Electric 
      Reliability Council........................................    42
    English, Glenn, CEO, National Rural Electric Cooperative 
      Association:
        Morning session..........................................    38
        Afternoon session........................................   122
    Esposito, Peter G., Vice President and Regulatory Counsel, 
      Dynegy, Inc. on behalf of Electric Power Supply Association   135
    Flynn, Peter, President, New England Power Company on behalf 
      of Richard P. Sergel, National Grid USA....................   110
    Fontes, Roger A., General Manager, Florida Municipal Power 
      Agency on behalf of American Public Power Association......    25
    Franklin, Allen H., President, CEO & Chairman, Southern 
      Company....................................................    96
    Gerken, Marc S., President, American Municipal Power-Ohio on 
      behalf of TAPS.............................................   129
    Harris, Phillip G., President and CEO, PJM Interconnection...    49
    Johnston, Robert, President and CEO, Municipal Electric 
      Authority of Georgia on behalf of The Large Public Power 
      Council....................................................   113
    Kanner, Marty, on behalf of Consumers for Fair Competition...    63
    Nordhaus, Robert R., Van Ness Feldman on behalf of Large 
      Public Power Council.......................................    34
    Schriber, Alan R., Chairman, Ohio Public Utilities Commission 
      on behalf of National Association of Regulatory Utility 
      Commissioners..............................................    11
    Steffes, James D., Vice President of Government Affairs, 
      Enron Corporation on behalf of Electric Power Supply 
      Association................................................    54
    Szwed, Stanley F., Vice President, Transmission, Firstenergy 
      Corp. on behalf of Edison Electric Institute...............    15
    Trabandt, Charles A., former FERC Commissioner...............   140
    Travieso, Michael J., Maryland People's Counsel..............   147
    Vesey, Andrew M., Vice President Energy and Utilities for the 
      CAP Gemini Ernst & Young...................................    67

                                 (iii)

  












ELECTRIC TRANSMISSION POLICY: REGIONAL TRANSMISSION ORGANIZATIONS, OPEN 
                    ACCESS, AND FEDERAL JURISDICTION

                              ----------                              


                      WEDNESDAY, OCTOBER 10, 2001

                  House of Representatives,
                  Committee on Energy and Commerce,
                    Subcommittee on Energy and Air Quality,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Largent, Burr, 
Whitfield, Norwood, Shimkus, Wilson, Bryant, Radanovich, Tauzin 
(ex officio), Boucher, Sawyer, Wynn, Waxman, Rush, McCarthy, 
Strickland, Barrett, and Luther.
    Staff present: Sean Cunningham, majority counsel; Jason 
Bentley, majority counsel; Brendan Williams, legislative clerk; 
Hollyn Kidd, legislative clerk; Sue Sheridan, minority counsel; 
and Rick Kessler, minority counsel.
    Mr. Barton. The subcommittee will come to order. If our 
audience would find a seat.
    We have an unusual situation this morning. We have two 
separate hearings with a separate lunch break in between. We 
also have the Democratic Caucus meeting to elect a new Whip. I 
spoke with the ranking member, Mr. Boucher, last evening and he 
agreed that we could do our opening statements and then I would 
call a recess until our Democrats got here to hear the 
testimony.
    Now, it's possible the Democratic Caucus will be all peace 
and harmony, and there'll be a unanimous consent election, but 
it's probable that it's going to be fairly contested and take a 
number of ballots, and the Democratic process will go slowly. 
So, it could be that we'll do opening statements and then 
recess until approximately 11 a.m. I hope that we have some 
folks show up before then.
    So we're going to start our opening statements and get as 
many as the Republicans on the record, and then wait until Mr. 
Boucher and some of his colleagues come on the majority side.
    So the Chair would recognize himself for an opening 
statement.
    First, I want to thank all our panel members for coming 
back. I believe this panel was scheduled to be here on 
September 11, and as we all know a very bad thing happened that 
morning which required us to postpone this hearing. But we're 
glad to have you all here and I'm told that everybody that was 
here September 11 is back here.
    We give special thanks to Mr. English. We understand that 
you're going to be here this afternoon, too. So, we'll get a 
double dose of your wisdom.
    We're going to hear this morning about Siting, Incentives 
and Reliability. It's my belief that the Congress and the FERC 
should do what it can to encourage the expansion of 
transmission capacity where needed, particularly through 
private sector investment. The FERC should take a new look at 
incentive rate making in the discussion draft that's now 
publicly available. We have some incentives to make that 
happen.
    I believe the States should continue their traditional role 
of siting transmission lines, but I now believe that the 
Federal Government should impose a deadline on States for 
timely consideration for looking closely at transmission lines 
that are in the public interest.
    The discussion draft calls for the FERC to act as a 
backstop for applicants after 1 year of work or lack thereof at 
the State level.
    On reliability there is broad agreement that some 
organization or organizations should have the power to enforce 
reliability standards. The question now is how to do it. Many 
on this subcommittee, including my good friend Congressman Wynn 
of Maryland have been leaders in encouraging consideration of 
reliability proposals.
    Today we're going to have before us several witnesses who 
are all committed to some reliability legislation. I look 
forward especially to hearing that testimony and working with 
the members about the proper plan to put that forward.
    This afternoon after a short break in our second hearing 
we're going to reconvene and hear from the second panel on the 
RTOs or regional transmission organizations. The issue of open 
access for transmission and the jurisdictional issue of who 
should have jurisdiction over those RTOs.
    I want to thank any of our witnesses who are already here 
in the audience that are going to participate on the second 
panel.
    Last night I released a revised discussion draft on a 
proposed starting point on RTO policy. I would like to say that 
it is, at the moment, my best guess about where the middle 
ground is on RTOs, but it is a draft. And I certainly expect 
people, some people to be for it and some people to be against 
it, and some people to be undecided and sit on the fence. 
That's the whole reason we put out discussion drafts.
    The language that we released late last evening all 
transmitting utilities must file, perform or participate in an 
RTO, and that's all--A-L-L, not O-I-L.
    FERC must approve RTO applications that meet--you've got to 
wake up now. We got a lot of time this morning. Ralph Hall's 
not here to entertain you, so I've got to do the best that I 
can.
    FERC must approve RTO applications that meet certain 
minimum standards, but may propose changes to applications if 
they do not meet those standards. If there is no agreement, the 
FERC in the discussion draft could order participation in an 
RTO, but the applicant could appeal that FERC mandate to the 
Federal courts. FERC shall continually enforce uniform market 
rules including seams agreement between RTOs.
    Finally, under the proposed draft language, the FERC may 
not require approved RTOs to merge. So what we've tried to do 
is hit a middle ground between a FERC mandate and let the FERC 
do whatever it wants to give FERC no authority and let the 
private sector participate or not participate as it so chooses.
    It's my personal belief that all utilities should be in an 
RTO. It's also my belief that there's no magic about a specific 
number of RTOs. The No. 4 has been bandied about quite a bit 
recently. That's a good number, but it's not the only number 
out there.
    There's no magic about having three RTOs in the Eastern 
Interconnect and one in the Western Interconnect. I believe 
that if all--A-L-L--utilities are in an RTO, the RTOs work well 
within themselves and with other RTOs, we will have greatly 
helped to establish a seamless national network.
    The open access provision and the discussion draft are 
equal to what was in the Electricity Restructuring legislation 
in 2944 in the last Congress. There is a way to ensure equal 
terms and conditions for transmission access while retaining 
the unique characteristics of public power and coops. Now I 
want to pursue that, but I also want to make sure that all who 
depend upon transmission lines to sell power in the wholesale 
markets or to purchase wholesale power for their consumers can 
gain the proper access to the bulk power transmission network.
    Finally, we're going to welcome witness testimony on the 
jurisdiction issue. Who should have jurisdiction over the 
transmission component of a bundled retail sale? This issue is 
wrapped up in the RTO debate and it may be that members solve 
this issue when we decide about RTOs. The Supreme Court just 
last week heard arguments on jurisdiction. I believe that the 
Congress should step in and provide clarity to the law if a 
consensus is possible. I want an appropriate role for the 
States, but I do think that we need a less bulkanized system.
    After this hearing and after the proper time period to let 
members digest the testimony in its written form, it's my 
intent to begin discussion of the subcommittee members on both 
sides of the aisle on a second electricity draft. Mr. Boucher, 
of course, will be deeply involved in it, as will full 
committee ranking member Mr. Dingell.
    Electricity has not been and should not be, and as long as 
I'm subcommittee chairman will not be a partisan issue. We have 
a good base of member education and member interest on both 
sides of the aisle. Time is short in this Congress. I'm under 
no illusions that if the Congress adjourns very quickly, 
there's a good chance that we'll have to roll this over to next 
spring. But there's also a possibility, and when I walked in I 
was told by staff that it looks like the ice is beginning to 
break in the Senate and the energy bill is going to go forward. 
So, I think there is a chance that if we could have two good 
hearings today and member interest and the Congress stay in 
session longer than another week or 2, we could move to a 
markup on this bill in this Congress in the next month or so. I 
hope that's the case. I would love to move a bill out of 
subcommittee and have it ready to go, perhaps, for discussion 
in a comprehensive energy bill that we go to conference with 
the Senate.
    Our goals for an electricity restructuring are several. In 
a simplified form, we want to increase the supply of 
electricity. We want to improve the effective operation of our 
transmission grid and we want to increase the capacity, at 
least the potential to increase the capacity of our 
transmission grid.
    Those of you that are here testifying on behalf of the 
various State utilities today can help put those goals forward. 
Now, you can help us toward a better function electricity 
system. As I've told some of you privately, this is not the 
time to tell what you think what I want to hear or what Mr. 
Boucher wants to hear, or anyone else for that matter. It's the 
time for you to tell us what you really believe. Look beyond 
the interest of your special interests; look at the broader 
national purpose. And if you'll help us in that regard, we can 
reach a compromise that's good for the country.
    So I look forward to these two hearings today. These are 
the last two hearings I propose to hold unless we need to have 
a legislative hearing on the bill that we introduce. So this is 
a very, very important day.
    [The prepared statement of Hon. Joe Barton follows:]
Prepared Statement of Hon. Joe Barton, Chairman, Subcommittee on Energy 
                            and Air Quality
    Today's hearing takes the place of two hearings that were canceled 
during the week of September 11. I would like to thank the members of 
the first panel for coming back. I know some of you were stranded here 
for a while last time.
    This morning, we will hear about siting, incentives and 
reliability. I believe Congress and the FERC should do what it can to 
encourage the expansion of transmission capacity where needed, 
particularly through private sector investment. FERC should take a new 
look at incentive ratemaking, and my discussion draft would make that 
happen. States should continue their traditional role of siting 
transmission lines, but I now believe the Federal government should 
impose a deadline on them for timely consideration and for looking 
closely at lines that are in the public interest. My discussion draft 
calls for FERC to act as a ``backstop'' for applicants after one year 
of work at the State level.
    On reliability, there is broad agreement that some organization or 
organizations should have the power to enforce reliability standards. 
The question now is how to do it. Many on this Subcommittee, including 
Congressman Wynn of Maryland, have been leaders in encouraging 
consideration of reliability proposals. Today we have before us several 
witnesses who are all committed to passing some reliability 
legislation. I look forward to hearing the testimony and working with 
Members about the proper plan to put forward.
    Later today, after a break, we will reconvene and hear from a 
second panel on Regional Transmission Organizations (RTOs), open access 
for transmission, and the jurisdiction issue. If those witnesses are 
already here, I thank you for coming and hope you enjoy Round One.
    Just last night, I released a revised discussion draft with my 
proposed starting point on RTO policy. In the language, all 
transmitting utilities must file to form or participate in an RTO. FERC 
must approve RTO applications that meet certain minimum standards but 
may propose changes to applications if they do not meet the standards. 
If there is no agreement, FERC can order participation in an RTO but 
the applicant can appeal to Federal courts. FERC shall continually 
enforce uniform market rules, including seams agreements between RTOs. 
Finally, FERC may not require approved RTOs to merge.
    I believe all utilities should be in RTOs. To me, there is no magic 
in having 3 RTOs in the eastern interconnect and 1 in the western 
interconnect. I believe that if all utilities are in RTOs, and the RTOs 
work well within themselves and with other RTOs, we will have greatly 
helped establish a seamless national network.
    The open access provisions in the discussion draft are equal to 
what was in electricity restructuring legislation in the last Congress. 
There is a way to ensure equal terms and conditions for transmission 
access while retaining the unique characteristics of public power and 
cooperatives, and I want to pursue that. But I also want to make sure 
that all who depend on transmission lines to sell power on the 
wholesale markets, or to purchase wholesale power for their consumers, 
can gain the proper access to the bulk-power transmission networks.
    Finally, I welcome witness testimony on the ``jurisdiction 
issue''--who should have jurisdiction over the transmission component 
of a bundled retail sale. This issue is wrapped up in the RTO debate, 
and it may be that Members solve this issue when we decide about RTOs. 
The Supreme Court just last week heard arguments on jurisdiction, and I 
believe that Congress should step in and provide clarity to the law if 
a consensus is possible. I want an appropriate role for the States, but 
I want a less balkanized system.After this hearing, I will begin 
discussions with Subcommittee Members on electricity. These, of course, 
will start with Subcommittee Ranking Member Boucher and full Committee 
Ranking Member Dingell. Electricity is not a partisan issue, and there 
is a good base of Member interest and education on both sides of the 
aisle. If there is interest in moving forward, and if Congress will 
remain in session for sufficient time, I will work to introduce a bill 
in the coming weeks and move toward markup. I look forward to working 
with all Members and stakeholders for suggestions on revising the 
discussion draft.
    Our goals with electricity restructuring should be many. 
Simplified, they are:

1. Increasing the supply of electricity;
2. Improving the effective operation of our transmission grid; and
3. Increasing the capacity of our transmission grid.
    The witnesses today can help us on that path toward a better-
functioning electricity system. I encourage your honesty and also your 
consideration of the national interest. Now is the time to look beyond 
the reasons to oppose compromises or be parochial. Now is the time to 
establish an electric grid and trading system for the 21st Century that 
we can all be proud of.

    Mr. Barton. We'd like to welcome Mr. Shimkus for an opening 
statement. I'm assuming you were the first member here? Mr. 
Norwood was here first. Well, we're going to welcome Mr. 
Norwood for an opening statement then.
    Mr. Norwood. Thank you, Mr. Chairman. I know it's hard for 
you to know which one of us was here first.
    Mr. Barton. Just glad you all both were here.
    Mr. Norwood. I promised John I'd get that in.
    Thanks for holding this hearing today on the important 
issue of transmission and all the critical issues associated 
with that. I plan to be brief with our statement and get as 
fast as we can to this very impressive array of witnesses that 
we have.
    Over the last 10 years marriages enacted both by the 
Congress and the FERC, this country's transmission network has 
undergone significant changes evolving from what used to be 
historically small wholesale power sales that ensured 
reliability. Today's current wholesale megamarket allows many 
different buyers and sellers to transfer power back and forth 
from one end of the grid to the other. In fact, the wholesale 
market today is now 400 percent larger than it was just 10 
years ago.
    Unfortunately, our current infrastructure was not developed 
with this new wholesale market in mind, and is really not 
equipped to handle such large bulk power transfers efficiently 
and reliability. Today bottleneck areas and problems of 
congestion on the grid are common. With these growing pains it 
is clear, I believe, that this committee and the Congress face 
new challenges to find thoughtful and well-balanced solutions. 
That's what really what this is all about today.
    I look forward to hearing the testimony from both panels 
today, both panels, and commend this collection again of 
witness that you have brought before us.
    Mr. Chairman, as usual, I truly applaud your leadership in 
this committee in trying to craft coherent national energy 
policy, and we're grateful for all the work that you do. And 
with that, I'll yield back.
    Mr. Barton. Thank you, distinguished gentleman from 
Georgia.
    And we would welcome the gentleman from Illinois for an 
opening statement.
    Mr. Shimkus. Thank you, Mr. Chairman. I appreciate this 
hearing and I want to welcome our panelists, both this one and 
the next one. And I think it'll be a long day, so I hope you 
got comfortable seats.
    The $64 million question this year has been what do we do 
about transmission? So as long as many of us have been involved 
in this process, this is my fifth year, it's really boiled down 
to transmission in the eyes of many of us.
    Do we let FERC or the States have jurisdiction over siting, 
or is there some mixture? Do we make RTOs mandatory or do we 
make them voluntary, or we allow them to be voluntary? How many 
RTOs do we have; the chairman mentioned that, 4, 8 or more? 
What kind of incentives do we offer? The list goes on and on 
and that is why today's hearing and all you panelists here are 
so important to help us sort through some of this process as we 
have draft legislation proposed and changes to drafts, and as 
the chairman as said, willingness to continue to work through 
this process.
    But the fact remains that we have to change the way the 
transmission system is run and governed. RTOs were the first 
step in the process, but we still have a lot more to do. The 
whole industry is dramatically different from the past. The era 
of big monopolies and set service areas will soon be a thing of 
the past in most areas of the Nation. Illinois is moving to the 
deregulated market, but we've experienced three RTOs within the 
State of Illinois for a period of time.
    Power will easily be generated in one State and be sent to 
another grid for use in other States, but the transmission 
infrastructure has not kept up with the demand. We have to make 
sure that can happen without the problems.
    The easier we can get power to consumers, the cheaper it 
will be for them. The task ahead of us is not easy. There are a 
lot of different constituencies that have a lot of different 
ideas about how we should proceed, and we've heard from many of 
those constituencies already and we look forward to working 
with the.
    I believe Chairman Barton has shown that he's ready for the 
task, and really this subcommittee as we've dealt with it for 
many, many years in working with our colleagues on the other 
side. We are excited about getting to some compromise and 
moving forward. And I look forward to working with the chairman 
on this issue.
    Again, Mr. Chairman, thank you for this hearing and I yield 
back my time.
    Mr. Barton. We thank the gentleman from Illinois.
    We'd welcome the gentleman from Tennessee for an opening 
statement.
    Mr. Bryant. Thank you, Mr. Chairman.
    I, too, thank you for holding this hearing this morning, 
and I believe we have another one this afternoon. And I'm 
coming in late and having to move between meeting and meeting, 
which I will continue to do today, so I may be out as other 
members may be out today. I want to go ahead and apologize to 
this very distinguished and numerous long panel here today. I 
think it's better to go one panel than 2 or 3 smaller panels. 
It cuts down on the number of questions we ask.
    I heard the end of my colleague from Georgia, Mr. Norwood's 
statement, and it sounded very articulate and I'm very tempted 
to adopt it, because he's always a man of wisdom, and I may do 
part of that. But I'm going to cut my--I will adopt his 
statement. I'm sure our chairman's was also good, and I'll 
adopt his statement also. I will add one comment and I will 
yield back my time after that.
    I'm not sure anyone on the panel, I haven't had the 
opportunity to see the statements yet, addresses this issue. 
But an open question as we move forward on the siting issues, 
the issue of acquiring right-of-way, acquiring properties, 
eminent domain and that tension, and it's tension I think is an 
understatement that exists with property owners being from an 
area that is very mindful; representing a constituency that's 
very mindful of property rights, I want to make sure that we 
pay proper respect to that. And that any governmental powers 
that we have out there or that we create to expand, enlarge or 
whatever, eminent domain and the authority to use it, I think 
we have to be careful in doing that.
    On balance with the not-in-my-back-yard syndrome, I 
understand fully that we have a transmission problem in this 
country and we have to move forward aggressively with the 
stability of legislation behind it, the force of law behind it 
to go ahead and built new transmission. So we have to find that 
balance in there between protecting property rights and yet 
doing something for the common good and avoid the not-in-my-
back-yard syndrome.
    So, it is a complicated issue, I understand. And perhaps 
someone on this panel can address the eminent domain issues and 
who should exercise that, should that be delegated to the 
private sector; those kinds of things if it's possible.
    And with that, Mr. Chairman, I would yield back my time.
    Mr. Barton. Thank the gentleman.
    Seeing no other members present, the Chair would ask 
unanimous consent that all members not present have the 
requisite numbers of days to put their opening statement in the 
record in its entirety at the appropriate point. Is there 
objection? Hearing none, so order.
    The Chair would also announce that Mr. Norwood, Mr. Bryant 
and myself are going to briefly change parties, go as a block 
to the Democratic Caucus, see what we can get for voting for 
either of the candidates up for the Whip, probably some votes 
on health care for Mr. Norwood, and I'll takes votes on 
electricity bill and Mr. Bryant can take votes on some good 
deed for the TVA, or something at that point.
    We're going to be in recess. I would ask my first panel to 
not wander too far. I think there's an outside chance that we 
could get started around 10. So you're at liberty to move about 
the compound, but don't go back to your offices. Let's stay in 
this general area.
    And we will reconvene as soon as we have some of our 
Democratic friends here to start the panel.
    [Brief recess.]
    Mr. Barton. The Chair recognize the distinguished ranking 
member for an announcement on who the new Whip is, and for an 
opening statement.
    Mr. Boucher. Well, thank you, Mr. Chairman. I will have to 
disappoint you with regard to one of those matters, but not 
with regard to the other. We are still counting votes, and I 
was so interested in coming to take part in your hearing today 
that I left before the result was announced. But I'm sure that 
all of us in due course will find out what that result is.
    Mr. Barton. Okay.
    Mr. Boucher. It will not be a secret.
    Mr. Barton. Well, there are several of us that are 
available for a brief switch in parties if it's so close that 
one or two votes makes a difference.
    Mr. Boucher. We would be glad to talk with each of those 
individuals, and if there are as many as six of them, that 
truly would be excellent news for us.
    Thank you very much, Mr. Chairman. Today's hearings 
assemble a group of expert witness who can help frame the 
questions at the root of the electricity restructuring debate 
and indicate to us what problems effect the Nation's 
electricity system, and suggest how Congress can improve the 
system through the passage of legislation.
    Today we will hear from two panels on matters related to 
electricity transmission policies. This morning's witnesses 
will address the siting of new transmission lines and system 
reliability. And this afternoon's panel will address regional 
transmission organizations, matters relating to open access and 
the balance between State and Federal jurisdiction.
    I want to commend Chairman Barton for his diligent effort 
to conduct thorough and balanced hearings on these matters of 
fundamental importance, and I also want to commend him for his 
usual practice of working closely with members on our side as 
we approach these important considerations.
    My State and many others have adopted some form of retail 
competition plan, although approximately one-half of the Nation 
remains subject to traditional utility structures. At this 
point I think it seems unlikely that Congress will enact a 
direct retail competition mandate and our legislature debate, 
therefore, centers on electricity transmission policy questions 
including how best to allocate existing transmission capacity 
and whether and to what extent, and by what means the Federal 
Government should encourage the construction of new 
transmission capacity.
    We should also bear in mind that some of the most 
fundamental questions regarding the balance between Federal and 
State authority over transmission were last week argued before 
the United States Supreme Court, and a decision on those very 
important matters should be forthcoming from the Court in the 
near term. That fact may influence to some extent our 
considerations in this subcommittee.
    As we consider these matters it is essential to reflect not 
only on the best policy approach, but also how much of the goal 
of our best policy choices can be accomplished within the 
confines of existing law. Does the FERC believe that it has 
sufficient authority under the Federal Power Act to perform its 
responsibilities and to carry it to the conclusions that it 
might desire to reach?
    Beyond the issues relating to transmission policy, we have 
a number of other associated concerns. What problems, for 
example, arise from the continued application of PUHCA. If 
PUHCA is to be repealed, what consumer protections need to be 
put in place in any electricity legislation that we consider? 
Can we achieve a more efficient use of existing generator 
capacity through real-time pricing and how can real-time 
pricing be encouraged? What are the merits or the problems 
associated with the continued application of PURPA. And what is 
the position of the Administration with regard to this entire 
set of issues and what legislative recommendations would the 
Administration make to us at this time?
    These are questions that we will examine during the course 
of this day and in future weeks. And as we do so I want to 
thank Chairman Barton for his singular dedication to a major 
reform of Federal policy with respect to electricity. And I 
very much look forward to working with him as we seek the best 
approach to these complex matters.
    Thank you, Mr. Chairman.
    Mr. Barton. We thank the gentleman.
    [Additional statements submitted for the record follow:]
Prepared Statement of Hon. Steve Largent, a Representative in Congress 
                       from the State of Oklahoma
    Mr. Chairman, in light of the tragic events of September 11th, the 
Committee correctly chose to postpone the two hearings that we will be 
holding today. As someone who has spent a considerable amount of time 
on the electricity restructuring issue, and more specifically 
transmission related issues, I want to thank you for promptly 
rescheduling these two very important hearings.
    For those of us who are old enough to remember the movie ``The 
Graduate,'' there is a memorable line from the film in which Dustin 
Hoffman's character is offered a one word piece of advice--
``plastics.'' Well I believe there is one word that this Subcommittee 
should keep in mind as it proceeds forward with comprehensive 
electricity restructuring legislation. That word is ``transmission.''
    California's energy problems earlier this year clearly demonstrated 
the economic chaos caused by a lack of generation. That being said, if 
we do not clarify the rules of the road for the interstate transmission 
system, generators will continue to be precluded from moving power 
across State lines because of a lack of investment, siting problems, a 
patchwork of different regulatory guidelines, or the abuse of market 
power.
    As members of this Subcommittee and our witnesses know all too 
well, the current transmission system was not built for the number of 
wholesale transactions that take place on a daily basis.
    It was designed largely to supply intrastate demand. Yet since the 
enactment of the Energy Policy Act of 1992, there has been an increase 
in interstate bulk power transfers, something the existing system was 
not designed to handle.
    Our current transmission system is analogous to the way our road 
system was connected, or more accurately, not connected prior to the 
construction of our interstate highway system in the 1950s.
    The regulation of our transmission system varies depending on 
whether the lines run through an open state or a closed state. The 
regulation varies depending on the ownership of the lines. Investor 
owned utilities are regulated by FERC while lines owned or operated by 
municipals, co-ops, TVA, or BPA are largely exempt from FERC 
regulation. Even the type of sale, be it an unbundled or bundled retail 
sale is subject to different types of regulation.
    It's my hope that we can create some form of regulatory parity to 
put all industry participants on an even playing field.
    I believe FERC has taken several pro-active steps with the issuance 
of FERC Orders 888, 889, and 2000 to develop competitive wholesale 
power markets.
    Clearly, FERC is not content to sit on the sidelines while industry 
and Congress decide how to restructure. On September 26th newly 
appointed Commissioner Pat Wood outlined a very ambitious, some say too 
ambitious, policy directed at the formation of competitive wholesale 
power markets.
    Mr. Chairman, I know you recently released a draft of your 
comprehensive restructuring bill. With what time we have left in the 
remainder of the session, I look forward to working with on this 
legislation, in particular Section 201 and Section 202, the open access 
and RTO provisions.
    With that I look forward to hearing from our distinguished panels 
of witnesses and I yield back.
                                 ______
                                 
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    First, let me thank Chairman Barton for continuing this series of 
hearings on our Nation's electric power industry. In today's two-part 
hearing we will focus on the transmission system--the infrastructure 
that is necessary for getting power efficiently and reliably from the 
generator to the consumer, and the competitive interstate marketplace 
that is needed to ensure affordable electricity supplies.
    Attention to reliable transmission goes in hand with Committee 
efforts to assure that our Nation has an affordable, reliable 
electricity supply that will keep pace with the demands of the 21st 
Century. This will require that we put an end to the uncertainty over 
the operation and governance of the interstate transmission system and 
establish clearly defined rules for competitive wholesale markets.
    Since 1992, Congress has encouraged the development of 
competitively generated wholesale power, which resulted in a general 
decline in electricity prices, as well as cleaner and more efficient 
production of power. The increased efficiency came at an essential 
time. The Energy Information Administration recently reported that, 
since 1990, as retail electricity sales (our demand) grew by 26%, power 
generating capacity increased by only 10%, and transmission capacity 
grew only 15%. So our success fueling the recent period of economic 
growth with electricity was achieved only because we were able to 
generate more power, more economically from existing plants.
    Yet success generating power more efficiently would have been 
meaningless without the ability to deliver the electricity to where it 
was economic and most needed. This has prompted a rethinking of our 
Nation's interstate transmission system and has made clear that we need 
a vibrant, accessible interstate transmission system if we hope to 
deliver the full benefits of that low-priced power to consumers.
    According to the Electric Power Research Institute, the number of 
wholesale power transactions increased 400% over the past decade--on a 
patchwork system designed to serve individual utilities. At the same 
time, investment in transmission infrastructure has steadily declined.
    We now know that the coordinated use of a number of transmission 
systems can allow a low-cost producer in one state to sell power 
cheaply to buyers in another. As our demand for electricity continues 
to grow, it is becoming more important than ever that we have the 
ability to share electric power freely within regions and among states. 
To do this, we cannot continue to view transmission as individual power 
lines; we must look at it as part of a broader, interstate system.
    Therefore, it is critical that our Nation begin designing and 
building modern, 21st Century transmission systems. This, of course, 
will require a legal and regulatory framework to make it happen.
    We must look at a variety of issues to determine how best to 
proceed in these matters. Today's hearing will allow us to focus on 
grid reliability, transmission siting issues, and incentives to 
encourage new transmission-system investments. This afternoon, we will 
hear testimony on the formation of Regional Transmission Organizations 
(RTOs), open access to transmission, and the role of the Federal 
government and States in ensuring that we have vibrant, competitive 
wholesale power markets. It will be a long day, but very informative.
    It is important that we address these issues, especially at this 
time of uncertainty over our Nation's energy security. I thank Chairman 
Barton for holding these hearings, and I look forward to the testimony 
of our witnesses.

    Mr. Barton. We have 8 of our 10 panelists here. We're going 
to start with Mr. Schriber and just head right down the line, 
and we'll make sure that Mr. Nordhaus and Mr. Ken get here and 
get an opportunity to participate.
    We're going to welcome you, Mr. Schriber, as Chairman of 
the Ohio Public Utilities Commission. He's here on behalf of 
the National Association of Regulatory Utility Commissioners. 
Put your statement in the record and ask you to summarize it in 
5 minutes.

STATEMENTS OF ALAN R. SCHRIBER, CHAIRMAN, OHIO PUBLIC UTILITIES 
  COMMISSION ON BEHALF OF NATIONAL ASSOCIATION OF REGULATORY 
   UTILITY COMMISSIONERS; STANLEY F. SZWED, VICE PRESIDENT, 
 TRANSMISSION, FIRSTENERGY CORP. ON BEHALF OF EDISON ELECTRIC 
INSTITUTE; ROGER A. FONTES, GENERAL MANAGER, FLORIDA MUNICIPAL 
 POWER AGENCY ON BEHALF OF AMERICAN PUBLIC POWER ASSOCIATION; 
ROBERT R. NORDHAUS, VAN NESS FELDMAN ON BEHALF OF LARGE PUBLIC 
   POWER COUNCIL; GLEN ENGLISH, CEO, NATIONAL RURAL ELECTRIC 
COOPERATIVE ASSOCIATION; DAVID N. COOK, GENERAL COUNSEL, NORTH 
   AMERICAN ELECTRIC RELIABILITY COUNCIL; PHILLIP G. HARRIS, 
PRESIDENT AND CEO, PJM INTERCONNECTION; JAMES D. STEFFES, VICE 
PRESIDENT OF GOVERNMENT AFFAIRS, ENRON CORPORATION ON BEHALF OF 
  ELECTRIC POWER SUPPLY ASSOCIATION; JOHN ANDERSON, EXECUTIVE 
DIRECTOR, ELECTRICITY CONSUMERS RESOURCE COUNCIL; MARTY KANNER 
 ON BEHALF OF CONSUMERS FOR FAIR COMPETITION; ANDREW M. VESEY, 
VICE PRESIDENT, ENERGY AND UTILITIES, FOR THE CAP GEMINI ERNST 
                            & YOUNG

    Mr. Schriber. Thank you, sir. And thank you for giving me 
the opportunity to testify here today.
    In addition to being Chairman of the Public Utilities 
Commission of Ohio, I'm also Chairman of the Ohio Power Siting 
Board, and I'm prepared to talk about many of the issues that 
you've raised earlier and have spoken of, but I'll stick 
specifically to power siting at this point.
    Ohio, I believe, has perhaps more authority as a siting 
board than most States, and it's been a very effective siting 
board. It's very socialized in the way it's constructed. I, as 
Chairman of the Public Utilities Commission, I'm also Chairman 
of the Power Siting Board. We have the Director of the EPA, 
Department of Health, Department of Development, Agriculture, 
Natural Resources, Engineers and legislative members that 
comprise our board.
    In order to receive approval for construction of a new 
facility in Ohio an entity, any entity, must apply for and 
obtain a certificate of need and convenience and environmental 
compatibility.
    I will point, and I think what's come to my mind as a 
casual observer, is that a lot of the issues that we see, and 
if you were to scan the testimony, come into whether it should 
be State or Federal issues who should exercise the power in 
this regard with respect to siting. And although a lot of 
arguments can be made either way, I believe very strongly, and 
I think reality suggests, that the States for various reasons 
have some issues before them which we can handle as far as 
siting is concerned.
    Most of the siting issues turn out to be landowner issues, 
and these as State authorities we become very intimately 
involved with. Many of the issues regarding siting have to do 
with natural resources within the State, and a lot of them have 
to do with agricultural land, the displacement of agricultural 
land and the optimum use of agricultural land.
    As a State authority we move much, much faster than might 
be done in either other States or at the Federal level. And we 
certainly have the infrastructure already in place.
    In Ohio our authority enables us to look beyond State 
boundaries in proceedings with other jurisdictions when we site 
major power plants, transmission lines or gas pipe lines. For 
electric power lines the statute requires that we look to the 
grid to the facilities beyond the State boundaries to make sure 
we are compatible with that.
    And finally, in Ohio our jurisdictional trigger goes to all 
facilities. So not only would a public utility who needs or 
wants to build a facility have to come before the Ohio Power 
Board, but any facilities. It could be a merchant company, it 
could be a nonpublic utility. so that in effect in Ohio we 
believe we have sort of a one-stop shop where all utilities or 
nonutilities that wish to build facilities would come before 
us.
    I would say that our record speaks for itself. It's not 
before you, but our record would suggest that since in the 
years 2000 and 2001 we've added 2200 megawatts of electricity, 
most are gas peaking plants, although we have combined cycle 
baseload gas plants under construction, by and large we move 
people in and out within 6 months upon application.
    I would also point out that we have a pipeline, the 
Independence Pipeline that has been proposed through Ohio over 
which FERC has jurisdiction. That pipeline has taken years. 
It's been a contentious debate for over 2 years. Interestingly, 
although FERC has jurisdiction, we've gotten thousands of 
letters because for some reason, I think that may be obvious, 
that the State authorities are those who usually get the flake 
when things don't quite work out for the landowners within our 
States.
    So, if Ohio could be a model for other States, I would say 
that would be an optimum solution in my mind. Now, does this 
mean that FERC could not adopt the Ohio model? They probably 
could, but as I've suggested because of our sensitivity to 
landowners, because of our sensitivity to the use of our 
resources, I would suggest that the States would, if they 
could, be somehow compelled to adopt our model, move forward 
much more expeditiously in power siting.
    And I'll stop with that. As I said, I could go on other 
issues, but we have a lot of panelists here. And I appreciate 
the opportunity to be here.
    [The prepared statement of Alan R. Schriber follows:]
 Prepared Statement of Alan Schriber, Chairman, Ohio Public Utilities 
                               Commission
    Mr. Chairman and Members of the Subcommittee: Good morning. My name 
is Alan Schriber. I am the Chairman of the Ohio Public Utilities 
Commission. I am here today on behalf of the National Association of 
Regulatory Utility Commissioners, commonly known as NARUC. I greatly 
appreciate the opportunity to appear before the House Energy and 
Commerce Subcommittee on Energy and Air Quality and 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 ensure 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 
consumers.
    I would like to begin today by addressing electric transmission 
siting.
    NARUC strongly disagrees with the presumption permeating here in 
Washington that ``the root cause of all transmission congestion 
problems in this country is State eminent domain and siting authority, 
and therefore the Federal government must step in.'' This theory is, at 
best, simplistic.
    As a nation, we want the lights to come on whenever we flip the 
switch. We want to run consumer goods using electricity that is 
inexpensive. We want to be able to be employed by and own stock in 
companies that produce these electric-powered consumer goods. We want 
our companies to be able to buy power at interruptible rate levels, but 
never have to be interrupted.
    However, we do not want generation facilities fouling the air, 
water, and land, nor do we want transmission lines running through our 
communities or near our schools or homes. We do not want gas pipelines 
running under our feet or near our communities. We do not want to pay 
any additional costs associated with renewable energy. We do not want 
to spend the money necessary on research to find technologies to 
replace the energy sources we currently depend upon.
    Therefore, the conclusion that we must draw from all of this is 
that a major impediment to siting energy infrastructure in general and 
electric transmission in particular is the great difficulty in getting 
public acceptance for needed facilities. Quite frankly, this tells us 
that no matter where siting responsibility falls, with State government 
or the Federal government, siting energy infrastructure will not be 
easy and there will be no ``quick fix'' to this situation.
    Giving the Federal Energy Regulatory Commission (FERC) eminent 
domain and siting authority is not a panacea. Beyond the practical 
matter of the time FERC would need to be prepared to assume this new 
role and the additional funds that Congress would need to appropriate 
to accomplish this, how many examples actually exist where a State 
action (or inaction) is solely responsible for unreasonably preventing 
a needed transmission project?
    Currently, the States have the responsibility and authority to site 
transmission. In fact, the transmission infrastructure that is 
currently in operation now has received State siting approval. 
Additionally, those projects that are in the planning stages are being 
planned with State approval in mind.
    Make no mistake, NARUC and its membership understand that 
additional transmission is necessary in all regions of the country. 
NARUC's members are also well aware of the difficulties involved with 
the siting of these facilities. The fact remains that in spite of these 
difficulties, the States have been successful in siting the electric 
transmission infrastructure that exists today. However, we must also 
continue to be cognizant of the basic laws of physics. As much as we 
all would like to be able to move electrons from wherever they are 
produced to wherever they are needed, like we can with natural gas 
molecules, the electric transmission system is not able to accommodate 
those types of transactions. In other words, the transmission system as 
it now exists was not built to handle the types of wholesale 
transactions that a competitive market will require. This means we will 
have to be innovative to make the system function the way we need it to 
function.
    For instance, as we look for innovative ideas, we can begin by 
remembering that generation and transmission are substitutable. A State 
may determine that a transmission line is not necessary if, for 
example, distributed generation is used instead, thereby saving 
valuable resources and protecting citizens from the unnecessary costs 
of the transmission project. FERC does not now have the ability to make 
such a determination, and we do not support proposals to expand FERC 
authority over generation.
    NARUC believes that the States should do more to improve upon the 
tremendous success story of the nation's electricity infrastructure. 
States exercising jurisdiction over the siting and certification of 
transmission facilities should not discriminate against interstate 
facilities, meaning that in general, interstate facilities should be 
sited, certificated, and otherwise regulated under the same standards 
and procedures as intrastate facilities.
    NARUC supports voluntary regional bodies that permit the States in 
which an interstate transmission facility is proposed to be sited, to 
issue certificates authorizing the construction of the proposed 
facility through collective decisionmaking. If States choose to retain 
certification authority for themselves, there should be agreed upon 
mechanisms to resolve disputes where individual States involved have 
come to conflicting and/or inconsistent determinations in their 
respective deliberations. These voluntary regional bodies could: 
address siting of transmission; identify regional bulk power market 
needs for State siting agencies to consider in their respective 
deliberations; and, plan for the construction of new interstate 
transmission facilities.
    Congress should affirm that States have the primary authority to 
establish, operate and govern these voluntary regional siting bodies, 
and FERC could act as an appropriate ``backstop'' authority where 
States or regions fail to act. Additionally, Congress should provide an 
explicit grant of authority to the States and FERC to act in 
cooperation.
    Until all stakeholders (residential and commercial consumers, 
industrial consumers, utilities, energy suppliers and marketers, 
transmission owners and environmentalists) begin to make sacrifices, it 
will continue to be extremely difficult to improve our electric 
transmission system. We as public officials must also try to use our 
positions to apply reason rather than fanning the flames of emotion.
    Mr. Chairman, NARUC would like to thank you for efforts to produce 
legislative language that does not take the draconian step of overt 
Federal preemption of State authority over siting and eminent domain 
for transmission facilities. However, for the reasons I have just 
mentioned, NARUC must respectfully oppose the Federal transmission 
siting provisions found in section 402 of your electricity legislation 
discussion draft.
    I would now like to briefly comment on reliability.
    The reliability of the nation's electric system is one of the most 
important issues in this debate, and NARUC believes that Federal 
legislation must indeed address this subject. NARUC continues to 
support the NERC process that has developed legislation mandating 
compliance with industry-developed reliability standards and provides 
explicit authority to FERC and the States to cooperate to enforce those 
standards. NARUC also supports legislation that includes workable 
mechanisms to support energy efficiency programs that enhance 
reliability.
    Enforcement of operational standards and criteria should be 
supervised by the FERC in cooperation with the States through existing 
State authority, joint boards, or other mechanisms. Enforcement of 
compliance with planning and system adequacy standards should rest 
first with the States and regional bodies. Congress should explicitly 
affirm the public interest in transmission grid reliability and the 
need for mandatory compliance with reliability standards. Congress 
should expressly include in legislation: (1) a savings clause to 
protect existing State authority to ensure reliable transmission 
service, and (2) a regional advisory role for the States.
    Federal legislation should also facilitate effective decisionmaking 
by the States and recognize the authority of the States to create 
regional mechanisms including, but not limited to, inter-state compacts 
or regional reliability boards, to ensure transmission reliability. 
NARUC cannot support reliability language that fails to provide a 
continuing role for States in ensuring reliability of all aspects of 
electrical service, including generation, transmission, and power 
delivery services or results in FERC's preemption of State authority to 
ensure safe and reliable service to retail consumers. State officials 
will be held accountable by the public when the lights fail to stay on. 
Because of this responsibility, State officials and regulators are 
particularly concerned that they be able to act effectively to ensure 
uninterrupted electricity service.
    NARUC witnesses have appeared before your Subcommittee many times 
prior to today requesting a State savings clause and a regional 
advisory role for the States. However, the Chairman's electricity 
discussion draft legislation fails to include these two ``must have'' 
provisions. Mr. Chairman, NARUC must therefore respectfully oppose the 
reliability title of your discussion draft.
    The third topic I was asked to comment on today was ``incentive 
rates.'' NARUC has begun to hold discussions on this issue, though we 
have not developed an official position as of yet. I would be happy to 
provide you with my own thoughts on this topic during the question and 
answer portion of this hearing.
    Thank you for your time and attention. NARUC members and staff look 
forward to working with the members of this Subcommittee to put forth a 
successful national energy policy. Thank you again and I look forward 
to your questions.

    Mr. Barton. Thank you, Mr. Schriber.
    We now want to hear from Mr. Stanley Szwed, who is Vice 
President of Transmission for FirstEnergy Corporation. He's 
here on behalf of the Edison Electric Institute.
    Your statement's in the record, we would ask you to 
summarize it in 5 minutes.

                  STATEMENT OF STANLEY F. SZWED

    Mr. Szwed. Thank you, Mr. Chairman. And I do very much 
appreciate the opportunity to testify here today.
    I'm Stan Szwed, Vice President of Transmission for 
FirstEnergy Corp of Akron, Ohio, and I am testifying on behalf 
of the Edison Electric Institute.
    Mr. Chairman, thank you also for your discussion draft. It 
includes good provisions on nearly all of the transmission 
priorities that we support.
    My testimony today will focus first on why transmission is 
critical to competition and reliable electric service, and 
second on specific legislative recommendations.
    Mr. Chairman, wholesale competition is here, so is retail 
competition in many States. Transmission capacity is critical 
to competition. There is not enough of it and, clearly, it is a 
Federal responsibility. If you want competition to work, 
Congress must address transmission needs. It's that simple.
    Transmission is the critical backbone of the entire 
electrical network. It is not a service that would be nice to 
have that we won't have enough of, like broadband, for example. 
This is electricity and we all depend on it daily.
    We do have the greatest transmission network in the world, 
but it wasn't built for what we're trying to accomplish in 
competitive markets today. The transmission system we have 
today, many times we can't get power from a point A to a point 
B. It's no one's fault. The lines simply were just not designed 
to move power between points that people now want to connect 
to. So we have to transform what I call a system of local roads 
network into what we need now, and that is more of an 
interstate highway system. And the key to building the highway 
system we all want is to set the right regulatory atmosphere 
necessary to attract investment.
    In essence, with the formation of regional transmission 
organizations, RTOs, we're establishing a separate new 
industry. If Congress and FERC get sidetracked on the perfect 
RTO size and boundaries, if Congress and FERC bog down on the 
perfect rules of the road, we'll be in the theoretical 
classroom forever.
    Investors want us out of the classroom and into operation. 
Turning off investors will stifle competitive markets and harm 
consumers. Our collective efforts to get it perfect will not 
mean getting it at all.
    Now I'd like to turn my attention to suggesting seven 
specific legislative aspects that we would ask to be considered 
in any legislative work done. The first is that of reforming 
transmission rate making.
    Congress should reform transmission rate making to reflect 
risks in the new transmission industry and to make transmission 
a reasonable investment proposition. Returns on transmission 
assets should be in line with assets in industries with equal 
risk.
    The Barton discussion draft section 401 is a good step. We 
also thank Congressman Sawyer and Burr for introducing H.S. 
2814 which would reform transmission rate making. In the last 
Congress this subcommittee adopted by voice vote the rate 
reform provisions from their similar 1999 legislation.
    Second, we do need to reform transmission siting. EEI 
supports a FERC siting rule which States are unable to act on 
new transmission line applications. If a State failed to act on 
an application or materially altered it, FERC could issue a 
certificate of public convenience and necessity for a 
transmission line. This is essentially what the Barton 
discussion draft calls for.
    Third, adopt mandatory reliability standards. Effective 
competitive markets need to have mandatory reliability 
standards. We also believe there should be a single national 
reliability organization. The discussion draft contains 
reliability provisions we generally support.
    Fourth, remove tax barriers. We need to allow tax deferred 
sales and tax free spinoffs of transmission property as 
provided in H.R. 4 Such taxes impede RTO formation. This 
language resulted from an agreement between investor owned and 
public power providers of electricity. Thank you for including 
this in your discussion draft as well.
    Five, repeal the Holding Company Act. It is a significant 
disincentive for transmission investment if entities with more 
than a 10 percent ownership stake in RTOs are required to 
become a registered holding company. the Holding Company Act is 
outdated. It has no benefit to customers and in stifling 
progress on policy goals. We should simply get rid of it.
    Six, avoid RTO mandate authority for FERC. Congress should 
not mandate RTO participation or authorize FERC to do so. RTOs 
are forming and mandate authority for FERC is risky. Investors 
must know their investments cannot be summarily forced into a 
structure with wholly different financial fundamentals.
    And last, streamline section 203 of the Federal Power Act. 
The Barton discussion draft would repeal this section, and we 
support repealing it as we support other measures that address 
the lengthy and duplicative FERC reviews.
    Thank you, Mr. Chairman. Your actions will have very 
important consequences for our future infrastructure needs.
    [The prepared statement of Stanley F. Szwed follows:]
 Prepared Statement of Stanley F. Szwed, Vice President-Transmission, 
        FirstEnergy Corp. on Behalf of Edison Electric Institute
                              introduction
    Thank you for the opportunity to testify before the Subcommittee 
today. I am Stan Szwed, Vice President of Transmission for FirstEnergy 
Corp. FirstEnergy is a diversified energy services company 
headquartered in Akron, Ohio, and is the nation's 10th largest electric 
utility. We serve 2.2 million customers in Northern Ohio and Western 
Pennsylvania. We are in the final stages of our proposed merger with 
New Jersey-based GPU. GPU serves 2.1 million customers in Pennsylvania 
and New Jersey. When our merger is completed, FirstEnergy will be the 
4th largest electric utility in the nation based on customers served. 
As Vice President of Transmission, I am responsible for the operation 
of the FirstEnergy transmission system--that is, managing the electric 
power grid and keeping it available 24 hours a day, seven days a week, 
365 days a year. Our system--and others like it in three major 
interconnections in North America--is always on.
    I am testifying today on behalf of the Edison Electric Institute 
(EEI), the association of U.S. shareholder-owned electric utilities and 
industry affiliates and associates worldwide. I am pleased to have the 
opportunity to testify before the Subcommittee on critical transmission 
issues that should be addressed in electricity restructuring 
legislation.
    At the outset, let me express my sympathies to all those affected 
by the attacks on America on September 11, which was the date this 
hearing was originally scheduled to have taken place. Electric 
transmission facilities are critical infrastructure, and the industry 
takes very seriously its responsibility to maintain the security and 
reliability of those facilities.
    EEI is a leader in advocating public policy to support competitive 
electric generation markets with market-based pricing and a wide 
diversity of market participants. EEI and its members firmly believe 
that market-oriented restructuring of the electric industry remains the 
best opportunity to provide consumer benefits and to develop reliable 
new sources of supply. To accomplish this goal, EEI strongly supports 
passage of comprehensive energy legislation.
    FirstEnergy has been an industry leader on electric transmission 
issues. With many partners, we have accomplished groundbreaking work to 
develop what was, when we proposed it, a first of its kind: a for-
profit transmission company as a regional transmission organization. 
During the course of our work, we have tried to help policy makers set 
the right course for transmission. I hope that my experience on these 
two efforts--the development of a for-profit RTO (The Alliance) and the 
promotion of proper federal policy on transmission--will be of value 
for the Committee.
                               background
    The Energy Information Administration (EIA) projects that more than 
1,300 new power plants will need to be built between now and 2020, to 
meet our economy's electricity needs. However, without an adequate 
transmission system, that power will not get to where it is 
needed.1
---------------------------------------------------------------------------
    \1\ As the PA Consulting Group stated in its 2001 report, 
``Transmission represents only a small portion of the cost of 
electricity, but has a substantial effect on the success of electricity 
markets by increasing access to supplies and reducing electricity 
prices. However, the inability of the restructuring process to 
adequately address as yet the needs of the transmission sector is 
jeopardizing the health of both the sector and of the entire electric 
power industry, which it supports.'' Roger Gale et al., PA Consulting 
Group, The Future of Electric Transmission in the United States Sec. 1-
1 (2001).
---------------------------------------------------------------------------
    In many areas transmission capacity has not expanded to keep pace 
with new demands to support competition. Utilities built the bulk of 
today's transmission system before the advent of wholesale and retail 
electricity competition, primarily to move power limited distances and 
to bolster reliability. The current transmission grids were not 
designed to serve as the interstate super-highway system for 
competitive electricity markets. Therefore, it should not come as any 
surprise that transmission congestion is on the rise.
    Fundamental changes in the industry are imposing tremendous demands 
on transmission systems to carry more and more transactions across even 
greater distances. Between August 1999 and 2000, transmission 
congestion in the Eastern Interconnection grew by more than 200 
percent.2 In the first quarter of 2001, this transmission 
congestion was already three times the level experienced during the 
same period in 2000.3
---------------------------------------------------------------------------
    \2\ Eric Hirst and Brendan Kirby, Edison Electric Institute, 
Transmission Planning for a Restructuring U.S. Electricity Industry 8 
(2001).
    \3\ Id.
---------------------------------------------------------------------------
    Maintaining transmission adequacy at current levels would require 
about $56 billion in investment during the present decade.4 
The Electric Power Research Institute (``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.5 Such investment must come from transmission-owning 
companies and, ultimately, from investors.
---------------------------------------------------------------------------
    \4\ Id. at v.
    \5\ The Western States Power Crisis vi (2001).
---------------------------------------------------------------------------
    This will be a major challenge. The fact is--annual investment in 
transmission has been declining by almost $120 million a year for the 
past 25 years.6 Transmission investment in 1999 was less 
than half of what it had been 20 years earlier.7 As the 
North American Electric Reliability Council (``NERC'') testified 
earlier this year: ``[i]n North America 10 years ago we had a little 
less than 200,000 circuit-miles of high voltage transmission lines. 
Right now we have about 200,000 circuit-miles of those lines. And ten 
years from now we are projecting that we will have just over 200,000 
circuit-miles of high voltage transmission lines.'' 8 For a 
graphical representation of the decline in transmission investment over 
the last 25 years and the increase in the number of wholesale 
transactions using the transmission system, please refer to the charts 
included at the end of this testimony.
---------------------------------------------------------------------------
    \6\ Hirst and Kirby, supra note 2, at 5.
    \7\ Id.
    \8\ National Energy Policy with Respect to Federal, State, and 
Local Impediments to the Siting of Energy Infrastructure: Hearing 
Before the Senate Comm. on Energy and Nat. Resources, 107th Cong. 
(2001) (statement of David N. Cook, General Counsel, North American 
Electric Reliability Council).
---------------------------------------------------------------------------
                       the transmission business
    The new transmission business must be able to make a case for 
itself. It must be able to demonstrate to investors, employees, 
customers, regulators, suppliers, and others that it can perform and 
grow--that it can be a stand-alone enterprise. For a stand-alone 
transmission company operating independently of affiliated generators, 
distribution companies or other market participants, this means it must 
demonstrate that it can attract investment, recruit and keep highly 
talented, highly motivated people, and pay a just and reasonable return 
to its owners. Investors need to know that investing in the new 
transmission industry has commensurate opportunity for reward as 
investments of similar risk.
    Federal and state regulatory policies seek to promote competition 
for electric service by permitting both retail customers and generators 
access to the transmission system on a nondiscriminatory basis. In 
particular, the FERC, by promoting the formation of regional 
transmission organizations, is requiring transmission service to be 
furnished by large multi-state organizations independent of 
transmission owners. This policy requires the transmission business to 
stand on its own in providing reliable transmission service, expanding 
its facilities to support growing competition for electric service, and 
providing reasonable compensation to stockholders. Since reliable and 
readily available transmission service is one of the keys to effective 
competition, a regulatory environment absolutely, without fail, must be 
created that gives this new transmission business the opportunity not 
simply to survive, but to thrive. California demonstrates that we 
cannot overlook the direct relationship between investing to keep up 
with changing demands and electric reliability.
    Open access to transmission facilities, which FERC required in 
Order No. 888, means that transmission lines once solely used for the 
vertically integrated company that owned the line, are now part of an 
interstate transmission system that could be used by anyone. The 
problem is that as a whole, the systems were not built to serve as an 
interstate highway. They were built to deliver electricity from a 
specific power plant to a specific load center within the regulated 
service area of a single utility or utility system. The separation of 
transmission from the traditional utility and the transfer of control 
over transmission service to RTOs introduce new requirements and 
dictate a new approach to ensuring reliability of transmission service.
    The new transmission industry will need to compete with the private 
sector to attract investment, build a business, and serve its 
customers. Don't just take my word for how important it is to get the 
new transmission industry right. The PA Consulting Group stated in its 
2001 report that ``the inability of the restructuring process to 
adequately address as yet the needs of the transmission sector is 
jeopardizing the health of both the sector and of the entire electric 
power industry, which it supports . . . [The] lack of additional 
incentives in the face of new risks lies at the heart of many of the 
problems now facing the transmission sector.'' 9
---------------------------------------------------------------------------
    \9\ Roger Gale et al., supra note 1 at Sec. 1-1.
---------------------------------------------------------------------------
    In a comprehensively regulated service such as transmission, 
setting out the right business proposition depends very heavily on 
Congress and federal regulators establishing the right federal 
policies. I especially want to commend Representatives Sawyer and Burr, 
who have looked at transmission from the perspective of trying to 
increase investment, encourage construction and expand markets. 
FirstEnergy endorses their legislation, H.R. 2814, and encourages the 
Committee to include it or similar elements in any electricity 
restructuring legislation. Based on the legislative principles outlined 
above, an electricity bill should address the following areas:
Reform Transmission Rates
    Congress should provide definitive pricing direction to FERC with 
the policy goal of having a healthy, robust transmission system for the 
nation that can help deliver the many benefits of electric competition 
to all consumers. As such, Congress should reform transmission rate 
making to reflect the risks and uncertainties in the brand new 
transmission industry. FERC has a legal obligation to set rates that 
simultaneously protect consumers' interests in having reasonable rates 
and investors' interests in reasonable returns. However, transmission 
rate reform, which many parties acknowledge is needed, has been too 
long in coming. As has been noted, ``The transmission sector, as the 
provider of services to participants in both the wholesale and retail 
markets, has . . . seen an increase in risk, but there has been little 
if any increase in potential rewards.'' 10 The best thing 
for consumers is a robust, growing transmission network, and it will 
require some different regulation to bring that about.
---------------------------------------------------------------------------
    \10\ Id.
---------------------------------------------------------------------------
    We support transmission rate reform so that returns on transmission 
assets are in line with assets in industries having commensurate 
risk.11 The September 21, 2001, electricity discussion draft 
circulated by Chairman Barton (``Barton discussion draft'') directs 
FERC to conduct a rulemaking that would improve transmission rates with 
the goal of promoting the expansion and improvement of interstate 
transmission networks. We also support innovative rate treatments, such 
as allowing transmission owners to share with customers some of the 
financial benefits of providing more cost-effective service.
---------------------------------------------------------------------------
    \11\ In recent years the S&P 500 companies have, on average, 
yielded a rate of return on equity (ROE) of approximately 20 percent, 
while vertically integrated electric utilities have lagged behind at 
10-13 percent on average. See Joint Comments of Kit Konolige et al., 
regarding the Commission's Notice of Proposed Rulemaking on Regional 
Transmission Organizations, at 9, FERC Docket No. RM99-2-00.
---------------------------------------------------------------------------
    We believe that if reform of transmission pricing is undertaken, 
prices for delivered electricity will remain stable and may even 
decline. Generation accounts for the lion's share of electricity 
costs--some 75%. A more vigorous transmission sector should strengthen 
competition. Increasing access to supply should lead to more 
competition and lower delivered prices.
    The President's National Energy Policy Report called for the 
Department of Energy to work with FERC to encourage the use of 
incentive rate making proposals. H.R. 2814, the bill introduced by 
Representatives Sawyer and Burr, also directs FERC to utilize 
innovative transmission pricing policies. Chairman Barton's discussion 
draft contains helpful language on this point. And H.R. 2944, the 
electricity bill passed by this Subcommittee in 1999, included 
innovative pricing language. FERC is moving in the right direction on 
issues like these, but encouragement from Congress, especially in the 
form of legislative language directing FERC to consider the need for 
transmission investment and expansion when setting rates, is very 
important.
Reform Transmission Siting
    One of the key impediments to increasing transmission capacity is 
the problem of siting new lines, particularly lines that are built to 
facilitate interstate power transactions. To help site new transmission 
lines, EEI supports giving FERC a role as backstop. This backstop would 
come into play only when states are unable or unwilling to act on the 
application. Under this proposal, if a state failed to act on an 
application, or materially altered it, FERC would be given the 
authority to issue a certificate of public convenience and necessity 
for a transmission line. FERC would have similar authority if other 
Federal agencies failed to act or materially altered a regionally 
approved proposal.
    The proposal to grant FERC a key role in siting new transmission 
lines has gained support across the political spectrum. The President's 
National Energy Policy Report recommends developing legislation to 
grant FERC siting authority for new transmission. The Barton discussion 
draft would grant FERC a backstop role if a state lacked authority to 
site a new transmission line, withheld approval or delayed final 
approval for more than one year. H.R. 2814 also would grant FERC a 
similar backstop role. In his draft bill on electricity legislation, 
Senate Energy Committee Chairman Bingaman proposed granting FERC siting 
authority.
    It made sense in 1935 when the Federal Power Act was adopted to 
leave transmission siting authority with the states, since transmission 
lines were generally local in nature. It also made sense for Congress 
to grant FERC's predecessor, the Federal Power Commission, authority to 
make siting decisions for natural gas pipelines, since they tend to be 
interstate in nature. Now, however, our transmission system is being 
asked to meet obligations similar to natural gas pipelines: move large 
amounts of energy across long distances and across state lines.
    FirstEnergy endorses federal siting authority, even though in Ohio 
we have a comparatively good siting process. In the early 1970s, Ohio 
established a transmission siting board. Today in Ohio, if you propose 
a transmission facility, the application need only be approved by the 
state siting board. The applicant must demonstrate a need in Ohio for 
the facility, and must demonstrate that environmental considerations 
are given due regard. Once these thresholds are met, the board issues a 
certificate on environmental compatibility and public need. Roughly 28 
states have siting statutes, while the remaining states retain roles 
for local authorities in siting decisions.
    We understand that the issue of federal eminent domain authority 
raises concern. Of course, to carry out necessary siting, there must be 
a certificate of public convenience and necessity issued. Only then may 
the holder of the certificate exercise the authority. The FERC 
currently has authority to issue certificates for natural gas pipelines 
and for electric transmission for hydroelectric projects. In addition, 
the federal electric utilities that own transmission have eminent 
domain authority.
    Electric utilities currently exercise the power of eminent domain 
when issued state certificates of public convenience and necessity if 
they are unable to acquire the rights-of-way through other means. EEI 
recently surveyed its member companies on their use of eminent domain 
authority. The companies that responded have transmission operations in 
39 states. They reported acquiring 4,107 miles of transmission line 
rights-of-way over the last five years, involving more than 14,000 
parcels of land. Of those parcels, only 417--or 2.9 percent--required 
the use of eminent domain authority. Utilities clearly exercise eminent 
domain as a last resort.
Remove Tax Barriers
    Congress should enact tax reform to remove disincentives to 
formation of regional transmission organizations and to provide 
incentives for new investment. Specifically, we need to allow for tax-
deferred sales and tax-free spinoffs of transmission property, as 
provided for in H.R. 4. This language resulted from an agreement 
between the Edison Electric Institute, the American Public Power 
Association, and the Large Public Power Council. In addition, we need 
to accelerate depreciation periods for transmission property, as called 
for in S. 596, introduced by Senator Bingaman.
    Forming a for-profit transmission company or transco, which is what 
my company and many others are doing to comply with Order No. 2000, is 
extremely difficult, and is complicated by the tax laws. To meet the 
Order's independence requirement, many utilities would prefer to find a 
way to divest transmission assets. In other cases where government 
action requires a taxpayer to sell property, the tax code prevents 
incursion of tax penalties. If utilities sell transmission property and 
reinvest the proceeds into other utility property, taxes should be 
deferred until a taxable event involving the property occurs. If 
utilities spin off transmission property, this should not be considered 
a taxable event.
    As for depreciation of transmission assets, the depreciation period 
should be brought into line with periods for property in other 
industries, given the changed circumstances under which the industry 
must attract capital.
Remove PUHCA Barriers
    Congress should repeal the Public Utility Holding Company Act. It 
is now a significant barrier to investment in RTOs. When the Senate 
Banking Committee held a hearing on S. 206, the Public Utility Holding 
Company Act of 2001 (which has now been adopted by that committee by a 
19-1 vote), Cindy Marlette, FERC's Deputy General Counsel, testified to 
the impact of PUHCA on RTO formation, stating:
        PUHCA may cause unnecessary regulatory burdens to utilities 
        who, in compliance with Commission policy and regulations, seek 
        to form or join regional transmission organizations (RTOs) . . 
        . Under PUHCA, any entity that owns or controls facilities used 
        for the transmission of electric energy--such as an RTO--falls 
        within the definition of public utility company, and any owner 
        of ten percent or more of such a company would be a holding 
        company and potentially could be required to become a 
        registered holding company. This could serve as a significant 
        disincentive for investments in independent for-profit transcos 
        that qualify as RTOs.12
---------------------------------------------------------------------------
    \12\ Hearing on S.206 ``The Public Utilities Holding Company Act of 
2001: Before the Senate Comm. on Banking, Housing and Urban Affairs, 
107th Cong. (2001) (Statement of Cynthia A. Marlette, Deputy General 
Counsel, Federal Energy Regulatory Commission).
---------------------------------------------------------------------------
    Put simply, the Holding Company Act stifles investment in the 
emerging independent transmission industry. As EEI member companies 
attempt to raise financing for newly forming RTOs, they are discovering 
that PUHCA's restrictions are a significant concern to Wall Street 
firms and a barrier to investment.
Avoid Market Structuring Authority for FERC
    Congress should avoid giving FERC new authority to restructure the 
industry. As noted above, RTOs are forming. This process is already 
subject to intense FERC review and approval.
    FirstEnergy has been actively involved in RTO formation for the 
last four years. Our company joined the Alliance filing in June 1999, 
well before Order No. 2000 was issued. With four major FERC orders 
behind us, each conditionally approving our filings and encouraging us 
to continue, the Alliance is nearing operations. And we are not alone; 
electric utilities in the Northeast and the Southeast have also spent 
countless hours and invested millions of dollars in efforts to form 
their own RTOs. Giving FERC additional authority to alter the process 
at this stage could damage and impede the progress already made. Now is 
certainly not the time to increase uncertainty. With 98 percent or more 
of investor-owned transmission assets committed to RTOs in development, 
the industry is demonstrating that many proposals in the last Congress 
for additional RTO authority were unnecessary. FERC is an economic 
regulatory agency. Market structuring decisions should remain primarily 
where they reside today--in the Department of Justice, Federal Trade 
Commission, and with the state antitrust authorities.
    Furthermore, if the federal government focuses the transmission 
debate on the authority of the commission to restructure the industry, 
it conditions the industry to be concerned with regulation, and not 
with making transmission systems work. The businessmen will be 
regulatory experts, not transmission experts. Lately my colleagues and 
I have spent a lot of time negotiating our way through regulatory 
changes and policy debates, when what we need to do most is run this 
critical business and focus on customer satisfaction.
Adopt Mandatory Reliability Standards
    In a competitive electricity market, voluntary reliability rules 
that market participants may or may not obey, depending on their 
economic incentives, will not work. We have already seen market 
participants bending and even ignoring the existing voluntary rules for 
their own gain. The North American Electric Reliability Council (NERC) 
is reporting numerous violations of its voluntary reliability rules. A 
comprehensive restructuring bill should include provisions to ensure 
reliability standards developed by technical experts are mandatory and 
enforceable on all market participants, with FERC oversight. Also, the 
rules should apply uniformly to provide stability and security for new 
markets with new boundaries.
    The President's National Energy Policy Report calls for such 
legislation. H.R. 312, legislation introduced by Representative Wynn, 
contains reliability provisions developed by NERC and numerous industry 
stakeholders. H.R. 2814 includes the same reliability provisions. H.R. 
2944, as approved by this Subcommittee in 1999, contained similar 
provisions. Also, the Senate passed a version of this bill last year. 
The Barton discussion draft contains different language, but we believe 
its overall goal is consistent with the previous proposals and that, 
with a few modifications, this language would be acceptable to a 
majority of EEI's member companies.
Streamline Merger Review Authority
    Congress should streamline, at the very least, the review of 
dispositions of utility property by the FERC under Section 203 of the 
Federal Power Act. Among other things, this review is a barrier to 
consolidation of transmission networks and formation of RTOs.
    Section 203 of the Federal Power Act is currently a ``one-size-
fits-all'' provision that applies to the disposition of all 
jurisdictional assets with a value of $50,000 or more. It applies to 
everything from a simple sale of a transmission substation to the most 
complicated utility transactions. FERC reviews of dispositions of 
property under section 203 take far too long and are often duplicative 
of reviews conducted by other agencies. For some transactions, review 
is required by FERC, the Department of Justice, the Federal Trade 
Commission, the Securities and Exchange Commission, the Nuclear 
Regulatory Commission, and each affected state. Utility transactions 
should be reviewed by the government, commensurate with the way 
transactions involving other industries are reviewed. However, the 
massive, time-consuming, duplicative review specific to the electric 
utility industry is contrary to consumer interests because it delays 
companies' ability to respond to market needs and needlessly increases 
transaction costs.
    Both the Barton discussion draft and H.R. 2814 would repeal Section 
203 of the Federal Power Act, which grants FERC authority to review 
public utilities' disposition of property, consolidation and purchase 
of securities. This eliminates duplicative federal merger reviews, 
leaving the Department of Justice or Federal Trade Commission to review 
such mergers.
                            the alliance rto
    FirstEnergy is one of the leaders in forming the Alliance Transco 
Limited Liability Company (Alliance Transco LLC) that we anticipate 
will be qualified as the Alliance RTO. We anticipate that an affiliate 
of National Grid USA, itself part of a worldwide independent 
transmission-only company, will be the independent Managing Member of 
Alliance Transco LLC. As part of the transaction, National Grid expects 
to make very substantial investments in Alliance Transco LLC to fund 
start-up and to acquire assets. Alliance Transco LLC will be a for-
profit transmission company. The business of the company will be to 
provide transmission service. The EEI member companies that now own the 
transmission assets expected to be controlled by Alliance Transco LLC 
will become its customers, aligning their interests more closely with 
other generators and utilities. As I mentioned, with two years of 
regulatory proceedings behind us and substantial approvals already 
obtained, Alliance Transco will be ready to operate by the end of this 
year in accordance with the ambitious timetable set by Order No. 2000 
if it gets final approval from FERC this fall.
    Over the last four years, and especially since the first Alliance 
filing in 1999, a major portion of my daily activity and the people I 
work with has been focused on forming the Alliance. The model we built 
has attracted five newer members to the Alliance, which will now be 
able to provide transmission service roughly from the Gateway Arch in 
St. Louis to Kitty Hawk, North Carolina. It will link large load 
centers such as Chicago, Cleveland, and Northern Virginia.
    Alliance is but one RTO being developed by EEI member companies. In 
each case and under each model, there are business and human challenges 
that must be overcome. On the business side, we are focused on crafting 
and executing the business and financial arrangements necessary to 
establish electric transmission institutions that can serve growing 
competitive markets for electricity. This is the cutting edge of 
financial restructuring.
    On the human side, the new transmission industry will need 
experienced and highly trained, highly motivated personnel. It takes 
experienced people to run these systems. The system operators are the 
finest people around. The last thing they want to happen is to reduce 
load or have a blackout. They take pride in making sure that we 
effectively balance resources and load, and they work day and night--
literally 24 hours a day, seven days a week, 365 days a year--to keep 
the lights on. We must keep these operators. However, without the right 
business proposition, and without some certainty about the direction 
and promise of this emerging industry, how will we keep them?
    I implore you to craft legislation in such a way that accelerates 
and does not retard the development of this new transmission industry 
and the start-up of RTOs in development.
                               conclusion
    Our country needs a comprehensive electricity restructuring bill. 
And since transmission is the backbone of the entire industry, Congress 
needs to ensure that wholesale electricity markets are capable of 
delivering adequate, affordable and reliable electricity to consumers. 
Without sufficient transmission capacity it won't happen. Transmission 
is the linchpin to well-functioning wholesale and retail markets. We 
look forward to working with this Subcommittee to develop the 
transmission reforms necessary to enable the industry to launch the 
independent transmission businesses of the future and close the 
transmission investment gap.
[GRAPHIC] [TIFF OMITTED] T6759.001

[GRAPHIC] [TIFF OMITTED] T6759.002

    Mr. Barton. Thank you, Mr. Szwed.
    We now want to hear from Mr. Roger Fontes, is that correct? 
Who is the General Manager of the Florida Municipal Power 
Agency and he's here on behalf of the American Public Power 
Association.
    You're recognized for 5 minutes.

                  STATEMENT OF ROGER A. FONTES

    Mr. Fontes. Good morning, Mr. Chairman, and thank you, 
members of the subcommittee for the opportunity to testify 
today.
    I am testifying on behalf of the American Public Power 
Association which represents 2,000 publicly owned utilities 
serving 40 million customers.
    APPA supports the implementation of Federal policies that 
will establish effective wholesale competition, and we share 
the view of many members of the subcommittee that getting the 
transmission issue right is the key to achieving that goal. 
Nowhere is this more evident than in my State of Florida where 
we have inadequate interstate connections with other States and 
where prior transmission discrimination has led to lengthy 
litigation on transmission access issues.
    Getting it right means resolving all of the issues you have 
identified for these hearings today, but you've also asked the 
panel to specifically address three key ones: Siting, incentive 
rates and reliability of the grid. So let me address each of 
these.
    Siting. It is widely recognized that the Nation's 
transmission system is weak and highly constrained. These 
problems inhibit competition and threaten reliability. The 
biggest obstacle to new transmission lines is the difficulty of 
siting.
    Currently the balkanized State-by-State process is not 
working. Since these facilities are necessary to support 
interstate commerce, a Federal role is appropriate and 
essential. APPA supports the concept of Federal eminent domain 
authority for major transmission facilities and in that regard 
we support section 402 of the chairman's draft bill.
    Given the political problems involved, however, we think 
this authority should only be used after appropriate 
consultation and cooperation with State and local governments. 
Thus, we suggest that this section be expanded to include an 
authority to create States creating joint siting boards that 
mirror RTO boundaries, require these boards to provide one-shop 
review and approval processes for RTO approved facilities and 
provide FERC with siting authority if States fail to establish 
boards or act on RTO plans.
    Regarding incentive rates. Many transmission owners are 
urging Congress to direct FERC to institute incentive rates to 
encourage transmission construction. We strongly believe that 
this is the wrong approach and is unnecessary. We must stop 
looking to the entities that both own transmission and 
generation to build new transmission facilities. The risk of 
losing generation sales to competitors by building new 
transmission is so great that we believe the incentive will not 
help. And extensive profits really only spill through to higher 
consumer rates for everyone.
    Indeed, the chairman's discussion draft includes a 
proposal, and we respectfully request that it be deleted.
    First, really, the obstacle to transmission is not the lack 
of capital or investors. The main obstacle is siting. 
Transmission is a low risk traditionally regulated utility 
investment. It has been successful in attracting capital at 
reasonable and regulated rates of return. I believe Thomas Lane 
from Goldman Sachs testified before your committee in late July 
and said ``There is definitely a role in the markets for low 
risk/low return investments, which is what transmission 
represents.'' We agree with this statement.
    A recent example of this is Department of Energy's request 
for interest in constructing what's now become the famous Path 
15 in California, which I understand garnered more than a dozen 
responses.
    Second, additional legislation is not needed. FERC already 
has existing authority to approve innovative or performance 
based rates. FERC has had an incentive rate policy since 1992. 
Personally I find it ironic that the same time large 
transmission owners are demanding higher rates to build new 
transmission, they are steadfastly refusing to allow public 
power and cooperative system to be paid by RTO's for their 
prior transmission investments. Congress should not support 
this gambit.
    Transmission will be built if we resolve siting issues and 
support FERC's authority to require RTOs to have the full 
authority to plan and construct the grid.
    Reliability. Certainly events of the past year have 
reenforced the importance of maintaining and improving the 
reliability of the transmission system. APPA supports enactment 
of Federal legislation to establish a national electric 
reliability organization to set and enforce reliability 
standards with FERC oversight. In this regard we support 
section 301 of the chairman's draft. We also support some 
changes to that section as proposed by the NERC, National 
Electric Reliability Council, that would impart, underscore the 
need for FERC to oversee implementation of the standards and 
enforce compliance by RTOs and others using the Nation's 
transmission grid.
    Thank you for the opportunity to be here today. Public 
power looks forward to working with the subcommittee to address 
these issues for the benefits of all consumers. Thank you.
    [The prepared statement of Roger A. Fontes follows:]
Prepared Statement of Roger A. Fontes, General Manager and CEO, Florida 
    Municipal Power Agency, on Behalf of the American Public Power 
                              Association
    Thank you, Chairman Barton, Ranking Member Boucher and Members of 
the Subcommittee for this opportunity to testify. I am pleased to 
appear today on behalf of the American Public Power Association to 
discuss several important issues involved in restructuring the nation's 
electric transmission grid.
    I am General Manager and CEO of the Florida Municipal Power Agency 
(FMPA), a joint action agency providing wholesale power and other 
services to 29 municipal electric utilities in Florida. APPA represents 
the interests of more than 2,000 publicly owned electric utility 
systems across the country, serving approximately 40 million customers. 
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. 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 they have maintained that 
obligation, even in states that have introduced retail competition. 
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, 
obligated to serve all customers--understanding the underlying 
structure and mission of public power is essential in crafting balanced 
electricity legislation that will maintain industry diversity and 
promote the consumer interest.
Wholesale Competition First--the Role of the Federal Government
    There is only one reason for Congress to enact comprehensive 
electric utility restructuring legislation--to promote wholesale 
competition for the benefit of all consumers. The overriding objective 
must be to restructure the industry in a way that has a high 
probability of benefiting all classes of consumers with no degradation 
of reliability of service.
    Moving from a monopoly model to a competitive model is very 
difficult. Those in this transition who are threatened with a loss of 
market control can be expected to fight tenaciously to retain 
competitive advantages or seek to gain market power. The biggest 
obstacles to the creation of robust wholesale competition in the 
electric utility industry are: 1) the inadequacies of our nation's 
transmission infrastructure; 2) the failure to establish on a 
comprehensive basis efficient, competitively neutral regional 
transmission organizations and to plan, construct, operate and provide 
the transmission service needed for regional markets to succeed, and; 
3) the pervasive existence of market power in regional generation 
markets that can be exercised to keep prices for consumers well above 
truly competitive levels.
    The evidence of the continuing abuse of transmission and generation 
market power is abundantly clear from the hearing record of this 
Subcommittee. The vast majority of witnesses from very diverse 
constituencies and interests that have appeared at Subcommittee 
hearings over the past five years--whether it was on specific 
restructuring legislation or in response to the western electricity 
crisis of the past year--have pleaded for Congress to address this 
problem.
    Because they involve interstate commerce, Congress can only address 
the market power problems in generation and transmission. Federal 
antitrust laws may remedy problems in mature markets, but they are not 
effective to guide the transition to competition for industries, like 
the electric utility industry, that must evolve from highly 
concentrated monopolies. Antitrust laws cannot convert such industries 
to ones that are capable of being controlled by competitive forces.
    The identification of market abuses in any modern industry is hard, 
but in the electric utility industry, it is extremely difficult. 
Electricity is a real-time product. It is literally consumed as it is 
produced. It cannot be stored. This makes transactions in the 
electricity market very vulnerable to subtle discrimination and 
manipulation, including the ability to withhold transmission from 
competitors through reservations of capacity for ``reliability'' and to 
manipulate the timing of maintenance of strategically located 
generation and transmission facilities. For these reasons, the primary 
federal antitrust agencies, the Federal Trade Commission and the 
Department of Justice, have previously testified in favor of remedying 
the electricity market structure.
Transmission: the Key to Competition
    Since today's hearing is focused on transmission issues and how 
they are addressed in Chairman Barton's discussion draft, my testimony 
will delineate transmission provisions that are essential in federal 
restructuring legislation and will also cite specific provisions in the 
draft bill, including those that could be modified or eliminated. It is 
important to remember, however, that generation markets and the 
transmission system are inextricably linked. In particular, it is 
essential that federal legislation provide the Federal Energy 
Regulatory Commission (FERC) with authority to prevent and, where 
necessary, remedy the exercise of market power.
    It is widely recognized that our current transmission system is 
weak and highly constrained. The weaknesses of the grid not only 
threaten reliability; they undermine our ability to achieve robust 
competition. Competitive wholesale markets simply cannot work unless 
numerous competitors are able to deliver their product to buyers. 
Today, our regional grids are characterized by ever increasing 
congestion leading to more and more interruptions and providing buyers 
with fewer and fewer reliable choices of supply. We need to fix the 
grid, physically by enabling prompt construction of needed facilities, 
and institutionally by providing for independent, competitively neutral 
planning, operation, and service.
    Thus, APPA shares the view of many Members of the Subcommittee that 
getting transmission ``right'' is the key to building an effective, 
competitive wholesale market and that expansion of the grid is critical 
to making the interstate transmission system more robust and efficient.
    The way to achieve these goals is four-fold:

1) reform the balkanized, state-by-state transmission siting process;
2) stop looking exclusively to entities that own both generation and 
        transmission to build new transmission facilities. The risk of 
        losing generation sales to competitors by building more 
        transmission is so great that these entities will not do it 
        without hefty incentive payments--payments that will 
        unnecessarily increase electricity costs for consumers;
3) grant FERC the authority to establish large, rationally scoped and 
        truly independent Regional Transmission Organizations (RTOs) 
        with full authority to plan and expand the regional 
        transmission system; and
4) ensure that RTOs fully compensate all transmission owners--whether 
        large vertically-integrated utilities, smaller transmission 
        dependent utilities, or a non-industry investors--for their 
        investment in transmission facilities turned over to an RTO's 
        control and operation.
    The Chairman's draft admirably addresses the first item, goes in 
the wrong direction on the second, and has not yet addressed the third 
and fourth.
Regional Planning and Siting
    The Administration's National Energy Policy Report directed 
Department of Energy Secretary Abraham to ``develop legislation to 
grant authority to obtain rights-of-way for electricity transmission 
lines, with the goal of creating a reliable national transmission 
grid.'' APPA supports the approach employed in Section 402 of the 
discussion draft that provides FERC with siting authority when States 
or other entities designated to review siting requests are either 
unable or unwilling to act.
    As the Subcommittee reviews the discussion draft, we would suggest 
that these additional provisions be added to Section 402 to further 
streamline the siting process:

1) Authorize the creation of joint state siting boards that mirror RTO 
        boundaries.
2) Require theses siting boards to provide a one-stop review and 
        approval process for facilities in approved RTO regional plans.
3) Establish reasonable deadlines within which these siting boards must 
        act on RTO plans. Although Chairman Barton's draft authorizes 
        FERC to be given siting authority on a particular project if a 
        State or siting entity has failed to act within a year, we 
        believe that certain projects may need more immediate action.
4) Grant the RTO federal eminent domain authority for the project so 
        that it will not have to proceed in multiple state courts under 
        different standards once a project has been approved either by 
        a joint board or by FERC.
    As the Chairman has acknowledged by including FERC siting authority 
in his draft, the adequacy of the interstate transmission grid is vital 
to our nation's economic and security interests and should be addressed 
on the national level. The current bureaucratic maze of state 
regulations and the threat of possible judicial action in multiple 
state courts substantially hinder the siting of new interstate 
transmission lines. By substituting a single joint siting process for 
reviewing projects in multiple states that are subject to different 
rules and standards, investors will be able to proceed with much 
greater certainty that a project will be approved and completed.
Incentive Pricing
    We are aware that some transmission owners have been urging 
Congress to legislate to direct FERC to institute ``incentive,'' 
``innovative,'' or ``negotiated'' rates to encourage owners to expand 
the grid. In fact, the Chairman's draft directs FERC to conduct a 
rulemaking on incentive and performance-based transmission rates. This 
provision is unnecessary; APPA believes that FERC, under the Federal 
Power Act and Order 888, already has sufficient authority and 
flexibility to design transmission rates to ``promote economically 
efficient transmission and generation of electricity.'' These rates 
remain subject to the ``just, reasonable, and not unduly discriminatory 
or preferential'' standard that has been the hallmark of FERC rate-
making authority. (This standard was recently affirmed by FERC in Order 
2000 on RTOs.) Further, APPA believes that incentive rates will 
undoubtedly lead to increases in overall transmission costs, which are 
decidedly not in the public interest.
    As is mentioned above and will be discussed in more detail below, 
the most significant impediment to achieving a robust transmission 
system is the current, fractured, siting process. Because the 
Chairman's discussion draft addresses this most vital of transmission-
related issues, the codification of ``incentive,'' ``performance-
based,'' ``innovative,'' or ``negotiated''' rates is unnecessary and 
the wrong approach. For these and the following reasons, we feel 
strongly that Section 401 should be eliminated from the draft bill.
Additional Legislation Is Not Necessary; FERC Is Already Empowered to 
        Approve Innovative or Performance-Based Rates:
    Legislation endorsing innovative rate-making to encourage 
transmission owners to join RTOs, invest in new facilities, and operate 
the transmission system efficiently is not necessary. The Federal Power 
Act (FPA) already makes ample room for incentives and performance-based 
rates that satisfy the ``just, reasonable, and not unduly 
discriminatory or preferential'' standard that is the hallmark of 
utility rate-making. In addition to this fundamental standard, Section 
212(a) of the Federal Power Act, which FERC has read into Sections 205 
and 206, already provides FERC all the flexibility needed to design 
rates to ``promote economically efficient transmission and generation 
of electricity,'' but subject to the essential protections of the 
``just, reasonable and not unduly discriminatory or preferential'' 
standard. Requests for additional legislative pricing authority should 
be recognized for what they are--requests for rates that would not 
otherwise meet the longstanding and fundamental requirement that rates 
be just, reasonable, and in the public interest.
    The concept of incentive rates is not new to FERC. Since 1992, FERC 
has had an incentive rate policy.1 That long-standing policy 
recognizes that to be fair, ``Incentive rate-making must simultaneously 
protect customers' interest and offer potential rewards to the utility 
for good performance.'' They also must be balanced: ``[I]ncentive 
regulation should be designed to penalize utilities that fail to 
achieve these efficiencies--opportunities for reward should be offset 
by symmetric downside risk.'' The policy statement establishes sound 
regulatory standards to guide evaluation of incentive rates, including 
the requirement to quantify benefits to consumers and maintain quality 
of service.
---------------------------------------------------------------------------
    \1\ Policy Statement on Incentive Regulation, 61 FERC para. 61,167 
(1992).
---------------------------------------------------------------------------
    FERC's RTO rulemaking, Order 2000, expressly endorses its 1992 
incentive rate policy and applies it to the RTO context. In Order 2000, 
FERC both outlined a series of incentives and pricing innovations that 
RTOs could propose, and endorsed performance-based rates. FERC's RTO 
rule expressly invites rate treatments, such as rate moratoriums, rates 
of return that consider ``risk premiums and account for demonstrated 
adjustment in risk,'' and ``non-traditional depreciation schedules for 
new transmission investment,'' 18 C.F.R. Sec. 35.34(e). At the same 
time, the Commission's rule requires a demonstration as to ``how any 
proposed rate treatment would help achieve the goals of Regional 
Transmission Organizations, including efficient use of and investment 
in the transmission system and reliability benefits to consumers,'' as 
well as a cost-benefit analysis.
    Existing law expresses policies on reasonable incentives and rate 
innovations, and demonstrates that new incentive rate legislation is 
not necessary. Existing law gives FERC ample authority to provide 
balanced and justified rate incentives and performance-based rates that 
foster investment in and efficient operation of an expanded grid 
capable of supporting a robust competitive market, and ensuring 
reliable service to all consumers. No additional pricing language is 
needed to permit pricing innovations or incentives that meet the 
Federal Power Act's just and reasonable and not unduly preferential 
standard.
    FERC has the ability to approve performance-based rates that reward 
above-average performance in the timely and cost-effective construction 
of needed facilities, but FERC also has the ability to penalize poor 
performance and significant congestion not remedied in a reasonable 
time. It needs no new congressional directive to reward RTOs that 
reduce their costs, increase throughput and customer satisfaction, and 
eliminate congestion, while enhancing reliability.
    Some proposals appear designed to raise rates to a level where the 
requirements of Order 2000 and FERC's incentive rate policy would not 
be satisfied, and to rewrite the FPA's long-revered rate-making 
standard. By legislating incentives, without requiring the 
quantification of benefits to consumers and any cost benefit analysis, 
the legislation would tip the balance achieved by the just and 
reasonable standard, as reflected in Order 2000. In addition, some 
proposals would provide for incentive rates even where a transmission 
owner does not join an RTO.
    As to RTOs, these proposals would legislate continued ``pancaked'' 
rates that violate Order 2000. A centerpiece of Order 2000 is the 
elimination of cumulative pancaked rates (or tolls) that must be paid 
whenever a transaction crosses the corporate boundaries separating one 
transmission owner from the next, a rate practice that FERC found to 
impede development of competitive markets. To remove such barriers to 
competition, FERC's RTO rule expressly requires: ``Customers under the 
Regional Transmission Organization tariff must not be charged multiple 
access fees for the recovery of capital costs for transmission service 
over facilities that the Regional Transmission Organization controls'' 
18 C.F.R. Sec. 35.34(l)(ii).
    In addition, it is neither necessary nor appropriate for Congress 
to legislate utility rates of return. This determination, which FERC 
makes with the help of expert testimony, as well as information from 
the financial community on what would constitute an appropriate rate of 
return should be left to an expert agency, governed by long-standing 
Supreme Court precedent as to what rate of return is reasonable.
    Lastly, and most inappropriate for a monopoly service, is the 
proposal of some IOUs for ``negotiated rates'' that are expressly 
``without regard to costs.'' FERC has repeatedly found non-
discriminatory, open access transmission service to be the necessary 
foundation for competitive wholesale markets that the Energy Policy Act 
of 1992 intended to foster. Negotiated rates would undermine this 
fundamental policy objective. Vertically integrated transmission owners 
could use this provision to burden their competitors, for example, by 
refusing to provide service on a timely basis, or without extensive or 
expensive litigation, absent ``voluntary'' agreement to an extortionate 
rate. Indeed, congressional authorization of ``negotiated'' rates would 
signal a ``Back to the Future'' approach, inviting the very 
discrimination and self-preferences that formed the factual foundation 
for Order 888 and FERC's open access requirements.
    Even as they relate to RTOs, ``negotiated rates'' are a bad idea. 
RTOs, while independent of market participants, are still transmission 
monopolists, providing a service essential to their electricity 
markets, and our nation's economic well being. The concept of rate 
``negotiation'' makes no sense in this context, where customers are 
necessarily captive to the RTO on which their loads or generations are 
located. RTOs, seeking to maximize profit from their expansive regional 
transmission monopoly, might well be tempted to use ``negotiated 
rates'' as a mechanism to extract excess profits for providing 
customers the service to which they should be entitled at regulated 
rates. (Of course, the just and reasonable requirement does not prevent 
compensation to RTOs for providing enhanced or expedited service.) 
Indeed, protecting consumers from the ability of public utilities to 
insist on excessive charges for essential services is a core purpose of 
the FPA and the fundamental premise for subjecting monopoly services to 
be regulated, just and reasonable, and not unduly discriminatory or 
preferential rates.
Enhancing FERC's Authority to Require RTOs that Have Full Authority to 
        Plan and Cause Expansion of the Regional Grid is a Far More 
        Effective Way to Ensure Investment in a Robust and Reliable 
        Transmission System:
    Today, the only parties that can build additions to the integrated 
transmission grid are the existing transmission owners. A weakness of 
many of the RTOs being formed is that they are not permitted to 
construct transmission lines themselves, but have to order or cajole 
existing vertically integrated owners to construct. This gives 
tremendous leverage to the owners. It should not surprise anyone that 
owners in this negotiating position are holding out for higher rates of 
return and depreciation schedules much shorter than the useful life of 
facilities, while the situation gets worse.
    A key factor discouraging construction is the fact that owners of 
local generation who also own transmission have a significant conflict 
of interest when it comes to transmission construction that will open 
their generation up to competition. For instance, a new transmission 
line may cost $200,000,000 ($100,000,000 of equity) and the FERC return 
on equity may be 12%, or $12,000,000 per year. But construction of the 
line may also expose the owner to losses of up to $30,000,000 a year in 
generation sales. Thus, it is not surprising that such an owner will be 
reluctant to build transmission and needs a large incentive to proceed.
    A second important problem with looking to existing, vertically-
integrated transmission owners to finance the transmission needed is 
that many of these owners are diversifying into unregulated generation 
and other investments that have significantly different risk profiles 
than transmission. If a company is willing to take high risk and its 
``hurdle'' rate to justify new investments is a 15-20% return with a 5-
8 year payback, a transmission investment is not going to pass the test 
without a major incentive paid by captive customers. This is 
particularly true in light of the competitive downside to major 
transmission improvements for an owner of local generation. Similarly, 
transmission projects are not going to meet the investment criteria of 
venture capitalists or those interested in Internet stocks. This does 
not mean, however, that the rate of return for transmission should 
compete with the potential returns for those alternative investments, 
which involve much more risk.
    Notwithstanding, owner attempts to justify incentives by claiming 
that transmission is risky is quite untrue. Transmission is the 
prototypical low risk, traditional, regulated utility investment that 
has been very successful in attracting capital at reasonable, regulated 
rates of return.
    The most significant risk associated with transmission is in 
getting facilities built in the first place ( the long lead times 
required to build and the fact that a line may ultimately not get built 
because of siting controversy. This risk can be mitigated by allowing 
recovery of prudent planning and siting costs for facilities in 
approved RTO plans, whether or not the facilities are ultimately built.
    But once a transmission line is built, the risk is relatively low, 
and certainly significantly lower than with generation. A good example 
is the recent Fitch Report on the new American Transmission Company in 
Wisconsin, a transco that began operations on January 1, 2001. As the 
report points out, over 95% of this transmission-only company's revenue 
requirement is guaranteed by recovery from its firm, network customers 
regardless of changes in load, weather, etc. The way costs are 
allocated and charged under FERC procedures to the network customers of 
a monopoly transmission system provides a very certain and steady 
recovery of revenues. The primary remaining risk is that variable O&M 
costs (which are minor) will exceed what is included in rates, or that 
management will do a poor job otherwise and the authorized return will 
not be realized. This risk profile certainly does not justify a rate of 
return on equity in excess of a just and reasonable regulated utility 
return ( or accelerated depreciation, for that matter.
    There is certainly adequate capital in the markets for a safe, 
regulated annuity-type investment, which is what monopoly transmission 
should be. The new RTO regime needs to be designed to attract capital 
for projects from investors that are looking for solid 11-12% utility 
returns, year in and year out, with low risk ( the risk being that the 
return may go to 10% in one year or up to 13% in another. These are 
very different investors than those looking for a 15-30% return and are 
willing to risk 0-5% or a loss.
    As Thomas Lane, Managing Director, Goldman Sachs & Co. testified to 
this Subcommittee on July 27, ``There is definitely a role in the 
markets for a lower risk, lower return investment which is what 
transmission represents. Whether it's 11%-12%, somewhere in that 
neighborhood is what we still need to ferret out with the investor 
base.''
    There is no reason to think that ``cost plus'' regulation, plus a 
reasonable return on prudent investment, will be insufficient to 
attract investment in transmission, without added ``inducements.'' Cost 
plus rate-making has been blamed for inducing over-investment in 
expensive generation facilities, pre-competitive generation markets; a 
utility would only earn more by building more. Once decisions to expand 
transmission are divorced from existing owners, with their competitive 
and financial conflicts of interest, this same regulatory regimen would 
be ample to spur investment.
    For these reasons, we believe it is very important that RTOs be 
specifically authorized in legislation to build transmission--whether 
they are for profit or nonprofit organizations--or, if they choose, to 
bid out passive ownership. If there is a major transmission project the 
cost of which will be $100,000,000, the RTO should be able to finance 
the project itself as a regulated utility or raise the needed capital 
by bidding out the return required, taxes, and depreciation (the fixed 
costs of ownership). Individual companies or pools of investors, 
willing to be passive owners and looking for the solid annuity-type of 
return of a monopoly transmission utility will certainly bid.
    In addition, public power and co-op systems should be not only 
permitted, but also encouraged, to finance at least their share of 
transmission additions through debt. This will help keep the cost of 
service down for everyone.
    To this end, it is essential that RTOs be structured to compensate 
all transmission owners--whether a large vertically-integrated utility, 
a smaller transmission dependent utility, or a non-industry investors 
in transmission--for their investment in transmission facilities. 
Transmission expansion (and RTO participation) will be discouraged if, 
as is now proposed by several RTOs, transmission dependent utilities 
that own transmission are to be paid only a fraction of their revenue 
requirement (if that) for transmission facilities turned over to an 
RTO's control and operation. RTOs will not fulfill their purpose if 
only incumbent large transmission owners are fully compensated for 
their transmission investment.
    In other words, we should not accept transmission owner efforts to 
retain exclusive rights to construct while seeking rate incentives as 
an inducement to do so. Rather than granting existing owners an 
exclusive right to build for RTOs and giving in to their incentive 
demands, we should enable RTOs to put competitive pressure on the cost 
of capital.
    Thus, Congress should adopt legislation that arms FERC with 
authority to require formation of large, rationally-scoped and truly 
independent regional transmission organizations with full authority to 
plan and expand the regional transmission system. This would fully 
separate transmission from generation interests, so expansion decisions 
are not influenced by how the expansion affects the value of the 
transmission owner's generation. Providing RTOs the authority to cause 
needed construction by the transmission owner or others opens the doors 
to market-based means to get the needed transmission constructed 
efficiently--by bidding out construction to third parties.
Reliability
    APPA supports the goal of the Chairman's draft in creating a 
national electric reliability organization to set and enforce 
reliability standards, subject to FERC oversight. 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 electricity crisis in the West 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 industry. As the industry has become more 
competitive, more participants have been executing an increasingly 
greater number of transactions every day. The focus of most of these 
transactions is on short-term costs rather than on system stability.
    The North American Electric Reliability Council (NERC) and its 
regional councils currently promulgate and implement standards to 
ensure the adequate availability of electricity throughout the country. 
This voluntary system of compliance with reliability standards works 
reasonably well in the regulated environment in which the industry 
previously operated, but it will not continue to provide the necessary 
safeguards in a competitive market nor in an era of heightened threats 
of terrorist attacks.
    It is our understanding that NERC has submitted suggested changes 
to Title III, Section 301, of the Chairman's draft bill. APPA concurs 
with NERC's comments, and would underscore the need for FERC to oversee 
the implementation of reliability standards and enforce compliance by 
RTOs. The Chairman's draft should be modified to explicitly require 
this obligation to comply. RTOs will be responsible for the reliable 
operation of the bulk system in real time. They also need to be 
responsible themselves by complying with reliability standards.
                       other transmission issues
FERC Transmission Jurisdiction
    Local control is one of the most fundamental aspects of public 
power. However, it is difficult to envision effective wholesale 
markets, which, as noted, APPA strongly supports, without some degree 
of federal involvement in public power transmission that is part of the 
regional grid. APPA members have struggled with the problem of 
balancing the retention of local control with the recognition that 
transmission is a matter of interstate commerce. While publicly owned 
utilities with transmission facilities are not anxious to be subjected 
to FERC jurisdiction, the limited jurisdiction contemplated in Chairman 
Barton's restructuring bill (H.R. 2944) from the last Congress, known 
as FERC-lite, is an acceptable compromise and is consistent with APPA 
policy. In essence, FERC-lite would extend FERC jurisdiction to public, 
cooperative, and federal utilities with transmission facilities 
interconnected to the national grid. The FERC-lite language makes the 
important exception, however, that FERC would not be given the 
authority to set transmission rates for these transmitting utilities. 
Instead, FERC would determine whether the rates to others are 
comparable to those charged to themselves. If they are not, FERC would 
remand the issue to the publicly owned utility.
    While the Chairman's draft includes the essential provisions of 
this FERC-lite approach, unfortunately, it also includes new provisions 
giving FERC the authority to order refunds by public power systems, and 
in so doing, providing FERC authority over public power systems' 
transmission rates under Sections 205 and 206 of the Federal Power Act. 
The combination of these authorities, in fact, results in very heavy 
federal regulation of public power and cannot be supported by APPA. We 
suggest that the provisions related to FERC refund authority be 
deleted.
    The issue of transmission jurisdiction in a bundled vs. unbundled 
transaction is an important issue now before the U.S. Supreme Court. 
Within APPA's membership, there are different positions on this issue. 
Transmission dependent utility (TDU) members believe that service to 
them must be fully comparable to utility owners' own use of the system. 
The native load of a TDU system should not be shed before the native 
load of the owner or there can be no fair competitive market. Public 
power transmission owners that are vertically integrated are equally 
concerned that FERC not interfere with their primary obligation to 
provide highly reliable, economic service to the consumers that own 
them and for whom their systems have been built.
Creation of Regional Transmission Organizations (RTOs)
    The single most important step that can be taken to achieve the 
goal of a robust transmission system is the establishment of large, 
truly independent RTOs that have primary planning responsibility for 
the regional grids under their control. APPA continues to support the 
authority of FERC to establish and require public utility participation 
in strong, truly independent RTOs in order to facilitate the 
development of vigorously competitive retail markets. Any federal 
legislation should provide FERC with the authority needed to achieve 
this goal. In addition to mandating true independence, and sufficient 
size, and rational scope of RTOs, the statutory criteria should 
accommodate the unique characteristics and legal requirements of public 
power to ensure that public power's participation by FERC order is not 
inconsistent with state laws and constitutional requirements. 
Furthermore, the additional criteria for public power participation 
must be consistent with bond covenant requirements and should not 
impair control of local system operations of reliable and economic 
service to customers of public power systems.
    In order for an RTO to be effective in promoting a competitively 
neutral transmission system, it must have several specific 
characteristics. It must be independent to ensure that owners of 
transmission cannot exercise vertical market power. It must have 
boundaries that are rational and that eliminate the current 
balkanization and gerrymandering of the grid. It must take into 
consideration the needs of all stakeholders--including the needs of 
public power transmitting utilities--to ensure fair and equitable 
treatment of all users. In addition, while it may be appropriate for 
FERC rates to reward excellent performance as previously discussed, it 
is not appropriate for FERC to provide incentives for participation in 
RTOs. Instead, RTO participation should be a key condition to enjoying 
the benefits of market pricing and relaxed wholesale regulation.
    It is absolutely essential to clarify FERC's legal authority to 
accomplish these objectives or we will experience continued long delays 
and unnecessary litigation. Without a clarification of FERC's 
authority, utilities will continue to resist and delay RTO formation--
and the current chaotic state of development will continue 
indefinitely.
    Publicly owned utilities have been willing to participate in RTOs 
which are consistent with the specific criteria set forth by FERC in 
Order No. 888 and clarified in Order No. 2000. In fact, FERC 
commissioners and various FERC orders have specifically addressed 
public power participation, not to encourage public power systems to 
join but rather to encourage private utilities to let them join on fair 
and reasonable terms.
RTO Participation
    FERC has indicated that it believes it currently has the authority 
to order jurisdictional utilities to participate in RTOs, and we agree 
that restructuring legislation should affirm this existing authority 
while expressly confirming and providing for:

1) The authority asserted in Order No. 2000 to order RTO participation 
        by a jurisdictional utility to remedy undue discrimination or 
        anti-competitive effects and as a condition for mergers or 
        market based rates. Legislation should also confirm FERC's 
        authority that was the foundation for Order No. 888.
2) Recognition and reinforcement of FERC's existing authority to 
        require RTO participation as a condition to authorizing market-
        based rates for jurisdictional utility wholesale power sales. 
        Where such authority has already been granted, FERC should be 
        required to review those prior actions and determine whether, 
        absent the participation of the wholesale supplier in an RTO, 
        continued market-based wholesale rates are consistent with 
        promoting competition or in the public interest.
3) RTO participation by jurisdictional utilities should be a necessary 
        condition in determining proposed mergers of vertically 
        integrated utilities are consistent with the public interest.
4) RTO participation by jurisdictional utilities should be a condition 
        precedent to any relaxation of Public Utility Holding Company 
        Act (PUHCA) requirements.
5) As mentioned above, FERC should be allowed to reward superior 
        performance by RTOs, but prevented from providing financial 
        incentives simply for RTO participation.
6) FERC must have the authority and responsibility to ensure that RTOs 
        are capable of providing the infrastructure and services 
        required for competition to thrive. This authority should 
        include the responsibility to determine what constitutes 
        ``independence'' of RTO operations from control, direct or 
        indirect, of the owners of transmission committed to the RTO 
        (as well as other market participants); whether a proposed RTO 
        will have the authority to operate, control, plan and cause 
        expansion of the grid for the benefit of all customers; and 
        what boundaries are necessary to ensure a regional scope 
        sufficiently broad so as to ensure development of robust and 
        efficient regional electricity markets.
    In addressing the participation of non-jurisdictional utilities--
public power systems and rural electric cooperatives--FERC should be 
given the ability to direct RTOs to accommodate their unique tax and 
legal requirements. And, if a RTO also administers wholesale markets, 
FERC should--after reviewing all market rules, tariffs and protocols 
promulgated by the RTO--make a finding that the rules and protocols do 
not allow sellers or buyers to exercise market power.
    Regarding the issue of FERC mandating the participation of non-
jurisdictional utilities in RTOs, deference should be provided to 
publicly owned utilities, similar to the restraints on FERC 
jurisdiction over transmission facilities noted above. Specifically, 
APPA recommends that FERC's authority to order publicly owned utilities 
to join a regional transmission organization should be limited to 
situations in which FERC finds that (1) the publicly owned transmission 
owner has (a) engaged in undue discrimination in the provision of 
transmission services, or (b) abused its control over transmission so 
as to disadvantage competitors; and (2) that the FERC open access 
transmission tariff has not and is not likely to remedy the problem. In 
such cases, APPA agrees FERC should be authorized to require the 
publicly owned utility at issue to surrender control of its 
transmission to an independent regional transmission organization that 
meets FERC RTO criteria.
    We also believe Congress, in clarifying FERC's authority to order 
utilities to join RTOs, should take into consideration the cost 
consequences of such action. Clearly, RTOs should decrease, not 
increase, total transmission costs. Cost shifts and increases have been 
a very significant problem for public power systems in California. 
Obviously, it would be imprudent for a public power system, which has 
financed transmission with public funds, to join an RTO that will 
significantly increase the cost of power to its customers. Some cost 
shifting may be inevitable, but any FERC action in this area should be 
premised on the principle that adverse cost consequences for utilities 
ordered to join RTOs should be held to the minimum possible. This is 
particularly important with respect to public power systems that have 
constructed their facilities with public funds.
    APPA appreciates the Subcommittee's willingness to address the 
important issue of comprehensive electric utility restructuring 
legislation and the key role of the transmission system in fostering a 
competitively neutral wholesale electric market for the benefit of all 
consumers.

    Mr. Barton. Thank you very much.
    We now want to hear from Mr. Robert Nordhaus, whose with 
Van Ness Feldman. He's here on behalf of The Large Public Power 
Council.
    Your statement's in the record. We'd ask you to summarize 
it for 5 minutes.

                 STATEMENT OF ROBERT R. NORDHAUS

    Mr. Nordhaus. Mr. Chairman, members of the subcommittee, 
I'm Robert Nordhaus here on behalf of LLPC. I'm standing in for 
our originally scheduled witness, Chuck Manning of Austin 
Energy who was not able to make it back for this hearing.
    By way of background, LLPC is an association of the 22 
largest public power systems in the country, and among our 
members are the principal public power transmission owners.
    We will have a witness in the afternoon who will address a 
number of specific issues with respect to FERC jurisdiction and 
RTO policy. I'm addressing three matters; reliability, siting 
and transmission rate making.
    With respect to reliability, LLPC does support the general 
approach of the NERC consensus bill from last year. We realize 
the consensus seems to have evaporated, but we do believe that 
it is necessary to provide for mandatory reliability standards 
and for an enforcement mechanism that applies to all players in 
the electric power industry.
    FERC's authority now is limited. The mechanism for 
enforcing the current voluntary reliability standards if 
largely limited to contracts and tariffs and there's no public 
suasion behind them. So, we would recommend that any 
comprehensive electric restructuring legislation include 
provisions that make the current voluntary standards mandatory, 
provide for an adequate enforcement mechanism. We do believe 
that it's appropriate for the day-to-day work in developing 
standards and enforcing them be delegated to a private 
organization acting under FERC supervision.
    With respect to siting, the LLPC support carefully 
circumscribed eminent domain authority. We think that it's 
important to make sure that those who exercise this authority 
do it after a careful coordination with whatever regional 
transmission planning mechanisms are set up, presumably through 
RTOs, and that the interests of State and local governments in 
the process be respected.
    We have suggested in the testimony a couple of things. One 
is that the committee may wish to limit the exercise of this 
authority, the eminent domain authority, in the chairman's bill 
discussion draft to RTOs and to transmission owners acting with 
the approval of an RTO whose transmission is under the 
operation of an RTO. Similarity, as we look at where the real 
problem is, it may be that a further condition that could be 
appropriate is that the exercise of this authority be 
predicated on a finding by FERC that it's necessary to ensure 
adequacy of interstate transmission service.
    With respect to rate making, the LLPC believes that the 
starting point for transmission rate making should be cost 
service rate. In our testimony we set out several circumstances 
under which it may be appropriate to depart from that. As a 
general matter, we do not think that market based rates for 
transmission services are feasible or appropriate under 
virtually any circumstances.
    With respect to negotiated rates, we suggest that that may 
be possible where the transmission users has an unqualified 
right to elect a cost based rate in lieu of a negotiated rate.
    With respect to performance based rates, we think that 
there's actually some significant latitude for coming up with 
workable performance rates using a split savings formula that 
gives a portion of efficiency savings or savings through 
construction of new transmission facilities, a portion of the 
savings to the transmission owner as long as a portion of the 
savings is reserved for the transmission users.
    With respect to incentive rates generally, our view has 
been, particularly with rates of return, that current rates of 
return look pretty good compared to what investors are doing on 
the stock market right now. That the place for incentive rates 
of return is not for all transmission investment, but perhaps 
for critically needed new investments, and that's something 
that we think could be considered.
    I would also echo Mr. Fontes' point, and that is FERC does 
have adequate authority under existing law to deal with all of 
these issues. It's not clear that it needs to be addressed in 
legislation.
    Mr. Chairman, those are our remarks. And with that, I'll 
yield to the next speaker. We thank you.
    [The prepared statement of Robert R. Nordhaus follows:]
Prepared Statement of Robert R. Nordhaus on Behalf of The Large Public 
                             Power Council
    My name is Robert R. Nordhaus and I appear today on behalf of the 
Large Public Power Council (LPPC). I am a member of the law firm of Van 
Ness Feldman, PC, and serve as outside counsel to LPPC. The LPPC is an 
association of 22 of the largest public power systems in the United 
States. LPPC member systems directly or indirectly provide reliable, 
affordably-priced electricity to approximately 18 million customers and 
we own and operate over 44,000 megawatts of generation and 
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.
    LPPC members are publicly-owned, service-focused and committed to 
the local residents and communities they serve. The benefits of their 
reliable and cost-effective provision of generation, transmission, and 
distribution service flow directly to their customers and communities.
    Mr. Chairman and members of the Subcommittee, the LPPC appreciates 
your efforts to develop comprehensive electricity legislation. The LPPC 
supports the enactment of comprehensive legislation that promotes a 
competitive, efficient wholesale power market of benefit to all 
consumers. The LPPC believes that a robust wholesale market should be 
encouraged and supports efforts to increase competition so long as low-
cost, reliable service is ensured for consumers.
    The LPPC also appreciates the efforts this Subcommittee has made to 
advance the debate on how to achieve a competitive market that benefits 
consumers. The Large Public Power Council offers its continued 
assistance in crafting legislation to facilitate competitive markets. 
The LPPC has reviewed the Discussion Draft dated September 21, 2001, 
issued by Chairman Barton, and while we will not comment extensively on 
this draft, my testimony and that of Bob Johnston later today will 
highlight several of LPPC's specific concerns. We understand that this 
is a discussion draft and that it is intended to foster significant 
discussion among the affected parties and the Committee members. The 
LPPC would like to continue to participate in this dialogue.
    I would like to comment on the issues that are the focus of the 
Committee's attention today.
                            incentive rates
    The LPPC supports the continued establishment of transmission rates 
according to well-established, cost-based rate principles. Allowed 
rates of return should be sufficient, as determined under conventional 
approaches, to compensate transmission owners for the risk and costs 
caused by increased use of the existing transmission facilities and 
reasonable costs to attract capital for the new transmission 
construction. However, the costs related more appropriately to the 
generation or distribution businesses of the transmission owner should 
not be included. Given the substantial uncertainties accompanying the 
restructuring of transmission ownership and operation, as well as the 
nature of the business going forward, it may be premature to depart 
from cost-based ratemaking principles in establishing transmission 
rates.
    We do not support the concept of market-based rates for 
transmission service. Except for isolated circumstances involving the 
construction of merchant transmission facilities, there is no evidence 
of competition among transmission providers for wholesale or retail 
customer business. Only a tiny minority of wholesale or retail 
customers enjoy physical interconnections with more than one 
transmission provider. Under current circumstances, there is no 
competitive market pressure to limit transmission rates; thus there is 
no economic justification for implementing market-based transmission 
rates.
    The LPPC believes that the establishment of transmission rates 
through negotiations between transmission providers and customers 
should be permitted only when the customer has either or both of two 
demonstrated alternatives: the ability economically to continue to 
conduct business without the proposed transmission service or the 
availability of the transmission provider's cost-based default tariff 
(similar to the ``recourse rate'' in natural gas regulation). The use 
of negotiated rates may also be appropriate when lining up customers 
for a new merchant or project-financed transmission facility.
    Finally, the LPPC is willing to consider the appropriateness of a 
performance-based or other form of incentive rate for transmission 
service. We believe that the building of new transmission should be 
encouraged and believe that properly structured incentive rates might 
be able to encourage such investment. However, any incentives must be 
tied to acceptable and demonstrable benchmarks of performance. An 
acceptable proposal could provide for a ``split the savings'' formula 
under which the transmission provider would be permitted to retain a 
percentage of demonstrated savings achieved through improved efficiency 
of operation (as compared to an accepted baseline cost of service) or 
through construction of new facilities that relieve congestion and 
lower transmission users' congestion costs. The form of incentives or 
savings must not disadvantage or discriminate among different types of 
wholesale energy customers or transactions. In addition, we believe 
that such proposals should be made only in the context of a filing by 
an RTO or subsidiary organization encompassing more than one 
transmission provider's system, (e.g., an independent transmission 
company).
    Section 401 of the Discussion Draft directs FERC to conduct a 
rulemaking to establish incentive rate policies, designed to promote 
expansion of and improvements in the transmission network. The LPPC 
urges a more narrow application than is contemplated by the Discussion 
Draft. For example, while we could support higher rates of return for 
critical new transmission investment, we would not support a general 
increase in rates of return for sunk investments that is unrelated to 
changes in market interest rates or equity returns.
                             siting issues
    A thorough review of the various processes that serve as a barrier 
to constructing new power generation and to the more efficient use of 
existing power generation should be undertaken. There are multiple, 
sometimes duplicative permitting requirements for new generation 
facilities. In addition, various regulatory requirements make 
construction of new facilities time-consuming, costly, and 
unpredictable. Recognizing the need for a more efficient and 
transparent permitting system, the LPPC would encourage a review of the 
permitting requirements for new and existing generation and, where 
possible, require that the processes be streamlined, conducted in 
parallel and expedited to the maximum degree feasible. The LPPC 
supports the creation of an inter-agency process among the 
Environmental Protection Agency, the Department of Interior, FERC, and 
the Nuclear Regulatory Commission that would streamline the current 
requirements.
    Coordination of federal approvals on the multiple permits would 
reduce time-lines, uncertainty, and costs for companies constructing or 
modifying generation facilities. Given the importance of getting power 
on line, this issue can make a real contribution to a comprehensive 
energy strategy.
    The difficulty in constructing new transmission facilities and 
upgrading existing facilities on a timely basis is one of the key 
obstacles to assuring the delivery of low-cost, reliable electric power 
to consumers. Prompt federal and state action is necessary to enable 
transmission providers to install new facilities and upgrades where 
needed. The LPPC supports giving FERC carefully circumscribed authority 
to provide transmission-owning RTOs or ISOs the right of eminent domain 
if they demonstrate that the installation of transmission facilities is 
required to ensure adequate and reliable service. Owners of 
transmission facilities under operational control of an RTO or ISO 
would be given similar authority. Section 402 of the Discussion Draft 
provides federal eminent domain authority to an applicant seeking to 
construct or modify transmission facilities. As currently drafted, 
there is no requirement that the transmission facility be part of a 
regional planning process or approved by an RTO or ISO, or that it be 
necessary to enhance or improve reliability or economy of service. The 
LPPC would urge that this provision be revised to provide the eminent 
domain authority to the RTO (or to transmission owners whose facilities 
are operated by an RTO) and that the role of the state and local 
governments be given greater weight. One possibility would be to limit 
exercise of this authority to circumstances where adequacy of 
interstate service is at issue.
    The LPPC also supports the development and use of mechanisms--such 
as interstate transmission siting agencies or joint boards (comprised 
of members of federal and state regulatory agencies)--that encourage 
the coordination of federal and state environmental permitting and 
certification activities.
                              reliability
    As the recent crisis in the West has demonstrated, great care must 
be taken to ensure the continued and reliable supply of electricity as 
the industry is restructured. The LPPC supports mandatory reliability 
criteria and standards developed by national or regional reliability 
organizations overseen by FERC. We supported the NERC reliability 
consensus legislation last Congress. Although it appears that the 
consensus has evaporated at this time, we remain committed to 
supporting the general concepts contained in that legislation. The LPPC 
believes that there is a need to clarify FERC authority over 
reliability, that there should be binding electric reliability 
standards, and that there should be a clear mechanism to enforce these 
reliability standards.
    The LPPC believes that regional modeling should be done to assess 
the impacts of the creation and development of RTOs on the transmission 
grid. As the transmission grid is regionalized, an evaluation of the 
lessons learned should be done so that reliability is ensured and the 
potential benefits are maximized.
    We believe that any legislative proposal should make it clear that 
compliance with reliability organization rules or standards does not 
subject entities to the jurisdiction of FERC for purposes other than to 
ensure reliability. Also, reliability standards need to be supported by 
long-term contracts that will ensure the availability of operating 
reserves.
                               conclusion
    As the Subcommittee continues to move forward with electricity 
legislation, the LPPC offers our continued assistance. We look forward 
to helping you to develop comprehensive electricity 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. We thank you, Mr. Nordhaus.
    We now want to hear from Mr. Glenn English, who is CEO of 
the National Rural Electric Cooperative Association. He's also 
a distinguished former Member of the House of Representatives.
    Your statement's in the record in its entirety, and we 
would welcome you to summarize it in 5 minutes.

                   STATEMENT OF GLENN ENGLISH

    Mr. English. Thank you very much, Mr. Chairman. I 
appreciate that, and I want to follow up on what Mr. Nordhaus 
was talking about, focus on one particular aspect of the draft 
that was circulated and one that, quite frankly, I find to be 
very puzzling.
    It has to do with the whole question of incentive rates. 
We've had a lot of discussion about incentive rates. What does 
not seem to be generally recognized is the fact the Federal 
Energy Regulatory Commission already has the authority for 
incentive rates. That's under the existing law. They are 
required to provide incentive rates that are just and 
reasonable.
    Well, that gives anyone an awful lot of discretion to 
simply use your judgment to determine what is just and 
reasonable, what is necessary to get this job done. But it 
appears from the language in the draft that that simply is not 
adequate. So if it is not adequate, obviously that brings one 
to the conclusion that if you are including just and reasonable 
to be redefined in this legislation, then you must be 
attempting to redefine it to something that's unjust and 
unreasonable. And quite frankly, I have a hard time 
understanding how in the world anyone could justify insisting 
that the Federal Energy Regulatory Commission in effect grant 
rates that are unjust and unreasonable. That's what I find to 
be particularly disturbing about this proposed legislation.
    Now, as it stands now we think the Federal Energy 
Regulatory Commission has all the authority they need to use 
their good judgment and to act in the public interest. There is 
no disagreement over the fact that there needs to be more 
transmission built in this country. There is no disagreement 
over the fact that this country needs a transmission system to 
meet the needs of the country everywhere. And we all join in 
supporting that. But this particular segment to give the 
Federal Energy Regulatory Commission more tools, instead it 
takes away the tools that FERC has and it requires the FERC to 
act in a way that they find to be unfair. To act in a way that 
will obviously discriminate against the consumers of this 
country.
    And, in fact, I think a very strong case can be made, Mr. 
Chairman, that this particular provision is nothing but a 
transfer of wealth from the consumers of this country to the 
utilities that are building this transmission.
    Now, the outrage with regard to this particular section 
doesn't stop there, Mr. Chairman, because it isn't just new 
transmission that would come under this new provision of 
requiring the Federal Energy Regulatory Commission to provide 
more than what they feel to be just and reasonable. They're 
required now to provide it on transmission that already exists.
    now, if we were in fact going to raise rates to consumers 
with regard to the transmission line to require that consumers 
pay an unjust and an unreasonable rate on existing 
transmission, we would hope that there would be something done 
with that money that'd be productive. But there's absolutely 
nothing in this legislation that require those funds to be used 
to build new transmission. In fact, there's nothing to prohibit 
the additional funds from being overseas. That simply doesn't 
make any sense, Mr. Chairman.
    So we find this to be a very unfair segment and certainly 
we think that at the very least if consumers are going to be 
required to pay an unfair, an unjust and unreasonable amount of 
money for transmission in this country that there should be 
some provision that requires that money to be used to build new 
transmission in this country.
    Now, what we find to make far more sense, and since we're 
going to get out of the classroom and out of the academics with 
regard to this issue, Mr. Chairman, is your own State of Texas. 
We think your own State of Texas has the right approach with 
regard to building transmission of this country, and we take 
note of the fact for all of those that are interested in more 
than an academic exercise, that this year in the State of Texas 
three-quarters of a billion dollars is going to be building 
transmission. And next year they already have scheduled over a 
billion dollars of more transmission being built in the State 
of Texas. But they don't find that there's any requirement for 
an unjust or unreasonable rate. In the State of Texas that's 
being done with a 10-percent return on investment, which is in 
line with what the testimony was for this committee from the 
investment community from Goldman Sachs.
    In addition, Mr. Chairman, there are no incentives that are 
being provided in the State of Texas. There's no accelerated 
depreciation as this legislation includes in the State of 
Texas, but they're building transmission in the State of Texas. 
Now, if it can be done in the State of Texas, I'd ask you why 
can't it be done in the rest of this country. It has certainty, 
Mr. Chairman, in the State of Texas; that's the reason. They 
let others do it in the State of Texas. They open it up and let 
everybody compete. Anybody that wants to build transmission, 
let them do it. That's what they do in the State of Texas.
    And they let the shareholders, all those people that are 
going to be using it and making the decision on where that 
transmission is going to be built.
    Now, that makes sense, Mr. Chairman. And I would suggest to 
you if we're going to do something productive in this 
legislation on building transmission, that we should in fact 
allow FERC to use the State of Texas proposal in order to build 
transmission in this country. Give them the options. You know, 
if you feel it's necessary, give FERC whatever authority they 
feel they need to get this job done, but let's not limit the 
options. Let's not require the FERC to do something that's 
contrary to what their good judgment allows.
    Mr. Chairman, I'd only say if it's good enough for the 
State of Texas, it's good enough for the rest of this country.
    Thank you very much.
    [The prepared statement of Glenn English follows:]
Prepared Statement of Glenn English, Chief Executive Officer, National 
                 Rural Electric Cooperative Association
                              introduction
    Chairman Barton and Members of the Subcommittee, I appreciate this 
opportunity to continue our dialogue on the restructuring of the 
electric utility industry. For the record, I am Glenn English, CEO of 
the National Rural Electric Cooperative Association, the Washington-
based association of the nation's nearly 1,000 consumer-owned, not for 
profit electric cooperatives.
    These cooperatives are locally governed by boards elected by their 
consumer owners, are based in the communities they serve and provide 
electric service in 46 states. The 35 million consumers served by these 
community-based systems continue to have a strong interest in the 
Committee's activities with regard to restructuring of the industry.
    Electric cooperatives comprise a unique component of the industry. 
Consumer-owned, consumer-directed electric cooperatives provide their 
member-consumers the opportunity to exercise control over their own 
energy destiny. As the electric utility industry restructures, the 
electric cooperative will be an increasingly important option for 
consumers seeking to protect themselves from the uncertainties and 
risks of the market. I would like to thank you, Mr. Chairman, and 
Members of the Committee for your receptiveness to the concerns and 
viewpoints of electric cooperatives.
                        transmission reliability
    North America needs the electric transmission equivalent of the 
interstate highway system. The current transmission system cannot 
reliably handle the dramatic increase in transactions since the 
enactment of the 1992 Energy Policy Act. Transmission deficiencies are 
contributing to wholesale and retail electric market failures that are 
harming consumers.
    Based on the following reasons, NRECA does not believe that these 
problems can be solved only by offering utilities high incentive 
transmission rates or other financial incentives to build transmission.

 FERC's Existing Authority. FERC already has the authority to 
        establish incentive transmission rates. FERC issued a policy 
        statement in 1994 that would permit ``more flexibility to 
        utilities to file innovative pricing proposals . . .'' In Order 
        2000, FERC stated that it was ``critically important for RTOs 
        [regional transmission organizations] to develop ratemaking 
        practices that . . . provide incentives for transmission owning 
        utilities to efficiently operate and invest in their systems.'' 
        1 In testimony before the Energy and Air Quality 
        Subcommittee on September 20, 2001, Deputy Secretary of Energy 
        Frank Blake stated that ``FERC has great flexibility under 
        current law to set transmission rates at a level to attract 
        investment.' Since FERC has existing ratemaking authority to 
        approve incentive transmission rates, legislative language is 
        unnecessary.
---------------------------------------------------------------------------
    \1\ FERC has also been encouraging the submission of incentive 
transmission rate proposals. According to FERC in Order 2000, ``we have 
approved five ISOs [independent system operators] with innovative 
transmission pricing, but otherwise have received few innovative 
transmission pricing proposals.''
---------------------------------------------------------------------------
 Higher Electricity Prices for Consumers. Currently, FERC has 
        wide discretion in determining whether a public utility's 
        transmission rate is reasonable. Legislative language requiring 
        FERC to approve incentive transmission rates is designed solely 
        to handcuff FERC by curtailing its authority to reject 
        unreasonably high transmission rates, resulting in higher 
        electricity prices for consumers. Also, by limiting FERC's 
        ability to reject unreasonable rates, the opportunity for 
        profiteering based on transmission rates exists.
 The Investment Community Is Unconvinced. During the July 26 
        hearing before the Energy and Air Quality Subcommittee, Thomas 
        Lane, Managing Director in Goldman Sachs Energy and Power 
        Group, responded to Member questions and stated that there is a 
        role for transmission rates that include the more traditional 
        return on investment of around 12%. Since Wall Street believes 
        that investments will flow into the transmission sector based 
        on the current rate structure, it is unnecessary to force FERC 
        to rubber stamp unreasonable rates.
 Lack of Newly Constructed Transmission. Legislative language 
        forcing FERC to approve incentive transmission rates will not 
        automatically result in the construction of new transmission 
        for two reasons. First, the language fails to guarantee that 
        transmission facilities will, in fact, be built in exchange for 
        FERC's approval of incentive rates. Second, the language would 
        require FERC to approve incentive rates for the operation of 
        existing transmission facilities. High rates of return 
        associated with existing transmission facilities will act as 
        disincentives to the construction of new transmission that is 
        needed to support a robust wholesale market.
 Impediment to Generation Markets. The interstate transmission 
        system should exist to enhance the competitive generation 
        market not to balkanize it further. Any approach that allows 
        individual companies with a financial interest in the energy 
        market to control transmission would have the unwelcome effect 
        of erecting tollgates on the interstate system, thereby 
        narrowing generation markets and protecting the existing power 
        of local generators.
    NRECA is concerned that the incentive approach would raise the 
rates of return and increase the costs for consumers, the intended 
beneficiaries of lower prices from competition. Also, FERC not only has 
that authority under existing law, but also has been encouraging 
utilities to propose innovative incentive-based rate designs for 
years.2 In fact, FERC recently offered utilities a 300 
basis-point increase in the rate of return and a 7-year recovery period 
if they would build transmission in the West by a stated deadline.
---------------------------------------------------------------------------
    \2\ FERC's Pricing Policy for Transmission Services, 59 Fed. Reg. 
55,031 (1994) (codified at 18 C.F.R. Part 2); Formation of Regional 
Transmission Organizations, 65 Fed. Reg. 810, 913 (2000) (codified at 
18 C.F.R. Part 35).
---------------------------------------------------------------------------
    Given FERC's current efforts to encourage innovative rates, NRECA 
is concerned that legislative language establishing only incentive 
rates may handcuff FERC, limiting the agency's ratemaking discretion at 
a critical time in the development of a competitive industry.
    As an option to legislating higher rates of return, NRECA believes 
Congress should lower the risk of building transmission. Congress 
should direct FERC to allow any entity that builds a qualifying 
transmission project to recover its costs. By reducing the risk, 
Congress could encourage institutional investors and others looking for 
low risk investments invest in improvements to the nation's 
transmission grid.
    To qualify for assured cost recovery, NRECA believes that 
transmission projects must:

--be identified through a regional joint-planning process that 
        coordinates and has oversight for the reliable operation of the 
        regional transmission system
--be constructed according to best engineering practices
--be operated by the relevant Regional Transmission Organization (RTO)
--offer service pursuant to traditional cost-of-service principles, 
        with the cost-of-service analysis taking into account the low 
        risk provided by FERC's obligation to assure cost recovery.
    By mitigating risk, spreading the cost of new facilities broadly, 
and enabling new competitors to build transmission, NRECA's approach to 
new transmission helps to ensure that the interstate highway system can 
be built at the lowest possible cost to consumers.\3\
---------------------------------------------------------------------------
    \3\ FERC's Pricing Policy for Transmission Services, 59 Fed. Reg. 
55,031 (1994) (codified at 18 C.F.R. Part 2); Formation of Regional 
Transmission Organizations, 65 Fed. Reg. 810, 913 (2000) (codified at 
18 C.F.R. Part 35).
---------------------------------------------------------------------------
                          electric reliability
    Since 1968, the electric utilities of the United States, Canada, 
and part of Mexico have worked together through NERC to develop 
voluntary standards that have provided North America with the most 
reliable energy in the world.
    The introduction of restructuring, however, is putting pressure on 
the voluntary system. Under regulation, regulators have placed a 
premium on reliability and utilities were guaranteed to recover 
reasonable reliability-related expenses. In a competitive environment, 
however, investor-owned utilities are rewarded for cutting costs and no 
one has the authority to ensure that those cost-cutting measures do not 
degrade the reliability of the bulk transmission system.
    It is necessary for Congress to replace NERC with a new self-
regulating industry organization that has the authority, under FERC 
oversight, to develop and enforce mandatory reliability standards.
    For that reason, NRECA supports the NERC consensus language that 
has been included in several bills introduced in the House and Senate. 
That language would require FERC to approve a new North American 
Electric Reliability Organization that would have the power to ensure 
the reliable operation of the interstate bulk transmission grid. NRECA 
believes that similar legislation needs to be enacted as soon as 
possible.
    NRECA opposes a competing proposal that would grant authority over 
reliability directly to FERC. The Commission lacks the expertise or the 
resources to address reliability on its own. There are questions 
whether it has been able to handle adequately its existing mandate to 
regulate wholesale markets. Responsibility for the reliability of the 
nation's grid would strain its existing staff even further. On the 
other hand, while stronger enforcement authority is needed, there is no 
question that NERC has done an admirable job of setting reliability 
standards. Congress should not reject an industry-based model that has 
worked extremely well for over 20 years.

    Mr. Barton. Well, I don't know about all that, but it's 
certainly well spoken. You can always tell a former 
congressman.
    Mr. English. Well, and someone from Oklahoma, you don't 
know how difficult it was for me to say that, Mr. Chairman.
    Mr. Barton. Well, your team won the football game on 
Saturday, so you got the right to come here and pontificate a 
little bit.
    Mr. English. Well, thank you very much.
    Mr. Barton. It goes with the territory.
    We now want to hear from Mr. David Cook who is general 
counsel for the North American Electric Reliability Council.
    Your statements in the record, and we ask you to summarize 
in 5 minutes.

                   STATEMENT OF DAVID N. COOK

    Mr. Cook. Good morning, Mr. Chairman, Mr. Boucher and 
members of the subcommittee.
    My name is David Cook. I am general counsel for the North 
American Electric Reliability Council (NERC).
    I appreciate the opportunity to testify this morning on the 
critical issue of assuring the continued reliability of the 
North American bulk power system. NERC strongly urges Congress 
to enact reliability legislation in this session of Congress. 
NERC and a broad coalition of State, consumer and industry 
representative support legislation that would transform the 
current set of voluntary electric system operating guidelines 
into a set of mandatory transmission system reliability rules, 
developed and enforced by an industry-led self-regulatory 
organization with FERC oversight in the United States. For more 
than 30 years a voluntary industry based system for maintaining 
the reliability of the bulk electric system has worked very 
well. But for the reasons outlined in my testimony, voluntary 
standards will not serve us well for the future.
    This past June 14 major organizations wrote to the Congress 
and the Administration in support of legislation making the 
reliability rules mandatory and authorizing creation of an 
industry electric reliability organization subject to FERC 
oversight in the U.S. Such an organization would be the best 
position to marshal the technical expertise and market 
expertise of the whole industry to develop rules for running 
the higher complex interconnected transmission system. Such an 
organization would be able to focus on reliability as its 
primary mission while the electric industry and electricity 
markets continue to evolve and new forms of business 
organizations come into existence.
    An electric reliability organization would also address the 
international nature of the interconnected grid. That 
organization with participation from the U.S., Canadian and 
Mexican interests could ,subject to regulatory oversight from 
those countries, develop the common set of rules necessary to 
operate the interconnected grid that spans national borders.
    This subcommittee approved one version of the NERC 
coalition language when it passed H.R. 2944 in 1999. Last year 
the Senate passed the NERC consensus legislative proposal as S. 
2071, but hat bill was not considered in the House.
    The President's National Energy Policy endorses development 
of legislation authorizing an industry self-regulatory 
organization subject to FERC oversight in the U.S.
    I wanted to thank to Mr. Wynn and those who joined him in 
reintroducing that proposal this year as a H.R. 312. I also 
want to acknowledge Mr. Burr and Mr. Sawyer for including the 
NERC language as part of their bill, H.R. 2814.
    Since the June letter those groups have worked with others 
to develop a shorter less detailed version of the reliability 
legislation. I have submitted a copy of that revised language 
with my testimony.
    The revised legislation provides for the creation of a 
self-regulatory organization under FERC oversight of 
reliability. In addition, it provides FERC with greater 
flexibility and authority to oversee the work of the electric 
reliability organization. It clarifies the role of the electric 
reliability organization and regional transmission 
organizations. And it includes definitions of ``adequacy'' and 
``security'' to more clearly delineate the scope of that 
organization's authority.
    A number of organizations have announced they will support 
the revised version of the legislations, others are still 
reviewing the matter.
    With respect to the September 21 discussion draft 
circulated by Chairman Barton, NERC believes that Title II with 
the changes that we have recommended in correspondence included 
with my testimony provides a workable basis to move forward on 
reliability legislation. NERC stands ready to work with the 
members of the subcommittee and their staff as well as others 
in the industry to make improvements to the language, but we 
continue to believe that creation of an industry electric 
reliability organization is critical.
    The need to change how we deal with reliability is clear. 
Mr. Chairman, I was in Colorado last month and heard you say to 
those in the industry now is the time to act. I completely 
agree with you. The electric industry is undergoing profound 
changes and our system of reliability needs to change to keep 
pace.
    The events of September 11 served to underscore the 
importance of the effort. As this subcommittee has heard, NERC 
plays a critical role in the protection of the security of our 
electric transmission infrastructure. In the future it will be 
that new electric reliability organization that serves as a 
point of contact and coordination on this industry-wide 
security efforts.
    Those who would simply give the job of reliability to FERC 
without authorizing an industry electric reliability 
organization ignore this important function currently served by 
NERC.
    NERC urges Congress to adopt legislation authorizing 
creation of such an organization for reliability and for 
security.
    Thank you very much. Be happy to answer your questions.
    [The prepared statement of David N. Cook follows:]
 Prepared Statement of David N. Cook, General Counsel, North American 
                      Electric Reliability Council
    Good morning, Mr. Chairman and members of the Subcommittee. My name 
is David Cook and I am General Counsel for the North American Electric 
Reliability Council (NERC).
Summary
    NERC strongly urges Congress to enact reliability legislation in 
this session of Congress. NERC and a broad coalition of state, 
consumer, and industry representatives are supporting legislation that 
would transform the current set of voluntary electric system operating 
guidelines into a set of mandatory transmission system reliability 
rules, promulgated and enforced by an industry-led reliability 
organization, with FERC oversight in the United States. NERC firmly 
believes that steps must be taken now to ensure the continued 
reliability of the electricity transmission system if the Nation is to 
reap the benefits of competitive electricity markets. The changes 
taking place as the electric industry undergoes restructuring are 
recasting the long-established relationships that reliably provided 
electricity to the Nation's homes and businesses. Those changes will 
not jeopardize the reliability of our electric transmission system IF 
we adapt how we deal with reliability of the bulk power system to keep 
pace with the rest of the changes that the electric industry is now 
experiencing. NERC believes that the best way to do this is through an 
independent, industry self-regulatory organization, modeled after the 
securities industry, where the Securities and Exchange Commission has 
oversight of several self-regulatory organizations (the stock exchanges 
and the National Association of Securities Dealers).
    NERC is a not-for-profit organization formed after the Northeast 
blackout in 1965 to promote the reliability of the bulk electric 
systems that serve North America. It works with all segments of the 
electric industry as well as consumers and regulators to ``keep the 
lights on'' by developing and encouraging compliance with rules for the 
reliable operation of these systems. NERC comprises ten Regional 
Reliability Councils that account for virtually all the electricity 
supplied in the United States, Canada, and a portion of Baja California 
Norte, Mexico.
What is Reliability?
    Reliability means different things to different people. For the 
consumer it could mean, ``Does the light come on when I flip the 
switch?'' Or, ``Does a momentary surge or blip re-boot my computer or 
cause me to lose a whole production run of computer chips I was 
manufacturing?''
    To NERC, reliability means making sure that all the elements of the 
bulk power system are operated within equipment and electric system 
thermal, voltage, and stability limits so that instability, 
uncontrolled separation, or cascading failures of that system will not 
occur as a result of sudden disturbances such as electric short 
circuits or unanticipated failure of system elements. It also means 
planning, designing, and operating each portion of the bulk power 
system in a manner that will promote security in interconnected 
operations, not burden other interconnected systems, and not interfere 
with the functioning of competitive markets.
    NERC sets the standards by which the grid is operated from moment 
to moment, as well as the standards for what needs to be taken into 
account when one plans, designs, and constructs an integrated system 
that is capable of being operated securely. The NERC standards do not 
specify how many generators or transmission lines to build, or where to 
build them. They do indicate what tests the future system must be able 
to meet to ensure that it is capable of secure operation. NERC's rules, 
which are not enforceable, have generally been followed, but that is 
starting to change. As economic and political pressures on electricity 
suppliers increase, NERC is seeing an increase in the number and 
severity of rules violations. Hence, the voluntary approach is no 
longer adequate for maintaining the reliability of the bulk power 
system. Just as the rest of the electric industry is changing, the 
reliability infrastructure must change too.
Voluntary Reliability Rules Will Not Work in a More Competitive 
        Electric Industry
    NERC's formation in 1968 was the electric industry's response to 
legislation that had been introduced in the Congress following the 1965 
blackout in the Northeast. That legislation would have given the then 
Federal Power Commission (FPC) a central role in the reliability of the 
bulk electric system. Instead of adopting that legislation, Congress 
opted for an industry-led effort. For more than thirty years, this 
industry-based voluntary system has worked very well and we have had an 
extremely reliable electric system. But the reliability rules or 
standards have no enforcement mechanism. Peer pressure has been the 
only means available to achieving compliance.
    As good as that system has been, voluntary standards will not 
suffice in the future. Here is why:

 The grid is now being used in ways for which it was not 
        designed.
 There has been a quantum leap in the number of hourly 
        transactions, and in the complexity of those transactions.
 Transmission providers and other industry participants that 
        formerly cooperated willingly are now competitors.
 Rate mechanisms that in the past permitted utilities to 
        recover the costs of operating systems reliably are no longer 
        in place, or are inadequate given increased risks and 
        uncertainties.
 The single, vertically integrated utility that formerly 
        performed all reliability functions for an area is being 
        disaggregated, which means that reliability responsibilities 
        are being divided among many participants.
 Some entities appear to be deriving economic benefit or 
        gaining competitive advantage from bending or violating the 
        reliability rules.
 Construction of additional transmission capacity has not kept 
        pace with either the growth in demand or the construction of 
        new generating capacity, meaning the existing grid is being 
        used much more aggressively.
    A number of factors have contributed to our present circumstance. 
Demand has been steadily increasing over the past decade and is 
expected to increase. This past summer several utilities in the Eastern 
Interconnection experienced new all-time peak demands on their systems. 
The good news is that merchant generators are now building or planning 
to build hundreds of new plants across the country to meet this 
increased demand. The bad news is that the same is not true for 
transmission.
    Ten years ago North America had a little less than 200,000 circuit-
miles of high voltage transmission lines. Today we have about 200,000 
circuit-miles of lines. Ten years from now we are projecting that we 
will have just a little over 200,000 circuit-miles of high voltage 
transmission lines. All of these new generators will need to access the 
transmission grid to get their power to where it is needed. For the 
most part, however, the transmission dollars that are being spent today 
are just to connect new generation to the grid; they are not going to 
build major new power lines that will strengthen the grid's ability to 
move large blocks of electricity from one part of the country to 
another, or in some instances, such as Texas, from one part of a State 
to another. That lack of additional transmission capacity means that we 
will increasingly experience limits on our ability to move power, and 
that commercial transactions that could displace higher priced 
generation with lower priced generation will not occur.
    Moreover, the existing grid is being pushed harder and is being 
used in ways for which it was not designed. Historically, each utility 
built its generating stations close to load centers, which were largely 
cities. As the cities grew, the electric systems grew with them, 
spreading outward from the center. The weakest part of the electric 
grid is generally where one system abuts another. Initially, utilities 
installed connections between adjacent systems for emergency purposes 
and to share generating reserves to keep costs down. Gradually those 
interconnections were strengthened so that adjoining utilities could 
buy and sell electricity when one had lower cost generation available 
than did the other. But these systems were not designed to move large 
blocks of power from one part of the country to another, across 
multiple systems, as is happening today. The volume and complexity of 
transactions on the grid have grown enormously since the advent of open 
access transmission.
    Electric industry restructuring adds to the challenge. In the past, 
vertically integrated utilities with monopoly franchise service 
territories had complete responsibility for all aspects of their 
electric systems. They planned and built their transmission systems, 
ensured that sufficient generation was constructed, and operated and 
maintained their transmission and distribution systems, all to serve 
customers within designated service areas. With restructuring, there 
may no longer be a designated group of consumers for which to plan 
service. Instead, responsibilities to construct and maintain 
generation, transmission, and distribution are being divided among 
multiple entities. In some cases, those responsibilities may be falling 
between the cracks. Regional Transmission Organizations (RTOs) may 
provide a means to reintegrate some of these functions. But the RTO 
proposals that have been filed to date vary considerably in the extent 
to which the RTO will have the authority to plan and expand the 
transmission system, not only to connect new generation, but also to 
meet broader needs of wide-area reliability and commerce.
    The result of all this is that the transmission grid is being 
increasingly stressed. NERC is seeing more congestion on the grid, for 
more hours of the day. NERC is also seeing increasing violations of its 
reliability rules. If these trends continue, we risk the increased 
likelihood of grid failure.
Legislation is Needed to Ensure Bulk Power System Reliability in a More 
        Competitive Electricity Market
    We need legislation to change from a system of voluntary 
transmission system reliability rules to one that has an industry-led 
organization promulgating and enforcing mandatory rules, backed by FERC 
in the United States and by the appropriate regulators in Canada and 
Mexico. In August 1997, NERC convened a panel of outside experts to 
recommend the best way to ensure the continued reliability of North 
America's interconnected bulk electric systems in a competitive and 
restructured electric industry. On a parallel track, in the aftermath 
of two major system outages that blacked out significant portions of 
the West in July and August 1996, the Secretary of Energy convened a 
task force on reliability, chaired by former Congressman Phil Sharp. 
Both groups came to the same conclusion: The current system of 
voluntary guidelines should be transformed into a system of mandatory, 
enforceable reliability rules, AND the best way to accomplish that was 
to create an independent industry self-regulatory organization, 
patterned after the self-regulatory organizations in the securities 
industry, with oversight in the United States by the Federal Energy 
Regulatory Commission.
    On June 18, 2001, NERC and a broad coalition of state, consumer, 
and industry representatives (the American Public Power Association, 
the Canadian Electricity Association, the Edison Electric Institute, 
Institute for Electrical and Electronics Engineers--USA, the Large 
Public Power Council, the National Association of Regulatory Utility 
Commissioners, the National Association of State Energy Officials, the 
National Association of State Utility Consumer Advocates, the National 
Electrical Manufacturers' Association, the National Rural Electric 
Cooperative Association, the Northwest Regional Transmission 
Association, the Transmission Access Policy Study Group, and the 
Western Interconnection Coordination Forum) sent a letter to each 
member of the House Energy and Commerce Committee in support of 
legislation to authorize creation of such an industry self-regulatory 
organization to develop and enforce reliability rules. That legislation 
would accomplish the following goals:

 Reliability rules would be mandatory and enforceable.
 Rules would apply to all operators and users of the bulk power 
        system in North America.
 Rules would be fairly developed and fairly applied by an 
        independent, industry self-regulatory organization drawing on 
        the technical expertise of industry stakeholders.
 FERC would oversee that process within the United States.
 Approach would respect the international character of the 
        interconnected North American electric transmission system.
 Regional entities would have a significant role in 
        implementing and enforcing compliance with these reliability 
        standards, with delegated authority to develop appropriate 
        regional reliability standards.
    This Subcommittee approved one version of the NERC legislative 
language when it passed H.R. 2944 in 1999. Last year the Senate passed 
the NERC consensus legislative proposal as S. 2071, but that bill was 
not considered in the House. This year, Mr. Wynn and a number of other 
members have reintroduced the NERC legislative proposal (H.R. 312). In 
addition, the President's National Energy Policy endorses development 
of legislation authorizing an industry self-regulatory organization 
subject to FERC oversight within the U.S.
    Since the June letter, the organizations supporting the NERC 
reliability legislation have continued to work with representatives 
from across the electric industry, as well as state and consumer 
interests, in an effort to strengthen and broaden support for the 
legislation. One of the major criticisms of the earlier legislative 
language has been that the proposal is longer and more detailed than 
may be appropriate for a legislative enactment. To address that 
concern, as well as to respond to other concerns that have been raised 
over the recent months, we have developed revised legislative language 
that is shorter, less detailed, and more flexible to accommodate 
whatever structural changes emerge in the industry. I have attached a 
copy of that language to my testimony.
    The revised legislation preserves from the earlier version the 
essential features for authorizing creation of a self-regulatory 
electric reliability organization. In addition, the revised 
legislation:

 provides FERC with additional flexibility and authority in 
        shaping the development of the electric reliability 
        organization and in overseeing its ongoing standards 
        development and enforcement activities;
 clarifies the respective roles of the electric reliability 
        organization and evolving regional transmission organizations; 
        and
 includes definitions of ``adequacy'' and ``security,'' the two 
        components of reliability.
    Together with the state savings clause from the earlier 
legislation, these new definitions place bounds on the scope of the 
electric reliability organization's standard-setting authority.
    Under this legislation, FERC can assure harmonization of 
reliability standards developed by the electric reliability 
organization and market rules in two ways. First, FERC must approve the 
process by which reliability rules are developed. The legislation 
requires that process to be open, balanced, not dominated by one 
particular sector, and consistent with the requirements of due process. 
FERC can assure that market interests are adequately represented in 
that process. Second, FERC must approve the reliability rules before 
they take effect. If, despite the balanced process, a proposed 
reliability rule intrudes too far into commercial or market activities, 
FERC can reject the proposed rule and direct the electric reliability 
organization to make appropriate changes.
    Changes to this revised reliability legislation were made just 
before the horrific events of September 11, and those events have 
interrupted efforts by those who have supported the NERC legislation in 
the past, as well as others, to complete their review of this language. 
In light of the Subcommittee's hearing schedule and the Chairman's 
stated desire to move forward on electric restructuring legislation, 
including reliability, NERC believes it appropriate to submit the 
proposed language to the Subcommittee now. NERC as well as all those 
that supported the earlier language believe this revised legislative 
proposal to be a considerable improvement over the earlier language, 
but it maintains all the essential features of that earlier language. 
Support for this proposal is not unanimous, and doubtless the language 
can be improved further. NERC is prepared to work with Members of this 
Subcommittee and Subcommittee staff, as well as with others from the 
industry, to make whatever changes are necessary.
    In addition, on September 21 Chairman Barton released a discussion 
draft of electric restructuring legislation. NERC commented on Title 
III, the reliability provisions of that draft, in a letter to Chairman 
Barton on October 2. A copy of that letter is attached to my testimony. 
NERC believes that Title III of the September 21 discussion draft, with 
the changes recommended in our October 2 letter, would form a workable 
basis for moving forward with reliability legislation. NERC stands 
ready to work with Members of this Subcommittee and Subcommittee staff, 
as well as with others in the industry, to develop appropriate 
language. What is critical is that we act now to update how we deal 
with reliability, even as the rest of the electric industry is 
undergoing profound changes. The horrific events of September 11 only 
serve to underscore the importance of that effort.
An Industry Self-Regulatory Organization Is the Best Approach for 
        Developing and Enforcing Reliability Standards
    Having an industry self-regulatory organization develop and enforce 
reliability rules under government oversight takes advantage of the 
huge pool of technical expertise that the industry has been able to 
bring to bear on this subject over the last 30 plus years. FERC does 
not now possess and is not likely to achieve anything approaching the 
level of technical sophistication inherent in the NERC standard-setting 
process, which involves dozens of committees and working groups and 
thousands of professionals representing all segments of the electric 
industry. Having FERC itself set the reliability standards through its 
rulemaking proceedings, even if based on advice from outside 
organizations, converts matters that ought to be resolved by those with 
technical engineering expertise and commercial markets expertise into 
matters that are the province of lawyers. These complex rules need to 
be worked out together, using a fair and open process, in a 
collaborative fashion by all segments of the industry.
    The electric industry is in a great state of flux, as regional 
transmission organizations are forming, reforming, and consolidating. 
The path is not yet clear about how many RTOs there will be, or how 
extensive will be the participation in those RTOs, or when they will 
all come into existence. With all the uncertainty as to who will 
ultimately operate and plan the interconnected transmission system, it 
is more important than ever that an industry-led self-regulatory 
organization be created to establish and enforce reliability standards 
applicable to the entire North American grid, regardless of who owns or 
manages it. The self-regulatory organization can focus on reliability 
as its primary mission, even while new market structures and new RTOs 
are being formed. Because FERC will provide oversight of the self-
regulatory organization in the U.S., FERC can ensure that the self-
regulatory organization's actions and FERC's evolving RTO policies are 
closely coordinated.
    An industry self-regulatory organization also addresses the 
international character of the interconnected grid. There is strong 
Canadian participation within NERC now, and that is expected to 
continue with the new organization. Having reliability rules developed 
and enforced by a private organization in which varied interests from 
both countries participate, with oversight in the United States by FERC 
and with oversight by provincial regulators in Canada, is a practical 
and effective way to address the common set of rules needed for the 
international grid. Otherwise, U.S. regulators would be dictating the 
rules that Canadian interests must follow--a prospect that would be 
unacceptable to Canadian industry and government alike. Or regulators 
on either side of the border might decide to set their own rules, which 
would be a recipe for chaos. There are also efforts under way to 
interconnect more fully the electric systems in Mexico with those in 
the United States, primarily to expand electricity trade between the 
two countries. Expanded international electricity trade is a key 
element of the President's National Energy Policy. With that increased 
trade, the international nature of the self-regulatory organization 
will take on even more importance, further underscoring the necessity 
of having an industry self-regulatory organization, rather than FERC, 
set and enforce compliance with grid reliability standards.
Conclusion
    NERC commends the Subcommittee for attending to the critical issue 
of ensuring the reliability of the interconnected bulk power system as 
the electric industry undergoes restructuring. A new electric 
reliability oversight system is needed now. The continued reliability 
of North America's high-voltage electricity grid, and the security of 
the consumers whose electricity supplies depend on that, is at stake. 
An industry self-regulatory system is superior to a system of direct 
government regulation for setting and enforcing compliance with grid 
reliability rules. The revised NERC Coalition legislative language 
presents the best approach for achieving that goal. It is also the 
approach that has had the most consistent, widespread support among 
industry, state, and consumer interests. Title III of the September 21 
discussion draft, with the changes we have recommended, would also 
provide a workable basis for moving forward. It would then contain the 
essential features of the NERC approach. The reliability of North 
America's interconnected transmission grid need not be compromised by 
changes taking place in the industry, provided reliability legislation 
is enacted now.

    Mr. Barton. Thank you, Mr. Cook.
    We now want to hear from Mr. Phillip Harris, who is 
President and CEO of the PJM Interconnection in the northeast 
or the Atlantic Mid-Atlantic.
    Your testimony is in the record and we ask that you 
summarize in 5 minutes, please.

                 STATEMENT OF PHILLIP G. HARRIS

    Mr. Harris. Thank you, Mr. Chairman.
    Someone once said that in addressing complex public policy 
that the main thing was to keep the main thing the main thing. 
And the main thing is about customers. This is all about 
ensuring customers of the benefit of competitive price 
generation. That was the intent of the amendments to the 
Federal Power Act in 1992 and the fact that certain missteps 
have occurred in implementation in certain areas of the country 
should not overshadow that in the mid-Atlantic region, a region 
that has now grown to serve seven States plus the District of 
Columbia, competition has worked. This represents about 10 
percent of the electric capacity in this Nation.
    What we have found is that FERC already has the authorities 
they need for the most part under the Federal Power Act. 
Encouragement of this Congress should be to encourage FERC to 
get through the transition. In our area, we've got most of the 
transition and it's working, and the numbers are somewhat 
staggering. But from that practical experience for 10 percent 
of the Nation's electricity supply, we have certain facts that 
we think are an indicator of how to move through the transition 
sooner.
    We know there are those who suggest complex additions to 
law to create new organizations with exclusive authorities. But 
we believe this is a step background.
    To my testimony I've attached a graph that really tries to 
demonstrate that electricity is a giant ecological system. It 
touches the very fabric of all our lives; from the fuel that is 
used to the ultimate choice by the consumer. We simply can't 
carve out a transmission only reliability standard without 
realizing the effects on everything else.
    We have also discovered that there are no such things 
anymore as pure reliability standards. When you truly have 
competition that delivers value to customers, then ultimately 
the economics provide the value. Competition does work and 
competition can increase the liability. And with the technology 
that is rapidly advancing today, we've been able to find 
solutions to what was heretofore seen as only reliability 
problems. And these technological solutions do work.
    We've also seen the emergence of new organizations such as 
the Gas Industry Standards Board that's been remarkable in what 
they've accomplished over the past few years. They have 
international cooperation. They are voluntarily developing 
standards. They're receiving accreditation from the American 
National Standards Institute as a standard setting body and 
then their standards go to FERC, which are approved as a model 
that should also be looked at.
    And also we have found in the past 5 years of working with 
competition that our compliance with NERC standards has 
improved, not deteriorated.
    There are also those who seem to think that the competition 
is simply about transmission. It is not. It is about providing 
value to customers through competitive price generation. This 
means that you need to have regional planning protocols. FERC 
Order 2000 stipulates that all RTOs will be involved with 
regional planning. From 1994 to 1996 we developed a regional 
planning protocol for the mid-Atlantic area. This was a venture 
that involved the environmental community, all the States, 
deciding agencies in our States. Our regional planning protocol 
has resulted in over $700 million of transmission construction 
that is currently underway. Our current plans see no need for 
anything major that would be an impediment over the next 5 or 
10 year horizon. The problem is getting to regional planning 
and get it into effect throughout the Nation, that then begins 
to solve the problem of siting and the coordination that's 
necessary to move forward.
    We have also found that keeping the emphases on the 
consumer creates value. Over the 5 years we have seen the 
customer prices in PJM go to less than $100 99 percent of the 
time. Our competition has shown that 71 percent of the time the 
price has been less than $30.
    We have 7,000 megawatts of new generation under 
construction. We have 40,000 megawatts from 140 different 
companies under different stages of planning for generation 
construction. This is competition that works and competition 
that FERC can put into place with their current authorities.
    We think the evidence for competition is viable and the 
evidence is real. We think there are probably three simple 
things that we would suggest to you as you look forward to your 
legislative activities.
    One, you should send a clear, simple and flexible authority 
of FERC to address all the reliability issues.
    We think you should encourage and support the FERC to get 
through the transition. The problem is the transition. We get 
through the transition that will enable regional planning and 
competition to provide value to customers sooner rather than 
later is the key to success.
    And third, ensure that FERC has the resources to be 
effective in enforcement actions in a 21st century information 
economy.
    Thank you, Mr. Chairman.
    [The prepared statement of Phillip G. Harris follows:]
    Prepared Statement of Phillip G. Harris, President and CEO, PJM 
                        Interconnection, L.L.C.
          ``The future requires a higher sophistication in 
        acknowledging and dealing with differences . . .''
                                                   Peter F. Drucker
    This insightful quotation from Peter Drucker sums up the challenge 
for all of us in the electric industry sector. As policymakers and as 
members of the industry, we must achieve 21st century information 
solutions which ensure that our policies and institutions match the 
efficiency and pace of this speed of light product known as 
electricity.
    My name is Phillip Harris. I am the President and CEO of PJM 
Interconnection, the country's only fully functioning FERC-approved 
Regional Transmission Organization (RTO). We operate the largest 
competitive electricity market in the world, serving over 8% of the 
U.S. population. We also ensure the reliability of the electric power 
grid in a five-soon to be seven-state region including Washington D.C. 
(and this Capitol Building) as well as all or parts of New Jersey, 
Pennsylvania, Delaware, Maryland, Virginia, West Virginia and Ohio. We 
are honored to have been designated as the platform for use in FERC's 
planned Northeast RTO (NE RTO). As evidenced on the attached chart, the 
proposed NE RTO will encompass approximately 183,000 MW and is larger 
than the entire western grid of the United States and western Canada.
    The critical test of any idea is the test of use. In the PJM 
region, restructuring of this industry has worked to deliver real value 
to the 24 million inhabitants therein. During the year 2000, PJM spot 
market prices were below $100/MWH 99% of the time and approximately 71% 
of the time our prices were less than $30/MWH. New investment in this 
capital-intensive industry is flocking to our region. Over 140 new 
generating projects have been announced, which would add over 40,000 MW 
of generation to our region, as well as over $700 million in new and 
upgraded transmission investment. We were recently designated by 
Business Week as one of the top 50 businesses in the United States 
successfully integrating Internet technologies--the only utility to 
receive such designation. More than 70 nations have sent delegates to 
PJM to learn about its market model and the operation of the grid in 
the mid-Atlantic region. The Pennsylvania retail restructuring plan has 
been widely recognized as the most successful in the nation.
    With this background, I wish to address the fundamental points the 
Subcommittee raised in its October 5 letter.
       i. the current status and future outlook for this industry
    Congress decreed competition in bulk power electric markets as the 
law of the land back in 1992. Although nine years later this vision has 
yet to be realized in much of this country, in the PJM region, with the 
support of our States and our market participants we have been able to 
meet Congress' expectations. The key to our success has really been 
quite simple--we have made our mission the efficient assimilation, use 
and widespread dissemination of information that makes the markets 
work.
    As the attached chart indicates, despite the product moving at the 
speed of light, this industry has traditionally been operated through 
various ``silos'' of data and operation with little in the way of 
networking and integration. There were separate silos of data 
associated with the acquisition and delivery of fuel, the generation of 
electricity, its transmission and ultimately its distribution. Each of 
these silos operated as autonomous islands with little sharing of data. 
For example, even though the actions of a residential customer in 
flipping on a light switch had a speed-of-light effect back at the 
generating station, due to the lack of effective information flows, the 
customers receive bills for usage weeks later with no ability to 
evaluate, in real time, the economic effect of their actions. So too 
the transmission system was sized and built years earlier to deliver 
power from generating stations to load centers at peak times with 
little thought given to siting such lines at places that would relieve 
critical congestion on that system. In short, even though the physics 
of the product was sending us key information in real time, we didn't 
adequately listen to those signals and instead built infrastructure in 
an inefficient manner reflecting that failure.
    By the same token, we have created silos in the form of 
institutions which govern the delivery of this product. We have the 
NERC looking at reliability standards, the FERC looking at markets, the 
DOE looking at infrastructure and the state PUCs looking at retail 
issues. Some of this can be expected from the natural evolution of our 
laws over time. However, just at the time we should be looking to 
network these different functions and break down these walls, NERC 
urges you to create yet a new silo--an industry organization, with 
funding authority granted by Congress, which would dictate standards on 
the physical operation of only the bulk transmission system without 
regard as to whether those standards properly integrate with the 
functioning of the marketplace--a role beyond its competence. You can't 
pigeonhole reliability standards and separate it from the marketplace 
and retail electric programs any more than you can design a pen cap 
without also working in the design of the pen. There is no ``pure'' 
reliability issue separate from economics. For example, with an 
effective demand response system, customers though the marketplace will 
be voting with their dollars on the level of reliability of service 
they seek. They will be individually deciding whether they wish to 
incur a temporary curtailment of service and should receive economic 
compensation for so doing. No ``core'' national reliability standard 
can take the place of empowering customers to make economic decisions 
in their best interest. For this reason, we should avoid creating a new 
silo called ``reliability.''
    However, to date RTO development in the country has also involved 
the creation of silos. In the northeast we have three ISOs, each with 
their own rules despite the fact that the New York, PJM and New England 
markets (as well as the ECAR market) are essentially one large market 
crying out for a uniform set of rules and operations. We have proposed 
solutions in the FERC mediation process that will enable those markets 
to rapidly network into one while still maintaining essential local 
practices and enhancing the security and operation of the northeast 
grid. We need to embrace these solutions rather than slow them down.
    It is for those reasons, as you wrestle with provisions dealing 
with reliability, RTOs, siting, etc., we urge you not to create new 
``silos'' of institutions that look at parts, rather than the networked 
whole. In the PJM region, we have worked to avoid such silos, to the 
degree practicable:

--The PJM States work directly with us as the RTO, rather than having 
        disparate sets of rules that change at every border. Our State 
        PUCs deserve much credit for their leadership in making this 
        happen.
--We integrate reliability standards and the marketplace on a daily 
        basis. We have networked our regional reliability organization 
        very closely with the market participants and the states 
        because the needs of the marketplace and reliability are 
        interdependent.
--We have come up with new solutions in our PJM West marketplace, to 
        network the needs for delivery of capacity with a vibrant 
        marketplace while retaining their local reliability standards.
    Through the intended creation of four large RTOs in the country, 
the new FERC has set forth a vision which can work to network all of 
these important functions and, for the first time, match the borders of 
natural markets in the country. This is a wise and forward-thinking 
policy that deserves all of our support. We believe FERC needs all of 
our support to make the right decisions to put these large RTOs in 
place rapidly and ensure participation therein, in order to deliver 
real and measurable results to customers.
                       ii. how congress can help
    What can this Congress do to further these efforts? We would 
recommend the following:
    1. Reliability Issues--Congress should adopt simplified reliability 
legislation assigning the ultimate responsibility for devising and 
enforcing mandatory reliability standards to the FERC. As noted before, 
the pace of change and the speed of light of this product mandate that 
we not ``hard wire'' in new private institutions with their self-
regulating ability to, in effect, tax the public. Rather, the FERC 
should have the flexibility to assign all or parts of these tasks to 
different entities as it sees fit. Flexibility and simplicity should be 
the hallmark of reliability legislation. We have proposed legislation 
that would accomplish this and stand ready to work with you and others 
to refine any proposed reliability provisions.
    2. Siting--Congress should provide deference to decisions reached 
through balanced regional planning processes that are open and which do 
not favor transmission solutions over generation solutions or one 
technology over another. State siting processes should be part of the 
planning process undertaken by the RTO and State siting decisions 
arrived at through such open balanced regional processes should be 
afforded Federal and State deference. By embracing and enhancing open 
regional planning processes that involve the states, Congress would 
avoid the Hobson's Choice of favoring federalization of siting or 
continuing individual state decisions that could conflict with one 
another.
    3. More Standardization of Market Design--FERC needs to more 
clearly delineate the exact market functions to be performed by 
emerging RTOs and ensure a certain degree of standardization of design, 
so as to promote the free flow of information to enable commerce in 
this speed of light product. We remain concerned that while we have the 
ISOs involved in facilitating the markets in the northeast, in much of 
the rest of the country the developing RTOs seem to want to remain 
passive grid operators with no obligation to ensure a vibrant 
marketplace.
    As I indicated at the beginning the RTOs maintain critical data in 
real time on each aspect of the production and delivery of electricity. 
Neither retail competition nor your direction for vibrant wholesale 
competition back in 1992 will work without a clear role for the RTO to 
assimilate and distribute that critical information to the marketplace 
in real time. After all, the New York Stock Exchange would not work 
very well without the publication of prices. So too the RTOs must have 
a role in facilitating the marketplace by timely assimilating and 
delivering that critical data to serve as a ``platform'' on which 
competition can flourish.
    Although we must allow for a certain degree of regional 
flexibility, the FERC's prior approach of letting a thousand flowers 
bloom has not worked quickly enough to keep up with the needs of this 
speed-of-light product. We are heartened by the creation of an Energy 
Industry Standards Board using the successful Gas Industry Standards 
Board model. Their model presumes a linkage between wholesale gas, 
retail gas, wholesale electric and retail electricity services. A model 
much more functional for networking the needs of the 21st Century. By 
the same token, we believe the new FERC's initiatives outlined so far 
are worthy of this Congress' full support. This is not the time to 
``dumb down'' what is otherwise needed by these still immature markets.
    4. FERC Resources--Congress should ensure that FERC is fully 
staffed and has the resources needed to appropriately monitor the 
markets and regulate in those areas where the market is not properly 
functioning. This is not the time to pull the rug out of FERC's efforts 
to deliver on the promise of the Energy Policy Act of 1992 and Order 
2000.
    5. Enhancing Grid Security through a Hierarchical Network Model--
The events of September 11 have made us painfully aware of the need to 
keep security of infrastructure foremost in our minds. Unfortunately, 
those that presume ``silos'' proffer the risk inherent in them. Whereas 
the value of networked organizations provide resiliency, security and 
connectivity to meet the heightened security challenges of this 
century.
    The creation of large RTOs under the Regional Network Model that 
PJM proposed for the Northeast will significantly enhance the security 
and continuity of the national grid. Under the PJM Regional Network 
Model approach, data and responsibility will be decentralized among 
multiple paths while, through a hierarchical design, the benefits of 
integration and uniformity are realized. This is far more secure than 
the system that presently exists, wherein we have individual ``silos'' 
of security responsibility among each of the individual utilities in 
much of the country. If models such as those we proposed are accepted 
by the FERC, we can go a long way to ensuring the benefits of a 
networked model while strengthening those decentralized features 
necessary to resist terrorist or cyber attack. In short, the NE RTO, if 
designed correctly, will enhance the security and reliability of the 
northeast grid from what presently exists today.
    6. Role of Technology--The nation is moving rapidly to networked 
information through advanced technology. FERC should have these 
advanced tools and the staff resources to use them in order to identify 
and be responsive to market dysfunctions in a timely manner. And even 
more importantly, in writing laws in the electricity area, Congress 
should provide broad authority to the FERC and other government 
institutions rather than codifying constraints which will tie the 
agency's hands. New technology solutions that we have not even dreamed 
of will solve problems that seem intractable today. But if we hard-wire 
in solutions and institutions, we will unknowingly stifle that very 
technology we so much want to succeed.
    Our message is simple: with the wise use of information and with 
institutions such as the FERC having broad and flexible authority and a 
clear mission to promote competitive markets, our laws and institutions 
can begin to catch up and operate nearer to the speed and efficiency of 
this product known as electricity. At PJM, we have used the 
assimilation and ubiquitous delivery of information to empower our 
customers to meet their needs. We believe that this Congress should 
embrace similar 21st century solutions. We at PJM look forward to 
working with you to achieve this important goal.

    Mr. Barton. Thank you, Mr. Harris.
    We now want to hear from Mr. James Steffes, who is Vice 
President of Governmental Affairs for ENRON Corporation. He's 
here on behalf of the Electric Power Supply Association.
    Your statement's in the record in its entirety. We would 
ask that you summarize it in 5 minutes.

                  STATEMENT OF JAMES D. STEFFES

    Mr. Steffes. Thank you, Mr. Chairman.
    My name is Jim Steffes. I'm pleased to be here today 
representing the member companies of the Electric Power Supply 
Association (EPSA), of which I presently serve as Chairman of 
the Regulatory Affairs Committee.
    I would first like to discuss reliability. It's a fair 
statement that just about everyone within the industry agrees 
on the need to implement mandatory reliability standards. The 
old system of voluntary compliance no longer ensures a reliable 
network. It is also a fair statement that there is not 
consensus on how best to develop and enforce these mandatory 
standards.
    EPSA recommends that Congress provide FERC with a straight 
forward delegation of authority to implement and enforce 
mandatory reliability standards. This authority, coupled with 
FERC's current economic regulation of wholesale electricity 
markets, will best provide for reliable and low cost 
electricity service for American consumers.
    We do not think that enacting reliability language that 
tries to separate commercial matters from reliability matters 
is the right approach. It is critical that reliability 
legislation be aligned with FERC's approach to 
nondiscriminatory open access transmission and most 
importantly, to appropriate size RTOs.
    EPSA is also troubled by proposed language that would hard 
wire significant issues such as mandating the role of regional 
reliability entities. These issues are better left to the 
flexibility of the regulatory process. FERC should evaluate the 
merits of this and other issues in a rulemaking proceeding. It 
is simply unwise to statutorily mandate the authority of 
regional reliability entities.
    We are equally troubled by any limit on FERC's ability to 
seek necessary reliability rule changes on its own motion. Our 
industry continues to change at a rapid pace. Unfortunately, if 
we leave reliability rule changes in the hands of a self-
regulating organization, it is highly likely that we will never 
reach consensus on the most pressing matters. A good example is 
the question over the independence of security coordinators. 
This issue has been discussed for many years inside NERC, but 
no consensus has reached the NERC Board of Trustees. I would 
submit that given the nature of the issue, none will.
    The latest NERC legislative proposal still contains 
procedural mechanisms that limit, rather than enhance, FERC's 
role on moving forward with reliability matters.
    EPSA respectfully recommends that Congress direct FERC to 
establish and enforce mandatory reliability standards. The 
approach we support is based on the traditional model that 
Congress normally follows: Establish a general a policy and 
direct the appropriate agency, FERC, to carry it out. This is 
not to say that we disagree with an industry led standard 
setting organization. We believe that the industry has the 
knowledge and technical skills to continue to staff this work. 
We simply want to make it clear that FERC is in charge.
    Let me conclude on this topic by reiterating the central 
message. Trying to divorce commercial matters from reliability 
matters makes no sense in a competitive electricity market. Too 
many subjects. In fact, I would argue all subjects are both 
reliability and commercial in nature.
    In sum, the best way to strengthen reliability and 
establish robust competitive markets is to leave FERC with the 
discretion to make appropriate changes to a mandatory 
reliability regime as changes in the industry require.
    Let me end by making two points on siting and incentive 
rates.
    First, while physical improvements in the grid may be 
necessary, FERC and Congress must first focus on getting the 
rules of access right. Implementing right sized and well 
functioning RTOs and ensuring that all users take transmission 
service in a nondiscriminatory manner will properly define 
where more transmission is needed.
    Second, while EPSA has no hostility toward the idea of 
incentive rates, we truly wonder if any additional language is 
needed. FERC clearly has authority to be flexible in setting an 
allowable rate of return.
    In conclusion, Mr. Chairman, EPSA wishes to thank you and 
the subcommittee for this opportunity to discuss our views on 
these important issues. We look forward to continuing to work 
with you and your colleagues as you develop electricity 
legislation in the weeks to come.
    Thank you.
    [The prepared statement of James D. Steffes follows:]
  Prepared Statement of James D. Steffes, Vice President, Government 
Affairs, Enron Corp. on Behalf of the Electric Power Supply Association
    Mr. Chairman and members of the Subcommittee, my name is Jim 
Steffes. I am a Vice President, Government Affairs for Enron Corp. 
based in Houston, Texas, where my responsibilities center on regulatory 
policy including the topics you are considering in this hearing. Enron 
is one of the world's leading energy, commodities and services 
companies. Enron markets electricity and natural gas, delivers energy 
and other physical commodities, and provides financial and risk 
management services to customers around the world.
    I am pleased to be here today representing Enron and the member 
companies of the Electric Power Supply Association (EPSA), of which I 
presently serve as chairman of the Regulatory Affairs Committee. EPSA 
is the national trade association representing competitive power 
suppliers, including independent power producers, merchant generators 
and power marketers. EPSA members provide reliable, competitively 
priced electricity from environmentally responsible facilities in U.S. 
and global power markets. On behalf of the competitive power industry, 
I thank you for this opportunity to address reliability, siting and 
transmission pricing incentives, as you consider electricity issues.
                              reliability
    Mr. Chairman, regarding the fundamental subject of the reliability 
of the bulk-power transmission system, there is general agreement on 
the need to replace today's voluntary standards with mandatory 
standards that apply to all system users. However, there is not a 
consensus on how best to develop and enforce mandatory standards. It is 
critical that reliability legislation be consistent with the Federal 
Energy Regulatory Commission's (FERC's) approach to non-discriminatory, 
open access transmission, including large Regional Transmission 
Organizations (RTOs), if we are to bring the benefits of competition to 
consumers.
    Congress faces an important choice between two alternative 
legislative approaches to achieving mandatory reliability standards. 
Under the first approach, Congress could enact a lengthy electric 
reliability title sponsored by the North American Electric Reliability 
Council (NERC) that entombs numerous details in statute that are 
normally left to the flexibility of the regulatory process. Under the 
second approach, Congress could instead place mandatory reliability 
standards squarely under FERC's jurisdiction and direct the agency to 
promptly conduct a rulemaking to establish an efficient standards-
setting process and an effective enforcement mechanism. We strongly 
favor the latter approach for the following reasons.
    NERC and those in its self-described ``consensus group'' continue 
to advocate what we and others regard as an unworkable regime that 
seeks to draw a false line between reliability and commercial matters. 
The NERC proposal would hand over ``reliability issues'' to a newly 
created ``self-regulating organization.'' The problem with this 
strategy is that too many subjects are not purely either reliability or 
commercial in nature; in fact they are inseparable. For example, 
scheduling of specific power transactions over a transmission system is 
a commercial matter with reliability implications. Because FERC is 
squarely responsible for commercial practices in the electric industry, 
NERC's reliability approach will undermine FERC's responsibilities 
under the Federal Power Act.
    Given the importance Enron and other EPSA members attach to 
reliability, we participated in extensive discussions with NERC and 
others over the past several years to attempt to resolve our 
differences. While that process did not produce an agreement, we 
commend the extensive efforts that produced several legislative 
proposals, including the version NERC released last month. However, 
while the text of NERC's latest proposal is shorter, it is still 
needlessly lengthy and cumbersome because it seeks to tackle matters 
best left to FERC.
    Unfortunately, the latest NERC proposal is still laden with 
procedural mechanisms and delegations of authority that limit, rather 
than enhance, FERC's role on reliability matters. It is clear to us 
from participating in the NERC discussions that those who endorse its 
approach intentionally seek to limit FERC's authority over reliability 
in the name of enhancing reliability. For example, the NERC legislation 
proposes to create a new ``self-regulating organization'' that is in 
many respects independent from FERC. While there is certainly a key 
role for industry input on reliability standards, the ``self regulating 
organization'' as NERC proposes it would be too removed from FERC's 
general regulatory responsibility over wholesale power markets.
    Similarly, while it may make sense for FERC to defer to specific 
regional entities or approve regional variances from otherwise uniform 
reliability rules, FERC should evaluate the merits of doing so on a 
case-by-case basis. It is simply unwise, as the NERC legislation 
proposes, to statutorily mandate across-the-board regional reliability 
entities and regional rules variances. If those seeking approval of 
such entities can make a strong case in a particular instance, then 
they should make that case to FERC for its determination based on a 
factual record. FERC should not be forced to accept those entities or 
variances by force of federal law.
    The approach we support is based on the traditional model that 
Congress normally follows of setting a general policy and directing the 
appropriate regulatory agency to carry it out, subject to congressional 
oversight. With reliability, we respectfully recommend that Congress 
direct FERC to establish mandatory reliability standards. After 
receiving public comments, FERC should determine the appropriate role 
of an industry organization to recommend standards and when to permit 
regional variances, among other details. Nothing is gained by giving 
regulators a responsibility as important as keeping the lights on and 
then tying their hands.
    In sum, the agreed upon interdependent goals of strengthening 
reliability and establishing robust competitive markets can best be 
achieved by leaving FERC with the discretion to make appropriate 
changes to a mandatory reliability regime as changes in the bulk power 
system require. Both the Bush Administration and Senate Energy Chairman 
Bingaman appear headed in a direction on reliability consistent with 
our views.
                                 siting
    The transmission grid is the backbone of the wholesale power 
market. Enron and EPSA have repeatedly argued in favor of regulatory 
reform that provides consistent, non-discriminatory access to the grid.
    Beyond improved rules regarding access, we support efforts to 
enhance the interstate grid. The siting of new or expanded transmission 
facilities is critical to meeting the needs of power consumers. As you 
know, siting issues are presently handled at the state or local level. 
While this may have made sense at some time in the past, these policies 
need to be re-examined to allow for a reliable and low cost system.
    The Subcommittee is well aware of ``Path 15'' in California. This 
transmission bottleneck has existed for many years, in spite of a well-
documented need for improvements. Last winter, the impact of poor 
siting policies was felt by thousands of businesses and families in 
northern California when this bottleneck prevented available surplus 
power from southern California to reach the electricity-starved markets 
in the north. Path 15 is not an isolated example.
    Members of Congress and the Administration have proposed new 
policies that would make the siting process of interstate transmission 
facilities reflect interstate priorities. EPSA strongly endorses these 
reforms as necessary and appropriate. It will continue to be important 
to consider carefully the demands of the citizens in the towns and 
states where new transmission facilities are built. However, the siting 
process must also reflect regional and national priorities. Whether 
Congress adopts a new policy patterned on the successful program that 
allows new interstate natural gas pipelines to be built, or crafts a 
new approach that starts at the state and regional level, but uses a 
federal siting ``backstop,'' the time has come for new ideas and a new 
approach.
                        transmission incentives
    The need for reform of the siting process is often coupled with a 
call for new financial incentives for transmission. In general, Enron 
and EPSA have no objection to allowing a higher return on the 
development of critically needed transmission facilities. In at least 
one instance, EPSA has made a direct plea to FERC to raise the rate-of-
return for transmission facilities. However, we have three caveats with 
regards to any policy that would expand or enhance financial 
incentives:
    First, FERC clearly has authority to be flexible in setting an 
allowable rate-of-return for new facilities. Anyone advocating new 
legislative authority or requirements should first demonstrate why this 
existing authority is insufficient to encourage new development.
    Second, if the Congress endorses new policies to create new 
financial incentives, the projects to receive these incentives should 
be determined by FERC with input from a balanced, independent 
organization, such as an RTO.
    Third, if higher rates for new facilities are contingent upon a 
determination of critical need, it will be important to ensure that 
this policy does not inadvertently encourage a disregard of timely 
upgrades in the expectation that improvements to deteriorated 
infrastructure will bring a greater reward.
            inter-relationship of transmission policy issues
    While the Subcommittee will hear testimony later today on Regional 
Transmission Organizations (RTOs), we want to stress how appropriately 
structured RTOs are the strongest foundation for sound transmission 
policies, including those topics being considered in this hearing.
    In our view, it is critical that Congress support the formation of 
RTOs of sufficient size and configuration in order to facilitate strong 
regional power markets that will bring power from where it exists to 
where it is needed. If this overriding objective is achieved, other 
benefits will flow to consumers.
    For example, reliability will be enhanced as large RTOs provide 
transmission service in a non-discriminatory manner to those that have 
power so they may bring power to where it is needed to meet demand. 
Well functioning markets--the very goal of FERC's RTO policy--will 
ensure reliability. Similarly, RTOs as FERC envisions them maximize 
efficient use of generation and transmission assets, reducing (though 
not eliminating) the need for some facilities and related siting 
decisions. As to incentives, investments for the benefit of regional 
markets are more likely to be made when those assets are operated 
within the type of RTO structure we support, rather than as part of 
vertically integrated utility systems.
    Attached is a letter that EPSA sent to Chairman Barton and members 
of the Subcommittee last month on pending legislation that centers on 
transmission incentives and RTO policy (H.R. 2814, the ``Interstate 
Transmission Act''). The letter provides further details on these 
important points. Please place this letter in the hearing record.
                               conclusion
    In conclusion, Mr. Chairman, we thank you and the Subcommittee for 
this opportunity to present these views on reliability, siting and 
transmission pricing incentives in the context of non-discriminatory, 
open access transmission. We look forward to continuing to work with 
you and your colleagues as you develop electricity legislation in the 
weeks to come.

    Mr. Barton. We thank you.
    We want to hear now from Dr. John Anderson, who is the 
Executive Director of the Electricity Consumers Resource 
Council.
    Your testimony is in the record, and we ask that you 
summarize it in 5 minutes.

                     STATEMENT JOHN ANDERSON

    Mr. Anderson. Thank you very much, Mr. Chairman.
    Large industrial customers understand that the transmission 
grid is the linchpin of America's electricity system. Without 
adequate transmission capacity, the system fails. Similarly, 
without standards to ensure reliability, even a system with 
adequate generation and transmission will not be able to 
deliver power to end users on a regular and efficient basis.
    The transmission system is in need of improvement. We need 
to have existing congestions in transmission mitigated, and we 
need the transmission system to be operated in a 
nondiscriminatory manner. Specifically, no owner of 
transmission facilities should use those facilities to benefit 
its generation at the expensive of others.
    Today I do address the three issues central to this 
hearing. First is the issue of incentive based rates for 
transmission, sometimes called innovative pricing or 
performance based rates. This issue has received much attention 
before this subcommittee, even today before the subcommittee 
and, of course, FERC.
    We must remember that transmission is built and operated in 
the framework of a monopoly not competitive. ELCON members 
certainly believe that transmission owners should have a 
reasonable opportunity to recover prudently incurred costs and 
earn a just and reasonable return on the investment dollars 
that they put into transmission. But they should not get more 
than that.
    Simply put, you can try to drive a monopolist, but if you 
try you should not expect to get the results that you were 
seeking.
    The rate of return authorized for a monopoly transmission 
investment should reflect the risk that incurred. Generally 
investment in transmission is low risk. This subcommittee heard 
testimony from Goldman Sachs earlier and from several other 
people, and I refer you to that.
    If transmission owners and transmission investors can first 
demonstrate a higher degree of risk, then a higher rate of 
return might be acceptable. But they should have to demonstrate 
that first.
    Section 401 of Chairman Barton's draft dealing with 
incentive rates strikes me as overly prescriptive, unnecessary 
and undesirable. Ordering FERC to establish transmission 
pricing policies based on incentive based performance rates, 
both directs and confines FERC regardless of whether its 
expertise or market conditions may otherwise indicate.
    I find it particularly ironic that this subcommittee would 
want to legislate so precisely when FERC only 2 weeks ago on 
September 25 under the leadership of its new Bush appointed 
Chairman, Pat Wood, a good Aggie, embarked on an ambitious new 
plan----
    Mr. Barton. There's no such thing as a bad Aggie.
    Mr. Anderson. Thank you very much. Mr. Chairman, I stand 
corrected. Thank you very much.
    Simply put, legislative direction such as is included in 
section 401 of the draft bill is unnecessary. It would severely 
limit FERC's ability to respond to market developments and 
should not be included.
    The second issue is siting, specifically the issue of 
whether a Federal right of eminent domain should exist to 
facilitate such siting. I find it almost contradictory that 
some who support providing financial incentives for new 
transmission oppose Federal right of eminent domain.
    Congress recognized long ago that FERC should have the 
right of eminent domain in the siting of new natural gas 
pipelines. We believe the same right should exist for the 
siting of new transmission. Electricity clearly is interstate 
in nature.
    The language in section 402 of your bill establishing a 
Federal backstop for transmission siting is generally positive. 
However, I emphasize that even a Federal backstop will not 
change the protective attitudes of transmission owners who do 
not want new transmission capacity because it would jeopardize 
their own generation.
    The third issue is often called reliability, but in reality 
is simply the creation of a new electric reliability 
organization. ELCON and our members seek large seamless 
nondiscriminatory electricity markets. We support a strong top 
down reliability organization subject to FERC oversight. That 
organization must have fair and representative governance 
procedure. It should set uniform national reliability and 
commercial practice standards and procedures for North America. 
A one stop shop, to speak.
    RTOs should implement, not set the standards. There's no 
discernable need either for affiliated regional reliability 
entities or regional advisory bodies, nor is there a need to 
statutorily prescribe variances or mandates.
    The proposal put forth in section 301 of your bill is a 
noble effort. It recognizes that we do not need the complicated 
duplicative structure and process that was an integral part of 
the bill originally created under the auspices of NERC.
    When ELCON first considered this issue we believed that 
reliability and commercial practices were separate components 
that could be treated separately. We now no longer hold that 
position. Although NERC purports that its standards and 
missions are confined to reliability, they actually overlap 
substantially with commercial practices. Simply stated, it is 
impossible to separate reliability from commercial issues so 
one organization should handle both.
    In conclusion, ELCON seeks large nondiscriminatory seamless 
electricity markets. Such markets would benefit all customers 
by providing the opportunity to purchase electricity that is 
lower prices and more efficiently produced. We do not need 
artificial financial incentives to transmission owners or 
anyone else to get there. We need markets. We need a Federal 
approach since electricity is interstate in nature. And we need 
a means of siting new transmission that is efficient and 
effective. And finally, we need one set of rules, not several.
    Mr. Chairman, thank you very much for the opportunity to be 
here with you.
    [The prepared statement of John Anderson follows:]
     Prepared Statement of John Anderson, Executive Director, The 
                 Electricity Consumers Resource Council
    Mr. Chairman, members of the Subcommittee, thank you very much for 
the opportunity to testify at this hearing this morning.
    As you know, ELCON, formally the Electricity Consumers Resource 
Council, is the national association representing large industrial 
users of electricity. Our member companies come from virtually every 
segment of the manufacturing community.
    Large industrial customers understand that the transmission grid is 
the lynchpin of America's electricity system. Without adequate 
transmission capacity, the system fails. Similarly, without standards 
to ensure reliability, even a system with adequate generation and 
transmission will not be able to deliver power to end users on a 
regular and efficient basis.
    The transmission system is in need of improvement. We need to have 
existing congestions in transmission mitigated, and we need the 
transmission system to be operated in a nondiscriminatory manner. 
Specifically no owner of transmission facilities should use those 
facilities to benefit its generation. For the most part, the 
shortcomings in our transmission system are the result of a series of 
events.
    America's transmission grid--still governed essentially by a 1935 
statute--has been asked to change from a country road to an interstate 
highway. Electricity is being bought and sold in ways that had never 
been imagined.
    In recent years there has been uncertainty about how the 
transmission grid would be operated. Logically, monopoly transmission 
owners have been reluctant to make necessary investments in improving 
or expanding the transmission market to relieve transmission 
congestions that often protected their own inefficient generation. This 
is an understandable, but undesirable, result of increasing competition 
in generation. Additionally, electricity restructuring on a state-by-
state basis has presented transmission owners with an uncertain future, 
which has also contributed to a hesitant investment pattern.
    Of late, given the increased attention being paid to our 
increasingly inadequate transmission grid, there have been a number of 
proposals put forth. Some we find positive, some negative, some simply 
incomplete.
                              incentives:
    Let me turn first to an issue that has received much attention 
before this Subcommittee and before the Federal Energy Regulatory 
Commission--that is the issue of incentive-based rates for 
transmission, sometimes called innovative pricing or performance-based 
rates. ELCON has paid considerable attention to this issue, and in fact 
ELCON published an ``Issue Profile'' entitled Performance-Based 
Regulation in August 2000. That report is available at our web site, 
http://www.elcon.org/Documents/pbr--profile.pdf.
    ELCON members are perhaps the pinnacle of capitalism. They compete 
in world markets. They are keenly aware of rates for investment and 
return on investment, of risk and aversion to risk.
    Some people seem to think that increased competition in generation 
in some way changes the fact the transmission remains monopolistic. 
There is a basic difference between competitive markets, such as those 
in which ELCON members participate, and monopoly markets which is where 
we find owners of electricity transmission.
    We understand perfectly well that the underlying theory of 
``incentive regulation'' is intuitively appealing. This accounts for 
the growing popularity of proposals to provide ``incentives'' for 
transmission.
    But we must remember--transmission is built and operated in the 
framework of a monopoly market. ELCON members certainly believe that 
transmission owners should have a reasonable opportunity to recover 
prudently incurred costs and earn a just and reasonable return on the 
investment dollars they place in transmission. But they should not get 
any more than that. Simply put, you can try to bribe a monopolist, but 
if you try, you should not expect to achieve the result that you are 
seeking.
    We must also keep in mind that investment in transmission is 
essentially low-risk. As this Subcommittee heard from a Goldman Sachs 
analyst at an earlier hearing, a return in the historical 11-12 percent 
range usually is adequate. It will stimulate appropriate investment 
dollars. If transmission owners and transmission investors can first 
demonstrate a higher degree of risk, a higher rate of return might be 
acceptable.
    This was clearly illustrated in a recent report prepared by the 
financial analysts Fitch on the newly formed American Transmission 
Company, a transmission-only company not affiliated with any one 
utility. That report states that ATC's ``costs are recouped through an 
annual revenue requirement passed through rates to ``network'' 
customers' and that those network customers contribute over 95 percent 
of ATC's annual revenues. This is yet another illustration that 
investment in transmission is intrinsically low risk.
    ``Incentives'' beyond cost of service for new monopoly transmission 
investments fail on several counts.
    First, cost-of-service regulation should provide adequate economic 
incentives, because utilities are allowed to recover prudently-incurred 
costs and earn a virtually guaranteed rate of return with almost no 
downside risk. There is no need to embellish any monopoly transmission 
owner's potential earnings as long as this guarantee applies.
    Second, incentives cannot make a monopolist behave as a real 
competitor unless the monopolist is allowed to fail. Changing the rate 
of return does not change the underlying problem. The only way to 
minimize this problem is to structure the regulatory process in ways 
that minimize the potential for improper strategic behavior and 
gamesmanship.
    Third, traditional cost-of-service regulation is not lacking 
workable incentive mechanisms. In fact, under cost-of-service, 
regulators often establish bandwidths around allowed returns that 
reward exceptional behavior or exceptional risk and punish the 
opposite. But those who want to construct new transmission must first 
demonstrate that such risk exists.
    Section 401 of the ``Barton draft,'' dealing with incentive rates, 
strikes me as overly prescriptive, unnecessary and undesirable. 
Ordering FERC to establish transmission-pricing policies based on 
``incentive-based and performance-based'' rate treatments both directs 
and confines FERC regardless of whether its expertise or market 
conditions may otherwise indicate. Further, requiring FERC to report to 
Congress every year, assessing both ``the level of transmission 
investments in the preceding year and assessment of the level and 
sufficiency of the Commission's allowed financial returns'' will likely 
result in an upward spiral of rates of return on investment that might 
never end.
    (Parenthetically I am reminded of the old, probably politically 
incorrect, joke where the crazy man is singing off-color and off-key 
tunes outside an apartment at two o'clock in the morning. One apartment 
dweller asks him to stop and the crazy man says yes, for five dollars. 
The apartment dweller throws him five dollars and the crazy may goes 
away. But he comes back the next night, louder, more off-color, and 
more off-key. The apartment dweller comes to the window and is about 
the throw out five dollars when the crazy man say, no, tonight the rate 
is ten dollars. After all, he says, ``I may be crazy, but I am not 
stupid.'')
    I find it particularly ironic that this Subcommittee would want to 
legislate so precisely when FERC, only two weeks ago on September 25, 
under the leadership of its new Bush-appointed chairman, Pat Wood 
(Texas A&M, 1985), embarked on an ambitious new plan for ``Making 
Markets Work.'' Although we do not support every provision of Chairman 
Wood's plan, it comprehensively addresses the need for infrastructure 
improvement and expansion with the stated objective of providing 
``clarity of cost recovery to infrastructure investors.'' FERC already 
has the authority to approve higher rates of return, FERC has the 
authority to approve incentive-based rates, and FERC has the authority 
to create innovative rate structures (for example, FERC included such a 
requirement in Order 2000).
    Simply put, legislative direction such as is included in Section 
401 of the draft bill is unnecessary, would severely limit FERC's 
ability to respond to market developments, and should not be included.
                                siting:
    Now let me turn to transmission siting and, specifically, the issue 
of whether a federal right of eminent domain should exist to facilitate 
such siting.
    I find it almost contradictory that some who support providing 
financial incentives for new transmission oppose a federal right of 
eminent domain.
    Those who wish to build new transmission are faced with a myriad of 
different state rules and regulations. What has been called NIMBY--not 
in my backyard--has grown into BANANA--build absolutely nothing 
anywhere near anything. But a word of caution--unless you change the 
underlying motives of transmission owners, establishing a simpler 
procedure, while helpful, will not get the job done.
    Congress recognized long ago that FERC should have the right of 
eminent domain in the siting of new natural gas pipelines. We believe 
that the same right should exist for the siting of new transmission. It 
is clearly interstate in nature. Since citizens in one state may object 
to new power lines that provide power to citizens in another, it is up 
to the Federal government--in this instance FERC--to provide a means to 
overcome such provincialism and ensure that the needed infrastructure 
is in place. Because, in truth, all citizens will benefit from a well 
functioning, reliable, electricity grid.
    The language in Section 402 of the draft bill, establishing a 
``Federal backstop'' for transmission siting, is generally positive. 
However, a two-step process will by definition result in less, not 
more, transmission capacity. And even a Federal backstop will not 
change the protective attitudes of transmission owners who do not want 
new transmission capacity because it would jeopardize their own 
generation.
                              reliability:
    That brings me to my last point--what is often called reliability 
but in reality is simply the creation of a new electric reliability 
organization.
    ELCON and ELCON members seek large, seamless, nondiscriminatory 
electricity markets. We support a strong ``top-down'' reliability 
organization that sets uniform national standards and procedures for 
North America. RTOs should implement, not set, standards. We favor 
fewer levels of bureaucracy. We believe questions of reliability should 
be decided as quickly as possibility, and we seek rules of the road for 
reliability that are consistent so that buyers and sellers face a 
seamless electricity market. Rules intended to increase reliability 
should not unnecessarily intrude into commercial practices.
    ELCON has been working with the North American Electric Reliability 
Council (or NERC) for over four years in an attempt to draft 
legislation that would authorize an appropriate new reliability 
organization. We need a new organization because NERC as presently 
operating has no statutory authority. This means NERC has no 
enforcement or funding authority, and no antitrust immunity. NERC was 
created for the market of the 1960's; it is not designed for the 
markets of the twenty-first century.
    ELCON helped draft and then supported what is sometimes called the 
consensus reliability language first proposed in February 1999. That 
language has been revised several times over, and ELCON continues to 
this day to participate in NERC drafting sessions that, in truth, seem 
to be moving away from consensus at every meeting. The reason for the 
increasing lack of consensus is not really surprising. As we see the 
wholesale market continue to develop--what happened in California, what 
is happening with RTOs, what is happening at FERC--we realize that what 
was proposed two and a half years ago is inappropriate for today's 
electricity world. It was too detailed, too cumbersome and too 
prescriptive. It should not be adopted.
    As you are well aware, FERC is attempting to establish five large 
regional transmission organizations. These RTOs would be in charge of 
the operation of the grid within their regions. A critical question is 
who will draft the necessary reliability and commercial standards, a 
national standards organization or each RTO individually? If RTOs can 
draft their own standards, why do we need a national reliability 
organization?
    The proposal put forth in Section 301 of the Barton draft is a 
noble effort. It recognizes that we do not need the complicated, 
duplicative structure and process that was an integral part of the bill 
created under the auspices of NERC.
    The most recent version of the legislative language coming out of 
the NERC process establishes a new North American Reliability 
Organization (or NAERO) as well as a series of new Affiliated Regional 
Reliability Entities (or ARREs). The geography of the ARREs is expected 
to be identical to the geography of the RTOs. But the division of 
responsibility between the two is unclear.
    We contend that the ARREs are at best redundant and at worst 
counter-productive. They will contribute to a variety of rules and 
regulations and heighten the ``seams'' issue of how power flows from 
one RTO to another. More importantly, those who propose that ARREs be 
granted the right to ask for variances for different reliability 
standards in each RTO only increase those dangers. And those who 
suggest that ARREs be allowed to seek such variances directly from FERC 
are really seeking a balkanized electricity grid rather than a unified 
one. We are pleased that the Barton draft language does not envision or 
sanction such entities.
    Finally the NERC ``consensus'' language proposes, in statute, the 
creation of Regional Advisory Bodies which also may offer proposals to 
FERC and whose proposals shall receive ``deference'' from FERC. Again, 
ELCON does not believe that we should create RTOs with each responsive 
to multiple masters. This will Balkanize the electricity marketplace. 
Again, we are pleased the Barton draft does not include or create such 
bodies.
    ELCON and ELCON members believe that RTOs can best serve the 
purpose of implementing national reliability standards and 
administering those standards for purpose of operating a reliable grid. 
The standards should be established by a national organization. We do 
not need ARREs. We do not need Regional Advisory Boards. And we 
certainly do not need a process that gives deference to regional 
groups, which, again, can only lead to Balkanization. It is the 
interest of consumers and in the interest of reliability to create a 
system with as few levels of bureaucracy as necessary.
    That leads to one more issue--the question of standards for 
reliability versus standards for commercial practices. When ELCON first 
considered this issue, we believed these were two separate components 
that should be treated separately. We know longer hold that position. 
Although NERC purports that its standards and its mission are confined 
to reliability, we believe that they overlap substantially with 
commercial practices. It is impossible to separate reliability from 
commercial issues. Along those lines, the Gas Industry Standards Board 
has approved a proposal that it become an Energy Industry Standards 
Board to develop appropriate commercial standards for electricity, with 
the understanding that they might also affect reliability. I don't know 
if this question needs to be addressed in legislation or by FERC, but 
it should at least be considered.
    Optimally, we believe that any standard-setting organization 
created needs to address questions of both reliability and commercial 
practices--a one-stop shop so to speak. It should be a strong ``top-
down'' organization, subject to FERC oversight and approval, that 
establishes standards and practices. There is no discernible need for 
affiliated regional reliability entities or regional advisory bodies. 
Nor is there a need to statutorily prescribe variances or mandates for 
deference. There should be an antitrust exemption based on ``rule of 
reason,'' rather than on a rebuttable presumption. And this body should 
have a just and reasonable funding mechanism.
                              conclusion:
    In conclusion, ELCON seeks large, nondiscriminatory, seamless 
electricity markets. Such a grid would benefit all consumers, providing 
all consumers with the opportunity to purchase electricity that is 
lower priced, more efficiently produced. We do not need artificial 
financial ``incentives''--to transmission owners or anyone else--to get 
there. We need a federal approach. We need a means of siting new 
transmission that is not fraught with danger. And we need one set of 
rules, not several.
    Thank you Mr. Chairman.

    Mr. Barton. We thank you, Doctor.
    We'd now like to hear from Mr. Marty Kanner whose the 
coordinator for Consumers for Fair Competition.
    His statement's in the record and you're recognized for 5 
minutes.

                    STATEMENT OF MARTY KANNER

    Mr. Kanner. Thank you very much, Mr. Chairman, members of 
the subcommittee.
    You've heard this morning that transmission is critical to 
ensuring competitive markets. You've also heard that 
transmission system is constrained, and you've heard from a 
number of witnesses that incentive rates are unnecessary to 
relieve those constraints and provide the seamless highway of 
commerce that's needed. So my challenge this morning is to add 
what you've already heard.
    Some have suggested that incentive rates boosting the 
return on investment is necessary in order to attract the 
capital needed to invest in the transmission system. It's 
absolutely true that the failure to invest in the transmission 
network is related to economics. But it's not the economics 
associated with the rate of return on those investments, rather 
it's the economics of the competing business; generation. When 
we have vertically integrated utilities any transmission 
constraint boosts the prices that can be charged for generation 
within that constraint and effectively preclude the 
introduction of competitors.
    Looking at the economics, looking at the comparative 
investment and generation assets and transmission assets, it's 
absolutely true that if you follow the dollars maintaining 
constraints boosts profits. Simply adding to the return that 
can occur on the transmission system won't relieve those 
incentives, won't change the economics. It's simple: The 
economics dictate that transmission constraints are a good 
thing for transmission owners.
    So the question then is what do you do to relieve the 
constraints and is it necessary to provide incentives. Before I 
answer that question, I'd like to go beyond.
    In the various proposals including section 401 in the 
chairman's discussion draft, as well as the bill introduced by 
Mr. Sawyer and Mr. Burr there is not a limit on those 
incentives to just new investments. Rather, incentives would 
also inure to efficient operation of the grid, to participate 
in RTOs, even to those that are already RTO participants. 
Again, those are needed.
    FERC has already taken steps to encourage RTO 
participation. And efficient functioning of the transmission 
grid should be a requirement for a monopoly owner, not 
something that we need to provide sweet monopoly candy for 
people that do their job.
    On negotiated rates, it violates the basic tenant of the 
Federal Power Act. The Federal Power Act requires just 
reasonable, not unduly discriminatory or preferential rates. 
There's no way to ensure that if parties can simply have a 
sidebar agreement and tell transmission users it's take it or 
leave it. Pay what we are saying or else you don't get access. 
And there's no way for others, whether it's competing 
transmission users or FERC to determine whether that negotiated 
rate was fairly and reasonably entered into.
    As you've heard today, there's plenty of latitude within 
the Federal Power Act to ensure just and reasonable rates--to 
require just and reasonable rates and ensure that transmission 
owners receive a reasonable rate of return. In fact, that's 
precisely what the just and reasonable standard calls for. It 
requires that rates are neither extraordinary to transmission 
users, nor confiscatory for transmission providers. Within 
those bounds, there's tremendous latitude for the commission to 
ensure that rates reflect the risk associated with the 
investment and they are provided sufficient incentives to do 
what's necessary for the system, which makes me wonder then 
what is the hidden agenda?
    As you know, many utilities are seeking to sell or spin off 
their transmission assets. If utilities are no longer going to 
be transmission owners, why are they pushing so hard for 
incentive rates? The only conclusion I can come to is that 
they're looking to boost the asset value for those sales. If 
they can promise a potential purchaser that you'll get a 20 
percent return on the investment, they can increase the sale 
price that they can otherwise attract.
    If this is, in fact, the hidden agenda, then we need to 
make sure that transmission rates are based on the depreciated 
book value and not on the premium paid when new parties 
purchase these same assets. Otherwise, all we're doing is 
churning the assets and ensuring that transmission rates are 
higher.
    So what can be done? You've heard from a number of my 
colleagues today. We need a system that ensures access to all 
parties under the same terms. We need viable vibrant RTOs that 
have the authority to plan and ensure investment in the system. 
That's all that's needed, Mr. Chairman. Incentive rates clearly 
are not.
    [The prepared statement of Marty Kanner follows:]
  Prepared Statement of Marty Kanner on Behalf of Consumers for Fair 
                              Competition
    Mr. Chairman, members of the Subcommittee, I am Marty Kanner. I am 
testifying today on behalf of the Consumers for Fair Competition (CFC), 
an ad hoc coalition of consumer-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 Congress and the Federal Energy Regulatory 
Commission (FERC) must take clear and significant steps to promote the 
market structure needed to foster and sustain effective competition in 
wholesale electric markets, and its associated consumer benefits.
    CFC commends you, Mr. Chairman, for focusing attention on the needs 
of the electric transmission system. As the members of this 
Subcommittee know, the transmission system is the highway of commerce 
for the electric utility industry. As many of you also realize, today's 
electric highway system is in need of drastic repair. We are all by now 
familiar with Path 15--the North-South constraint in California that 
contributed to several of the State's rolling blackouts as well as 
higher electricity prices. Unfortunately, while Path 15 may be one of 
the most infamous constraints, it is far from the only one. Throughout 
the country there are constrained paths that inhibit wholesale power 
transactions, limit generation competition (and consequently increase 
rates), create ``load pockets'' in which market power can be exerted, 
and threaten system reliability.
    There is a glaring need for additional investment in the 
transmission system. Some have suggested--incorrectly--that the lack of 
transmission investment is a result of inadequate returns on those 
investments and that ``incentive rates'' are needed to cure this 
problem. In fact, they go far beyond investment in transmission 
additions, calling for incentive rates to reward efficient management 
of the transmission system, entice membership in Regional Transmission 
Organization, promote deployment of new technologies and assure system 
reliability. While all of these goals are important, incentive rates 
for transmission--especially rates that are set outside the bounds of 
the ``just and reasonable'' standard that has guided nearly seventy 
years of utility regulation--are unnecessary and harmful to consumers.
          transmission returns are not driving away investment
    Some have suggested that the lack of utility investment in 
transmission is directly caused by inadequate returns on those 
investments--utilities aren't investing in transmission because they 
can't attract capital at 10-12% returns. These assertions are simply 
untrue.
    Utility transmission investments are not competing with the high-
flying returns of high-risk investments. Traditionally, utility stocks 
were the investment of choice for low-risk investors--widows and 
orphans. Many utilities today are restructuring themselves to become 
pure wires companies or to separate their merchant, competitive 
operations from their ``traditional'' business in regulated functions. 
As noted before this Subcommittee on July 27 by Thomas Lane, Managing 
Director of Goldman Sachs, ``There is definitely a role in the markets 
for a lower risk, lower return investment which is what transmission 
represents.''
    Transmission is a monopoly service. As a monopoly function, its use 
must be priced at cost, with a rate of return that reflects the low 
risk associated with a monopoly function.
            other factors discourage transmission investment
    The lack of adequate investment in the nation's transmission system 
is due to factors other than return:

1. Competing Profit Motives. It is absolutely true that economics 
        drives the failure of utilities to invest in transmission--but 
        it is not the economics associated with the rate of return on 
        transmission investment. The transmission network is owned by 
        vertically integrated utilities with significant investment in 
        generation facilities. Transmission constraints serve to boost 
        the price that can be charged for generation within that 
        constraint and to frustrate market entry by potential 
        competitors. It is more profitable to maintain a constraint and 
        we should not seek to bribe utilities to relieve those 
        constraints.
2. Transmission Siting. Many transmission additions cannot be built--or 
        are severely delayed--because of the current transmission 
        siting regime. CFC does not have a position on the 
        appropriateness of federal siting authority. However, we 
        recognize that the current regime is a contributing factor to 
        the inadequacy of transmission investment.
3. Uncertainty Associated With RTOs. Some utilities may have foregone 
        or delayed investment in transmission as the world of RTOs 
        sorts itself out. Utilities, assuming that the cost of those 
        investments will be recovered through the RTO, may seek to 
        avoid a rate case fight before state regulators. I want to 
        emphasize, however, that RTOs can be the cure to needed 
        transmission investment, as I will explain later.
4. Uncertainty Associated With Technology and Generation Investment. 
        The industry is going through significant changes. It is 
        possible that a narrow subset of transmission investments could 
        be rendered moot by the siting of new generation. However, I 
        would note that there are less harmful means of addressing this 
        potentially uncertainty. Moreover, effective transmission 
        planning by an RTO can minimize or eliminate this uncertainty.
   incentive rates are even less justified for general transmission 
                               functions
    My testimony has focused on transmission incentive rates for new 
investment. However, the advocates of incentive rates go far beyond new 
investment--calling for incentives for joining RTOs, rewarding existing 
RTOs, limiting rate pancaking, promoting efficient operation and 
reliability.
    Why are we providing incentives for RTO membership when most 
utilities have already joined RTOs under FERC Order 2000, itself a 
``voluntary'' mandate, and FERC has taken additional steps to prompt 
RTO participation? What purpose do ``sign up'' incentives serve for 
those RTOs that already exist? Why should we provide incentives to 
limit rate pancaking when FERC Order 2000 already calls for the 
elimination of rate pancaking?
    negotiated rates violate the underlying tenet of ferc regulation
    The notion of ``negotiated rates''--FERC approving rates without 
regard to cost--is most abhorrent. The Federal Power Act prevents the 
charging of rates that are ``unjust, unreasonable, unduly 
discriminatory or preferential''. Negotiated rates can violate each of 
those standards. A transmission owner can impose excessive charges and 
tell the transmission user to ``take it or leave it''. Alternately, a 
transmission owner can discriminate between competing generation 
developers, facilitating interconnection only for the generator willing 
to pay top dollar. Moreover, if FERC (and competitors) are unable to 
review the underlying costs, no one will know if the negotiated deal 
reflects a fair rate or simply the transmission equivalent of ``an 
offer you can't refuse''.
                  incentive rates: the hidden agenda?
    Many utilities are seeking to sell or spin-off their transmission 
assets. If utilities are no longer going to be in the transmission 
game, why are they calling so loudly for incentive rates. I fear that 
the underlying motivation is to increase the market value of those 
assets. Didn't we already see this phenomenon in the sell-off of 
utility generation assets (a study by Professor Harry Trebing shows 
that 93% of those were for well above book value)--with its obvious 
negative impacts for consumers in California? Potential investors may 
be willing to pay a higher purchase premium if they can be assured of 
inflated returns.
    If this is, in fact, the hidden agenda, it is critical that we 
ensure that future transmission rates are based on the underlying book 
value of transmission assets and not on the acquisition cost.
          ``just and reasonable'' remains the proper standard
    The Federal Power Act directs FERC to ensure that all transmission 
rates are ``just and reasonable''. This standard provides sufficient 
latitude for FERC to: (1) adjust rates of return to reflect any 
increase in investment risk, (2) allow performance based rates to 
reward exceptional performance that benefits consumers, (3) send price 
signals (e.g., congestion pricing) to encourage investment to relieve 
constraints. Significantly for the members of CFC, the ``just and 
reasonable'' standard also requires that consumers do not pay 
extortionary rates.
    There is significant risk of consumer harm in flipping that model 
and directing FERC to provide incentive rates every time a transmission 
owner comes forward.
              how do we relieve transmission constraints?
    Mr. Chairman, I have spent my testimony critiquing the notion of 
incentive rates. But given the reality of today's transmission 
constraints, I feel obligated to also offer constructive suggestions 
for relieving those constraints.

1. Ensure Fair and Equal Access. ``Phantom'' transmission constraints 
        exist throughout the system. Transmission owners reserve more 
        transmission capacity than is needed, creating artificial 
        constraints that impede transactions. Similarly, inadequate or 
        untimely postings of available transmission capacity suggest 
        constraints that do not exist. Congress must ensure full, fair 
        and equal access for all parties to the nation's transmission 
        grid.
2. Independent Planning. As noted above, vertically integrated 
        utilities have little economic incentive to relieve 
        constraints. RTOs--as independent managers of the grid--must 
        have robust and effective planning authority and 
        responsibility.
3. Authority to Compel Construction. All to often, utilities will 
        ignore or defer transmission investment needs. RTOs must have 
        the authority to compel utilities to build needed transmission. 
        If utilities are unable or unwilling, then the RTO should be 
        authorized to build the facilities itself or solicit 
        competitive bids.
                               conclusion
    There is no doubt that significant investment in the nation's 
transmission system is needed. However, incentive transmission rates 
are not the cure. Transmission rates--as a monopoly service--must 
continue to be guided by the ``just and reasonable'' standard.

    Mr. Barton. We thank you, Mr. Kanner.
    Before we recognize Mr. Vesey, the Chair wishes to make a 
housekeeping announcement. We're moving expeditiously through 
this panel. Based on the number of members present and those 
expected to be present, I think we can conclude the questioning 
of this panel by approximately noon. Given that, we have called 
the representatives for the second panel and we're going to 
start the second hearing at 1 p.m. instead of at 2.
    So those of you that need to go make phone calls.
    We expect to start the second hearing at 1 p.m. instead of 
2. We've notified the panelists and they're agreeable. So if 
people need to know that information, please be notified.
    We now want to welcome our last testifier on the first 
hearing, Mr. Andrew Vesey, who is Vice President Energy and 
Utilities for the Cap Gemini Ernst & Young L.L.C.
    Your testimony is in the record, we recognize you for 5 
minutes.

                  STATEMENT OF ANDREW M. VESEY

    Mr. Vesey. Thank you, Mr. Chairman.
    Over the past 25 years capital investment in the 
transmission system has remained stable despite rising off 
system sales and falling reserve margins. However, since the 
mid-1970's the transmission system has grown at half the rate 
of demand. Transmission sector needs investment.
    Today's transmission goods grew incremental over time as 
the industry met the requirements of growth and the pressures 
for increased reliability. There was little reason to believe, 
however, that the current structure's the most economic or the 
most reliable in light of current market needs. In some parts 
of the country inadequate transmission capacity already 
diminishes the prospect for competitive power markets.
    On the rate of return regulation utilities make money by 
investing in assets. The apparent lack of investment in 
transmission is most likely the result of the market not 
believing that the owners of transmission have the ability to 
generate future revenues sufficient to cover their costs and 
provide a competitive return.
    If the market is doubtful, it is because the cost of 
capital used to establish prices is believed to be too low. Too 
low because the market sees risks that are not being 
acknowledge in the rate making process.
    What are these risks? Well, among them are competition. 
Competitions of the grid exist now and will grow over time. The 
emergence of distributed generation technology such as small 
gas turbines and fuel cells provides the potential of bypassing 
the transmission grid and the risk of straining transmission 
investment.
    Difficulty of siting new facilities is also one of the 
risks not recognized. With the passage of the Energy Policy Act 
of 1992 the transmission grid was required to act as a common 
carrier for bulk power transactions. It is this new 
responsibility that has revealed that the system, which was 
interconnected for liability purposes, could not longer be 
relied upon for the level of interregional commerce demanded by 
the bulk power markets.
    Significant investment in interregional transmission 
capacity is needed. The current siting process, however, is 
ill-equipped to adequately handle this type of project given 
the mismatch between those incurring the costs and those 
receiving the benefits of this type of project across local, 
State and regional boundaries.
    Finally, there's the investment risk associated with 
ongoing activities regarding the governance of transmission 
owning entities to ensure independence for market participants. 
The desire to separate asset ownership from the control and 
operation of those assets, if not done thoughtfully, has the 
potential of seriously deluding the powerful incentives 
provided by the market on for profit asset owning enterprises.
    There is today no clear consensus as to which business 
structure is optimal for owning transmission assets. The rules 
of the road are not fully written, and indeed may be different 
region-to-region.
    So how do we ensure the proper investments are made? One 
approach may be to simply have regulators provide higher rates 
of return in line with perceived risks. While fully 
compensating investors for risks is an absolute necessity, if 
these increased profits are earned through the current rate of 
return framework, they will at best only deliver a narrow range 
of the needed investments, not the broad range required by the 
new competitive markets. And at worse, they may result in over-
building.
    The new competitive market is significantly different from 
the markets in which today's transmission business is 
developed. It is a market potentially made up of thousands of 
commodity suppliers, hundreds of service providers and millions 
of individual consumers. It is characterized by high 
transaction costs and low barriers to entry and exit by both 
sellers and buyers.
    The network not only has to effectively manage the flow of 
electricity, but also has to manage the flow of information and 
cash. Traditional rates of rate of return regulation rewards 
firms for placing assets on the ground to transport 
electricity. This new competitive market requires firms to be 
rewarded for behaviors that promote customer focused, market 
driven solutions to facilitate commerce.
    With properly designed pricing transmission companies will 
succeed only by maximizing throughput, maintaining broad 
nondiscriminatory access and making system investments to 
maintain optimal congestion levels. When the benefits of lower 
costs and higher volume flow to the bottom line, transmission 
companies will seek efficient decisions inducing competitively 
neutral solutions. They will find the most cost effective, not 
the most asset intensive answers to customer needs and they 
will devise innovative operating procedures and a range of 
tailored cost effective offerings that fully utilize their 
facilities. But most importantly, they will be driven to enrich 
their customers by maximizing the value of commerce along their 
networks.
    Thank you.
    [The prepared statement of Andrew M. Vesey follows:]
 Prepared Statement of Andrew M. Vesey,\1\ Vice President, CAP Gemini 
                           Ernst & Young LLC
---------------------------------------------------------------------------
    \1\ This testimony is based in large measure on the material 
presented in the book ``Unlocking The Benefits of Restructuring: A 
Blueprint For Transmission'', By Shimon Awerbuch, Leonard Hyman and 
Andrew Vesey, Published by Public Utilities Report Inc; Vienna, 
Virginia, November 1999.
---------------------------------------------------------------------------
    Over the past 20 years capital investment in transmission remained 
relatively stable, in real terms, despite rising off-system 
transactions and falling reserve margins. In the 10 years preceding the 
Northeast Blackout of 1965, and in the decade following, utilities did 
build high voltage lines at a rapid pace that kept up with growing 
demand. From the mid-1970s to the present, however, the transmission 
system has grown at less than half the pace of demand.
    With generating reserves falling and transmission plant showing 
little expansion, transmission operators have responded by running the 
system in emulation of just-in-time inventory management concepts, 
which rely on coordination of all suppliers without the ``safety-net'' 
provided by system availability in excess of current needs. This 
operational response will work only as long as all suppliers continue 
to produce and ship on schedule and as long as buyers readily can find 
alternative suppliers.
    The transmission sector needs investment. Our transmission grids 
grew incrementally over time as the industry met the requirements of 
growth and the pressure for increased reliability. There is little 
reason to believe, however, that the current structure is the most 
economic or the most reliable in light of current market needs. 
Moreover it is doubtful that the existing structure represents an 
appropriate trade-off between economy and reliability, or that it 
incorporates the levels of reliability that customers want. In some 
parts of the country inadequate transmission capacity already 
diminishes the prospects for competitive power markets and decreases 
the system reliability during power plant outages. System operators, 
fortunately, have learned to compensate for some of the physical 
deficiencies by running the networks more efficiently.
    It is not clear, however, that transmission owners have avoided 
physical expansion because they could achieve their goals through the 
clever operation of their systems: owners more likely decided to avoid 
expansion because of siting difficulties or inadequate potential 
returns on their investments. The siting difficulties are well 
documented, but they have to be placed in the context of incentives, as 
well. Under rate-of-return regulation, utilities make money by 
investing in plant. Utility managers, therefore, never have avoided 
large, lumpy investments when they expected that the allowed rate of 
return would equal or exceed their cost of capital.
    Capital flows to a business based on the markets expectation that 
the business's management has the ability to use the capital to 
generate a stream of revenue that exceeds the cost of generating that 
revenue by an amount that is at least equal to the next best use of 
that capital. Simply stated capital flows to return. The market's 
``expectation'' is based on consideration of all the risks to which the 
generation of revenue is exposed and the period of time to fully 
recapture the invested capital and its return. The flow of capital to a 
business is directly proportional to that business's management's 
ability to create value by generating earnings that are greater than 
the business's cost of capital in the long run.
    The apparent lack of investment in the transmission sector is most 
likely the result of the market not believing that the business has the 
ability to generate future revenues sufficient to cover its cost and 
provide a competitive return. Under rate-of-return regulation the 
amount of revenue required is predetermined by calculating a unit price 
which, based on forecasted sales, will generate sufficient revenue to 
cover all production costs plus a profit. Calculating the firm's cost 
of capital determines the profit. If the market is doubtful that 
revenues are sufficient to yield the required return it is because the 
cost of capital used to establish prices is too low. It is too low 
because the market sees risks that are not being compensated for in the 
ratemaking process.
    Among the risk that the market sees are:

 Competitive challenges to transmission's monopoly status
 Difficulty in obtaining right-of-way and siting new 
        transmission
 The Evolving regulatory framework governing transmission
    Firstly, competition to the grid does exist and will grow over 
time. The rapid expansion of distributed generation technology such as 
gas-fired turbines as well as the advent of fuel cells clearly suggest 
that the role of transmission may change significantly over the next 
one or two decades. This competitive pressure should provide powerful 
incentives to a profit-oriented transmission owner to provide high 
quality service, efficiently manage embedded plant, and to add new 
capacity (where warranted) to enhance the functioning of the system, 
rather than lose market share to competitors. This new capacity, 
incidentally, would not be limited to wires and structures, but must be 
extended to include software, information systems, and new electronic 
and technical devices. All of which enhance the firm's capability to 
facilitate high value commerce in the emerging competitive electric 
energy market.
    As mentioned earlier, the emergence of distributed generation 
technology has the potential of contesting the monopoly status of the 
transmission sector. This raises the increased specter of bypassing the 
transmission grid and the risk of stranding transmission investment.
    Secondly, the current interconnected electric grid evolved over 
time to (1) transport energy from remotely located generating stations 
to local load centers required to serve local load, (2) aggregate 
diverse local load to lower overall generation investments and (3) 
enhance local reliability by inter-connecting neighboring systems. All 
these objectives provided local benefits in either cost or reliability. 
The cost and environmental impacts of providing right-of-way for 
transmission was evaluated against the anticipated local benefits. On 
the occasion when a transmission line crossed local jurisdictional or 
State boundaries the siting process became much more difficult as 
parities that bore costs did not readily perceive the benefits.
    With the passage of the Energy Policy Act of 1992, the 
transmissions grid was required to evolve further to act as a common 
carrier for bulk power transactions. It is this last responsibility 
that has revealed that the system that was interconnected for 
reliability purposes could no longer be relied upon for the level of 
inter-regional commerce demanded by the bulk power market. Significant 
new investment in inter-regional transmission is required. The 
traditional local siting process is ill equipped to adequately handle 
this type of investment given the increased mismatch between those 
incurring the cost and those receiving the benefits, a source of 
considerable investment risk.
    Finally, the ongoing activities regarding the governance of 
transmission owning entities to ensure independence from market 
participants through the creation of new entities such as RTOs, ISOs 
and TRANSCOs creates investment risk. The separation of asset ownership 
from the control and operation of those assets, if not done correctly, 
has the potential of seriously diluting the powerful incentive provided 
by profit maximization. There is today no clear consensus as to which 
business structure is optimal for transmission. The rules of the road 
are not yet fully developed and may be different region to region.
    So how do we ensure that the proper investments are made? One 
approach might be to conclude that all that is needed is to compensate 
transmission owners by having regulators provide them with higher 
rates-of-returns, commensurate with the perceived risks. While fully 
compensating investors for risk is absolutely necessary, if these 
returns are gained through the current rate-of-return regulatory 
framework they will at best only deliver a narrow range of investments 
not the broad range required in the new competitive electric energy 
markets. At worst they may result in non-value-adding over investment.
    To understand why this is so it is important to change our view of 
transmission from as an enabler of the generation market to an enabler 
of commerce in the competitive electric markets.
    The pre-1992 view of transmission was as a transportation system 
delivering electricity from company owned large plants, distant from 
company owned loads, to ratepayers over a system of company owned 
wires. Our post-1992 view has been modified to transmission being a 
transportation system delivering electricity from independently owned 
large plants, distant from loads, to customers over a system of company 
and non-company owned wires. While this view accurately describes the 
current state of transmission it does not accurately reflect the role 
of transmission, i.e. how transmission creates value in the new 
competitive market. It will not help identify the types of investment 
needed or give guidance on how best to induce firms to make those 
investments.
    A more helpful view of transmission is as a network, facilitating 
commerce in a competitive energy market, where every consumer is a 
potential repackager and reseller of product and every one connected to 
the network is a customer.
    A network is a set of dynamic, sustainable, value-producing 
relationships between parties with common interest. A network can be 
physical or virtual .The network is a medium through which exchanges 
between the parties can take place. The exchanges can be knowledge, 
information, or goods and services. The network is viable as long as it 
is value adding by offering those using it an economic advantage over 
alternative relationships.
    The set of dynamic, sustainable, value producing relationships 
between parties with common interest in this case is the competitive 
energy market. This competitive market is significantly different from 
the markets in which today's transmission businesses developed and 
currently operate. It is a market made up of thousands of commodity 
suppliers, hundreds of service providers and millions of consumers. 
High transaction costs and low barriers to entry and exit by both 
sellers and buyers characterize it. The network manages not only the 
flow of electricity but also the flow of information and cash. 
Traditional rate of return regulation rewards firms for placing assets 
in the ground. The new competitive market requires behaviors that 
promote customer focused, market driven solutions by having 
transmission businesses rewarded for:

 Providing access and throughput at lowest cost
 Efficiently utilizing its assets
 Providing new service offerings
 Efficiently meeting open access, service quality and other, 
        public policy objectives
 Maximizing throughput subject to efficient reliability 
        constraints
 Promoting volume and commerce: increasing the value of 
        transactions
    We need to move from seeking to create incentives that focus mainly 
on inducing capital investments in new transmission lines to those that 
induce the correct organizational behaviors. With properly designed 
pricing, flow based, market driven, transmission companies succeed by 
maximizing throughput, maintaining broad, nondiscriminatory access and 
making system investments to maintain ``optimal'' congestion levels.
    When the benefits of lower cost and higher volume flow to the 
bottom line, transmission companies will:

 Seek efficient decisions--inducing competitively neutral 
        solutions
 Find the most cost effective--not the most asset intensive 
        solution to customer needs
 Drive to enrich customers--maximizing the value of commerce 
        along the network
 Devise innovative operating procedures and a range of 
        tailored, cost effective offerings that fully utilize its 
        facilities subject to efficient reliability constraints

    Mr. Barton. Thank you.
    The Chair would recognize himself for the first 5 minutes 
of questions, and we're only going to have one 5 minute round.
    Mr. Schriber, I thought your testimony was excellent, as it 
was the last time you testified before us or your 
representative.
    What do you think the position would be of the various 
State PUCs if we put in the Ohio model as a Federal model for 
States for follow with regards to siting decisions?
    Mr. Schriber. Mr. Chairman, I think, at least in my 
interface with the other States, they would be delighted, I 
think, to share the same statutory authority we have.
    Many States have no power siting boards. We have 
neighboring States that rely almost entirely upon homerule. As 
a result, we have many, many more projects sited in Ohio than 
we would find in neighboring States. I would therefore suggest 
that the States would probably relish the opportunity to adopt 
the types of authority that we've been given by the State 
legislature.
    Mr. Barton. Okay. Is there anybody on the panel that is 
opposed to the general provision in the pending draft that 
gives Federal backstop authority on siting if the States fail 
to act? Is there anybody that opposes that backstop? I see 
nobody shaking their heads or doing anything. So the Chair is 
going to announce that nobody opposes it.
    Mr. Boucher. You haven't asked the members yet, Mr. 
Chairman.
    Mr. Barton. Well, I know. But the members are going to tell 
me. I'm not worried about that.
    On the reliability issue, we've got two different views 
here. We've gone one view, we have a gentleman that represents 
NERC that says be fairly prescriptive and put it into the law. 
We've got another view that our friend from ENRON put into the 
record that FERC can do it, just give the FERC the authority.
    I will note that some people's positions have changed since 
the last Congress, and that could be because we have a 
different FERC Commission, but that's just an observation. That 
may not be reliability.
    Is this really a technical issue? Should we let the 
technicians do it because it's an engineering problem or is 
reliability more of a policy issue and we need to let the 
political mechanism handle it?
    Mr. Cook, would you like to answer that?
    Mr. Cook. Yes, Mr. Chairman. And let me speak to the issue 
that's been raised as well about the inner relationship between 
reliability rules and the commercial rules.
    I agree with Dr. Anderson that they are inner linked. It's 
why NERC has gone to an independent board of directors, it's 
why we've added a market interface committee to our current 
committee structure. It's why we involve all segments of the 
industry including customers in our standard setting process to 
make sure that those commercial impacts are picked up as we go 
forward.
    In fact, Dr. Anderson sits on the Executive Committee of 
our Operating Committee.
    And in the new model I would expect that that same kind of 
attention to those issues would happen.
    The draft requires that no single sector can veto a 
standard, that no two sectors can control it and it encourages 
broad participation in the standard setting process. So in the 
first instance, it would not simply be the engineers only that 
would be making those judgment, it would be a collective 
judgment by industry participants. But the organization would 
be able to muster a lot of technical expertise to bring to bear 
on those subjects. And it would come together at FERC because 
the organization would be under FERC oversight, the standards 
would not actually take effect until FERC said they could.
    So that, it's a way to get the technical expertise of the 
industry brought to bear on these issues. And if in the 
inclusive standard making process that hasn't flushed out the 
commercial impacts and figured out way to accomplish both 
commercial purposes and reliability purposes, FERC is still 
there in a sense as an overseer backstop role to make sure that 
those issues get attended to. That's the structure of our 
proposal.
    Mr. Barton. Mr. Steffes.
    Mr. Steffes?
    Mr. Schriber. I want to highlight again the inner 
relationship between commercial and reliability matters. And 
while NERC proposes that they will begin to, you know, create 
an opportunity for the commercial elements to be recognized, we 
simply have found that on the hard questions--and I bring up 
the one in my oral testimony, the independence of security 
coordinators. On the hard questions a consensus body can't make 
that decision.
    The NERC draft, even the modified NERC draft I think 
continues to say that FERC could say that's not the model we 
want, but we can't get them to pull in the right answer.
    This industry is changing at a tremendously fast pace. We 
need FERC to be able to say I need a new rule, I need a new 
rule to ensure reliability to ensure the competitive markets 
continue to work. And we don't see that unless you just provide 
general oversight--general policy to FERC. That's our kind of--
--
    Mr. Barton. My time has expired. I'm going to let Mr. 
Harris answer this question, then I'm going to go to Mr. 
Boucher.
    Mr. Harris. Thank you, Mr. Chairman.
    What we've experienced in dealing with this issue from 
retail choice all the way through the wholesale system is that 
reliability isn't just a wholesale problem. It is an ecological 
system. It involves all elements. And so the only area that you 
can really deal with that is under a FERC oversight.
    FERC ultimately has to make the determination. We're also 
finding that we can give solutions economically to what used to 
be reliability solutions, and many of these are driven at the 
retail level. You just can't carve out something that says it's 
only a wholesale issue.
    We would suggest that FERC has the authority and through a 
rulemaking process they can come up with the right 
organizational structure where it involves NARU or GSBI, 
whatever, but FERC can create a structure that is vibrant and 
robust to deal with the technical issues that are going to be 
emerging, and that would be the appropriate way to address the 
question.
    Mr. Barton. Thank you. I'm going to not ask this as a 
question, just make a comment. I thought it was very 
interesting that my good friend, Mr. English, basically defined 
incentive rates by definition as just and unreasonable, and 
then gave a very elegant statement justifying his definition.
    I want to put on record that the Chair doesn't take as 
definitionally correct that incentive rates are unreasonable by 
definition. That's a debate that we'll have as we go to markup.
    With that, I would recognize my good friend, Mr. Boucher, 
for 5 minutes for questions.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. And I 
want to join with you in thanking these panelists for their 
very excellent presentations here this morning. We have been 
informed by what you have told us, and appreciate your taking 
the time to share your views.
    But there is a kind of a generalized belief and some 
anecdotal evidence that we do not have adequate transmission 
capacity in the Nation, but I'm not aware of precise studies 
that pinpoint where the deficiencies are. And I would like, as 
an opening matter, ask if anybody here is aware of either 
governmental studies that clearly demonstrate inadequate 
capacity or perhaps think tank studies that lead to the 
conclusion. And if you do, can you point us to those? Is anyone 
aware of studies? Mr. Szwed?
    Mr. Szwed. Yes, I think maybe one place you can turn is to 
the North American Electrical Liability Council. There's a lot 
of efforts that are done in terms of assessing the adequacy of 
the transmission system as well as the adequacy of generation 
across the United States.
    I think you can also look toward evidence in terms of 
evidence of the number of transactions that are taking place 
and the degrees of where they're have been issues or 
curtailments that have taken place to give you an indication of 
areas where there are in fact is congestion and perhaps where 
additional transmission capability could be enhanced.
    Mr. Boucher. All right. That's helpful.
    Mr. Cook, would you care to comment?
    Mr. Cook. There are certain interfaces that are congested 
on a fairly regular basis. One comes to mind in the Wisconsin 
area that is pretty limiting on commerce a fair amount of time. 
And there's some other places like that in the country that can 
be identified.
    There are also the circumstance, though, that these limits 
can change from season to season, year to year depending on 
weather patterns, for example.
    Last year there was considerable congestion in the central 
part of the country, Tennessee/Kentucky and so on, as sort of 
relatively lower costs power from cooler areas tried to move 
south.
    This year, it's interesting, the congestion was there but 
it was in a northbound direction because of the temperature 
differentials sort of went the other way.
    So attention to this issue does require, you know, paying 
attention to that kind of thing as well.
    There are currently some studies underway to try to get a 
better handle on this and focus on it.
    Mr. Boucher. Whose performing those studies?
    Mr. Cook. The Department of Energy, I understand, has got a 
current study underway.
    We issue an assessment, a 10-year assessment every year 
that pays some attention to these issues and documents that 
kind of stuff.
    Mr. Boucher. What was your most recent assessment?
    Mr. Cook. The most recent assessment was last--it would 
have been last October/November. Our board is considering this 
year's 10 year assessment at its meeting next week in 
Vancouver, and it will be available shortly after that.
    Mr. Boucher. Well, I would like to ask, Mr. Chairman, that 
we receive for the record a copy of the assessment that you 
issued last year and also the upcoming one to the extent that 
they focus on the question of inadequate transmission capacity 
and document those instances in which there are notable 
deficiencies.
    Mr. Chairman, if it's appropriate, I would ask that that be 
made a part of this record.
    And I would ask Mr. Cook that you provide it.
    Mr. Cook. I'll be happy to make sure that the subcommittee 
has that material.
    Mr. Boucher. It just seems to me that if we're going to 
legislate on the question of capacity, whether it be through 
incentive pricing or some backstop Federal authority to order 
that new capacity be built in the event that the States fail to 
act, that we at least ought to be absolutely confident that 
there is a significant problem for us to address.
    And I'll note again the generalized belief that there is, 
but we really don't have detailed evidence of that.
    Let me ask a little bit about the notion of incentive 
pricing, and I acknowledge that there is a debate about whether 
or not it's a good idea.
    I would like to ask this panel whether you believe it's a 
good idea or not whether you think that the FERC has current 
statutory authority to order incentive pricing should FERC 
believe that it is a good idea? Does anyone want to comment on 
FERC's current statutory authority with regard to incentive 
pricing?
    I think we heard very adequately from our good friend Mr. 
English on that very subject, so let me call on Dr. Anderson.
    Mr. Anderson. Yes, sir. I think that it's pretty clear that 
they have the authority. They've already included an incentive 
rate provision in their Order 2000, and that has not resulted 
in any significant problems.
    I think also to relate back to your last question, which I 
think is a very good one, there certainly are areas of the 
country where there are transmission constraints. But as Mr. 
Cook said, they change from hour-to-hour as various power flows 
change. I would relate that back to the incentive area also.
    It would not be appropriate, in my view, for you to 
legislate across the board incentives to build transmission. 
It's got to be much more targeted than that. It's got to be 
targeted to where there are constraints. And I think the idea 
of getting a study is a good idea. It's going to be a very, 
very difficult one because it's a moving target.
    But I think very strongly that the Commission has authority 
and has already taken action on incentives.
    Mr. Boucher. Thank you, Dr. Anderson.
    Who would like to offer a competing view? Mr. Szwed?
    Mr. Szwed. Yes. I would like to say a couple of things.
    First of all, I would agree, FERC does have latitude and 
authority to deal with alternative forms of pricing today. But 
I don't think we've seen any evidence of that at all recently 
in anything that's really been implemented by anyone.
    And I think as we think about transmission and we think 
about transmission moving into a separate business, a separate 
situation apart from other aspects of a vertically integrated 
utility where it is a business that needs investment, it needs 
people, it needs innovation to be able to do and in order to be 
able to effect to meet the goal of achieving broad competition 
and securing the infrastructure of the U.S., I think what 
Congress needs to do here is even though FERC may have that 
authority, is through legislation perhaps provide a stronger 
encouragement for FERC to--consist with the policy of having 
the reliable and efficient grid to support competition, to use 
the authority they have with respect to incentive pricing and 
put those kind of things to encourage investment and attract 
investment in the transmission grid.
    Mr. Boucher. Thank you, Mr. Szwed.
    Does anyone else want to comment on that issue?
    Mr. Kanner. If I could, Congressman.
    I think it's absolutely correct that FERC has the authority 
for incentive rates, performance based rates to allow 
congestion pricing. The boundaries, as I said in my testimony, 
are what's just and reasonable. What's not confiscatory to 
consumers or--I'm sorry--extraordinary to consumers or 
confiscatory to the company.
    Transmission owners have the right to challenge a FERC rate 
of return, to say we need more money to reflect the sorts of 
risks that Mr. Vesey suggested exist. As long as those rates 
and rates of return fall within that zone of reasonableness and 
just and reasonable rates, then there's nothing to complain 
about. It's what the perimeters that FERC uses in setting 
rates.
    In terms of establishing separate transmission companies, 
we heard from Goldman Sachs that that sort of transmission 
distribution utility is likely to be lower risk and therefore 
require a lower rate of return, not a higher rate.
    Mr. Boucher. Mr. English, would you like to have the last 
word on this?
    Mr. English. I'm reluctant to do so, Mr. Boucher.
    But the issue's judgment, that's what we're really talking 
about. We've got people who don't like the way that FERC has 
exercised the authority that they have, and it's been their 
judgment that this is the fair, the just and reasonable way of 
doing it. So what this is all about is redefining just and 
reasonable so that they have to define the way and set aside 
their judgment.
    Mr. Boucher. You would agree that they have the authority 
to provide for incentive pricing should they choose to do so?
    Mr. English. There's absolutely no question about it. It's 
in the law.
    Mr. Boucher. Okay. It seems to me that everyone agrees with 
that, and that's an important consideration for us as we go 
about making our decisions.
    So the issue really for us is, as I suppose as you phrase 
it, Mr. English, and that is given the fact that FERC can do 
this, should we take the next step and require that they do it?
    Well, thank you all very much. This is a helpful 
discussion.
    And thank you, Mr. Chairman.
    Mr. Barton. The gentleman's time expired.
    I recognize the gentleman from Tennessee, Mr. Bryant for 5 
minutes.
    Mr. Bryant. I thank the chairman.
    As I mentioned to you, I was going to be in and out. I'm in 
again, and so I've missed your testimony and I'm not sure 
anyone has addressed the issue specifically as I raised it 
regarding the siting and the eminent domain, and things like 
that.
    So, let me go ahead and ask a couple of questions related 
to that, and really open the panel to those of you that might 
feel you need to say something on this, that you're qualified 
to talk about this.
    But in the draft of this bill the States will continue to 
have eminent domain authority over transmission siting, but 
after 1 year there's kind of a backstop where FERC if the State 
hasn't responded, FERC can go ahead and site the proposal. 
They'll be given the power to step and site new transmission if 
the courts determine that it's in the public interest, so you 
still got the public interest test of course.
    My questions relate to how you would define and how we 
would define or how we would anticipate public interest being 
defined, as well as who would be exercising authority along. I 
know the State law would apply in the beginning, but once the 
FERC got involved would there be the possibility that--I don't 
know. Would there be the possibility that there could be 
different entities authorized, delegated the authority of 
eminent domain beyond the governmental entity? In other words, 
private companies? And I may be getting a little far afield.
    We've had situation in Tennessee in regard to pipelines 
where there were actually private company delegated that 
authority. And they were out trying to condemn land to put 
their pipeline in. And, again, it caused quite a--in my part of 
the State. But it was very controversial and I'm just looking 
for some input on, again, how do we mitigate, I guess, to some 
extent the consequences of eminent domain and how you define a 
public use as well as limiting it, perhaps, to a public entity, 
governmental entity to exercise that power?
    Yes, sir? Is that Mr. Harris?
    Mr. Harris. Yes, sir. It's interesting in listening to the 
discussion, because it's very difficult to make an informed 
decision without the right information.
    What we've developed in the mid-Atlantic is a regional 
transmission planning protocol that's been approved by the 
FERC. This was so important in the mid-Atlantic region that we 
decided that this had to be developed before we began 
commercial operations in 1997.
    This regional plan has the input of all effected parties; 
the States, the environmental community, the transmission 
owners, the generators, everyone participates in the planning.
    The information on the plan is made ubiquitously available 
so that generation can compete and transmission planning can be 
enhanced.
    For the areas that we serve, we now have nearly $700 
million worth of transmission planned and under construction. 
Our regional plan, which is publicly available, shows that 
those transmission expansion plans will meet the needs for the 
region for the next 5 to 10 years, and this is updated several 
times a year.
    So in order to get down to do you really have a problem or 
not, you need to determine what is the information.
    Mr. Bryant. Well, could I ask you something?
    Mr. Harris. It may be that there's not a problem.
    Mr. Bryant. Could I ask you when you were talking about the 
regional plans, and again RTOs, I guess, contemplate regional 
type organizations. They cross State lines.
    And in this regional plan that you have experience with, 
you have different States with different State eminent domain 
laws.
    Mr. Harris. That's right.
    Mr. Bryant. And what happens there when there's a conflict 
in that, let's say, or one State cannot get access to that 
portion of the region that's needed for this plan to work 
because of their laws?
    Mr. Harris. That's a good question. I think ultimately you 
have to believe in the common sense of good people. When you 
provide the right information and people participate, they 
understand what the issue; that we're looking at things over a 
broad region. They see what is necessary to affect the common 
good of the public for the whole region.
    And when you also actually look at the data, back to Mr. 
Boucher's problem of what really is the problem you're trying 
to fix; when you actually look at the hard numbers and see what 
you need to do, what often you find is a matter of an 
enhancement here. We have areas where one utility is building 
something that is actually solving another problem for another 
utility in another State, but it's the most economical way to 
do it, and it's getting done.
    So the answer is get to the real hard issues, develop the 
fact, allow broad public participation, understand the issue 
and then see what we need to do. And what we've seen in this 
area, which is a very sensitive area in the mid-Atlantic 
region, is that we've been able to solve this problem.
    Now, should we have an episode where we cannot, maybe we'd 
have to come back. But we're saying we're able to see the 
synergy between the State, the regional and the local needs to 
work together in a way for the common good. We think this is a 
better way of doing it to the future.
    Mr. Bryant. Yes. I think maybe I'm talking to the 
policymakers, and I think that's good and it may ultimately be 
that the courts and the various State legislatures decide this. 
Ultimately the courts decide these kinds of conflicts of law.
    Mr. English, you've had experience on all sides of this.
    Mr. English. I'm afraid so, and probably no group is 
effected more than electric cooperatives as far as land wise, 
46 States across this country on this particular issue.
    I think this goes to the heart of a real question that this 
committee needs to answer, and that is the question of what is 
the objective of this legislation? Are you attempting to deal 
with all transmission, no matter whether it be local, regional 
or national? Or are you truly trying to do something along the 
lines of identifying what needs to be a national grid? And if 
you're trying to do that, this gets into the question of 
whether or not you're going to identify what portions of the 
existing system and how that needs to be linked up with other 
regions of the country to develop that grid. That would narrow 
considerably what you're talking about in the area of eminent 
domain. And I imagine that makes it far more acceptable to the 
States. Certainly makes it more acceptable to our members, and 
I would think to a lot of members of this committee.
    But if you're going to just simply have a blanket FERC 
provide eminent domain as the final decider of this issue for 
transmission no matter what its purpose, no matter where it's 
built, then I think that that's a different matter. And, 
obviously, that takes this bill, makes this a much more narrow 
bill and that may not be what this committee wants to focus 
truly on the national aspects of the transmission issue and 
leave the rest to the States.
    Mr. Bryant. Congressman, I'd ask unanimous consent for 1 
additional minute so that the gentleman on the end can respond. 
Unanimous consent.
    Mr. Schriber. Thank you, Mr. Chairman.
    Congressman, I would point out that the Natural Gas Act 
provides for FERC State joint participation. In Ohio, as I 
testified, I believe we have a fairly broad authority to site 
facilities, we have engaged in those joint proceedings with 
anyone at the Federal level which is provided for. And I also 
pointed out, and I think you can imagine that in Tennessee if a 
landowner was exceptionally upset or aggrieved, you may get a 
letter. But I can assure you that your State authorities would 
really feel the heat, as we would in Ohio.
    So I would propose, as I have proposed that the States who 
are very sensitive to landowner issues, who are sensitive to--
very sensitive to the allocation of our land resources or the 
appropriate authorities, and I think that on a joint basis 
either regionally or regionally and with Federal participation 
a lot of the eminent domain, a lot of the siting problems can 
be overcome.
    Mr. Bryant. Thank you.
    I thank the chairman for yielding me that additional time.
    Mr. Largent. The gentleman's time has expired.
    Recognize the gentleman from Ohio for 5 minutes for 
questions. Mr. Sawyer?
    Mr. Sawyer. Thank you, Mr. Chairman.
    Let me just take a moment to thank Chairman Barton for this 
hearing. I genuinely believe that of all of the hearings that 
have been called on this large and complex matter, that this 
particular gathering of people in these two panels may 
represent the central issues in the entire question of how we 
go about building a Federal framework within which to enable 
all of the things that are going on in the States.
    It is critical to making available the assets necessary to 
real competition in a variety of regional grids throughout the 
United States.
    And so I want to thank Chairman Barton, and I want to thank 
our participants today. There are a lot of unanswered 
questions, and I just regret that we don't have more time today 
to undertake some of those questions.
    Let me further thank a couple of Ohioans who are here 
again. I regret that other matters before elements of this 
Congress prevented me from being able to be here to help them 
give appropriate introduction.
    And finally, let me just say that I hope that our panelists 
this morning would respond in writing to questions or, perhaps, 
in conversation in the coming weeks to a much wider range of 
questions than I have the capacity to grasp today.
    Mr. Cook. Be happy to do that, yes, sir.
    Mr. Sawyer. Please. Thank you.
    Let me turn to Stan Szwed. You have been involved in 
setting up the Alliance RTO. You've suggested that the 
flexibility to set up an entity that can attract the kind of 
investment that it will take to grow and nurture and facilitate 
real transmission entities. Can you give us examples of what 
that means in terms of attracting investment and how FERC 
authority to mandate RTO participation would effect that 
decision?
    Mr. Szwed. I think just generally, the Alliance RTO is a 
structure which is developed around the for-profit independent 
transmission company where there is an independent owner/
operator of transmission assets. And, in fact, in the 
development of the Alliance regional organization, we have in 
fact attracted a strategic investor because of the construct 
and structure of the model as well as trying to provide for 
opportunity for that strategic investor to see that the 
regulatory process would, in fact, hopefully put in place a 
reasonable rate program and mechanism for which business could 
thrive and survive, and have a longevity and for future 
investment to be made.
    So we're in that process of development today. And, in 
fact, the Alliance in many respects with a few additional 
rulings from FERC on a couple of matters that are pending, is 
well positioned to be in operation as early as the end of this 
year. And what I'm concerned about in mandate language or 
mandate authority is we in the utility business across so many 
of our investor owned companies, I think something like 98 
percent of the investor owned utility transmission assets are 
in some form of developing RTO. If we suddenly start changing 
the rules and mandating authority, that could upset a great 
deal of effort that has gone today and just may not get to a 
situation where we are in fact or would have operating RTOs in 
place sooner than later.
    Maybe just one more comment to add on that. I kind of think 
that in the development of all these RTO structures, earlier in 
my remarks I outlined what I thought was necessary no matter 
how many RTOs there are across the United States. The seven 
points that I outlined in my testimony are what we believe are 
important to have a successful transmission network and 
infrastructure in the United States. And we, the EEI companies, 
believe that very strongly.
    Mr. Sawyer. Thank you very much.
    Glenn English, it's good to see you.
    Mr. English. Thank you very much, Mr. Sawyer.
    Mr. Sawyer. If we give FERC the authority to ensure the 
recovery of costs for new transmission facilities, it seems to 
me that those entities that take advantage of the FERC's 
protection ought to be subject to FERC's rules. The question 
that I would have for those entities like cooperatives 
receiving that protection, aren't they receiving a significant 
benefit without any of the attendant responsibilities under the 
Federal Power Act?
    Mr. English. I guess the question I have for you, are you 
talking about in the construction of transmission?
    Mr. Sawyer. Yes.
    Mr. English. Well, most of the transmission that we have is 
very localized, as I'm sure that you know.
    Mr. Sawyer. Yes.
    Mr. English. It's basically a transmission that applies to 
our own membership. We have a great sensitivity about this 
question of whether our membership, which actually owns the 
utility to provide power for themselves, is going to be able to 
continue to govern their own asset. We're a little bit unique 
and different in that we're not third parties that have an 
investment; we're people that actually own our own utility. We 
invest in that utility to provide for our needs.
    If you're talking about the government coming in and then 
breaking that up, that would be much like someone coming in and 
telling you we want to get between you and your constituents. 
And we want, Congressman, don't be listening to what your 
constituents tell you, we want to tell you how we should 
operate.
    Mr. Sawyer. Happens all the time.
    Mr. English. Happens all the time. And if you stay in 
office, you don't listen to them, do you? Because, you know, 
the issue here I think is that particular question.
    As far as going out and building transmission, keep in mind 
we're very dependent on this transmission system in this 
country. We're probably more dependent than anybody else. Any 
costs that are unnecessary, any unnecessary costs going in that 
system get passed on to our members. We have great objection of 
that and concern.
    We believe that the judgment of FERC should, in fact, 
determine what is just and reasonable. And what we've strongly 
believed is that any attempt to override that is telling those 
FERC Commissioners you must rule on something that you feel is 
unjust and unreasonable. You must provide that benefit.
    What we think would make a lot more sense, as I said 
earlier in my testimony, let's broaden out the options that 
FERC has. Let's let FERC use some additional judgment. But what 
this proposed draft does, it restricts what FERC does. It says 
you can no longer use your judgment. It says you must do 
something that you, obviously, feel is unjust and unreasonable. 
That's what we think is unfair.
    We'd like to see this opened up. Let's use the experience 
of what's gone on in this country, let's use the Texas model, 
which by the way this legislation we note does not effect 
Texas. Texas is exempt as far as the provisions of FERC on the 
incentive provisions contained this bill on unjust and 
unreasonable.
    We think that we ought to go the other way and let's take 
the Texas model in which they're building three-quarters of a 
billion dollars worth of transmission this year, going to build 
another billion next year, it's scheduled; let's take that 
model and bring that into FERC and give FERC the opportunity to 
use that option.
    Mr. Largent. The gentleman's time's expired.
    Mr. Sawyer. Then I will yield it back.
    Mr. Largent. I'm going to yield myself 5 minutes to ask a 
few questions.
    It seems to me the issue that, Mr. English, you raise is 
one that's been handled in past pieces of legislation where we 
were able to craft some language that separated the definition 
of what is distribution versus what is transmission as it 
relates to cooperates that you all basically signed off on it. 
It seems to me that what I heard you saying earlier that's the 
same sort of mindset that we should have when it comes to 
developing this national grid versus trying to give FERC 
authority over every line that carries electricity, is that 
correct?
    Mr. English. To a certain extent. I think the real issue we 
have is a practical one. You know, FERC's very limited as far 
as the resources they have available.
    You know, one could really look at this; if we were 
interested in deluding the influence of FERC, if we wanted to 
try to make sure that FERC was ineffective, let's just give 
them a lot of jurisdiction and no more resources to do it. 
We'll spread them so darn thin they can't get the job done 
under any circumstances. And I think that's where we are.
    This bill gives FERC a lot more responsibility. Now the 
question is do we want FERC to do that job and do it well with 
limited resources, recognizing the budget problems and the 
difficulty if we've got? If so, then it comes down well what's 
really important from a Federal level in dealing with this 
transmission issue? And what we would suggest is it makes a lot 
more sense for us to truly develop this, and I'm not suggesting 
under any circumstances any government money be used on this, 
keep in mind, but along the lines we did the interstate highway 
system.
    We've got the equivalent today of what was the old two lane 
system, State highways existed back in the early 1950's. We 
reincorporated a lot of State roads, upgraded those with new 
standards and made some connections in linking those roads 
together and developing an interstate highway system. We think 
that that makes an awful lot of sense concept wise, and we 
think that FERC should have that responsibility. FERC should 
have the final say so. We think, just as we did with the State 
highway system, that you allow the States or the local folks to 
have a lot of input as which roads should be upgraded, what 
should be incorporated into that and develop this system in 
partnership with the States. And I think they would welcome 
that. That gives FERC a job they can do.
    If we're just going to go willie nillie anything that 
anybody can define somehow as being transmission of this 
country, no matter if it only goes a mile, and we've got some 
that would only go a mile that could possibly fit into that 
definition and we're going to give FERC jurisdiction on it, 
FERC's going to be spread so thin on----
    Mr. Largent. Can you sum up? I only 5 minutes. Thank you 
for your comments.
    Mr. English. But you're right.
    Mr. Largent. One of the things that I wanted to begin my 
questions with was recalling a committee hearing we had last 
year with what were then the sitting FERC Commissioners. And I 
asked them the question can any of you give me a definition for 
just and reasonable rates. Not one Commissioner could give me a 
coherent definition of what constitutes a just and reasonable 
rate. Not one. These are the Commissioners that we're wanting 
to--some of us want to give them more authority, some of us 
want them to give them less authority. You know, less authority 
in transmission, but all of you say we need to give them more 
authority on reliability standards.
    So I guess I would start there when we deal with 
transmissions. Somebody in their testimony, I can't remember 
where I saw it, said that we could need as much as $56 billion 
worth of investment in new transmission in this country. $56 
billion. Why don't we have that? Why are they not out there 
building transmission lines? Why are we so far behind the power 
curve, so to speak, in new transmission?
    I think if I asked a panel nodding question, do you all 
agree we need more for transmission in this country, all of you 
would nod yes we definitely need more transmission. But then a 
number of you on the panel said that we don't want to 
incentivize by giving higher rates of return on transmission 
construction. So we have sort of a conundrum here in that, you 
know, Marty, you talk about the fact that the current 
constraints boost profits. So the people who could benefit by 
having new transmission really don't want to do transmission, 
the generators, because they're actually getting higher rates 
of return on their generation asset because there's no 
transmission. And then the people that may be third party, you 
know, that want to develop a transco and be independent 
transmission owners, they're not really going to do it because 
the risk that's there that Mr. Vesey pointed out, they see as 
being as higher than the rate of return that's currently being 
granted by FERC.
    So, there is the conundrum. We have a huge need for 
additional transmission, but we nearly a consensus, at least a 
majority of the panel that say but don't give them any higher 
rates of return on their transmission because, you know, it's a 
burden on consumers. So where do you go from there?
    Mr. Kanner, I guess I would like to ask for your comments.
    Mr. Kanner. Well, I appreciate that, Congressman.
    I think in part it's separating the transportation 
function, that highway system, from the merchant function. 
Having RTOs with effective planning and construction 
responsibility is a clear step in the right direction where 
they're not looking at the merchant aspects and whether it 
boosts generation rates and profits or not.
    They also could conceivably say we're going to bid it out. 
We're going to find whoever is willing and able to build a 
transmission link at the cheapest possible rates and not we're 
going to just say whoever will do it, we'll give them the 
maximum amount; rather say whose willing to do it for the least 
amount.
    There's an independent transmission company in Wisconsin 
that is building new facilities. And my understanding is the 
rating agencies have said that's a low risk venture. So it 
seems like there is a model that can work, we need to get 
there.
    Mr. Largent. Mr. Vesey, I give you just a moment to comment 
on that problem.
    Mr. Vesey. Thank you. And it a problem. And I think the 
issue comes down all rates are incentive rates. I mean, it's 
not more or less the formation of capital and this question 
about what the right level is. If we had none of these other 
risks, if we would resolve all the siting issues and make the 
siting clear and expeditious, if we were to resolve the 
questions around RTOs and the question of independence, then 
you probably would see the current levels of return being 
appropriate to bring that capital to bear. So there's two ways 
to deal with this. You either can raise the reward or you can 
lower the risk; all that's within the purview of the things 
we're talking about here and should be part of the 
conversation.
    I think the other part is that one has to be cautious that 
don't only think about incenting investment to build new 
capacity. There are a lot of ways to provide addition transfer 
capability in the transmission system. We have talked not at 
all about the introduction of new technologies into 
transmission, because there is no incentive. In current rate of 
return regulation a utility will not get the benefits of those 
efficiencies, only makes money on capital investments, so why 
would anybody whose in the transmission business make an 
investment in something that increases the efficiency, 
therefore lowering costs, when they have no return at all?
    So, one of the points of my testimony is we have to think 
about this question of motivating behaviors, not looking to 
specifically induce capital to build new lines. It's a much 
broader conversation we have to have. And when we restructure 
the question that way, I think then you can find a balance 
because you can the providers of this new capacity working in 
tandem with their customers, which is critical.
    Mr. Largent. Thank you, Mr. Vesey.
    My time's expired.
    I believe Mr. Wynn from Maryland is next.
    Mr. Wynn. Thank you, Mr. Chairman.
    I would like to begin by thanking our subcommittee chairman 
Mr. Barton for his generosity in agreeing to work with me on 
the subject of reliability. I sincerely appreciate his offer 
and look forward to working with him on this issue.
    I'd like to begin by asking Mr. Harris, and I don't think 
this is too far afield, Mr. Harris, you can correct me if I'm 
wrong. I understand that PJM has some concerns regarding a 
recent FERC directive to join the Northeast RTO. If that is 
true, would you articulate your concerns? We've heard testimony 
that there are apparently some seams in the system that they 
were attempting to correct via that directive.
    The second question has to do with my concern regarding 
reliability. And you seem to object to the notion of a self----
    Mr. Barton. Will the gentleman suspend? We want to thank 
Mr. Schriber or Chairman Schriber for being--we understand you 
have a plane to catch. If there are questions for you, we'll 
put them in a written statement and get them to you. But thank 
you for your participation.
    Mr. Schriber. Thank you very much, and thanks for having 
me.
    Mr. Barton. Certainly.
    Mr. Wynn. If, in fact, you object to the notion of self-
regulating entity which would have FERC oversight, would you 
kind of articulate your concerns. And then if the other panel 
members who have an opposite view would support a self-
regulating entity for this purpose, I'd certainly welcome that.
    So, why don't we proceed with your, Mr. Harris?
    Mr. Harris. Thank you, Congressman.
    Take on the first issue. PJM is currently the only approved 
RTO in the United States that's operational. With PJM West 
we're close to 70,000 megawatts, seven States, plus the 
District of Columbia. We have competition that works. We have a 
regional planning protocol that works.
    There is concern when you talk about enlarging that or 
merging that that what we have that works so well may 
deteriorate if you try to bring in other areas or other regions 
too rapidly or too quick. And that is something that needs to 
be looked at as the large RTOs develop. And that was our 
concern and what we're discussing with the State of Maryland, 
and I think those are valid questions that need to be answered.
    On the issues of where we are going with the standards. 
Again, let me just state the 3 or 4 points here.
    The electric system must be thought of like an ecological 
systems; it touches everyone's life and all elements of it. It 
isn't simply transmission. Generation and transmission are in 
competition. In planning, you can have a generation solution 
that may be more important than the transmission solution and 
more viable for the public good.
    What we're about here to ensure that customers of a value 
of competitive price in generation, and transmission is a very 
meaningful role in that. So the key is having the plan that 
allows that to take place so everyone can participate and 
understand what's going on.
    The standard setting that needs to take place effects 
everything. Ninety-eight percent of the outages on a system are 
distribution outages. They are under State control, not FERC 
control or even NERC control. So when you talk about a standard 
in the 21st century, you need to develop a standard that is 
fully consistent with retail choice program and the State 
needs, the bulk needs, the fuel needs, the generation needs and 
all of this in a holistic way.
    So our concern with the proposal is that it tends to try to 
carve out a single element and create some organization around 
that. We need to move to the 21st century and look at a 
holistic solution. Therefore, we think that the better way to 
do it is to allow FERC to issue some sort of rulemaking and 
through a FERC process create the appropriate body that could 
look at these things holistically in a way that you can then 
provide standards that FERC can approve.
    Mr. Wynn. Can I just jump in and say could not a regional 
entity such as you describe be a subset of a self-regulating 
organization such that the regional entity would purpose to the 
self-regulating organization rules appropriate to that region, 
the SRO could then approve those and if FERC did not object, 
proceed and then have the kind of regional impact or input that 
you're describing?
    Mr. Harris. Yes, sir, that is one of the ways that this 
could be done. There are other ways, and that's when we need, I 
think, rulemaking way that FERC can come up with what would be 
appropriate to deal with the issues that we have and be 
flexible enough to adapt as technology and the learning curve 
grows as we develop this industry of competition.
    Mr. Wynn. Are there other members of the panel that want to 
comment on that issue?
    Mr. Anderson. Mr. Wynn, if I could comment very quickly.
    I think one of the points that Mr. Harris made, and several 
others have made, is that increasingly we recognize now that 
reliability cannot be treated as a stand-alone issue. It's 
overlapped with the commercial practices. It's absolutely 
incredible. Every reliability rule has commercial practice 
implications, just like very commercial practice rule has 
reliability implications. They need to be dealt with together.
    One of the big problems with NERC is that NERC deals only 
with reliability and the commercial practice implications of it 
are second hand, their step-child sort of thing. Now, NERC 
could solve that by expanding itself to not be just a 
reliability organization, but to be both a reliability and a 
commercial practice organization, or on the other hand the Gas 
Industry Standards Board could expand, as they say they're 
going to do, and create an Energy Industry Standards Board and 
deal with both reliability and commercial practices. To me, one 
or the other, either one of them would be a good way to start, 
but neither one of them now are doing it in this holistic way. 
You got to take both of them.
    We believe very, very strongly that both have to be worked 
on together.
    Mr. Barton. The gentleman's time, unfortunately, is 
expired.
    The Chair would recognize the gentlelady from Missouri for 
5 minutes for questions.
    Ms. McCarthy. Thank you, Mr. Chairman.
    And thank you for this very important hearing. And I 
appreciate all the input we're getting today, very valuable 
input from the panelists. And I'm going to give you full 
disclosure before I ask my question.
    Before joining the Congress, I served in the Missouri State 
Legislature for 18 years. And I was President of the National 
Conference of State Legislatures before coming to Congress. So, 
I very much like what I'm hearing from several of the witnesses 
about the fact that we, as Mr. English put it so well, you 
know, we have an existing system that works, how do we link it 
to the rest of the country? What is our real objective here? 
And I think the objective is to create some sort of dispute 
resolution that will work.
    I'm going to tell you about a company in my State and 
region, Ameren, which is working effectively in a bistate way 
with Illinois. Everything's going smoothly. But should they 
want to put in a new line or make any other improvements or 
opportunities, there's really no place for them to go if 
Illinois disagrees.
    And so I think the question we're grappling with is how do 
we put in place some sort of body that will resolve that for 
us? And coming from a State legislative background, I would 
like to see that body out there in the States.
    So, I was very intrigued by Mr. Schriber's comments and 
also Mr. Harris in your text about some sort of voluntary 
regional body that permits the States to work in an interstate 
way to resolve this.
    And I wonder if any of you on the panel could come up with 
the mechanisms that they would need specifically to do that? I 
would very much appreciate that.
    And also, a second sort of thought for someone to ponder. 
You know, Ameren has invested and is investing about $25 to $30 
million toward improvements in its efforts in those two States. 
So when we talk about incentive rate structures, I worry 
because those companies that choose not to invest in their 
transmission infrastructure seem to me will be rewarded through 
incentive rates. And so what does that say to companies that 
stepped up to the plate and did it without being told to?
    Mr. Harris. Yes, ma'am.
    First of all, let me go back to the planning process the 
mid-Atlantic that was developed in a cooperative way with all 
of the States, the environmental community and the transmission 
companies. It took us 2 years to develop that process. It is a 
cooperative process that has been approved by the FERC. It 
clearly delineates what the accounting and the cost 
responsibilities are among the entities. It is just absolutely 
crucial to have regional planning protocol.
    Now, we recognize that we would not have all of the answers 
to the world's problems, so therefore we've engaged in a 
process, we entered into an arrangement with each of our 
States. And each of the States meet periodically and regularly 
with our independent board of our RTO and we discuss the issues 
that are ahead of us as we move forward to the next levels of 
evolution. And having an inner active way to deal with the 
issues and to move forward is a way that we address the 
problem.
    What we've discovered is that when you really get the 
details of the information and allow public input with ubiquity 
of information, that the common sense of good people can 
prevail. We are building construction. Generation is competing. 
Things are getting done.
    Do we have all the answers? No, but where we stand today is 
something that is working. We don't see a large need for major 
transmission in the next 5 to 10 years. We will continue to 
work with our States very carefully in this arrangement where 
the States have direct input into the independent board as we 
try to engage the problems.
    So I think seeing it as a holistic thing that effects 
everyone and as a process as we move to the future is the wise 
way to go forward.
    Ms. McCarthy. Has FERC played any role as you've moved 
forward with this independent board?
    Mr. Harris. In only two ways. First of all, they approved 
our regional transmission expanding protocol, which bound all 
the companies that wanted to play with it. And the second thing 
when they approved us an RTO, they also directed that we 
consider the economic consequences when we evaluate 
transmission plans instead of just the load growth and the 
needs, but we also have to look at the economic consequences of 
congestion and other things, and we'll integrate that into our 
plan.
    Ms. McCarthy. Thank you.
    Would anyone else care to comment? Yes?
    Mr. Vesey. Very briefly. I think that we shouldn't leave 
the impression that no transmission is being built across the 
United States. In fact, significant capital is being spent, but 
it's mostly in continued maintenance and upgrade of existing 
facilities.
    The challenge becomes when you're building a line between 
States interregionally, and that's where the highest risk 
reside.
    I think that we've come to the point where we're actually 
managing our transmission infrastructure on a just-in-time 
basis, which is one of the reasons why the critical points that 
were made earlier, why there is such an impact in terms of 
reliability and commercial issues. Because we've got to the 
point where that's how we run the systems. There's a clear 
tradeoff that we're making in terms of our ability to put new 
capacity in the ground versus the way we're going to operate 
these systems to keep the systems up.
    So the only points here are that there are--it's not no 
transmissions being built, there are some who are building them 
and in some instances the risk and the reward is appropriate. 
In others it's not, the balance isn't right and that happens 
when people have to site, obtain new right away and actually 
site new transmission line and are being intrastate or 
interregion, which is a critical issue as we're talking about 
the bulk wholesale markets.
    Ms. McCarthy. So you're thinking that the incentive rate 
structure is for those opportunities that are not as rewarding 
and don't attract the investors as much as they should?
    Mr. Vesey. Again, I think the issue is that all rates are 
incentive rates. The points of the issue is in some new project 
development, the risks are definitely higher than others. Two 
of those sources of risks are the inability of--the difficulty 
of siting process between which cross State boundaries or 
regional boundaries. And the second one is the lack of clarity 
on how these RTOs, transcos, ISOs are going to work effectively 
to produce revenues for their businesses. We don't have an 
effective business model yet because that rules aren't 
finished.
    In those instances, to make investments that either cross 
those lines or involved in one of those forming up forming 
organizations, obviously the risk is if you buy the market is 
being higher than the return.
    Ms. McCarthy. I just wouldn't want to put incentive rates 
in place that would discourage investments from companies like 
Ameren who stepped up to the plate. Thank you.
    Oh, yes, do I have time----
    Mr. Anderson. Ma'am, one just quick comment on your 
regional bodies. As the one consumer group that's here at the 
table, although we represent large consumers, we are a consumer 
group.
    Consumer groups, we are very concerned about creating a 
third forum or a third entity that we have to participate in. 
Right now we have to participate at the State level. We also 
have to participate at the Federal level. It takes tremendous 
amounts of resources to participate in each one. And to add a 
third layer is a very difficult thing, and I urge you to do 
that very cautiously.
    Ideally, would be to create a regional body which takes 
over the State roles then in siting, but the States don't want 
to give that up either. If the States don't want to give up 
their siting authorities, which I well understand for a whole 
lot of different reasons, I urge you to be very careful in 
creating a regional body that then consumes a lot of resources 
also.
    Ms. McCarthy. Thank you.
    Thank you, Mr. Chairman.
    Mr. Largent. The gentlelady's time has expired.
    Mr. Sawyer. Mr. Chairman, I would ask unanimous consent, 
Mr. English looked like he wanted to make response.
    Mr. English. Yes, thank you very much Just very quickly.
    I think that we're making a couple of errors here on our 
assumptions. One is this is a judgment issue. FERC has all the 
authority. They can double rates, triple rates, quadruple rates 
if they find that to be just and reasonable.
    The second thing, is we're ignoring one big problem, and 
that is it is not in the interest of a lot of present 
transmission holders to see new transmission built, to see 
bottlenecks eliminated and roadblocks eliminated. Because it 
all comes down to the fact that right now that's part of the 
monopoly aspect, that's where they can make their money, that's 
where they can control the generation, that's where they can 
prevent this competition on wholesale power that I understand 
that that's what this committee is about. And unless you 
address that to simply increase the rewards, that doesn't 
overcome what these people really find to be in their best 
interest. And we've got to find out some way in which to break 
those roadblocks.
    Mr. Sawyer. Mr. Chairman, Mr. Szwed.
    Mr. Szwed. Yes. I just want to take exception to the fact 
that there seems to be the allegation that we're not building 
transmission because it's advantaging our generation. And I 
just want to remind you all that for the last 5 or 6 years 
utilities who own both generation and transmission have been 
under a code of conduct obligations with regard to Orders 888 
and 889, and that's further promulgated by Order 2000 and the 
move to RTOs.
    I think, you know, just going back, you know, we have been 
building transmission. My company alone spent $35 or $35 
million just last year in transmission to connect customers, to 
facilitate equipment repairs. I've got a request pending to put 
a large transformer in now that's $5 million alone.
    The issues goes back to what a lot of what Mr. Vesey was 
talking about. We're trying to create a more robust national 
marketplace and the transmission system we have today wasn't 
built for that. It was built to serve local load, connect 
neighbors and provide for reliability. What we've got to do is 
transform that, and that needs new investment.
    It's going to take new investors because the rules that 
we're operating under require independence for all this today. 
And we'd really like to see new investment, new independent 
investment come in and be done. And that requires the right 
kind of rates, the right kind of pricing, the right kind of 
returns.
    And I've heard here today the discussion of transmission is 
a low risk situation. I think you got to put it in the context 
of what it's all about. When we separate transmission from the 
rest of the vertical integrated utility, it takes on a 
different risk profile because its sole business is providing 
transmission service, and it has risks. And just to say that 
returns ought to be low because this is a low risk type 
proposition, I think we have to think about it. The risk reward 
ought to be commiserate with the comparable kinds of risk 
opportunities or possible kinds of other industries that have 
similar or equal risk, and the returns ought to be that. We 
haven't seen the kind of returns from FERC that recognize that 
yet, and that needs to be recognized as we establish the 
pricing reform that needs to be done.
    Mr. English. Focus on reducing the risk, Mr. Chairman.
    Mr. Largent. We'll return to the regular order here and 
recognize the gentleman from Wisconsin, Mr. Barrett for 5 
minutes.
    Mr. Barrett. Thank you, Mr. Chairman. And I apologize for 
not being here, so some of my questions may be redundant.
    I think some of you have mentioned a situation in 
Wisconsin, and that's the State that represent. And earlier 
this week I was home and talking to a farmer in the State of 
Wisconsin. The Wisconsin Public Service Commission has just 
approved about a 240 mile line from Duluth, Minnesota to 
Wausau, Wisconsin. And the concerns that this farmer had was 
evidenced by a question that was asked of the current Governor, 
who was asked whether it was fair to move this transmission 
line over a number of farms that had been there for many, many 
years. And the response was we're not going to let a couple of 
farmers stop this transmission of electricity into the State.
    The farmer's argument was I thought an interesting one, in 
that he said the power of eminent domain has traditionally been 
used for the public good in the sense that you have a company 
that is granted the public domain. Generally in the past if 
it's been granted, it was either to a regulated industry where 
the profit was monitored or some other entity where there is 
interaction between the government, the State government and 
the company itself so that the greater good would be 
recognized.
    His argument was that this is different, that these 
transmission companies are essentially simply for-profit 
companies and why should the law of eminent domain or whatever 
laws are going to be used in this situation allow a for-profit 
company to take the land away from a for-profit dairy farmer 
who is supplying milk to the people in this country?
    If one or two of you can respond to that, as if I were the 
farmer sitting there, as to why that should happen?
    Mr. English?
    Mr. English. And that farmer's probably a coop member, so 
he's probably one of our members. And I think he makes an 
excellent point.
    The real issue I think you still come down to is this 
question, you know, is this something that is necessary for the 
overall public good. I think what you categorize as eminent 
domain and the use of eminent domain and the overall purpose of 
it, I think you're right, we do have to go back to the heart of 
that and how do we use it. And it has to be done very, very 
selectively, very carefully. It has to be something that is 
necessary for the overall good. And that's certainly true, I 
think, whenever you're providing that on the Federal level.
    The States should be allowed to deal with this issue. It's 
only if it's absolutely necessary, you know, this is a final--
if it can't be resolved any other way that the Federal 
Government says it has to be done for the overall national 
good. But that should be a last resort. Last, last resort.
    Mr. Barrett. Well, and I think the debate we're having 
here, though, exemplifies that. The discussion, and I 
understand that the draft bill has some flexibility allowing 
the Federal Government to come in and take this over. But I can 
tell you, not with this farmer this week, but with a farmer 
that I met with in the last 2 months, walking into his farm--
their farm, a man and woman's farm, I felt like a character out 
of an ``Erin Brockovich'' movie. Someone just coming in from 
the Federal Government who didn't care at all about this poor 
farmer in Edgar, Wisconsin whatsoever. And we were going to use 
whatever methods we could to put this power line in.
    So, I am concerned about the provisions in here that give 
the Federal Government more authority, because there are people 
who feel this disenfranchised from State government because the 
public service commissioners wouldn't even come and hold public 
hearings in their part of the State of Wisconsin. And now we're 
being told well those people are too close to you and we're 
going to remove you even further from the decisionmaking power 
of this democracy.
    And I think that's one of the reasons you've got the 
western Governors--because I think that this is an offshoot of 
the whole issue of private rights and people feel as though the 
Federal Government is going to come in and just squash them. 
And I haven't heard a compelling reason why that isn't the case 
with the provisions in this draft bill, and I'd be interested 
to hear someone who can defend those. Someone who wants to 
defend those. Mr. Szwed?
    Mr. Szwed. Just a general comment. I think, as I said in my 
testimony, I think we are looking toward the States as the 
primary vehicle for accommodating that. And, again, the 
language really provides for FERC as the backstop. And I think, 
you know, I sometimes feel like we're between a rock and a hard 
place on this, maybe even more so when Chairman Schriber was 
here, because it's a tough situation between State and Federal. 
But as we move toward larger regional marketplace that has an 
interstate nature to it, obviously we'd like to see the States 
resolve the issues of siting first. But at some point there 
seems to be the need to have a backstop and some entity to go 
to or some authority to go to to resolve the issue if in fact 
that is important for the greater good of the competitive 
region of the electric marketplace.
    Mr. Barrett. But the legislation we're talking about, under 
the Natural Gas Act, when FERC acts don't they have to have at 
a minimum of certificate of convenience and necessity for the 
public good? And I don't see that here. Here it's just 
whatever's good for the transmission company and no time at all 
for the public good or public necessity.
    Mr. Szwed. Yes, I believe that's the case with the gas 
side. And even in the case of Ohio where in Ohio if you take 
Ohio as a microcosm where years ago we used to do this county-
by-county sort of thing and now it's rolled into the Ohio Power 
Siting Board, there's still in that cases also a requirement 
for the need and the benefit of the facility as well.
    Mr. Barrett. Shouldn't we need that in this situation?
    Mr. Szwed. And I would think that we probably would want to 
demonstrate the need for the facility and the reasons, and the 
benefits that it would provide, right.
    Mr. Barrett. I yield back, Mr. Chairman.
    Mr. Largent. All right. With that, I think everybody has 
had a chance to ask questions.
    I want to thank all the panelists for your time. Many of 
you are familiar faces that have been contributors in panels in 
the past. We want to say thank you to all of you for your 
participation.
    We'll convene the second panel at 1. Thank you.
    [Whereupon, at 12:31 p.m., the subcommittee recessed, to 
reconvene at 1 p.m., the same day.]
    Mr. Barton. If our panelists and our audience will take 
their seats, we'll start our second hearing of the day.
    As soon as we get order, we're going to let Mr. Norwood 
make some introductions and then begin the hearing.
    We know that we have witness that's coming by train, I 
think from Baltimore, he may be a little bit late so we're 
going to go ahead and start.
    The Chair wants to thank this panel for coming back. We 
also want to thank you for fastforwarding an additional hour. 
And we especially want to thank Mr. Franklin, because I'm told 
that he's been under the weather and is coming in spite of 
somehow suffering from a cold or the flu, or something like 
this.
    Our second hearing today is Electric Transmission Policy: 
Regional Transmission Organizations, Open Access, and Federal 
Jurisdiction.
    The hearing will come to order.
    The Chair would recognize Mr. Norwood to make a brief 
introduction, and then we will begin to hear testimony.
    Mr. Norwood. Thank you very much, Mr. Chairman, and I 
commend you on your selection of witnesses. Anybody from Texas 
that has enough sense to have two people from Georgia on the 
same panel, I know I have a great deal of respect for. But I do 
appreciate your leadership on these issues and would like to 
commend you and the ranking member for the selection of the 
witnesses.
    If I may, I'd like to take this opportunity to recognize 
and welcome two gentlemen from the great State of Georgia who 
will be testifying on this second panel today. Robert Johnson 
from MEAG Power and Allen Franklin from Southern Company.
    Thank you, gentlemen, for being here.
    Robert Johnson is the President, Mr. Chairman, and Chief 
Executive Officer from MEAG Power headquartered in Atlanta. 
MEAG Power is a public generation and transmission corporation, 
as you know, that provides power to 48 Georgia communities 
serving nearly 750,000 Georgians, many of whom are my 
constituents.
    With over 24 years in the electric utility industry, Mr. 
Johnson has held several management positions at MEAG at one 
time or another, having overseen both engineering and 
operations. In addition, Bob serves on the Board of Directors 
for the Energy Authority, one of the largest power marketing 
joint ventures among public power organizations that is located 
in Jacksonville, Florida.
    Bob received his bachelor of electrical engineering from 
Georgia Tech in 1978 and he's still a good guy, and his 
professional engineering license in 1983.
    Also testifying before our second panel today is a good 
friend of mine, Allen Franklin, Chairman and President and 
Chief Executive Officer of Southern Company, also headquartered 
in Atlanta. Previously Mr. Franklin was President and Chief 
Operating Officer of Southern Company, and prior to that served 
in the same capacity at Georgia Power Company, Southern 
Company's largest subsidiary.
    Allen received his bachelor's degree in electrical 
engineering from the University of Alabama, and a master of 
science from the University of Alabama, Birmingham.
    Mr. Chairman, both of these gentlemen are respected leaders 
within the electric utility industry and within the Georgia 
community, as both serve on the Board of Directors for the 
Georgia Chamber of Commerce.
    Bob and Allen, I'm very happy to have you here today before 
this committee, and I look forward to hearing each of your 
testimonies and perspectives on these critical issues affecting 
our national energy policy.
    Thank you, Mr. Chairman.
    Mr. Barton. Thank you, Mr. Norwood.
    Does Mr. Boucher wish to make a brief opening statement 
before we begin? Okay.
    We want to welcome this panel. And, again, thank you for 
your attendance. We're going to start with Mr. Bennett and go 
right down the line.
    Mr. Bennett is a Commissioner of the New York State Public 
Service Commission. We know it's been a very difficult time for 
you the last several weeks because of what happened at the 
World Trade Centers. We really appreciate your attendance 
today. We know that had to be difficult for you to take away 
from your duties in New York to come and testify before this 
subcommittee.
    Your statement's in the record in its entirety, and we 
would recognize you for 5 minutes to elaborate on it.

 STATEMENTS OF JAMES D. BENNETT, COMMISSIONER, NEW YORK STATE 
PUBLIC SERVICE COMMISSION, ON BEHALF OF NATIONAL ASSOCIATION OF 
REGULATORY UTILITY COMMISSIONERS; ALLEN H. FRANKLIN, PRESIDENT, 
 CEO & CHAIRMAN, SOUTHERN COMPANY; PETER FLYNN, PRESIDENT, NEW 
ENGLAND POWER COMPANY ON BEHALF OF RICHARD P. SERGEL, NATIONAL 
    GRID USA; ROBERT JOHNSTON, PRESIDENT AND CEO, MUNICIPAL 
  ELECTRIC AUTHORITY OF GEORGIA ON BEHALF OF THE LARGE PUBLIC 
  POWER COUNCIL; GLENN ENGLISH, CEO, NATIONAL RURAL ELECTRIC 
 COOPERATIVE ASSOCIATION; MARC S. GERKEN, PRESIDENT, AMERICAN 
MUNICIPAL POWER-OHIO ON BEHALF OF TAPS; PETER G. ESPOSITO, VICE 
  PRESIDENT AND REGULATORY COUNSEL, DYNEGY, INC. ON BEHALF OF 
ELECTRIC POWER SUPPLY ASSOCIATION; CHARLES A. TRABANDT, FORMER 
 FERC COMMISSIONER; AND MICHAEL J. TRAVIESO, MARYLAND PEOPLE'S 
                            COUNSEL

    Mr. Bennett. Very good. Thank you, Mr. Chairman, and thank 
you for your comments. It has been a hard time for the State of 
New York, but everyone in the State is very grateful for all 
the support from the Congress and from all the other areas of 
this great country.
    Actually I'm not here just as a Commissioner from the State 
of New York, but also as a representative of the National 
Association of Regulatory Utility Commissioners, otherwise 
known as NARUC, which is an organization composed of all of the 
utility regulatory commissioners in the country.
    The written statement of NARUC has been put into the 
record, and I'll just make a few brief comments and, perhaps, 
add something from the New York State perspective, and answer 
any questions you might have.
    Three basic issues before us today: Transmission 
jurisdiction, regional transportation organizations or RTOs and 
open access.
    To be brief insofar as transmission jurisdiction, it's very 
clear that FERC has jurisdiction over wholesale rates. It's the 
position in New York State and also of NARUC that the State 
retain authority to establish retail jurisdiction, and the 
jurisdiction to set retail rates including the rates for 
transmission services. And that FERC's jurisdiction should not 
be expanded to include unbundled retail transmission service.
    Second, the States should continue to exercise regulatory 
oversight over retail transmission service. As an alternative 
to State oversight, the States could be authorized to form 
voluntary regional bodies or RTOs to address regional 
transmission system issues and FERC should be required to defer 
to States acting on a regional basis.
    Insofar as retail jurisdiction, it's our belief that the 
jurisdiction should remain with the States.
    I think the two major issues here are reliability and 
pricing. New York has something of a unique position right now 
in that we have an ISO, an independent system operator, which 
is like an RTO of one State. However, we are working very 
cooperatively with New England and with PJM. And with 
experience we see that this region will be able to put together 
a voluntary RTO working on its own experience and its own 
knowledge without having the need for a direction from FERC as 
to how it should be done.
    We would also believe that Congress, if it so elected, 
should provide for a State commission advisory role and RTO 
governance that allows deference to the State commissioners 
within a region that reach consensus concerning governance and 
operational issues.
    NARUC does not support charging local retail customers for 
new transmission facilities to move merchant plant energy to a 
regional grid.
    NARUC also has long supported nondiscriminatory wholesale 
open access for transmission services.
    In conclusion, in the case of existing transmission 
facilities, the local retail consumers have born the vast 
majority of the costs of the utility's transmission facilities. 
It is the utility's obligation under State law or FERC approved 
contract to provide these consumers reliable and affordable 
service; they should not bear any unfair burden due to the 
transition to an open access transmission regime.
    Thank you.
    [The prepared statement of James D. Bennett follows:]
   Prepared Statement of James Bennett, Commissioner, New York State 
                       Public Service Commission
    Mr. Chairman and Members of the Subcommittee: Good morning. My name 
is James Bennett. I am a Commissioner on the New York State Public 
Service Commission. I am here today on behalf of the National 
Association of Regulatory Utility Commissioners, commonly known as 
NARUC. I greatly appreciate the opportunity to appear before the House 
Energy and Commerce Subcommittee on Energy and Air Quality and 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 ensure 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 
consumers.
    States have an important stake in how electric transmission 
services are provided to retail consumers. The transmission facilities 
that serve consumers were approved by State governmental entities, and 
importantly are being paid for by these retail customers. We are, 
however, keenly aware of the interstate commerce implications of 
transmission service and we believe that the issue of transmission 
jurisdiction is now properly before the Supreme Court. Accordingly, 
NARUC recommends that Congress follow its prudent practice of allowing 
the Court to rule on transmission jurisdiction issues prior to taking 
any legislative action.
    States should retain authority to establish retail rates that 
include transmission services, and FERC jurisdiction should not be 
expanded to include unbundled retail transmission service. FERC should 
continue to have ratemaking authority for interstate wholesale 
transactions and should have jurisdiction over transactions between 
suppliers and retail customers located in different States. Prior to 
the unbundling of rates to permit consumer retail choice, the States 
set the full bundled rate--including transmission service. This 
provided customers not only simplicity but a single source of 
regulatory redress when problems or complaints arose. Now that retail 
rates are becoming unbundled in order to allow customers to choose a 
generation supplier, such customers are no less in need of simplicity 
and regulatory oversight. NARUC believes that the best way to provide 
that protection is to allow the States to continue to exercise 
regulatory oversight over retail transmission service.
    As an alternative to State oversight, States could be authorized to 
form voluntary regional bodies to address regional transmission system 
issues and FERC should be required to defer to States acting on a 
regional basis.
    NARUC supports legislation leading to voluntary formation of 
Regional Transmission Organizations (RTOs), with deference given to 
States in RTO development, including size, geographic scope and 
configuration, as well as States acting collectively on a regional 
basis. Congress should develop a mechanism for States to address 
ongoing concerns in RTO functions after the initial RTO development 
period, including reliability, market monitoring, pricing, congestion 
management, planning and interregional coordination. In New York, for 
example we have established very high reliability standards--
particularly in the highly congested New York City area. These high 
standards come at a cost but we believe such a cost is miniscule 
compared to the consequences of a major outage. We believe that the 
States, working in conjunction with their RTO, are best able to 
develop, monitor, and insure effectiveness of such standards. New York 
has also worked with its ISO to develop sophisticated market monitoring 
systems and market price mitigation programs that help prevent the 
abuse of market power. Because of the unique electrical configuration 
in New York City, such programs are essential to protect consumers from 
price gouging especially during times of extreme scarcity of supply. As 
the Northeastern RTO is being developed, we are working with the 
parties to ensure that these practices continue.
    In order to ensure a cooperative working relationship between the 
States and the RTOs , Congress should provide for a State commission 
advisory role in RTO governance that allows for deference to State 
commissions within a region that reach consensus concerning governance 
and operational issues. In New York, PJM and New England, State 
commissions have a good working relationship with their respective 
Independent System Operators. As RTOs develop and electric systems 
become larger, we need to continue to find ways to have continued 
cooperation between the States and the emerging RTOs.
    At the heart of the issues raised at today's hearing--RTOs, 
transmission jurisdiction, and open access--is the relatively new 
development of merchant generating plants and the question of who pays 
to get the power produced by these plants to the markets where the 
owners of these plants wish to sell their power. These facilities are 
not owned by utilities and are not necessarily constructed near where 
they are needed. These generation units are not being constructed 
solely for the purpose of supplying the electricity needs of the State 
or region in which they are located. The main purpose for these plants 
is to sell power to the wholesale market for the most profitable price, 
regardless of where the purchaser is located.
    This raises the question of who should pay for any new transmission 
to get this merchant power to where it has been sold. NARUC does not 
support charging local retail ratepayers for new transmission 
facilities to move the merchant plant energy to a regional grid. In New 
York, for example, new generators are responsible for the costs of 
transmission lines necessary to connect to the grid. In addition, any 
grid improvements made necessary solely related to the new generation 
are also paid for by the generator. Any other improvements are paid for 
by the transmission owner and passed through to all users of that 
transmission system.
    In the case of existing transmission facilities, the local retail 
consumers have borne the vast majority of the costs of the utility's 
transmission facilities. Because the utility's obligation under State 
law or FERC-approved contract is to provide these consumers reliable 
and affordable service, they should not bear any unfair burden due to 
the transition to an open access transmission regime. We clearly expect 
that the new RTOs working with the States will develop sound 
interconnection policies that fairly allocate the costs of new 
transmission facilities between generators and transmission users.
    In closing, NARUC has long supported non-discriminatory wholesale 
open access for transmission services. State Commissions, however, must 
retain the authority to protect retail consumers by ensuring that they 
are not unfairly burdened by financial and environmental costs that 
ought to be born by other stakeholders. Further, States must continue 
to be deeply involved in RTO development, monitoring, and price 
mitigation.
    Thank you for giving me the opportunity to appear before you today. 
I look forward to answering your questions.

    Mr. Barton. Thank you, Mr. Bennett.
    We'd now like to hear from Mr. Allen Franklin, who is the 
CEO of Southern Company.
    And, again, we appreciate you coming since I've been told 
that you've been a little bit under the weather.
    Your statement's in the record, and we'd ask you to 
elaborate for 5 minutes.

                 STATEMENT OF ALLEN H. FRANKLIN

    Mr. Franklin. Thank you, Mr. Chairman.
    Let me say, first of all after hearing Mr. Bennett's 
testimony, I largely agree with the points that he made. Let me 
add just a moment or state just for the record our corporate 
situation, which I think helps explain our position on a lot of 
these issues.
    At this point about 90 percent of all of our net income is 
regulated by the States. About 10 percent is related to our 
participation in the wholesale market. So the big part of our 
business is still State regulated related to retail customers, 
but wholesale is important because it's a significant part of 
the growth of our company.
    For that reason, because retail is so important, we tend to 
be very sensitive to what our State commissions think, and we 
tend to be very sensitive to how different changes to the 
industry effects our retail customers.
    Let me also set the stage for the current state of the 
electric industry in the southeast. Unlike other parts of the 
country, there is plenty of generation in the southeast. 
There's massive amounts of competitive generation under 
construction. In fact, we expect the capacity to double in our 
service area in the next 5 years producing much more generation 
than will be needed to serve local load.
    A bigger issue with us is not enough generation, there's 
plenty, but the huge amount of transmission that's going to be 
required to move that generation into the market and outside 
the southeast.
    We're currently projecting that over the next 5 to 6 years 
we'll spend about $6 billion of additional capital for new 
transmission. That will triple the amount of investment we have 
in transmission. It took 80 years to get to $3 billion, in the 
next 6 years we're going to be at $9 billion. That will create 
a 10 percent rate increase for our retail customers, which is a 
concern to us and, obviously, through our commission.
    We intend to build the transmission that's required, and 
take that obligation seriously, but there are some FERC pricing 
issues I'm sure that were discussed this morning that make this 
transmission requirement much more severe than it should be. 
And the primary problem is that transmission pricing is not 
distant-sensitive, which results in generation being located 
much further from load centers than it should be, which 
increases cost and reduces the reliability of the system. 
That's a problem I hope that can be addressed.
    Now moving to RTOs. In my judgment RTOs are a good idea if 
done properly. I think their time has come. And I think FERC 
Order 2000 that was issued in late 1999 was very much on the 
right track. It laid out standards and expectations, and it 
left it to utilities and State commissions to move the process 
forward.
    We were making great progress in the southeast in 
developing an RTO structure in the size and the scope along 
with eight other public power entities to form a large, what I 
think would have been a very effective RTO in the southeast. 
That was going extremely well until FERC issued an order in 
July that in essence stopped that process in its tracks. Since 
that time there's been a great deal of confusion about the 
direction RTOs would take in the south.
    Where FERC goes next is not clear, but it's certainly a 
possibility that they would mandate not only the size, but the 
structure of the RTO. That's the wrong answer, in my judgment, 
from our standpoint in the southeast.
    First of all, I think they'd take the wrong structure.
    Second, it will cause public power to opt out, and in our 
part of the country it's critical that public power 
participate. There's been a severe State backlash, States all 
the way from North Carolina to Louisiana have objected to the 
FERC direction. It makes the nondistant-sensitive pricing 
worse, simply because an RTO is larger.
    Mr. Chairman, I think there is a relatively simple solution 
to the current situation. I think if we can get back on the 
pre-July track that we're on in the southeast, and if Congress 
can help us do that and FERC can help us do that, that'll be a 
plus. If FERC can work on their pricing and make it distant-
sensitive, that will be a big plus, and I would encourage 
Congress to do what it can to help FERC move in that direction.
    I want to also discourage Congress at this time from giving 
any additional authority to FERC to mandate RTOs, to mandate 
divestiture of generation or to take additional authority from 
the States on bundled transmission rates. If that happens, I 
can give you reasonable assurance that RTOs will form in the 
southeast. I think they will form faster and they will perform 
better.
    Thank you.
    [The prepared statement of Allen H. Franklin follows:]
  Prepared Statement of Allen Franklin, Chairman, President, and CEO, 
                            Southern Company
                              introduction
    My name is Allen Franklin, and I am Chairman, President, and CEO of 
Southern Company. Southern Company is the owner of five operating 
electric utility companies including Georgia Power and Savannah 
Electric and Power in Georgia, Alabama Power, Mississippi Power, and 
Gulf Power in Florida. In our southeastern service area, we have over 
35,000 MW of generating capacity and serve over 3.9 million customers 
at rates that are 15 percent below the national average. Southern 
Company is also the largest wholesale power provider in the Southeast. 
Our service territories cover 120,000 square miles and we have over 
26,000 miles of transmission lines.
    Southern Company supports removal of the remaining barriers to 
robust competitive wholesale markets through federal legislation. We 
believe continued, fair competition in wholesale markets can lead to 
added consumer savings while maintaining the high level of reliability 
that consumers have come to expect. We also support the development of 
properly sized and configured regional transmission organizations to 
help further the goal of non-discriminatory access to the transmission 
system. Southern Company's operating subsidiaries have been 
participating in and benefiting from competitive wholesale markets by 
putting our incremental generation needs out to bid. This program has 
been very successful in helping to ensure that consumers in our service 
area pay the lowest possible price for electricity--which should be the 
main goal of electricity policy initiatives. Just last year, Southern's 
operating companies procured 3,000 megawatts of power via long-term 
contracts through competitive bids, and we are seeking another 3,100 
megawatts this year. In response to Georgia and Alabama Power's most 
recent requests for proposals, generators bid over 30,000 megawatts for 
the solicitation of only 3,100 megawatts. Clearly a robust wholesale 
market already exists in the Southeast. The objective of Federal 
legislation and FERC policy should be only to enhance what already 
exists.
    Evidence that the competitive market is functioning well in the 
Southeast can also be seen by the incredible amount of new merchant 
generation seeking to build in the South. We currently have signed 
interconnection agreements for about 18,000 MW of new generation and 
have pending requests for another 34,000 MW, all in our service area. 
In fact, we are no longer worried about a shortage in generation in the 
region. If all of this generation is built, it would more than double 
the available generation in our area--clearly much more than is needed 
to serve consumers in this area. We are becoming more and more 
concerned about the feasibility of siting, building and paying for the 
additional transmission facilities that may be needed to satisfy 
transmission service requests from all of these new generators--in 
addition to what we must build to serve our retail customers.
    We are currently investing significantly in new transmission 
facilities--both to retain reliable service to our own growing load, 
and to provide transmission services for merchant generators building 
in our service area. We currently have transmission assets with a book 
value of 3 billion dollars. Over the next five years, we expect to 
double that investment to 6 billion dollars, just to keep pace with our 
load and the generating projects that have already requested service. 
If we are ultimately able to site and construct transmission for all 
currently announced generation projects in the region; our total 
transmission investment could triple in the next five to six years--
from 3 billion to nine billion dollars. Retail customer rates could 
increase by 10 percent if we are required to pick up most of these new 
transmission costs, as we are under current FERC policies. It is not 
clear that savings in generation will ever be sufficient to offset 
these higher transmission costs.
    This gives rise to one of our major concerns, as will be discussed 
in my testimony today; that FERC has not paid adequate attention to 
whether or not its transmission access and pricing policies are leading 
to rational investment in generation and transmission to minimize the 
total costs of electric service. Nor has FERC focused on transmission 
pricing policies necessary to bring forward the investment in 
transmission needed to support competitive markets. For example, the 
rationale being used for having just a few very large regional 
transmission organizations (RTOs) in the country is that by having a 
single postage stamp rate for a large region, you can have generation 
built anywhere to serve load anywhere. But this policy ignores several 
critical facts. First, building generation closer to load results in a 
more reliable system. Second, it is significantly less expensive to 
build gas pipelines to move gas to generators located near load centers 
than it is to build generation near the gas fields and build new 
electric transmission to move power to load centers. Third, FERC's 
postage stamp rate policy for electric transmission juxtaposed against 
distance sensitive rates for gas pipelines gives generators uneconomic 
incentives to build closer to the gas source--exacerbated by the fact 
that generators don't always have to pay the full cost of new 
transmission required as a result of their location decisions.
    These economic distortions exist today--they are simply made worse 
by moving to very large RTOs. Before very large RTOs are considered, 
appropriate transmission pricing for RTOs, ensuring proper locational 
decisions by generators must be developed.
    We do not know if the Commission's stated plan for four large RTOs 
across the country will best promote economically efficient, secure and 
reliable wholesale markets, or what costs and benefits to our customers 
would result from such a scheme. The Commission has yet to conduct any 
analysis to suggest what the optimal size or configuration for an RTO 
might be, and what is the most efficient and reliable market structure 
within an RTO. We believe such analysis is critical to ensuring our 
customers and state regulators that our participation in an RTO is in 
the best interest of all electric consumers.
    Thus, we are obviously very concerned about the direction of FERC's 
transmission policies. While it may be true that there is a shortage of 
generation or transmission investment in some parts of the country, it 
is not the case in our service area. We are continually building new 
transmission facilities. And as noted, we also have a tremendous amount 
of new competitive wholesale generation being built in the region. Our 
rates are well below the national average and we consistently rate 
among the top utilities nationally in customer satisfaction. We are 
concerned that movement to very large RTOs, without careful forethought 
regarding implementation costs and without appropriate transmission 
pricing and investment policies, could have disastrous results for our 
consumers in terms of cost and reliability. We have been taking a 
careful, rational approach to the formation of regional transmission 
organizations to ensure that the overall goals of a competitive 
wholesale market are achieved and that our customers benefit.
               southern company's rto development efforts
    When FERC issued Order 2000 at the end of 1999 we immediately began 
to examine what strategy made sense for us in terms of forming or 
joining a regional transmission organization. The necessary starting 
point for us was the Integrated Transmission System in Georgia. The 
Georgia transmission system has been jointly owned by four partners 
since the mid-1970's. The partners are Southern Company subsidiary 
Georgia Power, the Municipal Electric Authority of Georgia (MEAG 
Power), the Georgia Transmission Corporation--a cooperative utility--
and Dalton utilities--a municipal system. For an RTO to properly 
function in our region, it will require at a bare minimum the 
participation of these four utilities. That is because the facilities 
owned by the ITS partners are inter-mingled--sometimes we might own 
different wires on the same poles, or their wires will begin where our 
wires end. It would be impossible for an RTO to operate our 
transmission without also operating the transmission systems of our 
partners.
    Thus, we began our RTO discussions with the Georgia ITS partners. 
These discussions continued through 2000 and into 2001. Simultaneous 
discussions were also held with many other utilities in the Southeast, 
including all of our regional investor-owned utilities and TVA, and 
were broadened to include the Alabama Electric Cooperative (AEC) and 
the South Mississippi Electric Power Association (SMEPA). However, 
Order 2000 required Southern Company to make a filing by October 15, 
2000 either agreeing to participate in an RTO or listing the barriers 
precluding such participation. Because we had not yet reached agreement 
with other utilities on the exact form of an RTO, Southern Company 
filed by itself on October 15. Our filing took the form of a Request 
for Declaratory Order, seeking FERC's guidance on whether our proposed 
RTO would meet the standards of Order 2000. While it was never our 
intention to form a single company RTO, we were limited by time 
constraints.
    On March 14, 2001, FERC issued a response to Southern's Request for 
Declaratory Order. The Commission rejected Southern's October filing on 
two grounds (1) Southern Company proposed that only wholesale 
transmission services would be subject to the RTO tariff, contrary to 
FERC policy, and (2) Southern Company proposed some transmission 
incentives that would flow to transmission owners as opposed to the 
RTO. FERC determined that this would violate the principles of Order 
2000, in which the Commission intended to incent the entity making 
investment decisions, not the entity building transmission.
    Southern believed that we could respond adequately to these FERC 
concerns. However, the Commission also noted in its' March 14th order 
that as an alternative to correcting the deficiencies in its October 
filing, Southern should explore joining with one or more other 
utilities to form an RTO in the Southeast. Thus, Southern continued 
negotiations with the ITS partners and other utilities in our sub-
region and we also held discussions with GridSouth, GridFlorida, 
Entergy and TVA. Around the same time, several non-jurisdictional 
utilities in the Southeast that had been somewhat unsuccessful in their 
attempts to join other RTOs in the region requested to join our 
discussions to form the SeTrans RTO. These utilities included Santee 
Cooper, Jacksonville Electric Authority (JEA), and the City of 
Tallahassee.
    At FERC's request, Southern filed a status report regarding our 
efforts to join or form a larger Southeast region RTO on May 14, 2001 
(the status report was supplemented on June 20, 2001). Southern told 
FERC that since our October filing, Southern had furthered negotiations 
with the non-jurisdictional transmission owners in our area. To this 
end, we included with our status report Memoranda of Understanding with 
MEAG Power, Dalton Utilities, the City of Tallahassee, Jacksonville 
Electric Authority and the South Mississippi Electric Power 
Association. After the May 14 filing, Georgia Transmission Corporation, 
Alabama Electric Cooperative and Santee Cooper also signed Memoranda of 
Understanding. Thus, nine utilities were now involved in forming the 
``SeTrans RTO'', representing over 39 thousand miles of transmission, 
$6 billion dollars in transmission investment, and over 44,000 
megawatts of generation that would be within the RTO's purview. This 
would place SeTrans among the largest RTOs in the nation.
    Southern Company also reported to the Commission regarding its' 
discussions with Grid South, Grid Florida, TVA and Entergy. Southern 
decided that joining with GridSouth, Grid Florida or Entergy was not 
feasible at that time. These entities were far along in their RTO 
development. Dealing with the many issues involved with the non-
jurisdictional utilities in our area, as well as the jointly owned 
transmission system in Georgia would slow the progress that those 
entities had made. Southern Company and the municipals and coops with 
which we are partnering also have some critical differences over the 
RTO governance structure of GridSouth, GridFlorida and the Entergy/
Southwest Power Pool RTO. We believe that smaller RTOs could be 
implemented much sooner than the larger RTOs favored by FERC, and if 
warranted by the market and consumer benefits, merged into a larger RTO 
at a later date.
    While TVA indicated that it does not wish to join with Southern in 
an RTO, we have agreed that most of the benefit of a joint RTO can be 
gained through coordination agreements (that provide for seamless 
transmission services and markets across RTO and utility boundaries). 
Thus, Southern signed a separate Memorandum of Understanding with TVA 
to develop such seams arrangements. GridSouth, GridFlorida and Entergy 
have also expressed interest in working on seams issues with SeTrans. 
We recently executed a three-way Memorandum of Understanding with TVA 
and Entergy to work on these issues.
    The goal we expressed in our status report was for SeTrans to make 
a final filing with FERC for the establishment of the RTO by December 
of this year, with an operational date possibly as early as the fall of 
2002. Up until July 12, 2001, Southern Company--in partnership with the 
eight other transmission owning utilities in the Southeast--was 
negotiating and was close to completing a formal agreement to cover the 
initial costs of RTO development and establish a decision-making 
structure. We had also hired an independent facilitator and established 
working groups to develop detailed market and operational protocols.
    On July 12, 2001, the FERC rejected Southern Company's Status 
Report and issued an order requiring jurisdictional utilities that were 
in the process of forming separate RTOs in the Southeast to enter into 
a 45 day ``mediation'' process to merge the separate entities into a 
single Southeastern RTO. The implementation of this mediation process 
was a deviation from FERC's previous policy direction and applied not 
only in the Southeast, but in the Northeast as well. Specifically, the 
parties asked to merge their efforts were SeTrans, GridSouth, and 
Entergy. In addition, GridFlorida and the Southwest Power Pool (SPP) 
were invited to participate, but they were not required to participate. 
Also invited (but not required to participate) were state commissions, 
non-jurisdictional utilities (municipal utilities and cooperatives,) 
TVA, the Southeastern Power Administration, and all intervenors in the 
dockets related to these RTOs. About 200 people participated in the 
mediation that was led by a FERC administrative law judge (ALJ) with 
consulting assistance.
                         the mediation process
    The mediation was subject to a confidentiality rule invoked by the 
ALJ. We provide here just a broad overview of the issues and a short 
summary of the mediator's report, which was made public on September 
10, 2001.
    The Southeastern mediation focused on the form of governance, the 
market model to be adopted, how congestion pricing should be done, 
transmission pricing, and other required functions of RTOs, as laid out 
by FERC in Order 2000.
    While the mediation began with a discussion of four different 
models (SeTrans, GridSouth, GridFlorida, and a combined Entergy/SPP 
proposal), the discussion narrowed down to only two options. These are 
(1) a Transco (independent transmission company) type model, and (2) an 
independent system administrator model (also know as the independent 
third-party operator model) that has been supported by the SeTrans 
group.
    The Transco proposal has an RTO that is managed by a new entity 
that is formed via the investment on a passive basis in a limited 
liability company (LLC) with the anticipated divestiture of 
transmission by one or more parties to the LLC. Until actual 
divestiture of transmission assets, a Board of Directors that is 
selected through a fairly complex stakeholder process governs the new 
Transco Company. Initially, the Transco Company is owned by the 
utilities that have invested in it, with the percentage of ownership 
being based on the proportion of the amount invested. The transmission 
assets of a utility can be transferred into the LLC with the passive 
ownership of the divesting utility's ownership interest in the LLC 
increasing proportionately. Eventually, the Transco might be ``sold'' 
to investors through an initial public offering, at which time, the 
Board of Directors for the Transco would be elected by shareholders.
    The SeTrans System Administrator Model, on the other hand, would 
have a proven, experienced independent third-party transmission 
operator that would be hired by the transmission owners to operate an 
RTO that meets all of the requirements of FERC Order 2000. The System 
Administrator would have operating contracts, approved by FERC, with 
each of the participating transmission owners that would be similar, 
but that could contain certain terms and conditions specific to the 
needs of individual entities (particularly municipals and coops.)
    The System Administrator would not own any transmission, and thus 
would not be biased in any way towards its own transmission or against 
that owned by others. However, the System Administrator would still be 
a for-profit company with a balance sheet substantial enough to meet 
its' commitments. It would receive a management fee for performing RTO 
functions, and would have profit incentives (and penalties) to operate 
reliably and efficiently. We believe the for-profit nature of the 
System Administrator is essential to making performance incentives 
work. The System Administrator would be hired for a five-year term with 
extension provisions, but could be fired for cause with FERC's 
permission.
    Although there may be some surface similarities, there are 
fundamental differences between the two models. First, the Transco is a 
start-up company with an independent stakeholder-selected Board, with 
the option to turn it into a shareholder elected Board if an IPO 
occurs. The System Administrator, on the other hand, is an already 
existing, proven company, independent from all market participants, 
that has its own Board of Directors and shareholders already in place, 
and has contractual incentives to operate reliably and efficiently.
    The second fundamental difference is in asset ownership. The 
Transco is specifically set up as a repository for divested 
transmission assets, and earns a return on those assets. Under the 
System Administrator model, all transmission assets remain with 
others--although independent Transcos would certainly be able to 
participate on the same basis as other transmission owners.
    The mediator's final report discussed some of the pros and cons of 
both models, but in the end recommended adoption by FERC of the Transco 
model, with some modifications that were discussed during the mediation 
process. The mediator believed that of the two models, the Transco 
model ``is better developed and more clearly in compliance with 
requirements of Order 2000 based on a `best practices analysis' of 
other RTOs which have received Commission approval and prior Commission 
precedent with respect to the current filings.'' We continue to 
believe, however, that the System Administrator model offers the 
greater flexibility, is immediately more efficient, and can accommodate 
the requirements of all transmission owners and other stakeholders. We 
clearly disagree with the judge's findings.
    The Commission has not yet acted on the mediator's report, but 
there are indications that it will act within the next several weeks.
                       southern company position
    Southern Company actively participated in the mediation process. We 
are continuing to support the SeTrans model with the other SeTrans 
participants. We are extremely wary about turning over control of our 
assets and the reliability of our system to an entity that does not 
have a Board with direct fiduciary responsibility to anyone for the 
assets under its' control, as would be the case (at least until an IPO 
occurs) with the Transco model. We are also concerned about having our 
assets managed by a company that also owns transmission assets. 
Questions arise as to whether the Transco might favor its own assets. 
Finally, we are concerned about turning operation and control of 
transmission and system reliability over to a new, unproven entity. We 
prefer an experienced operator. Thus, we have made it clear that the 
Transco model, as currently constituted, is unacceptable to Southern 
Company. However, we do believe that Transcos can and will develop 
under the SeTrans governance model. We are certainly not opposed to 
for-profit transmission companies (Transcos), and we would like to 
retain that as an option for ourselves for the future.
    Another reason for support of the SeTrans System Administrator 
model is that it is the only model within which public power entities 
have said they can participate. Participation of public power is 
critical in our service area because of their significant ownership of 
transmission. Public power is very wary of turning control of 
transmission over to an entity that also owns transmission. In some 
cases, they believe it violates their charters or other legal 
requirements. Without their participation, any RTO in our region would 
be riddled with holes--like Swiss cheese--and unable to perform all of 
its intended functions.
    In addition to these matters, we have some even more basic 
concerns. Southern Company supports the concept of RTOs and believes 
they can improve the efficiency and reliability of wholesale power 
markets. However, we are not yet convinced that a super-sized, single 
RTO for the Southeast is in the best interest of the customers that we 
serve or our shareholders.
    Clearly, as proposed RTO sizes become larger, local control and 
interest on the part of the RTO operator will become more diffuse. It 
is unclear whether a system operator overseeing the entire Southeast 
will be able to deal effectively with local reliability problems. For 
example, would an operator in North Carolina be able to assess and deal 
with a reliability issue in South Florida or Mobile, Alabama, as would 
a smaller RTO with more intimate knowledge of local conditions? And a 
very large RTO will be expensive. We don't have any idea, at this time, 
whether the proclaimed benefits of a very large RTO outweigh the costs. 
In fact, to our knowledge no one has yet done any cost-benefit or other 
analysis on the proper size and scope of RTOs in the Southeast.
    For these reasons and others described below, Southern Company 
sought rehearing of the July 12 Commission order to negotiate a 
Southeastern RTO as have many of the other SeTrans participants and 
almost all of the state commissions in the Southeast. We believe that 
such a rehearing petition will preserve our legal options. While 
neither the FERC nor individual commissioners have publicly stated that 
a single RTO will be ordered if the parties don't come to voluntary 
agreement, that is certainly a course that industry observers expect 
FERC to take. Even if there is not a direct order to participate, there 
are increasing signals that regulatory pressure may be brought to bear 
on transmission owners who oppose FERC-prescribed solutions.
    Again, it bears emphasizing that our problem is not with the RTO 
concept. As discussed above, Southern Company has planned to join an 
RTO for over two years now and has been working diligently towards that 
goal. Indeed, we have helped lead an effort that has attracted 
substantial public power support--something that few other RTOs in the 
country have done. Nonetheless, we are opposed to FERC mandates that 
determine what the RTO should look like, what area it should cover, and 
how it should operate. If both FERC and the Congress allow voluntary 
negotiations to continue--consistent with FERC objectives--along the 
path adopted in Order 2000, the nation will end up in a far better 
place than if RTO mandates come from Washington. We do not believe that 
there should be a concern that too many RTOs will be formed. Even 
before the July 12th orders, there were a maximum of 14 separate RTOs 
being formed, and talks were already under way to consolidate several 
of them. And to the extent there are ``seams'' issues regarding 
differences in markets within the separate RTOs, those seams issues 
could be dealt with, as the FERC Chairman acknowledged in his testimony 
before this Committee on September 20th, by FERC rules that would 
require common market procedures among RTOs.
    Our clear preference is to be allowed to continue to negotiate with 
our public power partners and neighboring investor-owned utilities to 
perfect an RTO proposal that has sufficient scope, meets all of FERC's 
Order 2000 requirements, and is acceptable to our state regulators. 
State commissions throughout the Southeast, including Alabama, Georgia, 
Mississippi, North Carolina, South Carolina and Louisiana, all filed 
requests for rehearing or clarification of FERC's July 12th order. 
Three states--North Carolina, Louisiana and Florida--have opened 
regulatory dockets to examine whether the costs of RTO participation 
are prudent with respect to the pros and cons of RTO participation for 
the retail customers of jurisdictional utilities. All of the state 
commissions in the Southeast have taken a very strong position that 
FERC should not mandate a broad regional RTO until the costs and 
benefits to ultimate consumers have been carefully evaluated. 
Southeastern state regulators, legislatures, and consumers are all very 
much opposed to retail consumer choice at this time, and are concerned 
that while not directly linked to customer choice, mandated 
participation in RTOs will lead to that result. We fear that FERC's 
current path towards mandating very large and broad RTOs will cause 
irreconcilable differences with state commissions. Clearly if an RTO 
doesn't work as expected or the costs and benefits are out of line, we 
will be held accountable by our retail customers via our state 
regulators.
    Southern Company has established a list of principles that are 
critical with respect to our participation in an RTO. These principles 
are set forth below:

 The RTO must meet the basic requirements of FERC Order 2000.
 The benefits of RTO participation to our retail customers must 
        exceed the costs.
 The scope of the RTO must not prevent the RTO from being able 
        to maintain regional and local bulk power system reliability.
 The RTO should be a for-profit entity with incentives (and 
        penalties) to ensure optimal performance with respect to 
        reliability and cost effectiveness.
 The RTO should have a Board of Directors that is accountable 
        to its shareholders and has a fiduciary responsibility to the 
        performance of the RTO.
 The RTO should be comprised of a third party operator with 
        actual operating experience, as opposed to a newly created and 
        untested entity.
 The RTO development process and structure must accommodate 
        participation by all transmission owners, including public 
        power, electric cooperatives, investor-owned utilities, and 
        Transcos.
 The Third Party Operator must be independent of all market 
        participants and transmission owners, thereby avoiding the need 
        for complicated safeguards to ensure independence.
 The RTO must facilitate entry of other, and perhaps new forms 
        of transmission owners, including Transcos, to ensure that 
        needed transmission facilities will be built.
 The RTO must use operating agreements that, although 
        substantially similar, will accommodate the legal and 
        institutional requirements of all participants.
 The RTO must be acceptable to state regulators.
    We continue to believe that the proposed SeTrans RTO will best 
satisfy these objectives and should be allowed to reach fruition. At 
this time, there is no need for a FERC mandate, or for additional 
authority to be granted to FERC. Indeed, such action would likely be 
counter-productive.
    Southern Company also supports the tax provisions included in H.R. 
4 that would make it possible for transmission owners to sell or spin 
off transmission to new corporate organizations without incurring large 
tax liabilities. While Southern does not currently plan to divest 
transmission, it should be retained as an option for the future.
           do very large rtos or a national grid make sense?
    The desire to move towards a ``national grid'' or very large RTOs 
in this country must be tempered with economic and technical realities. 
The term ``national grid'' itself is a misnomer. Some who use the term 
use it as a rationale for socializing interconnection and transmission 
costs among all consumers, regardless of the benefits they receive. It 
does not make sense--from either an economic or reliability standpoint 
to ``nationalize'' the transmission grid. Having a centrally controlled 
grid is not feasible or desirable form the point of view of system 
security and reliability as discussed below. Nor does it make economic 
sense to remove all bottlenecks and congestion from the transmission 
system, because, in most cases, it is much less expensive to locate 
generation on the unconstrained side of the system, rather than 
building transmission to alleviate the constraint. In the Southern 
Company system alone, we have estimated that the costs of removing all 
bottlenecks could be $12 billion, with commensurate rate increases to 
our customers of over 30%. Thus, to argue that the cost consequences of 
a ``national grid'' are inconsequential, as some have, clearly 
stretches the bounds of reason.
    Furthermore, not all consumers benefit from transmission system 
upgrades, and should not be required to pay for system enhancements for 
which they receive no benefit. Only by requiring that cost causation 
principles be used--i.e., that those who create costs should pay for 
them--will true economic efficiency occur. Competitive wholesale 
markets can benefit consumers--but only if competitors face the true 
costs of decisions they make. Markets that are haphazardly designed by 
bureaucracies, without careful attention to all potential consequences, 
are doomed to failure.
    A primary argument used by proponents of broad regional or national 
grids is the notion that the transmission grid is like a lake, where 
elections are injected into the grid at one point to form a ``pool'' of 
electrons. Under this analogy, users can take electrons out of the 
``lake'' from any point as needed. Under such a vision (mistaken we 
believe) there would be no limit to the practical size of a grid, 
because there would be no cost of transportation (transmission) of 
electrons--in fact, electrons would not be transmitted at all--and 
there would be no added complexities in grid operations. The ``lake'' 
analogy, however, is seriously and dangerously misleading.
    The use of the ``lake'' analogy as support for broad geographic 
RTOs or a national grid represents a misunderstanding of how the bulk 
power system works. The fundamental problem is that a lake by its very 
nature is a storage medium for water. Thus, water can be ``injected'' 
into the lake when it rains (or when water from river flows into the 
lake) and then taken out anywhere from the lake as needs arise. If 
there is more supply than demand, the lake level simply rises. If 
demand is greater than supply, the lake level lowers. In either case, 
the system remains stable.
    Electricity, however, cannot be stored. There is not an equivalent 
``lake'' where power can be injected at one point and taken out at 
another. Power must be produced at the instant it is needed. Power from 
specific units is required to meet specific customer needs. While the 
customer may not use the exact same electrons that are generated for 
the customer's use, generation must be increased to meet a specific 
customer's increase in demand, and generation must be decreased when 
specific customers reduce demand. If supply and demand is not kept in 
constant balance, the system will become unstable and widespread 
blackouts can result. The specific generation to be increased in 
response to a customer's increase in demand must be decided by the 
system operator so that specific transmission lines are not overloaded, 
consistent voltage is maintained and system stability is achieved. The 
operator also has to do all this in the least costly manner possible. 
Thus, it is not the case that power can be injected (generated) 
anywhere in the system and taken out anywhere, at least not without 
very costly reliability consequences.
    An additional complicating factor in the electric system is 
something called reactive power. Reactive power is a product of the 
production of alternating current (AC) power, and must be supplied to 
run all motors that are connected somewhere in the grid. Reactive power 
does no useful work and does not exist as a product that can be 
separated from the ``real'' component of power, but the system can't 
operate without it. Operators have to ensure that reactive power is 
sufficient on a moment-to-moment basis. And unlike the ``real'' 
component of power, the reactive component of power can not be 
transported over long distances. Again, the ``lake'' analogy ignores 
the need for and nature of reactive power.
    Power (although not necessarily electrons) does flow from specific 
generators to specific customers, over multiple paths (based on the 
laws of physics, power will flow from generation to load over the paths 
of least resistance.) A simplified example may help to explain how this 
works. Suppose an island utility (to eliminate the effects of 
interconnected systems) has a demand of exactly 100 MW at 1:06 PM. The 
utility will be generating 100 MW (actually slightly more because of 
losses) at that time. Suppose at 1:07 PM a local industrial customer 
starts up its assembly line and in an instant the customer's demand 
jumps to 110 MW. Generation at the utility must instantaneously 
increase to match the increase in demands of 10 MW. The specific 
generating units to be ramped up again depends on the condition of the 
transmission system at that moment. The utility will be constantly 
monitoring the system to determine whether transmission lines can 
handle additional power. Because power cannot be directed to flow over 
specific lines, operators can only adjust flows on transmission lines 
by adjusting where power is generated. Thus, generation might actually 
be ramped up by 15 MW at one unit and ramped down by 5 MW at another 
unit to provide the 10 MW.
    In this simplified example, nothing else on the system has changed. 
Thus, the additional 10 MW of power will be injected into the grid to 
specifically meet the 10 MW of new demand, and the additional 10 MW of 
power generated will flow directly to that customer.
    The actual system is much more complicated in that demand is 
constantly changing. Some generators can react to changes on the demand 
faster than others, and systems are interconnected so that changes in 
the utility will affect other utilities with which that utility is 
interconnected. Also, most of the matching of supply and demand is done 
by computers although human operators can and may have to intervene.
    The point of this discussion is to demonstrate the complexity of 
the grid and associated operational issues. Trying to maintain 
reliability over a small area is difficult enough. Trying to operate 
the system over a whole interconnection would be either impossible or 
extraordinarily expensive and complicated. The optimal size for a 
``control area'' (a control area is the geographic area within which a 
single operator has control) or an RTO is difficult to determine and 
can depend on many factors. The biggest factor is the capability of the 
interconnections between utilities. If interconnections are weak, there 
is probably little trade between the utilities and little economic 
value to expanding the size of the control area or the RTO. From a 
technical standpoint, control area or RTO size is also limited by the 
capability of computers, software, metering and telecommunication among 
utilities. To change the control area size arbitrarily and without the 
knowledge of the control area parameters will likely increase costs to 
customers.
    Taken together, all of these issues--both technical and economic--
suggest that broad geographic RTOs or a ``national grid'' may create 
more problems than they solve. The optimal size for RTOs, while 
difficult to determine, should be based--as FERC suggested in Order 
2000--on logical market areas and on the strength or weakness of 
interconnections among sub-regions. Optimal size is also a function of 
technical limitations and costs. And broad RTOs raise pricing issues 
that must be resolved. But perhaps most importantly, the markets 
themselves should be allowed to determine appropriate RTO boundaries. 
As markets develop, RTOs will merge, break-up and reconfigure, as 
market needs dictate. Setting RTO boundaries by legislative or 
regulatory fiat would set in concrete boundaries that may or may not be 
the right ones. Furthermore, it has been demonstrated that seams 
agreements and reciprocity agreements among RTOs can achieve all of the 
same objectives as broader RTOs, perhaps at much lower costs. The key 
is to preserve flexibility as we learn more about markets and how they 
are working.
    Implementation of very large RTOs or even a ``national grid''--in 
particular the concept of collapsing the whole United States into just 
a few electrical control areas--also has reliability and security 
implications that are particularly critical. These issues and concerns 
are not and should not be considered to be a barrier to RTO formation. 
They are, however, issues that should be addressed in determining the 
proper scope, configuration and market structure for RTOs.
    The transmission grid in North America has evolved over many years 
with one primary objective in mind--to reliably connect local area 
generation to serve local area load. Interconnections with neighboring 
systems were also developed to provide limited backup for unplanned 
contingencies. Market forces today require that the transmission system 
be used in ways it was never designed for in support of long distance 
energy transactions with flow patterns varying from day to day. These 
new uses for the transmission system complicate the jobs of security 
engineers and operators, and stress the lines and substations designed 
to serve area loads.
    Today, reliability management begins with the transmission planning 
studies designed to connect existing and forecasted generation to 
existing and forecasted loads. Load serving entities such as Southern 
project forecasted load growth and transmission planners run 
contingency studies separately and jointly with neighboring systems to 
determine the least cost transmission solution required to meet 
projected needs. Additionally, any known firm transmission commitments 
for point to point service are included in the base transmission plan. 
For the projected load and generation plus the set of contingencies 
modeled, these studies will define the transmission additions required 
to avoid thermal, voltage, and stability constraints.
    Once the transmission additions are constructed--which may follow a 
protracted siting process--operations engineers manage the day to day 
operation of the system using load flow programs with contingency 
analysis. This type analysis is critical to reliability management by 
ensuring that the existing system configuration is always operated to 
withstand the next planning contingency. By measuring actual flows on 
transmission lines, the real time load flow includes the effects of 
loop flows from other systems and can immediately analyze new 
configurations as lines and generators trip or are placed in service. 
These load flow analysis tools are also used to calculate total 
transmission capacity for commercially important points of receipt and 
delivery on the transmission system. These values are posted on an 
electronic bulletin board (OASIS) and adjusted as transmission 
capability is sold or added. As additional transmission capability 
requests are made, security analysis is performed to ensure that 
adequate transmission capability exists to honor the requests.
    As transmission constraints appear, the Security Coordinator with 
responsibility for that area determines the appropriate action to 
relieve the constraint. The Security Coordinator may use local 
procedures, including reconfiguration of the system, redispatch of 
generation, or curtailment priorities using contractual agreements to 
relieve identified constraints. If local procedures are not sufficient, 
the NERC line loading relief program will be implemented to curtail 
lower priority energy transactions contributing to the constraint. This 
process has resulted in one of the most reliable electric power systems 
in the world.
    The implementation of a single RTO in the Southeast or even for the 
entire eastern interconnection raises a number of reliability 
management issues. As discussed, these issues can be addressed with 
careful organization and delegation. If these issues are not properly 
resolved, large area management of reliability will certainly result in 
reduced reliability, less than optimum use of the transmission grid, 
delay in addressing constraints and potential cascading outages.
    Large area reliability management will require that methods be 
developed to preserve or provide: local knowledge, observability, 
forecasting, control, and governance that allows hierarchical decision-
making.
    No matter how the RTO is structured to manage grid reliability and 
no matter how large an area it covers, we can maintain reliability at 
the lowest overall cost to consumers through the following actions:

1. Locate generators near loads: Consider two extreme cases. In Case 1, 
        generating plants are widely distributed across the system to 
        match the distribution of load. Generation near each load 
        center is capable of serving the load in that area and 
        transmission capacity exists to back up local generation (and 
        to import lower cost power to the area for economic reasons.) 
        In Case 2, generation is located far from load centers near 
        fuel sources and large amounts of power are moved to major load 
        centers on a routine basis.
      In the real world, neither extreme case will exist due to 
        practical constraints ranging from environmental restrictions 
        on locating plants near major cities, to the feasibility of 
        siting and constructing transmission to support Case 2. But 
        clearly the system will be more reliable and less costly if 
        generation is more widely distributed as described in Case 1. 
        Unfortunately, current FERC policy will not lead to this 
        preferred result. The reasons will be discussed later in this 
        testimony.
2. Do not overly centralize control: As more and more control of the 
        electric system is consolidated for larger and larger 
        geographic areas into one location, the opportunity to have 
        major wide spread control failures becomes more probable. If 
        the large area RTO implements a single control system for the 
        entire area, a single point failure (or catastrophic event) 
        that disables this system and any back-up systems, will leave 
        the entire area with no control options and will certainly 
        reduce reliability. Smaller RTOs (or at a minimum, hierarchical 
        control areas within a larger RTO) would limit this exposure 
        the same as distributed generation limits exposure to 
        transmission failures. Clearly, there is a tradeoff between 
        larger RTOs for market efficiencies and smaller RTOs for local 
        control and reliability. The proper balance can be found. But 
        it is our judgement that at least initially, smaller RTOs--with 
        close coordination among RTOs--is a better near-term solution 
        than immediate implementation of the huge RTOs currently being 
        considered by FERC.
    FERC should not mandate the boundaries for RTOs, nor should 
Congress give FERC such authority. Rather, FERC--as it did in Order 
2000--should express its objectives for RTOs and then let market forces 
and regional circumstances dictate the appropriate size, scope and 
configuration based on natural markets, reliability and security 
concerns and trading patterns. It was this direction in which we were 
headed--successfully, we believe--before the FERC actions of July 12th.
    Another critical component to maintaining reliability, whether in 
RTOs or otherwise, is to ensure that there are enforceable reliability 
standards. Congress should pass legislation that would allow 
reliability standards to be established and enforced by a self-
regulating reliability organization, with FERC as a back-stop. In this 
regard, we support the reliability provision in the Chairman's 
discussion draft.
              making markets work--open access and pricing
    If we are to rely on a competitive wholesale market for a good part 
of our future needs--and Southern plans to do so--we need to focus on 
how to ensure that such markets will operate efficiently and reliably. 
As stated earlier, getting markets to work efficiently by proper 
pricing of transmission is critically important to ensuring low costs 
and reliable service to consumers. Very large RTOs as suggested by 
FERC, without proper attention to how pricing will work, could have 
severe unintended consequences from both a cost and reliability 
standpoint. While transmission pricing was a specific subject of this 
Committee's previous hearing, we believe the relationship of pricing to 
RTO scope and configuration is critical to the long-term success of 
RTOs and worthy of further discussion here.
    FERC has indicated that one of its main objectives for very large 
RTOs is to eliminate pancaking--the charging of multiple transmission 
rates as you cross transmission owner boundaries. While that may 
``sound'' like a good idea, the truth is that eliminating pancaked 
rates and replacing them with a single postage stamp rate for a large 
region is exactly the wrong way to go. A postage stamp rate ignores the 
fact that it costs more to transmit power over longer distances than it 
does over shorter distances. More facilities are used for power 
transmitted longer distances, and losses increase as well.
    The problem is made more complicated simply because not all areas 
of the country are created equal in terms of utility size. In the 
Northeast, for example, you may have 50 utilities in a single state, 
meaning that a wheeling transaction could require transmission service 
agreements with multiple utilities just for short distance service. In 
such cases, it may make sense to eliminate pancaking.
    In the Southeast, however, we generally have very large utilities, 
as is certainly true in our case, which may span several states. If we 
had a single RTO with postage stamp rates in the Southeast that 
included Entergy, than the price would be the same to wheel power from 
southeast Texas to the Outer Banks of North Carolina as it would be to 
wheel power from the Atlanta suburbs to Atlanta. That just does not 
make good policy or economic sense, yet FERC appears to be headed in 
just that direction.
    The fact that under a postage-stamp rate, short-distance services 
subsidize long-distance services is only a part of the problem. Our 
greatest concern, and one that we believe you should share as well, is 
that it sends the wrong price signals to generators seeking locations 
for new plants. If it costs generators the same to transmit power over 
long and short distances, then it is axiomatic that generators will 
locate closer to the fuel source rather than closer to the load in 
order to save on fuel transportation costs. But locating further from 
the load means that more transmission facilities will be used and that 
new transmission facilities will be needed sooner than they otherwise 
might have been--it costs more to transmit over longer distances than 
it does over shorter distances, even ignoring electrical losses that 
occur on the transmission system.
    The price signals and location decision-making resulting from 
FERC's current policies are in direct contrast with the historical 
method of electric system planning, where generation sites are compared 
based on total costs--including the trade-off between pipeline or coal-
by-rail transportation costs and incremental transmission costs. And as 
discussed above--remember Case 1 and Case 2--the system will be 
inherently less reliable.
    Proper transmission price signals are also essential to the 
effective deployment of distributed generation. If transmission users 
see the true costs of their use of the transmission system, then they 
are more likely to look at distributed generation as an alternative. 
Without proper price signals, there is no way to know whether 
distributed generation is an effective alternative to transmission 
investment.
    FERC's current pricing policy means that we may will be faced with 
more demand for new transmission facilities than would be the case if 
the true cost of transmission were properly considered in locating new 
generation. In our region in particular, we are concerned about the 
feasibility and cost to retail customers of constructing transmission 
on such a massive scale.
    We are already planning to spend about 3 billion dollars (compared 
to a book value of current transmission assets of 3 billion dollars) on 
upgrading the transmission system just to maintain reliability and to 
accommodate generation now under construction over the next five years. 
Having to build new transmission for even more generating facilities 
that are locating away from load centers because of inappropriate price 
signals will significantly increase these investment levels, not to 
mention the problems of siting and constructing this transmission. 
Network transmission improvements for all the new generation that we 
believe is probable over the next five to eight years will cost an 
additional 3 billion dollars, increasing our total transmission 
investment from today's level of 3 billion dollars to a total of 9 
billion dollars. We don't know how much proper price signals would 
reduce that amount, but we can be sure it would have substantial 
beneficial effect.
    Consumers would ultimately pay for this transmission investment. It 
is not at all clear to us that added generation efficiencies from an 
expanded wholesale market will be sufficient to offset these added 
costs. We often hear that because transmission is such a small 
proportion of total costs relative to generation that the savings 
inherent in large wholesale generation markets will outweigh any 
potential increased transmission costs or transmission inefficiencies. 
If we were forced into building a whole lot of new transmission because 
of inefficient generation location, then it is clear that the costs of 
transmission will no longer be small relative to generation, and in 
fact may outweigh generation costs at the margin--particularly when 
siting costs and reliability issues are factored in.
    The problem is exacerbated because FERC's pricing policies have not 
been consistent between gas pipelines and electric transmission. Gas 
pipeline pricing is generally distance sensitive, while electric 
transmission is not. Thus, electric generators can locate close to the 
gas fields and avoid distance sensitive pipeline charges, and then 
transmit the electricity to the load over a long distance at a postage 
stamp price. Again, the result does not make sense and does not 
efficiently allocate capital between these two competing forms of 
energy infrastructure.
    The bottom line is that before FERC revises its RTO policies and 
sets boundaries, it ought to spend some time getting transmission 
pricing right. If large RTOs are formed under current pricing policies, 
we may end up over-spending for new transmission facilities and putting 
generation in the wrong locations. And with FERC's policy of rolling in 
the costs of most incremental transmission facilities, our retail 
consumers will bear a large proportion of those costs with little or no 
benefit.
    Another important transmission access issue is the application of 
open access rules to all utilities. We believe that all transmission-
owning utilities--including municipals, cooperatives, federal power 
marketing administrations and TVA should be subject to the same rules 
for open access. Our preference would be that all utilities be made 
subject to the Federal Power Act. However, if the ``FERC Lite'' 
concept--which only gives FERC the ability to remand open access 
tariffs back to the transmission owner is to be adopted--we remain 
concerned that there is no way for FERC to ever ensure comparable open 
access by non-jurisdictional utilities. There could be an infinite 
loop, where the non-jurisdictional utility never provides a 
satisfactory tariff to the Commission. There must be some teeth to the 
Commission's enforcement authority with respect to all utilities.
             interconnection standards and cost allocation
    Another issue that concerns us with very large RTOs is the issue of 
generation interconnection. With so much new generation being built in 
the Southeast, the question of who gets interconnected, in what order, 
and who pays for interconnection costs are becoming increasingly 
important.
    The discussion draft of legislation circulated by the Chairman 
contains interconnection provisions which we can support, mostly 
because it requires generators (or their customers) to pay the direct 
costs of interconnection. We would, however, also like to see 
provisions in legislation that would require generators to pay 
transmission system upgrade costs when such upgrades would not have 
been required but for the generation. One proposal that merits 
attention is ``participant funding'' of transmission upgrades. 
Participant funding would allow the generator or transmission service 
applicant to pay for the costs of new transmission, in exchange for 
which they would receive rights to use the transmission system without 
paying congestion costs. Such rights would have a value equivalent to 
the transmission investment made by the market participant.
    The Chairman of FERC has publicly indicated that he would like to 
see a change in FERC's transmission interconnection policies with 
respect to cost allocation. In the past, generators wishing to 
interconnect with the utility system would themselves be responsible 
for direct interconnection costs. If network improvements were also 
needed, FERC has relied on its ``or'' pricing policy--i.e., the 
generator would pay embedded costs or incremental costs, whichever is 
greater. More recently, the Commission indicated in Order 2000 that 
perhaps in the RTO context, ``and'' pricing would be more appropriate, 
meaning that generators would pay for their use of the existing 
transmission system and for any network upgrades they cause.
    The FERC Chairman has indicated that he disagrees with these 
policies, and that he would like to see both direct interconnection 
costs and network upgrades rolled into overall transmission rates and 
paid for by all load using the transmission system of the 
interconnecting transmission provider. In other words, even if a 
generator locates in Georgia to sell to load in Ohio, retail customers 
in Georgia (and everywhere else in the Southeast) would pick up a share 
of the interconnection costs. The implication of this potential change 
in policy of shifting costs from wholesale generators to retail 
customers is clear. The problem is particularly acute with large RTOs, 
because customers may have to pick up more of the costs of transmission 
than they would have needed locally. Given the very large number of 
merchant plants being built in the Southeast, a shift in policy to 
require all load within an RTO to pay the interconnection costs of new 
generators will have a significant cost impact on our retail customers, 
and will certainly cause new generators to be less concerned about the 
costs they impose on the electric system.
    And again, there are inconsistencies with gas pipeline practices at 
FERC. When an industrial customer or gas well wants to hook up with the 
interstate pipeline system, they are almost always required to pay the 
cost of the connections. It would be unthinkable in the gas industry to 
have an industrial customer tie into the pipeline system for its own 
use and have all other customers pay for it. But that is no different 
than allowing generators to interconnect and having customers who 
receive no benefits from that generation pick up the tab. We would urge 
Congress to make it clear that those who benefit from interconnections 
and transmission upgrades should be the ones who bear the costs.
                         jurisdictional issues
    The final issue that we'd like to address is the tension between 
state and federal jurisdiction. This state/federal jurisdiction issue 
will not only be a major topic of debate in Congress and at FERC, but 
also now the Supreme Court has the issue squarely before it. Southern 
Company believes that states should continue to have authority over all 
aspects of bundled retail sales, including transmission. Some would go 
further (as NARUC has) and retain state jurisdiction for unbundled 
transmission services when the buyer and seller are in the same state. 
At the other end of the spectrum, some argue that FERC should have 
jurisdiction over all transmission, whether it's used for wholesale or 
retail, bundled or unbundled.
    This debate is about much more than turf. The real underlying issue 
is who gets priority use of the transmission system during periods of 
constraint or emergency. And whether utilities can reserve enough 
capacity on the transmission system to meet their native load needs 
before offering capacity to others. Clearly, those advocating federal 
jurisdiction would like to have all uses of the transmission system on 
an equal footing. But this ignores the fact that the transmission 
system was specifically built to serve our native load customers and we 
continue to have a legal obligation to serve retail customers in states 
that have not opened to retail competition.
    This issue is at the heart of state commissions' concerns over 
giving FERC authority to regulate the transmission portion of bundled 
retail sales. It is the job of state regulators to protect the 
interests of in-state customers. We believe these customer interests 
can be served without constraining interstate commerce by leaving 
jurisdiction over bundled retail sales to the states. We do not believe 
that more authority at the federal level, at the expense of the states, 
is warranted.
    A second jurisdictional issue of importance is market power 
mitigation. Congress will be considering bills that give FERC broad new 
authorities for investigating and mitigating market power, both at the 
wholesale and retail levels. We believe FERC and the states already 
have sufficient authority to prevent and remedy market power problems. 
FERC, certainly, can withhold authority of any supplier to sell at 
market-based rates. But some believe FERC should also have the 
authority to order suppliers to divest generation. Such authority would 
clearly usurp traditional state jurisdiction over generation. If given 
this authority, FERC might try to require divestiture of plants, even 
where those plants are needed to serve retail customers in states 
without customer choice. Furthermore, there is no other federal agency 
that has authority to order divestiture of assets by market 
participants. We believe such authority is unnecessary, and will again 
lead to numerous federal/state conflicts.
                              conclusions
    The issues currently being considered by this Committee in 
developing electricity legislation will have profound effects on the 
industry for years to come. We believe that Congress can best ensure 
the efficient and reliable development of competitive wholesale 
electric markets by:

1.Continuing to allow RTOs to develop successfully under FERC Order 
        2000 in a manner consistent with market needs and regional 
        circumstances. Congress should refrain from giving FERC 
        authority to mandate RTOs, and in fact should encourage FERC to 
        continue along the path it started with Order 2000.
2. Providing guidance to the FERC on transmission pricing, to ensure 
        that federal pricing policies lead to sufficient investment in 
        transmission and ensure that pricing signals provided by 
        transmission lead to the efficient development and location of 
        new generating sources. Congress should also ensure that FERC 
        pricing policies do not allow for cross-subsidization among 
        electric customers or groups of electric customers.
3. Ensuring continuation of the proper historical boundaries between 
        state and federal jurisdiction, by leaving with states the 
        ability to regulate all aspects of retail sales, while 
        providing mechanisms for more effective coordination and 
        cooperation between state and federal regulators. If states and 
        FERC are constantly at odds, there will likely be little that 
        gets accomplished, no matter how much authority FERC has been 
        granted. There are appropriate roles for both state and federal 
        regulation in the emerging utility markets, and these roles 
        should be respected.
4. Adopting authority for a self-regulating reliability organization to 
        adopt and enforce reliability standards with appropriate FERC 
        review. It is imperative that reliability and security of the 
        nation's electric power supply system should remain our number 
        one priority.
5. Providing that all transmission-owning utilities abide by the same 
        regulatory rules.
6. Removing federal barriers to effective competition by repealing 
        PUHCA and PURPA, and removing tax barriers to forming new 
        corporate structures for transmission ownership and investment.
    The greatest concern we have with respect to industry restructuring 
is of unintended consequences. California is certainly the best example 
of what can go wrong when the momentum of a process overtakes good 
reason and careful forethought. We need careful thought on all of these 
industry restructuring issues before we move forward. It's the classic 
case of not being able to unscramble the egg once its been scrambled. 
We fear that we are all moving forward on a fast track without having 
reviewed the potential unintended consequences. We should move forward 
in restructuring, but in a deliberate, thoughtful manner. And we should 
always put consumer interests at the top of our lists. The costs and 
benefits to consumers of all restructuring policy options need careful 
review. And such review should occur before we make critical structural 
changes to the electric utility industry that can not be reversed.

    Mr. Barton. We thank you, Mr. Franklin.
    We now want to hear from Mr. Peter Flynn, who is President 
of New England Power Company up in Massachusetts. We'll get a 
little bit different of a regional perspective, I'm sure.
    We welcome you and put your statement in the record, and 
ask you to elaborate on it for 5 minutes.

                    STATEMENT OF PETER FLYNN

    Mr. Flynn. Thank you very much, Mr. Chairman.
    New England Power Company is the principal transmission 
subsidiary of National Grid USA. And I am appearing today in 
place of Richard Sergel, President and CEO of National GRID 
USA. Mr. Sergel provided the committee with written testimony 
in advance, and I'll be testifying consistent with his prefiled 
testimony.
    Let me begin by explaining that National Grid USA is in the 
transmission and the distribution business in the United States 
and in the transmission business in other countries. We have no 
aspirations to be in the generation or wholesale power sales 
business. In fact, we're getting out of that business. So I 
come to you today offering the perspective of a company that 
intends to be and wants to be in the wires business.
    I offer three observations for the committee's 
consideration.
    First, we believe that time is of the essence to take 
actions that will foster the development of workably 
competitive wholesale markets. We are encouraged by recent 
statements by the Chair of the Federal Energy Regulatory 
Commission that indicates that that agency is ready to move 
forward and aggressively pursue the formation of regional 
transmission organizations, RTOs. And we believe that's a good 
thing. However, there were some actions that only this Congress 
can take, and key among them would be the removal of existing 
tax disincentives for the sale of transmission assets.
    The single most important thing that Congress can do to 
foster the development of independent transmission sector would 
be to remove that tax disincentive.
    Second, the transmission sector is currently evolving. Some 
believe it will evolve to a structure that will be governed by 
not for profit entities. Others believe it will evolve to a 
structure that in which transmission will be governed by 
investor owned transmission companies operating under incentive 
rates.
    Our experience is that the business form will be better 
able to attract the investment and provide the innovation that 
will provide benefits for customers. We submit, however, that 
policymakers today need not choose between those two 
alternative structures provided that independent transmission 
companies operating under incentive rates have the opportunity 
to develop, the marketplace will ultimately choose the 
structure that best provides benefits to consumers.
    We urge Congress to ensure that independent transmission 
companies have an opportunity to develop and Congress could do 
that be enacting legislation that urges FERC to adopt incentive 
rates that will attract new investment and foster renovation.
    My third and final observation is that transmission must be 
independent, but not impudent. Independence is critical. Some 
argue, however, that independence requires a form where the 
entity managing the grid takes an almost hands-off approach to 
new investment. They argue that investor owned transmission 
companies will over invest in the grid. We disagree with that 
argument. In fact, we believe that the transmission grid is the 
essential highway that will allow competition in wholesale 
markets to occur.
    The danger is not that the grid will be overbuilt. The 
danger, we submit, is that transmission investment will 
continue to lag. And we suggest that policymakers should avoid 
relegating transmission owners to a passive ownership role 
only.
    Thank you, Mr. Chairman. And I look forward to answering 
any questions that the members may have.
    [The statement of Richard P. Sergel follows:]
 Prepared Statement of Richard P. Sergel, President and CEO, National 
                                Grid USA
    Thank you for giving me this opportunity to appear here today to 
discuss transmission issues related to electric restructuring. I am 
President and CEO of National Grid USA, the US affiliate of National 
Grid Group. National Grid Group is the leading provider of independent, 
for profit transmission in the world.
    In the UK, National Grid owns and operates the 4,500 mile high-
voltage transmission network in England and Wales, as well as 
interconnections with France and Scotland. Since privatization in 1990, 
National Grid has reduced controllable costs on the UK grid by over 50% 
in real terms, and saved a further  1 billion by reducing 
congestion on the system. At the same time, National Grid has 
consistently improved its record for system availability and 
reliability, even while demand on the system has grown to an all time 
high 50.6 GW in December of 1999. Moreover, in addition to balancing 
generation and demand, regulators have recently entrusted National Grid 
with the development and implementation of new commercial mechanisms 
for the bilateral trading of electricity throughout England and Wales, 
in accordance with recently adopted New Energy Trading Arrangements 
(NETA).
    Worldwide, National Grid also operates Transener, the Argentine 
transmission system, through a joint venture with Perez Compac. The 
system consists of over 5500 route miles of 500 kv transmission lines 
across an area equivalent to Western Europe. Transener recently 
completed construction of an 800 mile transmission line that connects 
generation located in the Andes with Buenos Aires. National Grid is 
also actively involved in the construction and operation of 
transmission interconnections between Zambia and the Congo, Tasmania 
and mainland Australia, the Isle of Man and the UK, and in the North 
Sea.
    In the United States, National Grid is likewise actively engaged in 
acquiring or partnering with US utilities who seek to become or create 
independent wires or transmission businesses. As a consequence, Grid 
has been an active participant in RTO formation efforts not only in New 
England and throughout the Northeast, but also with the Alliance 
Companies in the Midwest.
    By virtue of our worldwide experience and our active participation 
in RTO formation efforts here, I believe that National Grid is uniquely 
qualified to offer an informed view not only on the important role that 
independent transmission plays in the creation of successful 
competitive wholesale markets, but on the challenges that we in the 
United States face as we attempt to create an independent transmission 
sector. I would like to offer three basic observations that cut across 
all of the subjects under discussion here today.
    First, time is of the essence. In the wake of California, we need 
to accelerate the creation of successful, competitive wholesale markets 
for electricity. To put the matter bluntly, electricity restructuring 
needs a victory. We can hardly expect state regulators in regions that 
have yet to embrace restructuring to do so unless and until we 
demonstrate that competitive wholesale markets not only can function, 
but can deliver real value to consumers.
    As evidenced by it's July 12th orders, the FERC recognizes the 
importance of expediting the RTO formation process as a means of 
fostering wholesale markets. While we understand the concerns of many 
who argue that the FERC's action was somewhat abrupt, we embrace the 
FERC's underlying goal. Consequently, we have redoubled our own efforts 
to work through the mediation process to expedite the creation of a 
regional Northeast transmission organization while at the same time 
carving out a role for an independent transmission company. The near 
term creation of a successful wholesale market throughout the 
Northeast, a region that by and large already has embraced both 
wholesale and retail restructuring, is in our view critical to the 
overall success of restructuring, and we will do all within our power 
to make it a reality.
    The Alliance RTO likewise offers the promise of immediate action. 
Assuming that the FERC approves the pending filings, the Alliance could 
be out of the gate by as early as December 15th of this year, creating 
a regional transmission organization extending over eleven states. This 
will dramatically hasten the formation of competitive wholesale 
markets. Indeed, the Alliance RTO, if approved, would serve as an 
invaluable platform from which to extend the benefits of wholesale 
markets and regional transmission to the larger region. Moreover, if 
approved the Alliance RTO will provide policy makers with a laboratory 
with which to resolve the ongoing debate concerning the future 
structure of the transmission sector.
    Congress also can help expedite the formation of an independent 
transmission sector and competitive wholesale markets. Congress should 
enact measured electric restructuring legislation that, at a minimum, 
ensures the following:

 Open Access. The success of wholesale markets depends first 
        and foremost upon open access to the transmission grid. 
        Congress should ensure that the nation's transmission grid, 
        including that owned and operated by public power, is made 
        accessible to market participants and stakeholders.
 Clarified FERC Jurisdiction. Congress should clarify that the 
        FERC has jurisdiction over all transmission, bundled and 
        unbundled, public or private. An appropriate transition period 
        should be considered for bundled rates, and the FERC need not 
        have authority over rate-setting for publicly owned 
        transmission, but it must have sufficient authority to ensure 
        and enforce open access.
 FERC ``Backstop'' Siting Authority. Congress should ensure 
        that the FERC has authority to assist regional transmission 
        organizations in planning, siting and building new 
        transmission. In the first instance, siting should remain in 
        the province of the state and local authorities. If the process 
        bogs down, however, regional transmission organizations should 
        have recourse to the FERC.
 Removing Tax Disincentives. The single most important thing 
        that Congress can do to foster the development of an 
        independent transmission sector is to remove tax disincentives 
        for the sale of transmission assets. We are convinced, based 
        upon conversations with many market participants, that they 
        would VOLUNTARILY exit the transmission business if they could 
        defer or otherwise steer clear of the significant capital gains 
        penalty they face under the existing tax code. I applaud the 
        House for addressing the issue in HR 4, and urge the Senate and 
        the President to promptly enact the measure into law.
    Second, the transmission sector must continue to evolve. The RTO 
debate has spawned a far ranging discussion of the true nature of the 
transmission sector, and its ultimate organizational structure. Some 
argue that because of the grid's vital role in fostering competitive 
markets, transmission must be organized as a public entity, a political 
collective answerable to its many stakeholders.
    In National Grid's experience, however, transmission is best run as 
a regulated business, not unlike other regulated, network businesses, 
e.g. natural gas pipelines, telecommunications, etc. Our experience in 
the UK and elsewhere strongly suggests that a properly incentivized, 
independent transmission company can best attract new investment, best 
develop and employ new technology, and best apply innovative management 
techniques not only to upgrade the grid, but more fundamentally to 
extract significant unrealized value from the existing grid, for the 
benefit of customers.
    In reality, however, the debate about the future structure of 
regional transmission is probably premature. Transmission will 
ultimately adopt the form best suited to meet the needs of the emerging 
marketplace. It may emerge, as we envision, as a regulated business 
with unique regulatory responsibilities, or it may ultimately emerge as 
an extension of government regulatory authority with attendant business 
responsibilities. Policy makers should resist making premature 
judgments on which structure will work best, and allow the natural 
evolutionary process to continue.
    Instead, we believe that policy makers should focus on those issues 
that will most directly benefit markets, such as uniform market rules, 
investment incentives for new transmission, and innovative rates that 
encourage the efficient operation of existing transmission assets.
    Congress can aid in that process by ensuring the following:

 Financial Incentives. Congress should urge the FERC to adopt 
        financial incentives for new transmission investment and 
        innovative rate designs to foster efficient operation of the 
        existing facilities.
 Interconnection Standards and Procedures. Congress should 
        instruct the FERC to adopt uniform national transmission and 
        distribution interconnection standards and procedures to 
        expedite bringing new sources of supply to market.
 Removing Tax Disincentives, as previously discussed.
    Third, Transmission must be Independent, but not Impotent. National 
Grid's experience throughout the world has affirmed that the 
transmission sector must be independent from market participants to 
assure truly competitive wholesale markets. We hold that view not 
merely as a result of a license condition, or business expedient, but 
as a central tenet of our business plan. We do not engage in the 
generation business outside of the US, and have already disposed of, or 
are actively disposing of, our minor generation assets in the US. 
National Grid has no interest in being a market participant.
    The FERC, of course, has recognized the importance of independence 
in both Orders 888 and 2000, and is holding the industry as a whole, 
and National Grid in particular, to a very high standard of 
independence.
    Independence, however, should not be confused with impotence. True 
independence assures that the transmission grid will be operated at the 
highest possible levels of efficiency for the benefit of all customers, 
including not only generators and marketers, but also industrial, 
commercial and residential customers who depend upon the grid for the 
reliable delivery of energy from a wide variety of sources.
    Recently, however, a few in the ongoing RTO debate have taken the 
position that those who own transmission assets can never be truly 
independent, even if they are totally divorced from affiliated market 
participants. They argue that transmission owners cannot be entrusted 
to operate their own assets for fear that they will overbuild the 
transmission grid, and disadvantage generators or other market 
participants.
    In our view, and certainly in recent experience, the danger of 
under-investment in transmission is real. The possibility of over-
investment is, at best, hypothetical. In reality, transmission doesn't 
compete with generation--the true competitor is the cheaper and more 
efficient generation that new transmission can deliver to customers. 
Could it be that those who purport to worry about too much new 
transmission are in actuality worried about too much new competition?
    We would therefore oppose any Congressional enactment that would 
relegate transmission owners to passive ownership.
    Mr. Chairman, we believe that policy makers are properly focused on 
how to revitalize the transmission sector to aid in the development of 
competitive markets. We believe that Congress can play a valuable role 
in that process. I'd be pleased to answer any questions the Committee 
might have. Thank you.

    Mr. Barton. Thank you, Mr. Flynn.
    We now want to hear Mr. Robert Johnston, whose President 
and CEO of the Municipal Electric Authority of Georgia. He's 
here on behalf of The Large Public Power Council.
    Your statement's in the record, we would recognize you for 
5 minutes to elaborate on it. Welcome.

                  STATEMENT OF ROBERT JOHNSTON

    Mr. Johnston. Well, thank you, Mr. Chairman.
    Mr. Barton. You need to really pull that microphone close 
to you.
    Mr. Johnston. The LLPC is a collection of 22 of the largest 
public power systems in the country. We serve 18 million 
people, 44,000 megawatts of generation and 26,000 miles of 
transmission. We're located in all regions, including many 
regions represented by the members of this committee and we 
have long supported regional transmission entities that 
facilitate open access. We've also supported comprehensive 
legislation that promotes wholesale markets.
    Addressing some specific issues today, I'd first like to 
address bundled retail service issues. We must be allowed to 
retain capacity, both generation and transmission, to service 
our native load. Unlike wholesale energy transactions that they 
have no relationship to obligation to serve, we must retain 
this capacity because of the obligation to serve, an obligation 
that is imposed on us by State law.
    Any legislation or regulation that requires us to provide 
capacity to third parties that would otherwise be used for 
native load service is simply unacceptable. It will potentially 
cause to curtail service to native load communities, it may 
raise the cost or it may do both. Given that exposure, we 
cannot do that voluntarily.
    In order to fully open the transmission system the Federal 
legislation must also address private use tax restrictions on 
private power assets. Without resolution of this issue, we 
simply will not be able to put that 26,000 miles of lines into 
the system in open access; we'll be prevented from putting 
those resources into RTOs. And, third, we will be prevented 
from selling excess generation out of our system that may, in 
fact, be created by the open access.
    We recognize that the committee does not have jurisdiction 
over the tax issue, but we appreciate the chairman's previous 
support for the issue. The chairman's draft does contain 
appropriate language which addresses the issues, however I will 
mention that the recently passed H.R. 4 legislation has 
inappropriate language and would not be adequate.
    We supported Chairman Barton's legislation last year that 
incorporated the concept of ``FERC-lite.'' The concept required 
nonjurisdictional transmission systems such as LLPC systems to 
provide nondiscriminatory open access service. The new 
language, unfortunately, in the draft takes the ``lite'' out of 
the FERC-lite proposal.
    Rate refund authority given to FERC under the draft 
language effectively removed any local jurisdiction over cost 
recovery associated with publicly owned assets. These are 
assets that those communities have the responsibility for the 
debt. The language is unacceptable in our view and should be 
stricken from the draft.
    Regarding RTOs, LLPC supports RTO development, as 
previously stated. That said, we strongly believe that there is 
a right way to evolve to the preferred state so as to do no 
harm to reliability and low cost to our customers.
    We believe the proper approach is to buildupon efforts that 
are already working or in development and grow the RTOs in a 
controlled and logical way. it's critical that you realize that 
every region, and in fact every State has unique economic, 
operational, legal and regulatory requirements that must be 
addressed in an RTO. Because of this, it's clear that one size 
and one form for all regions is not an appropriate approach, as 
FERC is leaning toward. It is ill-advised and raises the 
probability of failure.
    In our opinion, you are basically throwing together 
extremely large geographic areas that have never operated 
together, turning that over to a completely new entity with 
zero operating experience and asking it to operate a system 
that is the life blood of the economy. Like it or not, that is 
going to raise the complexities and increase the risk.
    Now, I'm saying this as a representative of an organization 
that believes in and supports development of RTOs, but not in a 
blind one size, one form approach.
    Thank you, Mr. Chairman. I'll be glad to answer any 
questions.
    [The prepared statement of Robert Johnston follows:]
Prepared Statement of Bob Johnston on Behalf of The Large Public Power 
                                Council
    My name is Bob Johnston and I am the President and Chief Executive 
Officer of MEAG Power, located in Atlanta, Georgia. 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 and 
we own and operate over 44,000 megawatts of generation and 
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 well.
    The majority of LPPC members perform the same functions as 
traditional vertically-integrated utilities. However, LPPC members are 
publicly-owned, not investor-owned. As a result, LPPC member systems 
are not profit seeking entities. We are, instead, service-focused and 
committed to the 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 Subcommittee, the LPPC appreciates 
your efforts to develop comprehensive electricity legislation. The LPPC 
supports the enactment of comprehensive legislation that promotes a 
competitive, efficient wholesale power market of benefit to all 
consumers. The LPPC has long taken an active and progressive role in 
supporting the development of a competitive electricity market. The 
LPPC was the first group of transmission owning utilities to express 
support for open transmission access in the debates preceding the 
Energy Policy Act of 1992. More recently, we have led the way in 
developing and promoting regional transmission entities as a mechanism 
to manage and operate the transmission system in an open access 
environment and were one of the first organizations to promote the 
formation and implementation of Regional Transmission Groups.
    The LPPC supports competitive wholesale power markets and open 
access, non-discriminatory transmission service. Public power systems 
are oftentimes net buyers in the market and greater access to 
competitive wholesale power markets will benefit our customers and 
communities. Public power also sells any excess power, when available, 
in the wholesale market. However, our systems are built specifically to 
serve our native load customers. We do not overbuild our systems or 
speculate on future energy needs.
    Our first obligation is to our local customers and communities. 
Therefore, we support comprehensive energy and electricity legislation 
that will provide greater access to competitive wholesale power 
markets, that ensures open access, non-discriminatory transmission 
service, that improves reliability and increases efficiencies in the 
management and operation of the transmission grid, and that ensures 
delivery of services to consumers at the lowest reasonable rates. We 
oppose any changes in law that would undermine the use of our 
transmission assets to deliver reasonably-priced power to our retail 
customers.
    We appreciate the efforts this Subcommittee has made to advance the 
debate on how to achieve benefits for electricity consumers and we 
would like to offer the Large Public Power Council's continued 
assistance in crafting legislation. 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. We have reviewed the Discussion Draft dated 
September 21, 2001, issued by Chairman Barton, and, while we will not 
comment extensively on the Discussion Draft, we highlight a few of our 
specific concerns in this testimony. As noted above, we have been 
active in this debate for some time and have long supported Chairman 
Barton in his efforts to enact comprehensive energy legislation. 
However, we have serious concerns with the Discussion Draft in its 
present form, particularly with respect to (1) provisions of the draft 
that subject public power to virtually all of FERC's ratemaking 
authority and (2) the draft's repeal of FERC's authority to review 
mergers and asset sales. We understand that this is a discussion draft 
and that it is intended to foster significant discussion among the 
affected parties and the Committee members. The LPPC would like to 
continue this dialogue. We must, however, stress again that there are 
legal constraints--such as private use tax restrictions, bond indenture 
requirements, and state statutory obligations--that are unique to 
public power, which must be addressed before full open access can be 
provided or participation in RTOs can be contemplated.
    I would now like to comment more fully on the issues that are the 
focus of the Committee's attention today.
    transmission policies and the legal constraints on public power
    The LPPC believes that a competitive energy market should include 
open access to the transmission grid on a non-discriminatory basis and 
that the reliability of electric service must be preserved and 
preferably enhanced, through competition. For a competitive market to 
be viable, LPPC member systems must be able to continue to meet the 
needs of our customers and must be able to provide a reliable and cost-
effective delivery system. We must be able to serve our native load at 
the lowest reasonable cost while meeting reliability standards. As 
locally-owned and operated entities, LPPC members' first obligation is 
to the communities that we serve. Our commitment to these communities 
is to continue to provide reliable and reasonably priced electric 
power.
    It is important to emphasize that two things make us different than 
others in the electric industry. We are governed and supervised 
locally--and our performance directly affects our ratepayers rather 
than shareholders. We are therefore very protective of our ratepayers 
and our public policy positions tend to emphasize consumers rather than 
institutions. As a result, we believe that any transmission policy must 
recognize these obligations and allow us to continue to serve our 
native load.
    In addition, since public power systems have retained the legal 
responsibility to meet the energy needs of their native load customers, 
they must maintain and retain resources to ensure the capability to 
supply such energy. Sufficient generation assets and assured 
transmission access are required to assure that the energy needs of 
customer-owners are met in a reliable and cost effective manner. State 
and local laws place requirements on public power systems that must be 
addressed. For example, my utility, MEAG Power, has an obligation under 
our state statute to serve our customers. Unlike an energy marketer who 
wants firm transmission rights to support a sales contract, we must 
preserve the capacity to supply our customers due to an obligation to 
serve imposed by state law.
    In order to create fully open access transmission, federal 
legislation must resolve the ``private use'' tax issue and should 
recognize the distinct nature of public power and its contribution to 
the electricity industry. The LPPC has testified extensively on this 
issue, both before this Committee and the House Ways and Means 
Committee. Without resolution of current tax restrictions relating to 
private use, restrictions on tax-exempt bonds (1) will prevent public 
power from fully opening up its transmission and distribution systems 
for use by investor-owned utilities and marketers, (2) will prevent our 
full participation in Regional Transmission Organizations (RTOs), and 
(3) will constrain our ability to make long-term sales of surplus 
power. Absent adequate 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 
achieved.
    While we appreciate the efforts of the House on this issue and 
recognize that this Committee does not have direct jurisdiction over 
this matter, we cannot stress our position on this issue with more 
conviction. We appreciate the efforts of the subcommittee and the 
inclusions of our agreement on private use in the Discussion Draft. 
Earlier this session, the House passed H.R. 4, the Securing America's 
Future Energy (SAFE) Act. H.R. 4, as passed by the House, addresses 
private use issues, but contains a number of changes to the private use 
provisions as introduced in the Hayworth bill [H.R. 1459] that 
frustrate the aim of opening up and expanding the transmission grid. 
The Hayworth bill represented a landmark agreement between public power 
and investor-owned utilities forged at the request of Congress, and all 
parties believe it strikes an appropriate balance with respect to 
removing restructuring-related tax impediments. However, the private 
use provisions in H.R. 4 were modified in significant ways and these 
changes make H.R. 4's private use provisions unworkable--and in some 
respects, worse than current law--for public power. The Chairman's 
Discussion Draft contains the language as included in H.R. 1459 and we 
ask the Committee's assistance in ensuring that these key private use 
relief provisions are revised and modified so the original objectives 
sought by this agreement are achieved.
    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 an open access policy. It would require 
public power entities to provide transmission services at rates that 
are not unduly discriminatory and require 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. However, as 
noted above, absent adequate private use reform, public power will be 
unable to provide open access transmission service due to the existing 
legal constraints. For this reason, our support for the ``FERC-lite'' 
concept is predicated on the removal of these legal constraints.
    In addition, due to ``private use'' tax restrictions, our 
transmission-owning members have sized their transmission systems to 
supply their own native loads. At this time, 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-discriminatory 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 supported Chairman Barton's legislation introduced last 
Congress. The bill incorporated the ``FERC-lite'' concept and required 
large non-jurisdictional transmission providers to provide non-
discriminatory open access. However, that bill did not apply to the 
transmission component of a bundled retail sale, thereby allowing 
public power transmission owners to continue to serve our native load. 
Similarly, the Administration in its ``Comments on Draft Electricity 
Restructuring Act of 2001'' (Senator Bingaman's Discussion Draft), has 
recommended that the provision on federal jurisdiction over the 
transmission component of the retail sale be eliminated from the draft. 
The LPPC believes that this is appropriate. Some current proposals 
would expand transmission jurisdiction in a way that would jeopardize 
the ability of public power systems to serve their own resident, retail 
customers. The LPPC cannot support extending FERC jurisdiction in this 
manner as it may interfere with our fundamental obligation to provide 
reliable power to our ratepayers and owners.
    In addition, the LPPC has very serious concerns regarding the 
provisions contained in Section 702 of the Discussion Draft, which 
would amend Section 206 of the Federal Power Act. When combined with 
the amendments in Section 201, the effect is to take the ``lite'' out 
of FERC-lite. The ``Uniform Refund Authority'' provisions would allow 
FERC to set just and reasonable rates (and order limited refunds) for: 
(a) public power transmission to jurisdictional public utilities; and 
(b) public power wholesale sales to jurisdictional public utilities. 
This would largely negate the limitations on the Commission's 
ratemaking authority over public power transmission that are an 
integral part of FERC-lite. The Uniform Refund Authority provision 
would subject public power wholesale sales and transmission rates to 
review by FERC when and if such rates are challenged under Section 206. 
While public power systems would be able to set their own rates in the 
first instance, these rates could, at any time, be reset by FERC. If so 
reset, the public power system could then be required to pay 
retroactive refunds. In our view, the ``Uniform Refund Authority'' 
provision, as drafted, cancels out FERC-lite and imposes unworkable, 
``after-the-fact'' rate regulation on public power entities.
    rto policies should respect unique and regional characteristics
    As noted earlier, the LPPC strongly believes that the nation's 
transmission grid should be organized in a manner that first and 
foremost ``does no harm'' to existing transmission and related delivery 
systems that are performing properly and as designed. Any proposed 
changes should be thoroughly studied to ensure that benefits exceed 
costs and that unintended consequences are minimized. Necessary and 
timely upgrades to and expansion of the transmission grid are needed. 
This will most likely be accomplished if transmission assets are 
managed through a not-for-profit regional transmission organization 
(RTO). Under this model, such upgrades would not need to meet the 
higher rate of return requirements necessary for a for-profit entity. 
Native load customers of one state should not be forced to bear the 
cost of massive grid upgrades that are to benefit marketers or 
customers or another state. The costs of upgrades are more 
appropriately borne by those who benefit from them.
    The LPPC believes that RTOs should be created to foster wholesale 
competition. RTOs should have an appropriate geographic scope, 
preferably be not-for-profit, and, in all cases, be fully independent 
of market participants. While LPPC believes that this type of 
organization will operate more cost-effectively and will more likely 
result in the open transmission necessary for a fully functioning 
market, our members are open to consideration of other types of models. 
The LPPC opposes granting FERC broad new authority to compel 
transmitting utilities to join RTOs. Similarly, the Administration in 
its ``Comments on Draft Electricity Restructuring Act of 2001'' 
(Senator Bingaman's Discussion Draft), did not endorse expansion of 
FERC's authority in this area and recommended that provisions providing 
FERC with additional authority be deleted. The LPPC does, however, 
support confirming the authority that FERC asserted in Order 2000 to 
order jurisdictional utilities into an RTO on a case-by-case basis in 
order to remedy undue discrimination or anticompetitive conduct.
    The LPPC has significant concerns about provisions that mandate 
public power membership in RTOs. The LPPC believes that an 
evolutionary--and not revolutionary--approach is needed to ensure the 
continued delivery of reliable, affordable electricity to consumers. 
The LPPC does support the voluntary formation of RTOs. Many LPPC member 
systems are already participating voluntarily in RTOs or ISOs while 
others are working hard to establish RTOs in their regions. We have 
long endorsed the basic notion that coordination of transmission can 
have positive benefits for consumers. However, we understand that every 
region may have very different needs and problems. As such, we would 
strongly urge that the formation of RTOs proceed carefully, and without 
a ``one-size-fits-all'' approach.
    Regional efforts to form RTOs and ISOs underway at this time should 
be recognized and the efforts made should be built upon. While the LPPC 
is not necessarily opposed to the concept of four large RTOs currently 
being advocated by FERC, this should not be the first step. We should 
not let the perfect be the enemy of the good. Creating RTOs over large 
geographic areas multiplies the complexities and has the real potential 
of slowing progress. We believe that the advances made on a smaller 
scale should be recognized and those efforts continued. It may be 
possible, at some later time, to build upon these efforts and create 
larger scale transmission systems. The LPPC believes that regional 
modeling should be done to assess the impacts of the creation and 
development of RTOs on the transmission grid. As the transmission grid 
is regionalized, an evaluation of the lessons learned should be done so 
that reliability is ensured and the potential benefits are maximized.
    As our members participate in the development of RTOs and ISOs, our 
unique constraints have come into play. For example, my company, MEAG 
Power has participated in the discussions on a southeast RTO--
``SeTrans.'' Since we have an obligation under state statute to serve 
our native load, our participation in SeTrans was predicated on an 
ability to preserve the capacity necessary to provide power to these 
customers. Through negotiations, we believe we will be able to 
grandfather in our native load obligations and obtain recognition of 
our pre-existing transmission rights. In addition, under proposed 
SeTrans policies, we would not be required to curtail our native load 
unless all other mitigation measures have been attempted. This will 
allow us to fulfill our obligations to our customers imposed by state 
law. However, the same solution would not work for all public power 
entities. Unfortunately, recent actions at FERC may undercut the 
voluntary efforts underway in many regions, e.g., the SeTrans RTO 
proposal in the southeast, that are designed to accommodate public 
power.
    In addition, public power systems face difficult issues in 
participating in RTOs. These must be addressed before a national system 
of RTOs can be put into place. As noted earlier, private use 
restrictions present a barrier for participation by public power 
systems. Furthermore, many public power entities operate under 
additional legal and operational requirements that affect their ability 
to participate in the ownership of an RTO or to transfer ownership or 
operations of their transmission facilities to an RTO. These 
requirements include provisions in state constitutions, state and local 
laws, and bond covenants that vary from system to system. For these 
reasons, the LPPC believes that the voluntary regional efforts 
undertaken by the industry should be used and built upon, since through 
these negotiations efforts have been made to accommodate the unique 
characteristics and legal requirements of public power.
    The legal restrictions on public power and its participation in 
RTOs varies from state to state. Some states, such as Georgia, restrict 
the use of public funds while others limit the ability of public 
entities to associate with for-profit entities. Still other states 
specifically authorize public power entities to join with other public 
entities in the ownership and operation of electric transmission 
facilities. Attached to my testimony is a matrix that highlights some 
of the state and local requirements applicable to LPPC member systems 
which might affect their ability to participate in an RTO. What this 
illustrates is that a one-size-fits-all approach cannot feasibly 
address the myriad of issues that confront public power and its 
participation in RTOs.
                               conclusion
    As the Subcommittee continues to move forward with electricity 
legislation, the LPPC offers our continued assistance. We would be 
happy to work with the Subcommittee and its staff 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. However, I must again 
stress that any comprehensive electricity legislation must meaningful 
private use relief--either in the same bill or in companion legislation 
from the tax committee--in order to be workable.
    We look forward to working with the Committee to develop 
comprehensive electricity legislation that addresses our concerns, 
garners wide support and can ultimately be enacted. I will be happy to 
answer any questions you have.

     Examples of State and Local Legal Requirements for Public Power
                  Participation in Ownership of an RTO
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Chelan County, Public Utilities District    Wash. Const. art. VIII, Sec.
 No. 1.                                       7 provides that no county,
                                             city, town, or other
                                             municipal corporation shall
                                             give any money or property,
                                             or loan its money or credit
                                             to or in aid of any
                                             individual, association,
                                             company or corporation, or
                                             become directly or
                                             indirectly the owner of any
                                             stock in or bonds of any
                                             association, company or
                                             corporation.
                                            Wash. Rev. Code Sec.
                                             54.16.040 allows a PUD to
                                             purchase, maintain,
                                             conduct, and operate
                                             transmission lines within
                                             or without its limits, for
                                             the purpose of furnishing
                                             the district's inhabitants
                                             and any other persons,
                                             including public and
                                             private corporations,
                                             within or without its
                                             limits, with electric
                                             current for all uses.
                                            Wash. Rev. Code Sec.
                                             54.16.090 allows a PUD to
                                             enter into any contract or
                                             agreement with the U.S., or
                                             any state, municipality, or
                                             other utility district; or
                                             with any cooperative,
                                             mutual, consumer-owned
                                             utility; or with any
                                             investor-owned utility; or
                                             with an association of any
                                             such utilities, for
                                             carrying out any of the
                                             powers authorized by Wash.
                                             Rev. Code Title 54.
                                            Wash. Rev. Code 54.12.010
                                             prohibits unlawful
                                             delegation of Commission
                                             authority; case law
                                             requires needs of local
                                             ratepayers to be addressed.
Colorado Springs Utilities................  Colo. Const. art. XI, Sec.
                                             1 forbids a city to lend or
                                             pledge its credit or faith,
                                             directly or indirectly, in
                                             any manner to any person,
                                             company, or corporation,
                                             public or private, for any
                                             purpose whatever; or become
                                             responsible for any debt,
                                             contract, or liability of
                                             any person, company, or
                                             corporation, public or
                                             private, in or out of the
                                             state.
                                            Colo. Const. art. XI, Sec.
                                             2 prohibits a city from
                                             becoming a shareholder in
                                             any corporation or company
                                             or joint owner with any
                                             person, company, or
                                             corporation, public or
                                             private, in or out of
                                             state; but a city is not
                                             prohibited from becoming
                                             such a shareholder or joint
                                             owner to effect the
                                             transmission of energy in
                                             whole or in part for the
                                             benefit of the inhabitants
                                             of such city.
                                            Colo. Rev. Stat. Sec.  31-15-
                                             707(1) allows a city to
                                             acquire electric light and
                                             power works and
                                             distribution systems and
                                             all appurtenances necessary
                                             to any of said works or
                                             systems, or to authorize
                                             the erection, ownership,
                                             operation, and maintenance
                                             of such works and systems
                                             by others, subject to voter
                                             approval, municipal bond
                                             and financing requirements,
                                             and a condition that allows
                                             the city to purchase and
                                             condemn such works or
                                             systems.
                                            CS Charter 6-70 restricts
                                             participation unless in the
                                             ordinary course of
                                             business.
                                            CS Bond Ord. 8-14 restricts
                                             participation unless in the
                                             normal course of business.
JEA.......................................  Fla. Const. art. VII Sec.
                                             10 generally prohibits a
                                             municipality, county,
                                             special district, or agency
                                             of any of them to become a
                                             joint owner with, or
                                             stockholder of, or give,
                                             lend or use its taxing
                                             power or credit to aid any
                                             corporation, association,
                                             partnership or person; but
                                             it does not prohibit laws
                                             authorizing such entities
                                             from becoming a joint owner
                                             of, giving, or lending or
                                             using its taxing power or
                                             credit for the joint
                                             ownership, construction and
                                             operation of electrical
                                             energy generating or
                                             transmission facilities
                                             with any corporation,
                                             association, partnership,
                                             or person.
                                            Fla. Stat. Chap. 163 & 361
                                             authorize joint power
                                             projects among utilities,
                                             public and private,
                                             domestic and foreign,
                                             subject to restrictions
                                             that the right to full
                                             possession and to all of
                                             the use, services, output,
                                             and capacity of any such
                                             project during the
                                             estimated useful life
                                             thereof be vested, subject
                                             to creditors' rights, in
                                             the entity created pursuant
                                             to Chapter 163 or 361.
                                             Under local law and
                                             charter, may need City
                                             Council approval.
                                            Bond covenants prohibit
                                             adverse effect on revenues.
Los Angeles Department of Water and Power.  Cal. Const. art. 16, Sec.  6
                                             prohibits any political
                                             subdivision of the state to
                                             give or lend credit in aid
                                             of or to any person,
                                             association or corporation,
                                             whether municipal or
                                             otherwise, in any manner
                                             whatever, for the payment
                                             of the liabilities of any
                                             individual, association,
                                             municipal or other
                                             corporation whatever; it
                                             also prohibits the
                                             legislature from
                                             authorizing the state or
                                             any political subdivision
                                             thereof to subscribe for
                                             stock or become a
                                             stockholder in any
                                             corporation whatever.
                                            L.A. City Admin. Code Sec.
                                             Sec.  23.129 & 23.132
                                             require City Council
                                             approval.
                                            L.A. City Charter Sec. Sec.
                                             219.4 & 390 require City
                                             Council approval.
Lower Colorado River Authority............  Texas Const. art. 3
                                             prohibits a public utility
                                             from owning or acquiring
                                             stock in a corporation or
                                             from owning an interest in
                                             a partnership or joint
                                             venture (except with
                                             respect to electric
                                             generating facilities with
                                             other utilities).
                                            Bond covenants require LCRA
                                             Board of Directors to
                                             retain authority to adjust
                                             rates to assure that LCRA
                                             can meet its debt service
                                             and coverage requirements;
                                             no prejudice to bondholder
                                             rights.
Municipal Electric Authority of Georgia...  Ga. Const. art. IX, Sec.
                                             II, para. VIII prohibits
                                             any county, municipality,
                                             or other political
                                             subdivision of Georgia,
                                             through taxation,
                                             contribution, or otherwise,
                                             to appropriate money for or
                                             to lend its credit to any
                                             person or to any nonpublic
                                             corporation or association
                                             except for purely
                                             charitable purposes.
                                            Ga. Code Ann. Sec.  46-3-
                                             126(5) authorizes MEAG to
                                             acquire electric
                                             transmission lines by
                                             purchase or otherwise,
                                             either as owner of all or
                                             of any part in common with
                                             others or as agent, and to
                                             purchase or construct part
                                             of the capacity of
                                             transmission projects
                                             sponsored and owned by or
                                             in common with others, and
                                             to transmit power both for
                                             itself and on behalf of
                                             others.
                                            Ga. Code Ann. Sec.  46-3-
                                             126(7) authorizes MEAG to
                                             exercise any one or more of
                                             the powers, rights, and
                                             privileges conferred in the
                                             section either alone or
                                             jointly or in common with
                                             one or more other parties
                                             or utilities, whether
                                             public or private. MEAG is
                                             authorized to own an
                                             undivided interest in
                                             transmission facilities
                                             with any other parties,
                                             whether public or private,
                                             and to enter into
                                             agreements with the other
                                             parties regarding the
                                             construction, operation and
                                             maintenance of such
                                             transmission facilities by
                                             any one or more of the
                                             parties to the agreement
                                             acting as agent for the
                                             others.
                                            Ga. Code Ann. Sec.  46-3-127
                                             prohibits MEAG from
                                             constructing or operating
                                             any project for profit
                                             except insofar as such
                                             profit will inure to the
                                             benefit of the public.
Nebraska Public Power District............  Neb. Const. art. XI Sec.  1
                                             prohibits a city, county,
                                             town, precinct,
                                             municipality or other
                                             subdivision of the state
                                             from ever becoming a
                                             subscriber to the capital
                                             stock, or owner of such
                                             stock, or any portion or
                                             interest therein, of any
                                             private corporation or
                                             association.
                                            Neb. Const. art. XIII Sec.
                                             3 prohibits the credit of
                                             the state's political
                                             subdivisions from ever
                                             being given or loaned in
                                             aid of any private
                                             individual, association, or
                                             corporation.
                                            Affirmative and restrictive
                                             bond covenants covering,
                                             among other things, rate
                                             setting and compensation,
                                             revenue requirements,
                                             standards for contract or
                                             property transfer approval
                                             based on interests of NPPD
                                             and bondholders, use of
                                             proceeds or payments, and
                                             preserving the bonds'
                                             income tax exemption.
                                            Cannot delegate or surrender
                                             statutory authority to FERC
                                             or submit to its
                                             jurisdiction voluntarily.
                                            Can participate in a public
                                             RTO but only by agreement
                                             authorized under Nebraska
                                             Interlocal Cooperation Act
                                             (Neb. Rev. Stat. Sec.  13-
                                             801 et seq.) or Joint
                                             Exercise of Powers statutes
                                             (Neb. Rev. Stat. Sec.  70-
                                             628.01-628.04). Cannot
                                             delegate or surrender
                                             statutory duties and
                                             elected governing board
                                             powers to governing board
                                             of public RTO controlled by
                                             private persons.
New York Power Authority..................  N.Y. Pub. Auth. Law Sec.
                                             1005(11) requires that
                                             participation in an RTO be
                                             necessary or convenient for
                                             carrying on the Authority's
                                             business; possible
                                             restrictions in bond
                                             covenants based on
                                             permissible investment
                                             criteria.
Omaha Public Power District...............  Neb. Const. art. XI Sec.  1
                                             prohibits a city, county,
                                             town, precinct,
                                             municipality or other sub-
                                             division of the state from
                                             ever becoming a subscriber
                                             to the capital stock, or
                                             owner of such stock, or any
                                             portion or interest
                                             therein, of any private
                                             corporation or association.
                                            Neb. Const. art. XIII Sec.
                                             3 prohibits the credit of
                                             the state from ever being
                                             given or loaned in aid of
                                             any individual,
                                             association, or
                                             corporation.
                                            Neb. Rev. Stat. Sec.  70-
                                             601(1) defines ``district''
                                             to be public entities
                                             organized within Nebraska.
                                            Neb. Rev. Stat. Sec.  70-649
                                             allows any public power
                                             district to sell to any
                                             public power district,
                                             public power and irrigation
                                             district, irrigation
                                             district, city or village,
                                             any power plant, electric
                                             generating plant, electric
                                             distribution system, or any
                                             parts thereof, for such
                                             sums and under such terms
                                             as its board of directors
                                             may deem fair and
                                             reasonable.
                                            Neb. Rev. Stat. Sec.  70-
                                             628.01 allows any district
                                             that is interested in the
                                             operation of power plants,
                                             distribution systems, or
                                             transmission lines of
                                             ethanol production or
                                             distribution facilities,
                                             either alone or in
                                             association with another
                                             district or districts, may
                                             sell, lease, combine,
                                             merge, or consolidate all
                                             or a part of its property
                                             with the property of any
                                             other district or districts
                                             with the approval of a
                                             majority of the board of
                                             directors of each district
                                             involved.
                                            Neb. Rev. Stat. Sec. Sec.
                                             70-625 gives a public power
                                             district all the usual
                                             powers of a corporation for
                                             public purposes and
                                             authorizes it to purchase,
                                             hold, sell, and lease
                                             personal property and real
                                             property reasonably
                                             necessary for the conduct
                                             of its business, subject to
                                             any limitations in the
                                             petition for its creation.
                                            Neb. Rev. Stat. Sec. Sec.
                                             70-628.01-.03 authorizes a
                                             public power district to
                                             exercise its powers either
                                             alone or jointly with other
                                             districts, municipalities
                                             and public agencies, and
                                             electric cooperatives and
                                             electric membership
                                             corporations within or
                                             outside the state.
                                            Neb. Rev. Stat. Sec.  70-
                                             628.04 authorizes any
                                             public power district
                                             participating jointly and
                                             in cooperation with others
                                             in an electric transmission
                                             facility to enter into
                                             agreements with the other
                                             participants, including
                                             provisions for the
                                             construction, operation,
                                             and maintenance of such
                                             facility and allocation of
                                             resulting costs among the
                                             participants.
Orlando Utilities Commission..............  Fla. Const. art. VII Sec.
                                             10 generally prohibits a
                                             municipality, county,
                                             special district, or agency
                                             of any of them to become a
                                             joint owner with, or
                                             stockholder of, or give,
                                             lend or use its taxing
                                             power or credit to aid any
                                             corporation, association,
                                             partnership or person; but
                                             it does not prohibit laws
                                             authorizing such entities
                                             from becoming a joint owner
                                             of, giving, or lending or
                                             using its taxing power or
                                             credit for the joint
                                             ownership, construction and
                                             operation of electrical
                                             energy generating or
                                             transmission facilities
                                             with any corporation,
                                             association, partnership,
                                             or person.
                                            Fla. Stat. Chap. 163 & 361
                                             authorize joint power
                                             projects among utilities,
                                             public and private,
                                             domestic and foreign,
                                             subject to restrictions
                                             that the right to full
                                             possession and to all of
                                             the use, services, output,
                                             and capacity of any such
                                             project during the
                                             estimated useful life
                                             thereof be vested, subject
                                             to creditors' rights, in
                                             the entity created pursuant
                                             to Chapter 163 or 361.
                                             Under charter, may need
                                             City Council approval.
                                            Bond covenants prohibit
                                             adverse effect on revenues.
Sacramento Municipal Utility District.....  Cal. Const. art 16, Sec.  6
                                             prohibits a political
                                             subdivision of the state
                                             from lending or pledging
                                             its credit, in any manner,
                                             for the payment of the
                                             liabilities of any
                                             individual, association,
                                             municipal or other
                                             corporation, or from making
                                             a gift of any public money
                                             or thing of value to any
                                             individual, municipal, or
                                             other corporation.
                                            Cal. Const. art 16, Sec.  6
                                             prohibits a political
                                             subdivision of the state
                                             from subscribing for stock,
                                             or becoming a stockholder
                                             in any corporation.
                                            Cal. Pub. Util. Code Sec.
                                             12801 allows a municipal
                                             utility district to
                                             acquire, construct, own,
                                             operate, control or use,
                                             within or without the
                                             district, works or parts of
                                             works for supplying the
                                             inhabitants of the district
                                             and public agencies
                                             therein, or some of them,
                                             with light, water, power,
                                             and heat.
Seattle City Light........................  Wash. Const. art. VIII, Sec.
                                              7 provides that no county,
                                             city, town, or other
                                             municipal corporation shall
                                             give any money or property,
                                             or loan its money or credit
                                             to or in aid of any
                                             individual, association,
                                             company or corporation, or
                                             become directly or
                                             indirectly the owner of any
                                             stock in or bonds of any
                                             association, company or
                                             corporation.
                                            Wash. Rev. Code 35.92.052
                                             provides cities owning
                                             their own electric
                                             utilities to enter into
                                             agreements with investor-
                                             owned utilities,
                                             cooperatives, public
                                             utility districts, other
                                             cities, and agencies of the
                                             United States for the
                                             undivided ownership of
                                             transmission and generation
                                             facilities, so long as the
                                             city is not severally
                                             liable for actions of the
                                             other participants and so
                                             long as the city assumes no
                                             larger share of the
                                             responsibility and expenses
                                             than its proportionate
                                             ownership share.
Snohomish County, Public Utilities          Wash. Const. art. VIII, Sec.
 District No. 1.                              7 provides that no county,
                                             city, town, or other
                                             municipal corporation shall
                                             give any money or property,
                                             or loan its money or credit
                                             to or in aid of any
                                             individual, association,
                                             company or corporation, or
                                             become directly or
                                             indirectly the owner of any
                                             stock in or bonds of any
                                             association, company or
                                             corporation.
                                            Wash. Rev. Code Sec.
                                             54.16.040 allows a PUD to
                                             purchase, maintain,
                                             conduct, and operate
                                             transmission lines within
                                             or without its limits, for
                                             the purpose of furnishing
                                             the district's inhabitants
                                             and any other persons,
                                             including public and
                                             private corporations,
                                             within or without its
                                             limits, with electric
                                             current for all uses.
                                            Wash. Rev. Code Sec.
                                             54.16.090 allows a PUD to
                                             enter into any contract or
                                             agreement with the U.S., or
                                             any state, municipality, or
                                             other utility district; or
                                             with any cooperative,
                                             mutual, consumer-owned
                                             utility; or with any
                                             investor-owned utility; or
                                             with an association of any
                                             such utilities, for
                                             carrying out any of the
                                             powers authorized by Wash.
                                             Rev. Code Title 54.
                                            Wash. Rev. Code Sec.
                                             54.12.010 prohibits
                                             unlawful delegation of
                                             Commission authority; case
                                             law requires needs of local
                                             ratepayers to be addressed.
Santee Cooper.............................  S.C. Const., art. X, Sec.
                                             11 prohibits the state or
                                             any of its political
                                             subdivisions from becoming
                                             a joint owner of or
                                             stockholder in any company,
                                             association or corporation;
                                             but the General Assembly
                                             can authorize Santee Cooper
                                             to become a joint owner
                                             with privately owned
                                             electric utilities,
                                             including electric
                                             cooperatives of electric
                                             generation or transmission
                                             facilities, or both, and to
                                             enter into and carry out
                                             agreements with respect to
                                             such jointly owned
                                             facilities.
                                            S.C. Const. art VIII, Sec.
                                             13 permits the sharing of
                                             lawful cost, responsibility
                                             and administration of
                                             functions with one or more
                                             governments whether within
                                             or without the state.
Tacoma Public Utilities: Light Division...  Wash. Const. art. VIII, Sec.
                                              7 provides that no county,
                                             city, town, or other
                                             municipal corporation shall
                                             give any money or property,
                                             or loan its money or credit
                                             to or in aid of any
                                             individual, association,
                                             company or corporation, or
                                             become directly or
                                             indirectly the owner of any
                                             stock in or bonds of any
                                             association, company or
                                             corporation.
                                            Tacoma City Charter Sec.
                                             4.1 allows the city to
                                             possess all powers granted
                                             to cities by state law to
                                             construct, purchase,
                                             acquire, add to, maintain,
                                             and operate, either within
                                             or outside its corporate
                                             limits, public utilities
                                             for supplying power to the
                                             municipality's inhabitants
                                             and to sell and deliver any
                                             of these utility services
                                             outside its corporate
                                             limits to the extent
                                             permitted by state law.
                                            Tacoma City Charter Sec.
                                             4.5 prohibits the use of
                                             revenues for purposes other
                                             than the necessary
                                             operating expenses of the
                                             utility, including interest
                                             on and redemption of the
                                             outstanding debt thereof,
                                             and making additions and
                                             betterments thereto and
                                             extensions thereof. The
                                             funds of any utility shall
                                             not be used to make loans
                                             to or purchase the bonds of
                                             any utility, department, or
                                             agency of the city.
------------------------------------------------------------------------
This document reflects preliminary analysis for discussion purposes only
  and is not intended to be a legal opinion with respect to any matter
  nor to indicate that all or part of the facilities of LPPC members are
  transmission facilities for purposes of FERC jurisdiction. Submitted
  with LPPC Comments on RTO Notice of Proposed Rulemaking, Docket No.
  RM99-2-000 (August 20, 1999).


    Mr. Barton. Thank you.
    We have a series of two votes pending on the floor, and 
those are the only two votes for the day. We're going to hear 
from Mr. English, then we're going to recess to go vote, and 
then we will come back at approximately 2 p.m. to finish Mr. 
Gerken and Mr. Esposito and Mr. Trabandt and Mr. Travieso.
    So, Mr. English, we're going to give you the last word for 
this session of the panel. And then we'll go vote and we'll 
come back and will start with Mr. Gerken.

                   STATEMENT OF GLENN ENGLISH

    Mr. English. Thank you very much, Mr. Chairman. I 
appreciate that.
    As I think the members of this panel are well aware, the 
National Rural Electric Cooperative Association represents a 
1,000 cooperatives, 46 States and 35 million consumers in those 
States. It is owned by those consumers.
    Mr. Chairman, the National Rural Electric Cooperative 
Association supports the formation of large independent 
regional transmission organizations if they're fully 
independent and properly designed and operated, minimizes 
market power and maximizes efficiencies. That's what we think 
the objectives of RTO should be.
    Electric cooperatives expect and intend to be a part of 
RTOs that are established across this country. Of course, that 
would mean that the transmission that is a part of those RTOs 
would be under the FERC jurisdiction. And we have no objection 
to that.
    Mr. Chairman, for that reason, NRECA see little reason 
for--to subject electrical cooperatives to additional Federal 
regulatory commission authority if, in fact, those cooperatives 
are a part of RTO.
    We recognize that this would have a very heavy financial 
burden on those electric cooperatives and, of course, that 
would be on those consumer owners themselves.
    As far as legislation is concerned, we appreciate the carry 
forward of the recognition of the importance of the 
relationship between the consumer and his duly elected board, 
and the ability of that board to carry out the intent of those 
consumers.
    We are, however, somewhat puzzled by the insertion of 
section 206 of the Federal Power Act in applying that to the 
electric cooperatives. That seems to us to, in effect, take 
away what was given under the so-called FERC-lite provisions.
    We're also extremely concerned about the fact that it 
appears we'd find ourselves with dual jurisdiction, two 
different Federal agencies directly us as to what we should do. 
First is the Rural Utility Service, and of course anyone that 
has a loan through Rural Utility Service, they have their own 
rules, regulations, mandates as to what must be done. Second 
would be any FERC jurisdiction, which could in the very 
likelihood at least on some occasion be contradictory to what 
we're being told with those agencies.
    We think that if anything is done in this area, 
particularly as it applies to our assets and resources that may 
very well be under loan, that there should be something in the 
legislation that addresses that dual jurisdiction and requiring 
those two Federal agencies to work together to make sure that 
we don't find ourselves in that kind of a conflict.
    Also, we believe that the States should retain their 
traditional jurisdiction over retail sales and electric 
distribution systems should not be subject to FERC 
jurisdiction. Particularly whenever you consider the fact that 
FERC does not have the resources nor does it have the 
experience to be able to address a number of these issues, many 
of which are engineer related.
    So, we would strongly urge that careful consideration be 
given to the fact that any kind of retail sales, anything 
addressing the retail sales should remain with the States and 
should not be subject to FERC jurisdiction.
    And also I would again make the point, Mr. Chairman, as I 
did earlier today, that unless the FERC is specifically 
targeted as to what their objectives are, that will do nothing 
except dilute the very limited resources that FERC already has 
and make them incapable of carrying out the responsibilities 
that are to be assigned to them.
    We think the RTO's are extremely important. We think they 
need to be run right. We believe that everyone should have an 
equal chance to participate in those RTOs, and that's going to 
depend on a very vigorous and very alert FERC, one that has the 
resources to do that job.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Glenn English follows:]
Prepared Statement of Glenn English, Chief Executive Officer, National 
                 Rural Electric Cooperative Association
                              introduction
    Chairman Barton and Members of the Subcommittee, I appreciate this 
opportunity to continue our dialogue on the restructuring of the 
electric utility industry. For the record, I am Glenn English, CEO of 
the National Rural Electric Cooperative Association, the Washington-
based association of the nation's nearly 1,000 consumer-owned, not for 
profit electric cooperatives.
    These cooperatives are locally governed by boards elected by their 
consumer owners, are based in the communities they serve and provide 
electric service in 46 states. The 35 million consumers served by these 
community-based systems continue to have a strong interest in the 
Committee's activities with regard to restructuring of the industry.
    Electric cooperatives comprise a unique component of the industry. 
Consumer-owned, consumer-directed electric cooperatives provide their 
member-consumers the opportunity to exercise control over their own 
energy destiny. As the electric utility industry restructures, the 
electric cooperative will be an increasingly important option for 
consumers seeking to protect themselves from the uncertainties and 
risks of the market. I would like to thank you, Mr. Chairman, and 
Members of the Committee for your receptiveness to the concerns and 
viewpoints of electric cooperatives.
                  regional transmission organizations
    NRECA supports the formation of large, independent Regional 
Transmission Organizations or RTOs for all transmission owners.
    RTOs, if fully independent and properly designed and operated, can 
substantially mitigate the ability of transmission owners that also own 
generation to influence the market for electric energy and to 
potentially discriminate against competitors. Because an effective RTO 
can operate the transmission system on a regional basis to maximize 
efficiencies, it can also significantly improve reliability and reduce 
the potential for power market instability that can lead to price 
spikes.
    NRECA has supported the formation of RTOs in a number of ways. 
NRECA submitted comments to the FERC in the rulemaking that resulted in 
Order No. 2000, and, in fact, FERC adopted several of NRECA's 
recommendations. NRECA representatives attended each of the 
Commission's five regional collaborative meetings during 2000 and 
facilitated presentations made by individual cooperatives at those 
meetings. NRECA also successfully facilitated voluntary RTO 
informational filings by cooperatives even though the Commission's 
regulations did not require most cooperatives to make such filings. 
Finally, NRECA and cooperatives in the southeastern United States have 
been very active in the ongoing FERC mediation that is seeking to 
establish a single, large Southeast RTO.
    For cooperatives to fully participate in RTOs as they clearly wish 
to do, and in order for properly formed RTOs to develop, the following 
issues are of critical importance:
    Full Recovery of Transmission Revenue Requirements. Transmission-
owning cooperatives must obtain full, immediate recovery of their 
revenue requirements from an RTO if they agree to commit their 
facilities to the functional control of that RTO, as contemplated by 
Order No. 2000.
    Comparable Inclusion of Transmission Facilities. Some transmission-
owning cooperatives have had difficulty getting their transmission 
facilities accepted for operation/cost recovery by a future RTO on the 
same basis as investor-owned utilities during the RTO formation 
process. Those IOUs opposing inclusion of cooperative transmission 
facilities point to the radial, load serving nature of these facilities 
as a reason for excluding them, overlooking the fact that they own 
comparable facilities that are included in their FERC-regulated 
transmission revenue requirements. Cooperatives therefore favor the use 
of a single, consistent standard to govern the RTO's functional control 
of all transmission facilities, regardless of the owner.
    Grandfathered Contracts. Many cooperatives have substantial 
contractual arrangements with neighboring transmission providers. These 
contracts take many forms: some are among joint transmission owners, 
others deal with provision of both generation and transmission, and 
some are transmission-only agreements (both pre- and post-Order No. 
888). Whatever their content and form, these contracts are vital to 
sustaining the cooperative's ability to provide on-going service to 
their own member-owners. Transmission-owning cooperatives will not be 
able to join an RTO unless they have assurances that such contractual 
rights will not be severed without their consent. Similarly, 
transmission-dependent cooperatives cannot lose access to the 
transmission facilities needed to serve their member loads.
    Regulation by the Rural Utilities Service. Many cooperatives have 
substantial loans from, and, as a result, are substantially regulated 
by the Rural Utilities Service (RUS) of the U.S. Department of 
Agriculture. The Commission must take RUS regulation into account and 
coordinate with RUS to ensure that when cooperatives seek to join RTOs, 
inconsistent, inefficient regulation of cooperatives by these two 
federal agencies does not occur.
    85-15 Revenue Test. Cooperatives lose their tax-exempt status when 
more than 15 percent of their revenue is received from nonmembers. The 
Internal Revenue Service (IRS) has not clarified that, when a 
cooperative joins an RTO, the revenues received by the cooperative from 
the RTO will not be deemed to be nonmember income for purposes of the 
85-15 revenue test. Congress must ensure that cooperatives can join 
RTOs without unintentionally violating their current not-for-profit tax 
status. NRECA appreciates the Chairman's effort to address the 85-15 
issue in the September 21 discussion draft. That language, however, is 
inadequate to solve the problem and permit cooperatives to participate 
in RTOs. Since the September 21 discussion draft addresses tax issues, 
it should incorporate the provisions in H.R. 1601.
    Cost Shifting. RTO transmission rates and tariffs should (a) 
mitigate cost shifting and take into account the specific needs and 
characteristics of each affected region, including costs of operation, 
debt, and other expenses; (b) use the same effective return-on-
investment to all participating transmission owners; and (c) recognize 
the goal of establishing a single non-pancaked rate structure 
applicable to all customers.
    RTO Market Power. As transmission service remains a monopoly, and 
as individual RTOs assume control of larger transmission systems than 
individual transmitting utility owners, RTOs will possess unprecedented 
market power. In this context, a badly governed and operated RTO may be 
worse than no RTO at all. Thus, the monopoly status of an independent 
RTO must be acknowledged at the outset, and the RTO's transmission rate 
structure and associated cost-of-service should be developed using 
traditional cost-of-service ratemaking principles. RTOs should not be 
eligible for ``incentive ratemaking,'' ``performance-based ratemaking'' 
or ``light-handed regulation'' that would have the effect of increasing 
rates to transmission customers without concomitant benefits or 
reducing independent regulatory oversight of such an RTO's activities.
    Collaborative Process. The Commission has sought to encourage RTO 
forming public utilities to actively collaborate with cooperatives in 
order to accommodate their needs as consumer-owned entities. 
Unfortunately, in numerous instances collaboration has been nothing 
more than a thinly disguised effort of saying, ``take it or leave it.'' 
For cooperatives to effectively join RTOs, public utilities must be 
required to meaningfully collaborate with cooperatives beginning with 
the earliest stages of RTO formation efforts. The Commission should not 
fail to act when informed of RTO formation efforts that exclude 
cooperative participation.
    An NRECA member-approved resolution stating its conditional-support 
for RTO formation is attached hereto for the Committee's convenience 
and reference.
                  open access and federal jurisdiction
    NRECA opposes efforts to subject electric cooperatives to the 
jurisdiction of FERC. That expansion of jurisdiction would 
unnecessarily impose heavy financial burdens on electric cooperatives 
and their consumer-owners.
    NRECA also opposes efforts to move jurisdiction over retail sales 
and the distribution system from the states, where that jurisdiction 
properly lies, to FERC. FERC lacks the experience and resources to 
regulate retail service and the distribution system, as well as the 
capacity to address the important state and local interests that are 
inherent in retail electric service.
    NRECA, however, sincerely appreciates the Chairman's efforts in the 
106th Congress to limit the expansion of FERC jurisdiction over 
electric cooperatives. NRECA looks forward to working further with the 
Chairman and the Committee to resolve any concerns they may have about 
FERC's role in a manner that minimizes the adverse impacts on 
cooperatives and their consumer-owners.
Expansion of FERC Jurisdiction over Cooperatives with Transmission Is 
        Unnecessary
    Proponents of expanded FERC jurisdiction argue that all 
transmission owners, including cooperatives, must be subject to the 
same regulatory scheme if they are to move power efficiently across the 
grid. In fact, however, sellers of electric energy can move power 
across electric cooperative lines.
    In the Energy Policy Act of 1992 (EPAct), Congress amended Sec. 211 
of the Federal Power Act to require electric cooperatives and other 
transmitting utilities to provide non-discriminatory transmission 
service to any eligible entity that requests service. In the event the 
eligible entity is unsatisfied with the service or price offered, 
Sec. 211 allows that entity to petition FERC for an order requiring the 
transmitting utility to provide service.
    Moreover, FERC's Order No. 888 requires all public utilities to 
provide transmission service under a pro forma tariff that includes a 
``reciprocity'' provision. That provision permits a public utility to 
deny a transmitting utility open access transmission service unless the 
transmitting utility offers to provide the public utility equivalent 
transmission services in return.
    EPAct and FERC's Order 888 reciprocity requirements have proven 
extremely effective in opening up the entire transmission grid. Any 
eligible entity can obtain transmission service from electric 
cooperatives as easily as they can from any public utility, under 
comparable terms.
    Moreover, cooperatives simply are not large enough in most 
instances to pose a barrier to open markets. Whereas only 19 of the 166 
independently-owned public utilities subject to Order 888 qualify as 
small utilities,1 all but 26 of the nearly 1000 rural 
electric systems qualify as small utilities under that definition. Of 
those 26, four own no transmission lines at all.
---------------------------------------------------------------------------
    \1\ FERC Stats. & Regs. para. 31,036, at 31,897 (citing to the 
Small Business Administration definition of a small utility that is a 
utility that sells 4 million megawatt hours or less per year).
---------------------------------------------------------------------------
    To put it in perspective, FERC logically should have a more 
significant role regulating larger electric utilities such as Entergy--
whose subsidiaries own and operate more than 14,000 miles of 
transmission line and sell more than 97,000,000 MWH to more than 
2,400,000 metered accounts--than it should have regulating Hickman-
Fulton Counties Rural Electric Cooperative-- which owns 1 mile of 
transmission line, and sells less than 120,000 MWH per year to fewer 
than 4,000 member-owners.
Congress Should Not Subject Electric Cooperatives to Expanded FERC 
        Jurisdiction Under Sec. 206 of the Federal Power Act
    Until recently, proposals to expand FERC jurisdiction over 
cooperatives were intended to subject all transmission facilities to 
the same rules. Those proposals would ensure that cooperatives provided 
open access to their transmission facilities at rates that were 
comparable to what they charged themselves.
    Sec. 702 of the September 21 discussion draft goes far beyond that 
baseline. Sec. 702 would subject all transmission service and all 
wholesale sales made to public utilities to FERC review and regulation 
under Sec. 206 of the Federal Power Act.
    H.R. 2944, the Electricity Competition and Reliability Act, as 
passed by the Energy and Power Subcommittee in the 106th Congress, 
included language to expand FERC's jurisdiction over transmission-
owning cooperatives 2 based on a comparability standard. 
Specifically, the language would have authorized FERC to review the 
rates a transmission-owning cooperative charges its members against 
those it charges to non-cooperative members to ensure the rates are 
comparable. If the rates are not comparable, they would be remanded to 
the transmission-owning cooperative for revision. In this manner, the 
transmission-owning cooperative is allowed to maintain control of the 
ratesetting function, which is key to our consumer-members. The 
comparability standard along with the small electric utility exemption 
is know as ``FERC lite''.
---------------------------------------------------------------------------
    \2\ Transmission-owning cooperatives that have RUS loans and loan 
guarantees.
---------------------------------------------------------------------------
    Unfortunately, the September 21 discussion draft emasculates FERC 
lite. Sec. 201 creates the veneer of establishing the comparability 
standard as the basis for expanding FERC jurisdiction over 
transmission-owning utilities. Upon close analysis, however, Sec. 702 
of the discussion draft nullifies the comparability concept that was 
incorporated in Sec. 201 of the discussion draft. Under this section, 
rather than review cooperative transmission rates under a comparability 
standard, FERC would subject cooperative transmission rates to a full 
review under the just and reasonable standard. Rather than remand rates 
to boards of directors elected by cooperatives member-consumers, FERC 
would set the rates itself at whatever level FERC considers 
appropriate.
    In addition to emasculating FERC lite, Sec. 702 would also, for the 
first time, subject cooperatives' wholesale rates to FERC review and 
regulation. At a time when Congress and FERC are seeking to move 
towards a competitive wholesale market for electric energy, Sec. 702 
would move in the opposite direction, increasing the regulatory burden 
on electric cooperatives that seek to sell power in the wholesale 
market.
    NRECA recognizes that some entities have abused those markets. They 
have exercised their market power to raise the cost of electricity. 
Sec. 702 does not address those abuses.
    Electric cooperatives have not been part of the problem. Not-for-
profit electric cooperatives have not gamed markets, they have not 
abused consumers, and they have not exercised market power. It would be 
impossible for them to have done so. Cooperatives do not own enough 
generation and are not large enough players in electric markets to 
exercise market power. All together, electric cooperatives generate 
only about 5% of the electric power in the country, which is less than 
half of the power they need to serve their own consumers. All combined, 
electric cooperatives' sales to public utilities represent less than 1% 
of all sales in the wholesale market.
    H.R. 2944 recognized the substantial differences between not-for-
profit consumer-owned electric cooperatives and investor-owned 
utilities, and made an effort to accommodate those differences; 
Sec. 702 ignores those differences.
Expansion of FERC Jurisdiction to Cooperatives with Transmission Would 
        Subject Cooperatives to Expensive Duplicative Regulation
    If FERC jurisdiction were expanded, electric cooperatives would be 
subject to unnecessary, duplicative, and possibly contradictory 
regulatory obligations.
    First, all electric cooperatives are regulated by their customers. 
Cooperatives are not-for-profit and are owned by the consumers they 
serve. They are governed by boards of directors composed solely of 
consumer-owners, who are themselves chosen by the consumer-owners of 
the cooperative in open elections. The tradition of local ownership and 
control and democratic governance runs deep. And, because cooperatives 
are not-for-profit companies that are directly responsible to their 
consumers, all but fourteen States have delegated their power to set 
and regulate rates to the cooperatives' boards of directors.
    Second, even those electric cooperatives that have outstanding RUS 
loans or loan guarantees are subject to significant regulation by FERC. 
As explained above, RUS borrowers with transmission facilities are 
subject to Sec. 211 of the FPA. RUS borrowers must provide non-
discriminatory transmission service on request, and are subject to FERC 
wheeling orders where disputes arise. RUS borrowers are also subject to 
the reciprocity requirements in FERC's Order No. 888 and 889.
    Third, RUS borrowers are subject to pervasive regulation by RUS, 
pursuant either to RUS regulations or to the loan document that RUS 
borrowers must sign to obtain loans or loan guarantees. RUS regulation 
ranges the gamut: restrictions on depreciation rates, standards and 
specifications for electric system construction, uniform system of 
accounts, required standard contract forms, mandated competitive 
procurement procedures, merger review, credit management, and a myriad 
of additional topics--even intervention in the choice of senior 
managers for borrowers in financial difficulty. In all, RUS regulations 
cover more than 800 pages in the Code of Federal Regulations. Moreover, 
other RUS mandates are contained in hundreds of extant ``REA 
Bulletins'' covering most categories of electric system construction 
and daily operation.
    If FERC's full Federal Power Act (FPA) jurisdiction were expanded 
over transmitting utilities, RUS borrowers would be subject to several 
more levels of regulation than any investor-owned utilities. RUS 
borrowers could also be subject to conflicting requirements from 
different agencies. For example, both RUS and FERC would have the 
authority over cooperatives' transmission rates, accounting systems, 
and record keeping methods. Depending on how broadly FERC's 
jurisdiction was expanded, both agencies could also have authority over 
cooperatives' mergers and asset transfers, transmission maintenance 
procedures, and investments in new transmission facilities.
    That duplicative authority would raise costs and increase 
regulatory uncertainty for cooperatives, make it more difficult for 
cooperatives to react quickly to changes in the competitive market, and 
handicap cooperatives compared to public utilities, which do not face 
duplicative regulatory obligations.
FERC Lacks the Resources to Address Expanded Jurisdiction over 
        Cooperatives
    FERC has insufficient resources today effectively to meet its 
current regulatory obligations. In light of the limits on its 
resources, it is hard to imagine how FERC could effectively handle an 
expansion of its jurisdiction and authority. According to the last FERC 
Annual Report containing such numbers (1996 report), FERC regulates 
about 370 public utilities. Depending on the manner in which FERC 
defines ``transmission'', extending FERC jurisdiction over transmitting 
entities could add more than 450 cooperatives and many municipal 
systems. The number of FERC-regulated entities could more than double.
    In other words, FERC would become stretched even thinner. Under 
such circumstances, the amount of abuse in the market would be certain 
to increase dramatically. The holes in the regulatory net would become 
so large that utilities could conclude the chance of getting caught in 
wrongdoing would be so remote as to pose no barrier. Thus, instead of 
enhancing the competitive market, expansion of FERC jurisdiction could 
severely handicap it, putting consumers at substantial risk.
FERC Lacks the Capacity to Regulate the Distribution System and Retail 
        Services
    Several proposals for electric legislation would: (a) grant FERC 
the responsibility for establishing standards for the interconnection 
of distributed generation to the distribution system; (b) mandate net 
metering for some consumer-owned generation; (c) establish principles 
for setting rates for retail energy service to consumers with 
distributed generation; and (d) grant consumers, subject to FERC 
regulation, the right to sell power they choose not to use 
(``negawatts'') to third parties.
    NRECA opposes the federalization of these issues for several 
reasons. First, electric cooperatives own 44% of the nation's 
distribution system. Much of these distribution systems are located in 
rural areas where the population density is low, averaging less than 6 
consumers per mile. As a result, the revenue generated in these areas 
is extremely low, averaging approximately $7,000 per mile. Net metering 
and distributed generation interconnection programs, for instance, if 
formulated and implemented without a strong sensitivity and 
appreciation for local conditions would lead to increased electricity 
costs for consumers in rural areas that could least afford to pay them.
    Second, electric cooperatives have obtained $36.4 billion in RUS 
financing. As a result of this financing, RUS must approve the rates 
and practices of distribution cooperatives and cooperatives that own 
generation and transmission. Negawatt and net metering programs and 
distributed generation interconnection standards have a direct impact 
on these rates and practices; however, they are being federalized 
without any role for RUS. This will create significant problems for 
cooperatives.
    Third, these issues have traditionally been the responsibility of 
states and local regulatory bodies. Moving these issues to the federal 
level makes it more difficult, or in some cases impossible, for states 
and local regulators to protect the public interest.
    Policy decisions with respect to retail electric and distribution 
services can have tremendous impact on local standards of living and 
economies. It is important, therefore, for state and local regulators 
to be able carefully to balance local interests and to craft tightly 
focussed regulations of retail electric and distribution services that 
meet local needs. Moving responsibility over these issues away from the 
local community to the federal level makes it less likely that 
regulatory decisions will reflect local needs or protect local 
interests. Moving responsibility over these issues away from the local 
community to the federal level also makes it harder for utilities to 
provide reliable, universal electric service at a reasonable cost.
    The ``negawatts'' proposal embedded in Sec. 104 of the September 21 
discussion draft is a perfect example of the risks of federalization. 
At the federal level, the proposal is attractive because it appears 
that it would create a more liquid regional wholesale market. At the 
local level, however, it is clear that the proposal could cause 
significant price increases for retail consumers served by the same 
utility as a few very large industrial consumers who resell their 
power. It could also cause significant economic disruption in that 
community when industries choose to sell power and lay-off the workers 
no longer needed to work on idled production lines. State and local 
regulators are more likely to be sensitive to those kinds of concerns 
than federal regulators.
    Moreover, NRECA does not believe that FERC has the experience or 
the resources to regulate effectively matters relating to retail 
electric or distribution services. Over more than 65 years, FERC and 
its predecessor, the Federal Power Commission (FPC), regulated 
wholesale sales and transmission service. FERC has never established 
technical standards for the interconnection of generation at the 
transmission level, and it has never had any experience whatsoever 
regulating retail services or distribution systems. FERC does not 
employ today a single distribution engineer. Further, as discussed 
above, FERC is experiencing difficulty meeting its existing 
responsibilities today with its limited resources. Multiplying FERC's 
responsibilities by giving it new jurisdiction over retail and 
distribution services would spread FERC's limited resources even more 
thinly to the detriment of both wholesale and retail consumers.

    Mr. Barton. We thank you. When we come back, we'll start 
with Mr. Gerken. We're in recess until approximately 2 p.m.
    [Brief recess.]
    Mr. Barton. The subcommittee will come to order.
    The pending business before us is the hearing on RTOs and 
transmission policy for the electricity industry. We had heard 
from Mr. English, we now want to hear from Mr. Gerken as soon 
as everybody gets settled. it looks like they're about settled.
    Your statement's in the record. You're recognized for 5 
minutes.

                   STATEMENT OF MARC S. GERKEN

    Mr. Gerken. Good afternoon, Mr. Chairman and members of the 
subcommittee. I am Marc Gerken, President of American Municipal 
Power-Ohio in Columbus, Ohio. I am testify today on behalf of 
AMP-Ohio and TAPS.
    AMP-Ohio is a wholesale power supplier and service provider 
for 84 municipal power systems throughout Ohio, Pennsylvania 
and West Virginia.
    TAPS is an association of transmission dependent utilities 
and other supporters of nondiscriminatory transmission access 
and vigorously competitive wholesale electric markets. For more 
than 16 years AMP-Ohio has been involved in a competitive 
purchase and delivery of wholesale power as an aggregator for 
municipal electric systems. As an active participant in the 
Midwest wholesale market, AMP-Ohio has experienced both 
benefits of competition and the limitations of the current 
market structure.
    The topic of today's hearings, RTOs, open access and 
transmission jurisdictions are key to achieving an effective 
wholesale competition and its intended purpose meeting consumer 
benefits. And I stress the consumer benefit part. Compromise on 
these issues will do far more harm than good.
    AMP-Ohio operates in five different transmission control 
areas today that will be part of RTOs, the Alliance RTO, the 
Midwest ISO and the PJM RTO, that'll be PJM West. Not only are 
there competing RTO proposals, but transmission owners are 
playing RTO musical chairs, hoping from one RTO into another 
created a checkerboard system with potential holes and 
inconsistencies. These kinds of behaviors do not advance the 
development of large independent rationally scoped RTOs, which 
TAPS believes are essential to a competitive market.
    TAPS applauds FERC Chairman Pat Wood's recent statements 
and efforts to ensure proper RTO formation. Despite this 
important development, Federal legislation is still needed to 
clarify and affirm FERC's authority to move forward with this 
new organized scheme.
    Absent congressional affirmation, more aggressive FERC 
action is likely to get mired in litigation, therefore with 
regards to RTOs TAP would urge Congress to do three things.
    Affirm FERC's authority to require jurisdictional utilities 
to participate in an RTO to remedy undue discrimination, and as 
Chairman Woods also proposes, generic condition for market 
based authority and merger approval.
    Second, authorize FERC to require transmission owning 
Federal utilities to participate in an RTO if needed to remedy 
undue discrimination.
    And last, authorize FERC to order RTO participation by 
municipal and cooperative utilities upon finding that the 
transmitting utility has engaged in undue discrimination in the 
provisions of transmission, and that open access tariffs are 
unlikely to remedy this problem.
    On the question of FERC jurisdiction over transmission, 
TAPS believes that for the electricity competition to be 
successful it is essential that FERC have authority to 
establish one set of rules for the use and operation of the 
Nation's interstate transmission system. Somewhat like Mr. 
Flynn mentioned, think what pandemonium would occur if the 
interstate highways posted two different speeding limits for 
passenger cars. A higher limit for interstate in-state cars and 
a lower rate for out of State cars. Go on farther and think how 
many crashes or congestions would occur if the State 
established a different regime for instate cars to switch 
lanes, maybe you don't have to turn your turn signal on, versus 
the out of State cars. Or think what would happen if a State 
would mandate that out of State vehicles pull over to the 
shoulder during rush hours so that in-state vehicles could 
pass. You cannot have multiple inconsistent systems for use of 
an interstate transportation system, it won't work; yet this is 
precisely what the divided transmission authority allows.
    Some have suggested that the current split jurisdiction 
assures reliability to the transmission owner's native load. 
Our view is that it has the potential to subject native load 
customers of other utilities to less reliable and more 
expensive service. We do not see this as the State versus 
Federal issue, rather it is a State versus State, consumer 
versus consumer issue. And FERC is the only entity that can 
ensure open fair nondiscriminatory and reliable service to all.
    TAPS urges Congress to recognize in the legislation that 
there can be only one set of rules for all users of the 
transmission network, and those rules need to be set by FERC. 
And subsequently, TAPS support FERC jurisdiction over 
transmission use for bundled as well unbundled retail sales and 
also FERC jurisdiction over the terms and conditions of service 
over municipal cooperative system transmission systems subject 
to the FERC-lite provisions.
    TAPS looks forward to working with the subcommittee. And I 
appreciate it, and I look forward to your questions.
    [The prepared statement of Marc S. Gerken follows:]
  Prepared Statement of Marc S. Gerken on Behalf of the Transmission 
                       Access Policy Study Group
    Good afternoon, Mr. Chairman and Members of the Subcommittee. My 
name is Marc Gerken. I am President of American Municipal Power-Ohio in 
Columbus, Ohio.
    AMP-Ohio is a nonprofit wholesale power supplier and services 
provider for municipal electric utility systems, including 79 of Ohio's 
85 community-owned electric utilities, three in Pennsylvania and two in 
West Virginia. Ohio municipal electric systems account for 
approximately six percent of the retail electric sales in Ohio, serving 
about 360,000 meters statewide. Our organization has 186 employees, and 
operating revenues of more than $228 million. Our members receive their 
power supply from a diversified resource mix, including: wholesale 
power purchases through AMP-Ohio and on the open market; energy 
produced at the 213-megawatt, coal-fired Richard H. Gorsuch Generating 
Station owned and operated by AMP-Ohio; individual community-owned 
generation facilities; and municipal generation joint ventures such as 
the 42-megawatt Belleville Hydroelectric Project and the 157-megawatt 
OMEGA JV2 distributed generation.
    Ohio's municipal electric systems do not own significant 
transmission facilities, and therefore are transmission dependent. In 
2000, the non-coincidental peak for AMP-Ohio member communities was 
1,793 megawatts. We operate in five different transmission control 
areas today that will be part of the Alliance RTO, Midwest ISO and PJM 
RTO. Our energy control center has handled arrangements to move power 
across as many as 18 different transmission systems in one year.
    I am here today to testify on behalf of the Transmission Access 
Policy Study Group (TAPS). TAPS is an association of transmission-
dependent utilities and other supporters of equal, non-discriminatory 
transmission access to the nation's transmission grids and vigorously 
competitive wholesale electric markets. TAPS members are located in 
more than 30 states. (Let's attach list of members and map.) AMP-Ohio, 
and the other municipal, cooperative and investor-owned utilities and 
municipal joint action agencies that are members of TAPS, are 
transmission dependent utilities (TDUs). We must depend on the use of 
transmission systems of large vertically-integrated utilities in order 
to reach alternative sources of power supply for our consumers. TAPS 
members have been active in wholesale markets for some 20 years, and 
have been on the ``bleeding edge'' of efforts to obtain transmission 
service, open access, and RTOs. AMP-Ohio's 20-year involvement in the 
competitive purchase and delivery of wholesale power as an aggregator 
for our members gives us a full appreciation of the central role of 
open and non-discriminatory access to transmission in ensuring all 
consumers access to reliable service and for wholesale and retail 
competition to be a success.
    TAPS has concluded that the only way to get to a competitive 
electricity industry is by restructuring the industry to provide the 
transmission and market structure needed to allow competitive forces to 
work. We believe federal legislation is needed to achieve this critical 
objective, but it must be the right legislation. To promote electricity 
competition and ensure reliable service to all consumers, we must all 
work together to get the basic infrastructure right. The subjects of 
today's hearing--RTOs, open access, and transmission jurisdiction--are 
key to achieving these important objectives. Compromise on the critical 
issues of industry structure will do far more harm than good.
    Specifically, we believe that Congress should enact legislation to:

 Clarify FERC's authority to require participation in large, 
        truly independent and rationally configured regional 
        transmission organizations (RTOs), with full authority to 
        operate the regional grid as well as to plan and expand it, or 
        cause its expansion.
 Place regulatory responsibility for all transmission service--
        wholesale and retail, bundled and unbundled--clearly in FERC's 
        hands (subject to ``FERC lite'' jurisdiction over the 
        transmission owned by municipal and cooperative utilities).
1. ferc needs authority to require strong, independent, broad regional 
                                  rtos
    Large, rationally configured, independent and robust regional 
transmission organizations, with exclusive authority to operate, plan 
and cause expansion of the grid, are key to getting the transmission 
infrastructure right. The current regimen of control of transmission by 
individual vertically-integrated utilities must change to be compatible 
with and support competitive markets. Regional transmission 
organizations are the structure needed in a competitive electric 
industry. As FERC correctly found in Order 2000, RTOs are required (1) 
to eliminate the continued opportunity (that exists notwithstanding 
Order 888's requirement of open access tariffs) for discriminatory 
transmission practices; and (2) to achieve efficient management of the 
grid and improve reliability.
    Today, the grid remains largely in the hands of one set of market 
participants (vertically-integrated utilities or utilities with 
transmission subsidiaries) that can use that control--in ways often 
difficult to detect--to favor themselves. Even if the owner is not 
discriminating, that potential chills the market, as FERC has found. 
When curtailments are called or transmission service requests are 
denied, a doubt arises as to whether competitive considerations came 
into play.
    AMP-Ohio has experienced denials of service and interruptions that 
are frankly inexplicable except as the result of the transmission 
owner's manipulation of the transmission system to advantage its own 
generation and sales and disadvantage a competitor. For example, on 
June 30, 1999, AMP-Ohio's request to transmit 20 MW from a member city 
was denied based on a claimed lack of available transmission capacity 
(ATC). A check of the ATC across the interconnection in the opposite 
direction showed no capacity in that direction either, in apparent 
defiance of the laws of physics. We were amazed that an interface could 
be fully loaded in both directions at the same time--one would think 
that some unloading would occur, even be encouraged, as opposing 
reservations or uses are made. Our skepticism about the accuracy of the 
transmission providers' claimed lack of ATC in both directions was 
increased by the fact that we had to replace the power we had sought to 
transmit with a $4,000 per megawatt hour purchase--about 40 times the 
cost of generating our own power--from one of the transmission 
providers.
    As a defense against such discriminatory interruptions and service 
denials that are both costly and threaten reliability, AMP-Ohio has 
undertaken an aggressive campaign to place 157 megawatts of small, 
distributed generation resources in our member communities. But this 
defensive action only highlights the need to get operation of the 
transmission system out of the hands of market participants. Only truly 
independent RTOs, with no stake in the market, can achieve the trust 
required to create a marketplace--a competitively neutral platform--on 
which competition can thrive, with enhanced reliability and efficient 
use of generation resources.
    Regionalization of transmission planning under the control of an 
independent RTO, with authority to expand or cause expansion of the 
grid, is also critical to a robust transmission system capable of 
reliably handling the competitive market's increased traffic. Single 
system regional planning will be a dramatic improvement over a grid 
planned by numerous owners with different competitive agendas. 
Vertically-integrated utilities who now control planning and expansion 
often have a competitive interest in not improving their transmission 
system. Many risk losing substantial amounts of money if they construct 
new transmission that opens their generation up to competition. Even 
hefty incentives, paid by captive transmission customers, may be 
insufficient to overcome this competitive disincentive. No such hurdle 
would impede construction if independent RTOs had full responsibility 
to plan and build, or cause construction of, transmission facilities 
necessary to create and sustain competitive wholesale markets and 
provide a high degree of regional reliability for end use customers. 
Federal legislation should confirm that RTOs must perform this critical 
function.
    As was stated this morning by the American Public Power 
Association's witness, Roger Fontes, legislating new forms of incentive 
pricing for transmission services is NOT the right tack to take to 
encourage grid expansion and improvements; we should not accept 
transmission owner efforts to retain exclusive rights to construct 
while seeking rate incentives as an inducement to do so. Rather than 
granting existing owners an exclusive right to build for RTOs and 
giving in to their incentive demands, we should enable RTOs to put 
competitive pressure on the cost of capital. Therefore, Congress should 
1)authorize RTOs to cause expansion of the regional grid by 
constructing transmission themselves or by bidding out construction and 
passive ownership; and 2) allow and encourage public power utilities to 
share in the ownership of the new transmission facilities.
    As FERC has also recognized, RTOs can facilitate competition by 
ending the current balkanized markets, where an additional ``pancaked'' 
rate (or toll) must be paid whenever a transaction crosses the 
corporate boundaries separating one transmission owner from the next. 
In contrast, RTOs that eliminate rate ``pancaking,'' as FERC Order 2000 
requires, would permit competitors to sell their electricity goods 
throughout a broad regional market by payment of a single charge. By 
expanding the market, RTOs can increase the number of buyers and 
sellers that can transact with each other, enhancing competition and 
reducing market power.
    FERC Order 2000 gets the minimum functions and characteristics of 
RTOs right. However, it relies on voluntary action to get RTOs formed. 
But lethal to competition are gerrymandered RTOs designed by a group of 
vertically-integrated utilities to enhance their market power by 
creating barriers to competitors. Also crippling to efforts to expand 
the grid, and to invest in the baseload generation necessary to serve 
growing customer needs, is the uncertainty created by the ``RTO-
hopping'' spawned by reliance on voluntarism.
    ``Musical chair'' RTOs have plagued my region, the Midwest. We have 
two RTOs forming--the Midwest ISO (MISO) and the Alliance RTO--where 
there should be one, and their configurations keep changing. This past 
year, three major utilities--Illinois Power, Exelon (ComEd), and 
Ameren--sought to exercise what they claimed were their ``rights'' to 
pull out of MISO and switch to Alliance. The result (effectuated 
through a settlement that FERC approved) creates a hole in the Midwest 
ISO. Even more recently, on August 31, DTE Energy Co.'s transmission 
subsidiary filed with FERC to join the MISO and withdraw from the 
Alliance, despite the fact that DTE is not directly connected with any 
MISO member. Revolving door RTOs will never achieve their purposes. Nor 
will checkerboard RTOs.
    In February 2001, the Alliance and MISO reached an agreement 
through FERC mediation efforts that, in principle, calls for the 
continuation of the two RTOs, while establishing a single pricing 
structure for certain transactions, and an inter-RTO coordination 
agreement. However, the effectiveness of this arrangement remains to be 
seen.
    Recent FERC orders and statements by FERC's new Chairman Pat Wood 
indicate a greater willingness to require RTO participation and ensure 
that RTOs have a large, rational scope. In orders issued July 11, FERC 
expressed a preference for four RTOs (aside from the ERCOT portion of 
Texas)--one in the West, one in the Southeast, one in the Midwest and 
one in the Northeast, and initiated a 45-day mediation as step one in 
forming a single RTO for the Southeast and Northeast, respectively. At 
FERC's September 26 meeting, Chairman Wood issued a memo in which he 
made clear his willingness to employ ``sticks'' instead of just 
``carrots'' to ensure RTO formation:
          What to do about the December 15, 2001 date in Order No. 
        2000? I recommend that this be changed to be the date by which 
        all jurisdictional utilities must either elect to join an 
        approved RTO organization or have all market based rate 
        privileges by any corporate affiliate be prospectively revoked, 
        following a Section 206 investigation. I would also recommend 
        that no mergers be approved relating to entities who do not 
        become part of an operational RTO. And for an public utility 
        that chooses not to be part of an RTO, I believe we would need 
        to take a hard look at the transmission rates they are 
        permitted to charge to ensure that they are just and reasonable 
        and recognize the interdependence of the power grid.
    While we applaud Chairman Wood's statement, federal legislation is 
still needed to clarify FERC's authority to move forward on this newly 
energized course. Absent Congressional guidance, more aggressive FERC 
actions are likely to get mired in litigation. In fact, legal 
challenges to the flexible directives included in Order 2000 will be 
argued before the D.C. Circuit next week. TAPS therefore urges Congress 
to adopt in legislation the RTO participation position that was 
developed and is supported by APPA's transmission owning and TDU 
members:

 Confirm FERC's authority to require FERC-jurisdictional (as of 
        the date of enactment) utilities to participate in an RTO as a 
        generic condition for continued or requested market-based rate 
        authorizations or as a standard requirement for merger approval 
        or to remedy undue discrimination.
 Authorize FERC to require transmission-owning Federal 
        utilities to participate in an RTO to remedy undue 
        discrimination.
 Authorize FERC to order RTO participation by municipal and 
        cooperative utilities based on a finding that the utility has 
        engaged in undue discrimination in the provision of 
        transmission service, or abused its control over transmission 
        so as to disadvantage competitors, and open access transmission 
        tariffs are not likely to remedy the problem. Any such orders 
        must accommodate tax code restrictions and/or bond covenants.
2. ferc must be responsible for regulating all interstate transmission.
    For electricity competition to be successful, it is essential that 
FERC have authority to establish one set of rules for the use and 
operation of the nation's interstate transmission system. For this 
reason, TAPS supports extension of FERC jurisdiction over the terms and 
conditions of service over municipal and cooperative transmission 
systems, subject to ``FERC Lite'' provisions. In addition, TAPS 
supports FERC jurisdiction over the transmission used for bundled as 
well as unbundled retail sales. In fact, TAPS believes the Federal 
Power Act as currently enacted encompasses such jurisdiction, as we 
made clear in our brief to the Supreme Court. However, we urge Congress 
to clarify FERC's authority to reflect today's policy objective of 
promoting competitive markets and ensuring reliable service for all 
consumers.
    The Supreme Court case pertains to Order 888, in which FERC 
asserted jurisdiction over transmission for unbundled retail service 
(where states have adopted retail competition), but not transmission 
used for bundled retail sales (traditional retail sales where the price 
for power is ``bundled'' with the price of transmission and 
distribution services). The D.C. Circuit upheld FERC's assertion of 
jurisdiction over unbundled retail transmission as compelled by binding 
Supreme Court precedent as well as by deference to FERC's 
interpretation. Although the Court of Appeal's decision strongly 
suggests that FERC could exercise jurisdiction over the transmission 
component of bundled retail electric sales, it upheld FERC's decision 
not to do so as ``a statutorily permissible policy choice.'' At the 
Supreme Court, a number of states are challenging FERC's assertion of 
jurisdiction over unbundled retail transmission; Enron is challenging 
FERC's failure to assert jurisdiction over the transmission used for 
bundled retail transactions. TAPS has stated its support of Enron, and 
filed a brief opposing the states' challenge. The case was argued on 
October 3.
    Good public policy in 2001 and beyond should not depend on whether 
and how the Supreme Court interprets the 1935 Federal Power Act, as 
amended. Rather, for competitive markets to work, Congress must clarify 
FERC's jurisdiction over all uses of interstate transmission.
    To access competitive markets, all users must rely on the same 
integrated transmission grid. Perhaps no other industry stands more in 
need of a single set of interstate rules, and a single traffic cop, to 
ensure the coordinated, non-discriminatory, and efficient use of the 
transmission required to support competitive electricity markets.
    Think what pandemonium would occur if the interstate highways 
posted two sets of speed limits for passenger cars, one for in-state 
cars and the other for cars going out of state. Think how many crashes 
would occur if the state established a different regime for preferred 
in-state cars to switch lanes--they need not look or signal, because 
they are to be accorded ``priority.'' It would also be inconceivable 
for Virginia to establish a rule that during rush hours, out-of-state 
vehicles on Interstate 95 must pull over to the shoulder so Virginia 
vehicles may pass.
    Yet, that is precisely what divided transmission authority would 
allow, as determined by the Eighth Circuit. That court ruled that 
states could set their own rules for the transmission of bundled retail 
sales and favor these in-state users when there is insufficient 
transmission capacity. Northern States Power v. FERC, 176 F.3d. 1090 
(8th Cir. 1999). Under NSP, each state can set its own rules for 
transmission of bundled retail sales within that state, without regard 
to what other states do, and without regard to FERC's rules, while FERC 
is limited to setting rules for wholesale and unbundled (choice) retail 
uses. No regulatory body would have authority to ensure a coherent 
scheme for the use and allocation, among all users, of what is 
necessarily the single transmission network.
    Such a system will not work. You cannot have multiple, inconsistent 
systems for reserving, allocating and scheduling transmission over the 
unitary transmission network. Reliability, efficiency, and competitive 
markets will all suffer in the name of preserving service to a favored 
subset of retail consumers.
    For example, AMP-Ohio and its members serve the bundled retail 
customers of those member cities by paying to use the transmission of 
other utilities. In August, AMP-Ohio's transmission service that 
permits its members to serve these retail customers under network 
service was curtailed, increasing costs and threatening reliability. 
Should these retail customers, who have long paid and continue to pay 
their fair share of the costs of the transmission system, be more 
exposed to curtailments than the bundled retail customers of 
transmission owners? And should retail customers that dare to exercise 
their retail choice options (where available under state law) be 
treated as second-class citizens if they receive power transmitted 
through a state that gives priority service to its own bundled retail 
customers?
    As an active participant in the Midwest wholesale power market, 
AMP-Ohio has experienced threats to system reliability and prices 
spikes in recent years. While there are constrained transmission 
interfaces and a need for generation and transmission additions, in our 
opinion the root cause of these problems is market manipulation and 
market structure. Based on our 20 years of practical experience in the 
market, we can attest to the fact that the market has become 
increasingly dysfunctional and has taken steps backward, not forward.
    Retail competition will not be successful if power supplied through 
the market, using FERC-jurisdictional unbundled transmission service, 
is less reliable than power supplied to bundled customers. Consumers 
will not switch suppliers if they cannot count on reliable delivery of 
power from their new supplier. Nor can competitive wholesale markets 
thrive where states retain authority to accord transmission owners 
serving their bundled retail customers access rights superior to those 
of other users.
    While some will suggest that the current split jurisdiction assures 
reliability to the transmission owners' ``native load'' customers, our 
view is that it creates a black box that prevents the open markets that 
are needed to benefit all equally ``native load'' consumers. If a 
utility says it has no transmission capacity available to others 
because it is needed for its own bundled retail use, can we be sure 
that this isn't market manipulation in the name of reliability? 
Utilities have been known to reserve all of the transmission import 
capacity in the unlikely event that every single generation plant in 
the control area simultaneously shuts down. Removing such actions from 
FERC scrutiny by placing them behind a state-jurisdictional curtain 
invites discrimination and destroys any pretense of non-discriminatory 
open access. And they subject equally ``native load'' customers of 
other utilities to less reliable and more expensive service. Every 
utility, those that own transmission and those that do not, have native 
load customers that deserve and must have equal reliability. As was 
said by former FERC Chairman Martin Allday, everybody is somebody's 
native load customer.
    As we move toward competition on a state-by-state basis, it is 
essential that FERC be authorized to establish a single scheme for use 
of the grid that does not relegate wholesale uses or retail choice 
programs to second-class status. The absence of a clear, unified set of 
rules would enable one state to cripple choice programs in a 
neighboring state by according in-state bundled sales a higher priority 
than unbundled deliveries to its neighbors. This is not a state versus 
federal issue. Rather, it is a state versus state, consumer versus 
consumer issue. And only FERC is in a position to ensure open, fair, 
nondiscriminatory, and reliable service to all.
    TAPS urges Congress to recognize in legislation that there can be 
only one set of rules for all users of the interstate transmission 
network, and that those rules need to be set by FERC.
    TAPS appreciates this opportunity to present its views to the 
Subcommittee.

    Mr. Barton. Thank you, Mr. Gerken.
    We want to now hear from Mr. Peter Esposito, who is Vice 
President and Regulatory Counsel for Dynegy, Inc.
    Your statement's in the record and we welcome to have you 
elaborate on it for 5 minutes.

                 STATEMENT OF PETER G. ESPOSITO

    Mr. Esposito. Thank you, Mr. Chairman and members of the 
committee for allowing me to speak here today on behalf of the 
Electric Power Supply Association and my company, Dynegy.
    Those that are familiar with the energy situation last year 
in California, I know you all are, might logically ask why 
should I touch power? Isn't it the third rail of energy here? 
The simple answer is just because California didn't get it 
right doesn't mean the Nation as a whole can't afford to do it. 
Power's the life blood of the American economy. Growth and 
demand must be met by growth and supply and improvements in an 
aging infrastructure.
    Today some regions are on the edge of a supply/demand 
imbalance, as California was. This imbalance will only get 
worse unless we change today's regulatory paradigm of a 
patchwork of ever changing rules being issued under the aging 
statute. Simply put, those who supply and transmit power need 
rules they can rely on and consumers simply want power that is 
reasonably priced and reliable. Consumers don't want to be 
surprised by price spikes or blackouts, especially given the 
increased threats we now face.
    In this regard, incumbent monopolies have a legal 
obligation to provide service often at any price. New entrants 
are aligned with consumers because they know they will not be 
successful in the market unless they actually provide consumers 
reliable power at a reasonable price.
    How do we satisfy your constituents and our customers? We 
satisfy their desire for reliability at reasonable prices 
through competitive markets that allow customers to choose from 
a variety of suppliers and products that reflect the balance of 
price and reliability risk those customers choose to assume.
    It is amazing in this United States what a profit incentive 
can do to assure the products are on the shelves in ample 
supply. Mr. Radanovich was here, I'd point out, to whine.
    Establishing competitive markets requires some common sense 
and a big picture view. There are three perspectives that are 
involved in any market and are involved in the electric market: 
That of those who produce, in this case the generators; those 
who deliver, the transmission owners; and, those consume, 
consumers.
    This isn't rocket science. We need to assure that the raw 
material, energy, can be produced in large quantities and 
transported flexibly to the points where consumers want to use 
it. Much as the space program gave us a great political and 
technology benefits, forging flexible markets gives us double 
benefits. It trains us to reconfigure systems to make economic 
sense on an hourly basis allowing markets to help mitigate the 
impacts of nefarious attacks on our infrastructure. Flexibility 
works very well in the gas industry to bring consumers great 
benefit, it'll work here in the electric industry.
    More specifically, from the production side we must assure 
easy entry to markets. We can do that by establishing uniform 
interconnection rules applicable to all, as you all have 
proposed. But that is not all we have to do. We have to assure 
that wire owners do not restrict access to wires in order to 
favor their own generation, and to do that we need to separate 
control as we talk about this morning.
    FERC plans to do this through RTOs and Congress should 
affirm FERC's authority to compel memberships in RTOs by all 
transmission providers, or at a minimum not interfere with the 
FERC's current policy of saying you're either in the old world 
or the new world. That policy, if implemented, will work.
    The mere formation of RTOs, however, is not enough to 
ensure that markets can do their job effectively. We must 
assure that each has an open access tariff that is flexible to 
allow the aggregation of supply and the aggregation of 
customers, not just to take a static system and use it in a 
static manner.
    We need to deal with the seams issues between transmission 
providers. Today's transmission system is all too often 
characterized by numerous relatively small franchise service 
areas shaped in ways that would make the best congressional 
redistricters proud. To move power between regions one must 
contract with each of these franchisees for transmission 
service.
    Imagine changing trucking companies at each county line 
when trying to truck tangerines from Tampa to Trenton or 
oranges from Orlando to Oswego. The farmers and consumers had 
to pay the cost of this inefficiency, Congress would have acted 
decades ago to fix this problem and, in fact, it did by 
creating a national highway system. Yet this is how we transmit 
power in most regions today.
    This structure of the early part of the last century has 
stayed in place in large part due to structural and political 
inertia, if not outright existence. The time is right to fix 
this and reducing the sheer number of transmission providers by 
forming RTOs is, in part, the answer. So too is making the RTOs 
large enough to limit the burdens associated with changing 
trucks at every county line. This doesn't, however, require 
uniform markets, just consistent business practices between the 
RTOs.
    One problem with RTOs is that they will become big 
monopolies. We need to get consumer inputs through stakeholder 
advisor boards. Another thing is to incent them correctly. We 
talked about incentive rates this morning. We ought to be 
thinking about volumetric rates. You provide more service, you 
make more money. It's a pretty simple concept, works in the gas 
industry.
    We can remove artificial barriers including PURPA and 
PUHCA. We can empower FERC to require consistent business 
practices.
    From a transmission owner's perspective we need a 
regulatory and tax climate in which capital formation can 
occur. That involves regulatory certainty, changes in tax laws 
and the right to make a profit commiserate with risk.
    Second, they need the ability to expand their service to 
expanded access. We talked about siting this morning.
    And finally, there are other ways to expand transmission 
including use of existing rights of way and new technology.
    Finally, consumers need to be empowered. They need to see 
price signals so they know how much it's going to cost when 
they consume power. California they predicted 260 hours of 
blackouts last year where this past summer we had none, zero. 
Why? Because the consumers got the price signal.
    Finally, we need a means of consumer choice. And I know 
you're not going to go to mandating retail access, but you can 
set up a paradigm in the wholesale market where retail access 
can work, and I encourage you to do that.
    Your bill is going in the right direction, but the devil is 
in the details. I'd encourage you to take a look at those 
details, some of them sort of reverse direction, and we look 
forward to working with you on those details.
    Thank you.
    [The prepared statement of Peter G. Esposito follows:]
  Prepared Statement of Peter G. Esposito on Behalf of Electric Power 
                   Supply Association and Dynegy Inc.
    Mr. Chairman and members of the Committee. Thank you for allowing 
me to speak here today on behalf of the Electric Power Supply 
Association. EPSA is comprised of generators and marketers of electric 
power. I also speak on behalf of Dynegy, a marketer and generation 
owner, and a member of EPSA.
    Those familiar with the energy situation that developed in 
California over the last year will agree that incorrectly restructuring 
the power industry can have dire consequences. Armed with this 
knowledge, you may quite naturally ask: ``why should I touch power; it 
could be just another political third rail?''
    The simple answer is that just because California didn't do it 
right doesn't mean the Nation as a whole can afford not to do it at 
all. Now more than ever, power is the lifeblood of the American 
economy. Growth in demand must be matched by growth in supply and 
improvements in an aging delivery infrastructure. Today, some regions 
are on the edge of a supply demand imbalance. This imbalance will only 
get worse unless we change today's regulatory paradigm of a patchwork 
of ever-changing rules being issued under an aging statute.
    While those who supply and transmit power need modern rules they 
can rely on, consumers simply want power that is reasonably priced and 
reliable. They don't want to be surprised by price spikes or blackouts, 
especially given the increased threats we now face.
    Incumbent monopolies have a legal obligation to provide reliable 
service at any price. New entrants are aligned with consumers because 
they know that they will not be successful unless they actually provide 
consumers reliable power at a reasonable price.
    How do we achieve these reliability and price objectives 
simultaneously? Everyone seems to have an idea,

 Do we have the government build power plants to create a 
        reserve? That would be folly unless we want the government to 
        build all the plants. Otherwise the private sector would simply 
        back off its new construction until equilibrium of supply and 
        demand was created. No one is going to build power plants in a 
        glutted market if they are not going to get back their 
        investment and some return on that investment.
 Do we require public utilities to build more generation? Go 
        back to the ``good old days?'' Remember what got us here was 
        overbuilding during the rate-based ``nothing's too good for the 
        ratepayers'' construct, where the ratepayers are on the hook to 
        pay for virtually anything and everything the utilities build, 
        whether it is economic or not. Can our economy afford to pay 
        large premiums on power year after year under the old regulated 
        regime while our competitors in the rest of the world adopts 
        the new deregulated regime? Of course not!
    And how do we satisfy your constituents and our customers? We can 
satisfy their desire for reliability at reasonable prices through 
competitive markets that allow customers to choose from a variety of 
suppliers and products that reflect the balance of price and 
reliability risk those customers choose to assume. It is amazing in 
this United States what the profit incentive can do to assure that 
products are on shelves in abundant supply.
    Establishing competitive markets does not involve nuclear physics. 
It does, however, require some common sense and a big-picture view.
    There are three perspectives this Committee must consider when 
addressing electric restructuring. These are the perspectives of:

1. Generators: those who produce the product and who need easy entry to 
        markets, signified by access to the grid
2. Transmission owners: those who deliver the power, who need 
        roadblocks to grid expansion removed, and
3. Consumers: those who purchase and consume power, and who deserve 
        power that is reasonably priced and reliable.
    These are the three basic players in any market. Each needs to be 
empowered.
    This is not rocket science. We need to assure that the raw 
material--energy--can be produced in large quantities and transported 
flexibly to the points where consumers want to use it. Much as the 
space program gave us great political and technological benefits, 
forging flexible markets gives us a double benefit: By training us to 
reconfigure systems to make economic sense on an hourly basis, vibrant, 
flexible markets also help mitigate the impacts of nefarious attacks on 
our infrastructure.
    More specifically:
    First, from the production side, you must assure generators easy 
entry to markets. In power industry parlance, this means assuring that 
new generation can get interconnected to the grid and that, once 
connected, it is able to reach many consuming markets under reasonable 
contractual terms and at a price that is reasonable and determinable in 
advance.
    Bearing in mind that transmission is presently a monopoly and will 
be for some time, this means:

 establishing base-line interconnection rules for all markets, 
        in all states, that require transmission owners to provide new 
        generators with open access to their delivery systems, even 
        when those new generators compete with generation owned by 
        those who control the wires.
    One means of assuring that wires owners do not restrict access to 
wires in order to favor their own generation is to separate the control 
of wires from control of competing generation. FERC plans to do this 
through the formation of large Regional Transmission Organizations 
(RTOs), in effect pooling the transmission assets of many utilities 
under one independent operator. Congress should affirm FERC's authority 
to compel membership in RTOs by all transmission providers.
    The mere formation of RTOs, however, is not enough to assure that 
markets can do their job effectively. We must:

 Assure that each RTO has open access tariffs that facilitate 
        the movement of power from many generators to many consumers. 
        These tariffs must apply fairly and across the board to all 
        users of the transmission system so as to assure each a chance 
        to compete, both in the sale and purchase of energy.
 Deal with ``seams'' issues between transmission providers. 
        Today's transmission system is all too often characterized by 
        numerous relatively small franchised service areas shaped in 
        ways that would make the best Congressional redistricters 
        proud. To move power between regions, one must contract with 
        each of these franchisees for transmission service. Imagine 
        changing trucking companies at each county line when trying to 
        truck tangerines from Tampa to Trenton. If the farmers and 
        consumers had to pay the costs of this inefficiency, Congress 
        would have acted decades ago to fix the problem, indeed it did 
        by creating a national highway system with characteristics like 
        minimum bridge heights. Yet this is how we transport power in 
        most regions of the country today. This vestige of the early 
        part of the last century has stayed in place in large part due 
        to structural and political inertia, if not outright 
        resistance. The time is ripe to fix this, and reducing the 
        sheer number of transmission providers by forming RTOs is, in 
        part, the answer. So too is making RTOs large enough so that 
        the burdens associated, for example, with moving power from 
        Florida to the PJM are not overwhelming.
 One problem with RTOs is that they will, by definition, become 
        giant monopolies. Giant monopolies generally have no incentive 
        to act like a competitive business and their service tends to 
        become ``bureaucratic,'' to be kind. Because customers will not 
        have another RTO to go to for service if they don't like their 
        regional RTO, we must create incentives for RTOs to treat 
        customers as customers. There are two ways to address this.
   First, there must be some recognized means of assuring 
            customer input is taken seriously, for example through 
            stakeholder advisory boards to the the RTO.
   The second is to make RTO cost and profit recovery dependent 
            on providing valuable service, e.g., by setting up rate 
            designs that are based on throughput, not merely on 
            ownership of wires. When the RTO does a good job, it should 
            be rewarded; when it does not, it should not.
 Economies of scale must be achievable:
   Congress should remove artificial barriers, including 
            ownership restrictions included in PURPA and PUHCA.
   FERC must be empowered to require consistent transmission 
            business practices across the country.
    Second, from the transmission provider perspective, you must give 
the RTOs the tools to do their job and the ability to make a profit. 
This entails providing:

 A regulatory and tax climate in which capital formation can 
        occur.
   Regulatory certainty: Change is inevitable, but constantly 
            changing rules need not be. Just as generators are asking 
            for some certainty in environmental requirements and market 
            rules, transmission owners have a right to know what is 
            expected of them; when they will be rewarded and when they 
            will be punished by regulators.
   When change is required, there should be adjustments made to 
            facilitate change. Here, tax laws changes are necessary to 
            assure that taxable events do not occur simply because 
            transmission assets are transferred under government 
            request to RTO control.
   Transmission owners must have the right to make a profit 
            commensurate with risk.
 The ability to provide better service with expanded assets. 
        The surest way to eliminate any semblance of generator market 
        power is to remove all congestion from the system, so that many 
        sellers can reach many buyers and vice-versa. This will require 
        that something be done to facilitate siting of new transmission 
        facilities, in what could be a very painful political process. 
        This could occur through regional compacts, or through RTO 
        processes, with a federal eminent domain backstop. Again, 
        consumers all over the nation will benefit from better markets 
        and increased infrastructure security if we come together as a 
        Nation to deal with critical siting issues. Whatever method of 
        dealing with these issues is chosen, landowners must feel they 
        got a fair shake.
 Let us not forget in this quest that there are many ways to 
        expand transmission, through the use of existing rights of way 
        and with new technology. New wires in new rights of way are not 
        the only way to expand and enhance the transmission system.
    Third, consumers need to be empowered.

 Price signals: Consumers need to be charged power they 
        consume, so they know how much they will be billed if they 
        consume more or less of it. Contrary to lore, demand for power 
        in the aggregate is elastic, as has been proven so forcefully 
        in California this summer:
   where the NERC predicted 260 hours of blackout and none, 
            repeat none, occurred, and
   where wholesale prices came down before West-wide wholesale 
            price caps went into effect, once retail prices rose.
 Choice: Getting wholesale markets right means establishing the 
        foundation for customer choice. In California, had customers 
        been able to choose the 5 to 6 cent power being offered by 
        generators last year they would not now be shouldering the 
        burden of much more expensive power that was purchased last 
        winter, before demand dropped off. We realize that the Congress 
        is not likely to force choice on the states, but it should at 
        least give the states wholesale markets that allow choice to go 
        forward should the states so choose.
    Finally, but most importantly, we all need market rules that set up 
sustainable markets, that is, markets that are fair both to consumers 
and suppliers of power. Just as price caps will stifle the addition of 
needed generation, so too will very high prices stifle the economic 
growth and prosperity of our country.
    Both FERC and Congress have a role in assuring we meet these goals. 
Congress can best help consumers receive the most reliable and 
reasonably priced power by reaffirming FERC's authority and providing 
it with policy direction and appropriate flexibility to achieve these 
goals. The time to do this is now.

    Mr. Barton. Thank you.
    We now want to hear from Mr. Charles Trabandt, former FERC 
Commissioner, former general counsel to this committee, former 
general counsel, I think, to the Senate Energy Power Committee 
and until August the CEO of a company that was located, I 
believe, in one of the towers at the World Trade Center.
    So, we really, really appreciate you being here and 
appreciate your expertise, and thank you for your prior service 
to the country. And I'm sure that you have many services yet to 
provide for the country. Welcome to the committee.
    Your testimony is in the record and we would ask you to 
summarize it in 5 minutes.

                STATEMENT OF CHARLES A. TRABANDT

    Mr. Trabandt. Thank you, Mr. Chairman. It's a privilege to 
be with the committee again.
    As this morning's hearing demonstrated, there's a critical 
need for capital investment in the Nation's electric 
transmission infrastructure and I would suggest that isn't just 
for new interregional lines. The country is quite a bit behind 
in terms of sustaining capital investment for the existing 
system, as well as for new transmission lines. And I encourage 
you to think of that.
    Pat Wood last week also informed the country as well as 
you, as I understand it, that the needs that we had prior to 
September 11 probably are going to increase as a result of the 
attacks and the requirements of the new homeland defense 
infrastructure requirements, which both you and the Senate are 
considering right now.
    FERC in Order 2000 sought to address that need by providing 
structural and regulatory flexibility for independent for-
profit transmission companies or transcos as an alternative 
business model for the regional transmission organizations. 
That flexibility, in fact, have worked and I'm sure you're well 
informed of this, but we have across the country in every 
region a large number of investor owned utilities and public 
power entities which have joined transcos.
    Just last week a group of six southwest utilities acted to 
create the newest transco that would serve Arizona and New 
Mexico.
    Today it is clear from a business and financial perspective 
that the for-profit business model is a viable and, I believe, 
preferred option for RTOs. Furthermore, I am convinced a 
properly structured transco will be able to access the capital 
markets for equity and debt financing to provide timely funding 
for the improvement and expansion of the transmission 
infrastructure, which was the nature of my responsibilities as 
a managing director at Merrill Lynch.
    The Alliance Transco RTO with National Grid USA as the 
proposed managing member I suggest is one example of the 
transco RTO model which provides important precedence for 
further transco development. In that model National Grid, as 
you may know, has committed to a billion dollars of investment 
in the Alliance company's systems as part of the deal that was 
struck in August.
    I couldn't agree more with Mr. Vesey who spoke to you this 
morning about the new RTO transmission business under your bill 
as well as under Order 2000. I think it's a mistake to think of 
the new transmission business that these RTOs will be running 
as the same thing as transmission services that have been 
provided in the past. This is a new business model, it involves 
different risks and it certainly, in my judgment, is worthy of 
consideration of incentives to ensure the availability of 
capital to meet all the responsibilities that the RTOs will 
have that the utilities did not have in providing transmission 
services.
    FERC in July, however, took actions to require mediation 
negotiations in the northeast and the southeast intended to 
support an immediate drive toward a single RTO in each region. 
The actions signaled a major policy change to establish four 
RTOs, one each in the northeast, southeast, midwest and the 
west and to do so without the incentives and the flexibility 
provided by Order 2000, which as I just indicated has been 
successful from the model that I support.
    I would counsel caution with regards to such an immediate 
policy change because of the potential risk that it will 
materially disadvantage the transco alternative, and thereby 
inhibit the availability of capital for existing systems and 
new systems.
    Also such a policy change could have a negative impact on 
FERC actions already taken such as the alliance, Midwest ISO 
settlement arrangements which will support initial operations 
in the midwest in the very near future.
    Finally, I would recommend that the subcommittee in any 
legislation consider measures to preserve the structural and 
regulatory flexibility of Order 2000 for the RTOs, particularly 
in the transco business model. Such measures I believe should 
ensure the transcos can be a vital segment of the future 
electric transmission system and provide the needed capital for 
investment.
    In addition, I would recommend that the subcommittee 
consider appropriate procedures to protect investments already 
made and approved in operating transcos, and to provide for an 
orderly transition to any new policy direction which, Mr. 
Chairman, I think you've laid out in your discussion draft 
which, hopefully, would continue to support a viable transco 
alternative and financing for the infrastructure needs of the 
industry.
    Thank you, Mr. Chairman.
    [The prepared statement of Charles A. Trabandt follows:]
               Prepared Statement of Charles A. Trabandt
    Thank you, Mr. Chairman, for the opportunity to testify before the 
Subcommittee on the subject of ``Electric Transmission Policy: Regional 
Transmission Organizations, Open Access, and Federal Jurisdiction.'' At 
the outset, I want to commend the Subcommittee for its decision to 
proceed with these hearings. While we can never forget the horrific and 
tragic events of September 11th, we also cannot allow the perpetrators 
of those acts of war to paralyze our great nation. So, it is 
appropriate that important business such as these hearings go forward 
to address critical energy issues of the future.
    On the morning of September 11th, I was at the Institute of Nuclear 
Power Operations (INPO) in Atlanta for a regularly scheduled meeting of 
the INPO Advisory Council and a dinner to honor Dr. Jim Rhodes, the 
retiring INPO CEO. As the terrible events of that morning unfolded, the 
meeting was canceled and INPO immediately joined nuclear utilities 
across the country in tightening security and implementing emergency 
preparedness plans with impressive professionalism. From all reports, 
the nuclear industry performed superbly throughout those early days of 
national crisis and continues to do so.
    That same morning, my former colleagues in the Global Energy and 
Power Group of Merrill Lynch's Investment Banking Division had just 
arrived at their offices in the North Tower of the World Financial 
Center, across from the World Trade Center. They were evacuated 
immediately after watching in horror as the second hijacked aircraft 
hit the twin towers. I am thankful to report that they all escaped 
without serious injury. However, it now appears that those offices 
could be closed for an extended period, so my old group will be 
relocated elsewhere in the New York City area.
    I have been asked to provide testimony on FERC's Order No. 2000 RTO 
policy from a financial perspective, with particular emphasis on the 
independent transmission company or transco alternative and the 
incentives for transco's. My testimony reflects my eight years of 
experience as a Managing Director in the Global Energy and Power Group 
of Merrill Lynch's Investment Banking Division, from which I retired in 
August. As a Managing Director, I had responsibility for strategic 
advisory assignments for electric utility and energy company clients 
around the world. Among other assignments, I have advised electric 
utilities on specific transmission transactions, including the 
establishment, financing and strategy of Hydro One in Ontario and the 
establishment and financing of U.S. RTO's. My testimony is also 
informed by my prior service as a FERC Commissioner and as a Committee 
Counsel in the House of Representatives and the Senate.
    Other witnesses in this and prior hearings have testified about the 
increasingly urgent need for investment in the nation's electric 
transmission infrastructure. Investment by any measure has fallen just 
as the wholesale electricity market under open access policies has 
grown dramatically. And, just as the electricity system moves toward 
Regional Transmission Organizations, the stress and strain on the 
transmission infrastructure is going to increase at an accelerating 
rate for several reasons.
    Electricity demand nationwide has continued to grow and is 
projected to do so at a steady rate. Construction of new generation 
plants is underway at a record pace, requiring new interconnections and 
upgrades and increasing the demand for transmission services. Wholesale 
electric transactions for existing generation, with associated 
transmission service requirements, have increased several fold in 
recent years. Additionally, the system already is experiencing 
increased congestion with growing costs and fast rising transmission 
curtailments or TLR's. And probably not yet well understood nor fully 
appreciated, the existence of a new RTO can significantly change the 
wholesale transaction structures and transmission service requirements 
to execute newly economic trades. In short, there is a critical need to 
provide investment to maintain the national grid, which undoubtedly 
will increase in the aftermath of the September 11th attacks and in the 
new context of homeland defense.
    These relatively inevitable pressures on the electric transmission 
system in the context of the drive to RTO's under FERC Order No. 2000 
support a flexible approach to financing and structuring RTO's. FERC 
acted prudently to provide the electric industry with the opportunity 
to structure RTO's as independent for-profit transmission companies 
(transco's), as Independent System Operators (ISO's) or as hybrid ISO-
transco organizations. Hybrid organizations could include an RTO 
structured as an ISO with one or more transco's as members, who also 
may provide various services to the RTO.
    FERC also developed a transmission rate-making policy for RTO's 
which was intended to remove pricing disincentives for transmission 
owners to join RTO's and to help transmission companies become viable 
businesses. Under that rubric, FERC endorsed Performance-Based Rate 
Regulation (PBR) for RTO's to create incentives to make efficient 
operating and investment decisions, share benefits between customers 
and the RTO, protect system reliability, and prescribe rewards and 
penalties in advance based on benchmarks. PBR has been implemented for 
transmission services in Canada and the United Kingdom, in Federal 
regulation of telecommunications in the U.S., and by State PUC's for 
retail electric, gas, and telecommunications service.
    Consequently, while a novel concept at FERC thus far, the PBR 
approach is well established in regulatory circles. What is less 
apparent, however, is that it will take some time to collect the 
required data for the benchmarks for a new, non-power pool RTO. 
Nonetheless, the PBR has substantial financial and regulatory appeal as 
an alternative to FERC's traditional transmission ratemaking policy.
    In addition, FERC decided to consider innovative pricing proposals 
for RTO's, on a case-by-case basis, in response to its concern about 
continued under-investment in the transmission grid. The possible 
innovative pricing proposals include a formula rate of return, 
levelized rates, accelerated depreciation and incremental pricing for 
new transmission facilities. FERC also encouraged market approaches to 
congestion management as early as feasible. An RTO also can propose a 
rate moratorium for the period through January 1, 2005, and capture 
cost-saving benefits or increase leverage to increase earnings. 
Additionally, FERC will consider acquisition adjustments on a case-
specific basis where there are measurable benefits to customers.
    FERC also recognized that the IRS Code created a substantial 
disincentive for transmission owners to divest substantially 
depreciated transmission systems. As a result, passive ownership rules 
provide specific protections and rights for those owners who transfer 
control to the RTO (transco). Of course, the House-passed energy 
legislation would address the problem and mitigate or remove that tax 
disincentive.
    Another disincentive exists in the context of registration 
requirements under PUHCA with the SEC. The multi-state nature of the 
larger proposed RTO's could trigger a registration requirement for the 
owner of a small active ownership interest, with relatively severe 
limitations and approval requirements for other business and financial 
activity. Several potential strategic partners and equity financial 
investors have indicated that they would be unwilling to accept 
registration as a condition of a strategic partnership or an active 
equity investment in an RTO. Legislative action by the Congress or 
administrative action by the SEC may serve to remove this financial 
disincentive at some point.
    Not surprisingly, many possible strategic partners and equity 
financial investors are themselves directly, or are affiliated with, 
market participants, as defined by Order No. 2000. As such, those 
potential investors are limited by the FERC rules to a 5% ownership 
stake for 5 years, in order to ensure RTO independence, although they 
could make qualified passive investments. Thus, the market participant 
limitations do constrain the investment opportunity for many potential 
(and knowledgeable) investors and limit the universe for marketing 
transco private equity. But, it does not appear that FERC will amend 
Order No. 2000 to address this issue.
    FERC also adopted a policy of ``open architecture'' and required 
that RTO's be designed so that they can evolve over time. The purpose 
of open architecture is to allow RTO's to improve, evolve and 
accommodate technical change, albeit subject to FERC review. The open 
architecture policy is particularly important for transco's, given the 
likely substantial changes between Day 1 operations and later 
requirements, such as congestion management and new investment 
policies, which have major financial implications.
    This overall regulatory flexibility has spawned transco proposals 
across the country, which could create the proper conditions for the 
nascent independent transmission industry. Transco's could support 
further development of the competitive wholesale electricity market by 
accessing capital markets to secure the much needed financing for 
sustaining capital expenditures, upgrades and expansion of the 
transmission infrastructure. As a general financial matter, transco's 
should become attractive as an equity investment to strategic partners, 
financial (private equity) investors, and the public market.
    Strategic partners will be attracted by the opportunity to manage a 
significant asset base, share in the value creation potential (``gain 
sharing''), have specified rights with regards to the assets, and an 
acceptable projected return on the equity investment. There are 
indications that there are a number of potential strategic partners, 
however the probable requirement to register under PUHCA with the SEC 
is an impediment today. Financial investors will require a well-defined 
and meaningful investment as a private placement with a subscription 
agreement, appropriate limitations on liability, an acceptable return 
and exit strategy, board representation, and other typical features. 
There are definitely financial investors interested in the transco 
opportunity, provided that the specific transco structure can be 
formulated to satisfy their individual requirements.
    Transco's also may become attractive to the public equity markets 
in the form of an IPO, a spin-off, or a tracking stock, each of which 
has differing characteristics and conditions. The IPO alternative 
probably will require, among other factors, a solid management track 
record of a couple of years, a good business plan and marketing story, 
sufficient size for liquidity, adequate projected growth and total 
return, well developed valuation, reasonable regulatory stability, and 
of course, a positive stock market environment. As a result, it is not 
likely that the new transco's under Order No. 2000 will be positioned 
for an IPO in the first or second year of operations. That factor 
suggests the importance of a strategic partner and/or financial 
investors in the initial transco financial plan.
    Additionally, transco's should be capable of obtaining strong 
investment grade credit ratings, which will support financing by access 
to debt markets. Credit rating agencies have become more experienced 
with the transco concept and have developed a series of quantitative 
metrics and qualitative factors to assess the credit quality of a 
transco. A transco with transmission system assets should be able to 
achieve a solid investment grade rating with a capital structure having 
debt in the range of 60% to 70%, under reasonably favorable regulatory 
treatment.
    The electric utility industry is moving with reasonable dispatch to 
capture the opportunity provided by the FERC regulatory flexibility. 
For example, the Alliance Companies (nine Midwestern utilities and 
Dominion Energy), Grid South (three investor-owned utilities serving 
the bulk of customers in North Carolina and South Carolina), Southern 
Company and public power groups in Georgia, Alabama, and Mississippi, 
Grid Florida (three investor owned utilities serving the bulk of 
customers in Florida), Entergy in Arkansas, Louisiana and Mississippi, 
and TransConnect (five investor-owned utilities in the Pacific 
Northwest) have proposed and committed resources in varying degrees to 
a for-profit Limited Liability Company (LLC) structure for their RTO. 
Utilities, such as First Energy, DTE and Consumers Energy, have created 
independent transmission subsidiaries to facilitate options for their 
systems. In addition, the American Transmission Company with investor-
owned and public-owned transmission systems in Wisconsin already has, 
and the TRANSLink group, including NSP, Mid-American, Alliant, NPPD and 
OPPD, is in the process of, forming independent transmission companies 
in the hybrid structure under the Midwest ISO-proposed RTO. And, last 
week, Arizona Public Service, Salt River Project, El Paso Electric, 
Public Service of New Mexico, Tucson Electric and Texas-New Mexico 
Power announced that they were abandoning the non-profit DesertSTAR ISO 
proposal in favor of a new for-profit transco RTO, WestConnect, for the 
southwest region. Each of these initiatives will create the opportunity 
in one form or another to access capital markets for financing 
purposes.
    Two recent developments highlight the opportunity for for-profit 
transco's. First, a new consortium, in July 2001, won a structured 
auction in Alberta and signed an agreement to acquire the TransAlta 
transmission system which supplies 60% of the Province's transmission 
requirements. The consortium is 50% owned by SNC-Lavalin, one of the 
leading engineering and construction firms in the world, 25% owned by 
the Ontario Teacher's Pension Plan Board, a large institutional 
investor in Canada (OTPP), 15% owned by Macquarie Financial Group of 
Australia, and 10% owned by Trans-Elect of the U.S. The consortium paid 
a premium for the TransAlta assets in a competition which reportedly 
included several other international strategic and financial investors.
    SNC-Lavalin made the investment to capitalize on its international 
engineering and financing expertise, which when combined with the 
strengths of the TransAlta team, would support high quality 
transmission services and much needed expansion of Alberta's 
interconnections with surrounding jurisdictions. OTPP concluded that 
Alberta wanted to make it attractive for investors to expand the 
electricity system, such that the TransAlta transmission business was a 
good asset to finance pensions. And, Macquarie also saw the acquisition 
as a good investment and its first of many infrastructure investments 
in Canada. While not directly on point in the context of U.S. RTO's, 
this consortium demonstrates that there are strategic investors, such 
as SNC-Lavalin, and financial investors, such as OTPP and Macquarie, 
who are prepared to make financial commitments in the transmission 
infrastructure under favorable financial conditions.
    More recently, on August 28, 2001, eight of the Alliance Companies, 
announced that they had signed a Letter of Intent (LOI) with National 
Grid USA, by which National Grid USA would become the Managing Member 
of the Alliance Transco LLC. The transaction is subject to the 
negotiation of definitive documents pursuant to a detailed Term Sheet 
attached to the LOI and to a FERC determination that National Grid USA 
is qualified to be Managing Member. The eight Alliance Companies and 
National Grid USA made filings at FERC on August 28 seeking the 
requisite approvals of the joint Alliance Transco LLC. The Alliance RTO 
has already been substantially approved by FERC under Order No. 2000.
    The Alliance-National Grid USA transaction is highly significant 
and well reflects the potential business, commercial and financial 
benefits of FERC's regulatory flexibility with regard to RTO structure 
under Order No. 2000. A key element of the transaction as filed at FERC 
is a non-binding declaration of intent by Commonwealth Edison to divest 
transmission facilities with a gross book value exceeding $1 billion. 
Such a declaration of intent satisfies a critical pre-condition for 
establishing Alliance Transco LLC as the Alliance RTO. The resulting 
RTO would be structured as a for-profit transmission LLC, the first of 
its kind to become operational under Order No. 2000.
    The Term Sheet attached to the LOI lays out the key elements of a 
strategic partnership which would be beneficial to the Alliance 
Companies, National Grid USA and the customers of the Alliance Transco 
RTO. National Grid USA's parent company has an excellent track record 
in the United Kingdom for managing transmission assets effectively and 
ensuring reliable delivery of electricity. The Term Sheet commits 
National Grid to making $1 billion in specified investments in the 
Alliance RTO in exchange for a seven-year management contract and 
associated compensation. At the same time, the Alliance Companies are 
provided with significant incentives to divest their assets in the form 
of cash and attractive passive investments with financial benefits and 
assured liquidity in several forms.
    For those companies which do not divest immediately, there will be 
various protections to ensure that National Grid USA as Managing Member 
fulfills it obligations in its functional control of their systems. 
Both divesting and non-divesting Alliance Companies will have FERC-
approved approval rights over certain National Grid USA actions, while 
National Grid will have a right of first negotiation on any 
transmission asset sales by an Alliance Company to another party. In my 
judgment, the Alliance-National Grid USA LOI and Term Sheet is an 
excellent example of the types of commercially-based business and 
financial transactions which are possible under FERC's transco-RTO 
structure.
    The FERC transco-RTO structure can also be beneficial in creating a 
business-oriented approach and commercial culture for providing RTO 
services. In that regard, the Alliance Companies created a special 
purpose LLC structure for the start-up activities required to support 
initial operations of Alliance RTO. The special purpose LLC, with the 
nickname ``Bridge Co'', is a classic model of a lean but effective 
commercial organization in modern business terms.
    Bridge Co has a CEO as the only full time employee and a staff of 
seconded employees, supported by consultants and contractors with 
tightly negotiated contract arrangements. Bridge Co is coordinating all 
of the start-up arrangements for Alliance RTO, but without making any 
market design-related business decisions. In order to minimize initial 
operating costs and maximize open architecture design flexibility in 
the future, Bridge Co has negotiated favorable contracts for virtually 
all RTO-required functions and has avoided any significant investment 
in functional assets.
    All back office functions, employee benefits packages, information 
technology requirements, subordinate security coordination and 
supporting activities have been outsourced and procured by competitive 
bid from non-affiliated vendors. Additionally, Bridge Co has optimized 
organizational centralization and decentralized operations, such that 
staffing levels are adequate and cost-effective. The combination of 
these forward looking commercial approaches should support an initial 
RTO operation and organization that will have minimized costs on day 
one, while ensuring operational reliability, system security and high 
quality services for Alliance RTO transmission customers.
    Bridge Co currently is completing RTO system tests with vendors, 
conducting customer training programs and beginning operational tests 
with the Alliance Companies and then Alliance customers. Bridge Co is 
now hiring the operational staff required for 24/7 transmission 
operations. Total cost for the Bridge Co start-up effort and payment of 
Alliance Companies' expenses is approximately $75 million, which would 
be reimbursed by National Grid USA pursuant to the LOI. The existing 
Alliance master schedule contemplates that all necessary preparations 
will be completed and all required approvals will be received for 
initial operations, assuming timely FERC and state PUC actions. That 
result also could be another tangible benefit of the FERC transco-RTO 
policy, recalling that the Alliance companies operate in eleven states, 
stretching from Missouri to Virginia, with approximately 57,000 miles 
of transmission lines, 115 Gwe of generation capacity, and serving 
approximately 40 million customers.
    The fact that the Alliance for-profit transco RTO has reached the 
stage of operational testing for initial operations, while at the same 
time negotiating the definitive documents for a strategic partnership 
with National Grid USA as the Managing Member of Alliance Transco LLC, 
is itself a testament to FERC's flexible RTO policy. Quite importantly, 
FERC in January 2001, ordered that the Alliance Companies and MISO 
participate in a settlement conference associated with the requests of 
Ameren, Commonwealth Edison and Illinois Power to withdraw from MISO 
and join the Alliance. Chief Administrative Law Judge Wagner presided 
over a two-month negotiation which culminated in a settlement approved 
by FERC.
    Under the settlement, Alliance and MISO were authorized to pursue 
their separate RTO models, the three withdrawing companies made total 
payments of $60 million to MISO, and Alliance and MISO were required to 
implement an Inter-Regional Coordination Agreement and develop a super-
regional rate. The thrust of the latter requirement was to create a 
seamless market for transmission services to support a competitive 
wholesale electricity market across the Midwest region. Alliance and 
MISO have pursued that objective aggressively in so-called ``seams'' 
negotiations and in Open Access Transmission Tariff filings made at the 
end of August to support initial operations of both systems. Similarly, 
Alliance and MISO have participated in a stakeholder process to address 
the key market design issues associated with congestion management in 
their respective systems.
    Of course, there is opposition to the flexibility which has 
resulted in the Alliance-MISO settlement agreement and the Alliance-
National Grid USA LOI. Opponents generally prefer the ISO structure for 
a Midwest RTO and/or are anxious to put in place a single, fully 
integrated electricity market in the Midwest supported by one RTO, and 
I respect those views. FERC on July 12, 2001, signaled that the 
majority was in favor of four large RTO's in the Northeast, Southeast, 
Midwest, and West, and ordered jurisdictional transmission owners in 
the Northeast (PJM ISO, N.Y. ISO and N.E. ISO) and the Southeast into 
``mediation'' negotiations facilitated by FERC ALJ's. Various parties 
have petitioned FERC to convene Midwest ``mediation'' negotiations 
intended to reverse the Alliance-MISO settlement and broker some form 
of direct merger to form a single Midwest RTO.
    FERC has provided some additional detail in the past few weeks 
regarding its new RTO policy. Chairman Wood testified before the 
Subcommittee that large RTO's were not only required for competitive 
markets, but were now imperative for a reliable national power grid. He 
testified that the cost of planning and executing the necessary level 
of security and infrastructure protection will be significant and will 
require expertise that only large region-wide organizations can 
provide. To that end, FERC plans to make decisions in the Northeast and 
Southwest mediation cases in the next month or so, based on mediation 
reports from the assigned ALJ's. FERC has scheduled technical 
conferences next week on the key RTO market structure issues, including 
congestion management, cost recovery, market monitoring, transmission 
planning, business and reliability standards and the nature of 
transmission rights. The conferences will form the basis for a 
rulemaking to establish a significant amount of standardization 
nationwide in uniform market structure regulations. FERC also will 
review the status of the Alliance-MISO seams agreement and possibly 
consider requiring mediation for a merger, while encouraging RTO West 
and DesertSTAR to initiate merger discussions for a west-wide RTO which 
eventually would include California.
    Other witnesses have testified about the legal and policy 
considerations in opposition to and support of the FERC-ordered 
mediation in the Northeast and Southeast and the concept of four RTO's 
nationwide. From a business and financial perspective, I would counsel 
caution in this immediate policy direction. Policy makers and 
regulators may wish to consider the potential risk that the transco RTO 
alternative will be materially disadvantaged by such a significant and 
immediate change in the FERC RTO policy.
    In the area of infrastructure and transmission grid security, the 
Congress, the Administration and industry have responded in quick order 
to the heightened threat of terrorism. The Subcommittee provided 
leadership with the hearing on September 20th with Administration 
witnesses and related activities. The Department of Energy was 
scheduled to make legislative recommendations on security on October 
9th with immediate Committee mark-up of emergency legislation in the 
Senate this week. NERC has been in a readiness state of high alert and 
an EEI task force has been working with NERC, NEI, other energy trade 
groups and DOE on enhanced security measures.
    All of these initiatives, and undoubtedly many more in the context 
of homeland defense, will parallel the preparations for Desert Storm a 
decade ago. Government and industry worked in close cooperation then to 
ensure adequate protection of our vital energy sector. And, I 'm 
confident that today's efforts ultimately will be just as successful in 
the face of the new terrorist threat. At the same time, I support 
action by the Subcommittee to pursue its legislative agenda in the area 
of electricity policy. The nation now will probably require even more 
capital investment in the electric transmission grid and there needs to 
be some resolution of the major policy issues to support that result.
    In conclusion, the structural and regulatory flexibility provided 
by FERC under Order NO. 2000 has spawned a new generation of 
independent for-profit transmission companies and RTO's. Those 
transco's will be operated on a commercial business-like basis and 
should have access to the capital markets. Transco's should have the 
financial capability if properly incentivized to fund the critical 
transmission infrastructure improvements and expansion required to 
maintain system reliability and to support a competitive wholesale 
market. I would recommend that the Subcommittee in any Federal 
transmission policy legislation consider measures to preserve that 
flexibility, so that transco's can continue to be a viable and growing 
segment of the future electric transmission system. In addition, I 
would recommend that the Subcommittee consider appropriate procedures 
to protect investments already made in approved and operating transco's 
and to provide for an orderly transition to any new policy direction, 
which hopefully would continue to support a viable transco alternative.
    Thank you, Mr. Chairman. I would be pleased to answer any 
questions.

    Mr. Barton. Thank you.
    We now want to hear from Mr. Michael Travieso, who is with 
Maryland People's Council.
    We do appreciate your expediting your schedule to get here. 
Your testimony's in the record, and we would welcome you to 
elaborate on it for 5 minutes.

                STATEMENT OF MICHAEL J. TRAVIESO

    Mr. Travieso. Thank you very much, Mr. Chairman.
    It's not easy, I guess, but it's Travieso, it's apropos 
here. I guess it's like the oil company used to be.
    Mr. Barton. Well, I apologize for mispronouncing it.
    Mr. Travieso. That's okay.
    I am the Maryland People's Counsel. I was appointed to that 
position by Governor William Donald Schaeffer in 1994, and 
serve at the pleasure of the current Governor. I run a small 
State agency which has the responsibility for representing 
residential customers in the energy and telecommunications 
industries.
    My office has been very active in the past in PJM and the 
formation of the PJM policies, and is currently very active in 
the Northeast RTO process. We've been involved in the 45 day 
mediation process and continue to be involved.
    I would like to commend you, Chairman Barton and the 
members of the committee and your staff for continuing efforts 
to seek out and include the views of consumers or consumer 
representative as you proceed with your inquiry into the 
development of effective competitive wholesale markets. My 
testimony, however, is not intended as an endorsement of the 
deregulation and restructuring of the electric industry 
everywhere. While Maryland has restructured, I share the 
concerns of many about the ability of residential and small 
business customers to benefit unless wholesale markets can be 
made to function efficiently. Without a workably and 
competitive and efficient wholesale market, retail prices will 
be higher and perhaps much higher than necessary.
    I also believe that individual States who have restructured 
should be able to determine their own fate and determine, if 
they wish, that utilities with the obligation to serve under 
just and reasonable rates should remain in place.
    This testimony will focus on the basic principles necessary 
to establish a proper framework for a competitive wholesale 
market.
    I believe that the existing transmission systems were not 
planned or built to serve regional markets, and therefore must 
be redesigned. I believe that RTOs should have the authority to 
conduct transmission planning, studies and have the authority 
backed by FERC to order the construction of new transmission.
    I do not favor for-profit transmission companies. I believe 
that it will raise the cost of capital for transmission 
organizations and companies just as they have done for 
generators. Regulated transmission companies have not had 
difficulty attracting capital because under the cost of service 
regulation they are guaranteed a return. In fact, utility's 
cost of capital has traditionally been among the lowest of any 
businesses in the United States.
    Larger regional transmission organizations are better than 
smaller ones because of the reduction in administrative and 
transaction costs and the increase in generating capacity and 
diversity. I think the 40,000 megawatts which is in the bill is 
too small. I think that when you have transmission RTOs of that 
size, there's a significant risk of the exercise of market 
power. And my office favors the creation of the northeast RTO, 
although we have lots of concerns. That would create an RTO of 
over 120,000 megawatts, which would have the effect of reducing 
the opportunity for generators, generator owners to 
strategically bid their generation and to raise the price.
    I would say the principle difficulty in ensuring a truly 
competitive wholesale market would be creating one of 
sufficient size and scope to create uncertainly on the part of 
owners of generation that their bids to sell power will be 
accepted. I'm not talking about regulatory uncertainty. I'm 
talking about a situation in which there are enough sellers 
that the bids that these sellers are going to submit will have 
to be at or near marginal costs in order for them to actually 
sell their power. and when we redesign the electric system and 
returned, that's what the rhetoric was; the bids were going to 
be at or near marginal costs. That can only happen if there is 
a sufficient number of sellers, sufficient liquidity in the 
market, both the energy and the capacity market.
    I favor fewer and larger RTOs as long as they are properly 
structured, cost benefit analysis are performed prior to their 
formation and costs are not shifted from one set of customers 
to another or from customers of high cost transmission owners 
to those of low cost transmission owners.
    I oppose incentive rate making and actually NASUCA, the 
organization that my office is a member of, opposes incentive 
rate making as well for the recovery of transmission costs as 
unnecessary and not cost effective. It could lead to excessive 
earnings, higher consumer costs. There's no evidence of need. I 
believe that RTO planning will be sufficient to lead to the 
development of a transmission system that can do the job.
    I believe that the FERC currently has the legal authority 
to do what it is now doing regarding the creation of four large 
RTOs, market power mitigation and the imposition of customer 
refunds on entities that have used market power. However, FERC 
needs to exercise its power more to ensure that markets work 
efficiently and consumers are protected.
    FERC does need additional authority over transmission 
planning and in certain other areas. We are--I am against the 
FERC exercise of jurisdiction over retail transmission where in 
States that have not restructured, where they still have 
bundled rates. I believe that jurisdiction belongs to the 
States.
    RTO markets must design and encourage the utilization of 
demand side peak load reduction programs. And I note that's in 
the draft without much greater demand elasticity than currently 
exists. In PJM and elsewhere peak load prices will easily be 
subject to the exercise of market power.
    I believe that individual States must continue to play a 
prominent role in assuring reliability and in helping with the 
design of wholesale markets. However, the success or failure in 
obtaining workably competitive markets will ultimately depend 
on the FERC and on the RTO structure and authority.
    Thank you very much, and I'll be happy to answer questions.
    [The prepared statement of Michael J. Travieso follows:]
  Prepared Statement of Michael J. Travieso, Maryland People's Counsel
                              introduction
    My name is Michael Travieso and I am the People's Counsel for the 
State of Maryland. I have been in that position since 1994. The Office 
of People's Counsel is an independent state agency that represents the 
interests of residential utility consumers of electricity, natural gas, 
telephone and water services before the Maryland Public Service 
Commission, federal agencies, state and federal legislatures, and the 
courts. Created in 1924, the Maryland People's Counsel is the oldest 
consumer advocate agency of its kind in the United States.
    My office is a member of the National Association of State Utility 
Consumer Advocates (NASUCA). NASUCA represents 42 state utility 
consumer offices from 40 states and the District of Columbia. While I 
am speaking on behalf of the Office of the Maryland People's Counsel 
today, NASUCA members have extensive experience with electric utility 
restructuring at the federal and the state level. NASUCA has issued a 
series of resolutions concerning electric deregulation and the 
formation of regional transmission organizations that indicate the 
views of consumer advocates across the country. Many of my comments 
here today rely on those resolutions which are available on the NASUCA 
website.
    I would like to start by commending Chairman Barton, the members of 
the committee and your staff for your continuing efforts to seek out 
and include the views of consumers and consumer representatives as you 
proceed with your inquiry into the development of effective, 
competitive wholesale power markets.
    My testimony is not intended as an endorsement of the deregulation 
and restructuring of the electric industry. I share the concerns being 
raised by many about the ability of residential and small business 
customers to benefit unless wholesale markets can be made to function 
efficiently.1 This testimony will focus of my views on the 
basic principles necessary to establish a proper framework for a 
competitive wholesale market.
---------------------------------------------------------------------------
    \1\ See Cooper, Mark N., Electricity Deregulation And Consumers: 
Lessons From a Hot Spring And A Cool Summer, (Consumer Federation of 
America, August, 2001), and sources cited therein).
---------------------------------------------------------------------------
    My points in summary form are the following:

1. Without a workably competitive and efficient wholesale market, 
        retail prices will be higher than, and perhaps much higher than 
        necessary.
2. The principal difficulty in ensuring a truly competitive wholesale 
        market will be creating one of sufficient size and scope to 
        create uncertainty on the part of the owners of generation that 
        their bids to sell power will be accepted.
3. Both for reliability and market design purposes, RTOs must continue 
        or establish installed or deliverable capacity requirements and 
        concomitant capacity markets in addition to energy and 
        ancillary services markets.
4. Generally speaking, larger regional transmission organizations are 
        better than smaller ones because of the reduction in 
        administrative and transactions costs and the increase in 
        generation capacity and diversity.
5. Generally speaking, the existing transmission systems were not 
        planned or built primarily to serve regional markets and, 
        therefore, must be redesigned and enhanced to do so.
6. RTO market design must encourage the utilization of demand-side peak 
        load reduction programs. Without much greater demand elasticity 
        than currently exists in PJM and elsewhere, peak load prices 
        will be easily subject to the exercise of market power.
    I believe that individual states must continue to play a prominent 
role in assuring reliability and in helping with the design of 
wholesale markets. However, the success or failure in obtaining 
workably competitive markets will ultimately depend on the FERC and on 
RTO structure and authority. FERC should have clear authority and 
jurisdiction to:

a. Determine the appropriate size of RTOs;
b. Require transmission owners to join particular RTOs;
c. Return generators to cost-of-service prices if necessary;
d. Provide regulatory oversight to RTOs in order to monitor regional 
        wholesale markets and impose appropriate behavior modifying 
        penalties on parties or entities shown to have abused their 
        market power;
e. Regulate the long-range planning and cost recovery of transmission 
        owners in order to foster the efficient sale and delivery of 
        electricity and capacity across large regional wholesale 
        markets;
f. Ensure the competitive neutrality of transmission systems by 
        assuring that transmission owners will provide for open access 
        and use of the transmission system at just and reasonable rate 
        without any discrimination in favor of generation owning 
        affiliates;
g. Ensure the provision of transmission service at the lowest cost 
        possible;
h. Require that RTOs meet strict standards of economic operation and 
        investment;
i. Require that RTOs have independent non-stakeholder boards which 
        guarantee input from consumer advocates and state public 
        service commissions;
j. Provide a regulatory forum for the resolution of complaints by 
        market participants of tariff or RTO protocol violations, 
        violations of relevant federal law and the use and abuse of 
        market power;
k. Require RTOs to enforce compliance with rules and protocols 
        promulgated by the North American Reliability Council, (NERC).
    An RTO must exhibit the following characteristics and be able to 
perform the following functions:

 it must be independent from market participants;
 it must serve a region of sufficient scope and configuration 
        to perform effectively and support efficient and non-
        discriminatory power markets;
 it must have operational responsibility for all transmission 
        facilities under its control;
 it must have authority for maintaining the short-term 
        reliability of the grid.
 it must administer its own transmission tariff and use a 
        transmission pricing system that promotes efficient use and 
        expansion of transmission and generation facilities;
 it must ensure the development and operation of efficient and 
        fair mechanisms to manage transmission congestion;
 it must develop and implement procedures to address parallel 
        path flow issues both within its own region and with other 
        regions;
 it must provide for a supplier of last resort for all 
        ancillary services that cannot otherwise by supplied 
        efficiently by market mechanisms;
 it must be the single OASIS--the Open Access Same-Time 
        Information System--site administrator for all transmission 
        facilities under its control and independently calculate total 
        transmission capacity (TTC) and available transmission capacity 
        (ATC);
 it must monitor markets for transmission services, ancillary 
        services and bulk power to identify design flaws and potential 
        market power problems and propose appropriate remedial actions; 
        and
 it must be responsible for planning necessary transmission 
        additions and upgrades in coordination with appropriate state 
        authorities.
    I favor fewer and larger RTOs so long as they are properly 
structured; cost benefit analyses are performed prior to their 
formation; and costs are not shifted from one set of customers to 
another or from customers of high cost transmission owners to those of 
low-cost transmission owners. I oppose incentive ratemaking for 
transmission owners as unnecessary and not cost-effective. This 
country's transmission system should be regulated as the monopoly it is 
and should be operated in the public interest.
    I believe that the FERC currently has the legal authority to do 
what it is now doing regarding the creation of four large RTOs and 
regarding market power mitigation and the imposition of customer 
refunds on entities that abuse market power. In my view, FERC needs to 
exercise its power to ensure that markets work efficiently and 
consumers are protected. FERC does need additional authority over 
transmission planning and in certain other areas.
    If the FERC has any concerns about its authority, I urge this 
Subcommittee and Congress to give FERC the specific tools it asks for, 
including:

--specific authority to order the formation of RTOs and to order 
        utilities to join them;
--authority to ensure the adoption of uniform interconnection 
        standards;
--authority to award customer refunds for past periods if the FERC 
        determines the rates charged to be unjust and unreasonable;
--authority to assess civil penalties for market power violations;
--enhanced authority to review and scrutinize mergers;
--clear authority to remedy market power abuse
--authority to mandate reliability standards for bulk power markets and 
        to work with the states to ensure the reliability of electric 
        supply;
--authority to require the development and implementation of demand 
        response/peak sharing programs.
    That concludes my prepared remarks. I want again to thank the Sub-
committee for this opportunity to appear and to speak on behalf of the 
residential consumers of Maryland and to express what I believe are the 
concerns of consumers in general.

    Mr. Barton. Thank you.
    The Chair recognizes himself for questions. Just as an 
aside, the House has finished its business on the floor for the 
day, so that when this hearing is adjourned, members can go 
home if they wish. Just put that as a suggestion.
    I have a general question. We put out at the staff level a 
draft RTO proposal late yesterday afternoon. Have any of your 
groups had a chance to see that and study it? Okay. I don't 
see.
    Mr. Esposito. We've had a chance to see it, but not study 
it.
    Mr. Barton. Okay.
    Mr. Travieso. We've seen it, we haven't studied it yet.
    Mr. Barton. Okay. Well, I would encourage you to study it 
and get your written comments to the committee staff and the 
minority staff, and any specific members.
    We've had a lot of testimony, a lot of discussion about the 
number of RTOs. FERC was moving toward four RTOs plus ERCOT. 
What's the general position of you gentlemen? Is there a magic 
number and is that magic No. 4 plus one or should we let the 
market operate and see what seems to make most sense based on 
the geographic considerations?
    Mr. Franklin?
    Mr. Franklin. Mr. Chairman, there's certainly not a magic 
number. I don't think anyone could know what the proper--what 
the optimum ultimate size should be and what it will be 10 
years from now. To my knowledge, no studies have been done.
    There are some natural markets that have formed around the 
country, there's some in the southeast. I think the natural 
markets that have formed that have some reasonable transmission 
capability within that region so you can move significant 
amounts of power within that region is a good start.
    Our thought is that forming RTOs that can be formed 
relatively quickly that meet the needs of a specific region 
that can get concurrence of State commissions in that region, 
even if it's somewhat smaller, getting those done quickly but 
putting them together in a way that they could be merged with 
larger RTOs later makes a lot of sense.
    I think over time if an RTO is too small, it'll become 
obvious. There'll be demands for lots of transmission between 
that RTO and the next one and lots of power movements. And over 
time you can go from smaller RTOs to larger RTOs, but I think 
the other process is irreversible. I don't see how you form a 
huge RTO that covers 20 States and later decide that was too 
big, you can't manage the bureaucracy is out of control. It 
seems to me it's almost impossible to go in the other 
direction.
    Mr. Bennett, do you have a comment on that since you're 
representing the NARUC group, plus your State?
    Mr. Bennett. Yes, I would say it's sort of a geographic 
evolutionary process. As I said in my opening remarks, we see 
the benefit of a voluntary approach where a region puts 
something together. But as a practical example, New England, 
New York and PJM are working together. And logic dictates that 
if and when RTOs become the way to go, that would be a region 
that seems to work together, has worked together and is doing 
it now.
    Mr. Barton. Okay. You all haven't had a chance to study the 
RTO draft that we released yesterday afternoon, but it has as a 
minimum size requirement for an RTO 40,000 megawatts. Would any 
of you care on the record to comment on the minimum size 
requirement? Is 40,000 reasonably good or should it be higher, 
should it be lower, or should there be no minimum requirement 
in terms of the number of the size of the megawatts in the RTO?
    Mr. Esposito?
    Mr. Esposito. Mr. Chairman, 40,000 would allow California 
to remain a single State RTO, and I think we've seen the 
experience of single State RTOs not being pleasurable, to say 
the least. So you might want to look at a bigger number.
    I think at the end of the day what you really want to look 
at is where our market's developing, and that's where the 
physics, not the politics work together. And, you know, 40,000 
might be fine somewhere and not good somewhere else. So, it's 
difficult to just set a number in stone.
    Mr. Barton. Okay. Mr. Gerken?
    Mr. Gerken. What I think is important, I think I commented 
a little earlier on the first question. I think 4 or 5. The 
larger the RTOs to us, the better. I think what's more 
important is----
    Mr. Barton. The larger the size?
    Mr. Gerken. The larger the size of the RTO, less seams 
issues, but also importantly is that all these are run under 
one set of rules and guidelines. I think that is the biggest 
issue right now.
    We're stressed to a little point. We happen to fall within 
the Midwest ISO and the Alliance RTO, and that was formed as a 
merger, but it's still questionable whether that formation's 
going to work as what I call, I guess, a subset of one large 
RTO.
    Mr. Barton. Okay.
    Mr. Travieso. Just to follow up, I did say in my testimony 
that I thought 40,000 was too small.
    Mr. Barton. As a minimal?
    Mr. Travieso. As a minimum. Even as a minimum. It seems to 
me that once you're down to that size, in order for that size 
of an RTO to work, you'd have to have very vigorous FERC 
oversight and enforcement against market power abuse.
    Mr. Barton. Okay. My time has expired, but I'm going to ask 
one more question. Should the FERC be given the authority to 
force a private entity into a specific RTO? Now the draft 
mandates that you join an RTO, but it gives the time period and 
flexibility about creation, but there are those that say we 
should give the FERC the authority to mandate participation in 
a specific RTO. Mr. Franklin?
    Mr. Franklin. I'd like to answer that, Mr. Chairman, being 
a private entity. The answer is no.
    Mr. Barton. I am surprised. Shocked, amazed and stunned.
    Mr. Franklin. FERC doesn't know any better than any of the 
rest of us ultimately what size RTOs are going to be best or in 
which RTO in particular--transmission system should be. I think 
what needs to be in place is a national policy, which there is, 
that RTOs be formed. And I think there needs to encouragement 
to get them formed, but the heavy hand of simply dictating 
arbitrarily not based on cost studies, market studies or 
anything else that company A needs to be in RTO B without 
questioning or asking the question of State commissions, 
utilities, customers or anyone else just seems to me to be 
arbitrary and will lead to a bad result.
    Mr. Barton. Okay. Mr. Flynn?
    Mr. Flynn. Mr. Chairman, my response to your question would 
be no, I would be concerned if FERC were in a position where it 
could dictate join a particular RTO, because I don't think all 
RTO structures are necessarily equal. I think different 
structures have the potential for offering different degrees of 
benefits to market participants, to generators in the region as 
well as to consumers in the region.
    Based on our experience, we believe that there's greater 
potential for providing consumer benefits from an RTO that has 
as part of it an investor-owned for-profit independent 
transmission company. And if one gives FERC the authority to 
dictate a particular form of RTO, our concern would be that 
FERC, based on the information that's available, might pick 
wrong up front and we may be forced into a form of RTO that 
could be suboptimal.
    So we would rather see the flexibility for different 
structures to develop and then let the market choose which one 
is providing the highest level of consumer benefits.
    Mr. Barton. Okay. Mr. Johnston, and then Mr. Esposito, and 
then we're going to go to Mr. Boucher for his questions.
    Mr. Johnston. I would agree that--let me say the only time 
that FERC should be given the authority to force an entity into 
an RTO is to relieve market abuse as a mechanism of relief of 
that. Otherwise, I agree with some of the other comments that I 
don't think there is a perfect size. I think you have to look 
at markets, you have to look at operational issues in the 
regions, you have to look at cost benefits; all those play into 
the RTOs and which is best for me to join or for some other 
entity to join. But other than the relief of market abuse, I 
would not agree that FERC should have that authority.
    Mr. Barton. Mr. Esposito?
    Mr. Esposito. I agree a lot of points Mr. Flynn made, but 
at a certain point you can't just have a big hole in the middle 
of a region. And somebody's got to say you got to be part of 
the one that surrounds you. And the only entity I can think of 
to say that is FERC.
    Mr. Barton. Are you aware of a particular company or small 
group of companies in a particular region that would try to 
create a hole in the middle of the donut, so to speak?
    Mr. Esposito. There's a lot of that going on in the 
midwest. You can see the maps that are just Swiss cheese, 
because it does exist.
    Mr. Barton. Mr. Boucher?
    Mr. Boucher. Well, thank you, Mr. Chairman. Let's continue 
the discussion with regard to RTOs and, Mr. Franklin, let me 
begin with you.
    I know that when the FERC issued Order 2000 your company 
expressed support for the basic theory of that order, which is 
that utilities would be encouraged to join RTOs, but not 
required to do so.
    This July the FERC has made a somewhat more affirmative 
statement and has gone beyond Order 2000 by suggesting that if 
investor owned utilities do not join RTOs, the FERC perhaps 
would withhold merge authority and might withhold the authority 
for market based rates. So there's something of a greater 
encouragement, shall we say, for IOUs to join RTOs than was 
existent in Order 2000.
    So my first question to you is how do you feel about the 
new order, what is your reaction to that as compared to Order 
2000. And if you find that the July order imposes problems for 
you, what are those problems, if you could precise? Is it 
higher rates that would be imposed upon transmission sales or 
is it the inability to reserve sufficient capacity for your 
native load? I mean, what are the kinds of precise problems 
that you see stemming from this July order?
    Mr. Franklin. Thank you. A very good question, and I'll try 
to give a fairly short answer.
    First of all, the FERC order in July was not helpful. In 
the southeast, every investor owned utility that I have 
knowledge of and most all public power groups were working in 
good faith to form RTOs. So we didn't really need a bigger 
hammer. We already felt the need to move in that direction.
    What FERC has done, in my judgment, first of all has not 
only expressed an interest in moving faster and more 
deliberately to RTOs, they're beginning to express a very firm 
position on the structure for the RTO in the southeast and the 
size. Well, unfortunately, that was not the structure and the 
size being pursued throughout the southeast, so it has pretty 
much thrown those negotiations into turmoil and I think slowed 
down the process.
    No. 2, the States in the southeast are not at all convinced 
about the direction that RTOs should take. I think FERC 
generally was going in the right direction with Order 2000, and 
we were in the process of trying to convince our States that 
that was a good move. I think the recent approach by FERC has 
tended to dissuade or increase the concern that the States have 
about where FERC is ultimately going.
    And we can't move into an RTO. With 90 percent of our 
income regulated by States we cannot move into an RTO structure 
or size that our State strongly oppose. It would be financial 
suicide for us. So it's awfully important for us to bring the 
States along, and I think FERC action has hurt that.
    The other point, the very large RTOs I think long term may 
make sense. I doubt there needs to be four, maybe there needs 
to be six, maybe there needs to be eight. I don't know. I think 
time will tell. But with current FERC pricing where you can 
move within an RTO, where you can move power any distance for 
the same price you move it one mile, we're going to get huge 
distortions related to location of generation. And FERC has not 
been willing to address that.
    One of my greatest concerns related to large RTOs is the 
distortion that we see in the location of generation because of 
inadequate distance-sensitive pricing.
    Let me just mention one other thing since I've got the 
floor. The chairman's probably about to cut me off.
    But a big issue from a corporate standpoint for us is there 
is not inadequate generation in the southeast. I heard one of 
the panelists say there was imbalance. There is imbalance; 
there is way too much generation being built in the southeast. 
That's probably good for consumers long term, but it's going to 
require a huge amount of transmission. Ultimately we're going 
to have to build that transmission and collect the cost of that 
transmission from our retail customers. Regardless of FERC 
State jurisdiction the ultimate consumer in our region has to 
pay for that transmission. And we want to be sure that only the 
right transmission is built and that our State commissions are 
willing to allow us to recover that cost. That's a huge 
financial issue for us.
    Mr. Boucher. You have mentioned a couple of times in your 
testimony today this notion of distance-sensitive pricing, and 
I think it might helpful for us if you were a little more 
specific about what the problem that you perceive is and how 
distance-sensitive pricing should properly be structured to 
address that problem.
    Mr. Franklin. Okay. Thank you for this opportunity.
    In most any other form of transportation that I'm aware of, 
the further you move a product the more it cost to move it. So 
if you're going to build a manufacturing plant, all things 
equal, you build it closer to the market not a 1,000 miles 
away.
    In electric transmission within a region, within an RTO 
that's not true. You can build a power plant a mile from the 
load or 500 miles; the cost to move the power is the same. So 
there's no incentive to build the generation close to the load. 
That exacerbates the transmission problem. It's resulting in 
generation being build by the boatloads down along the Gulf 
Coast where natural gas is located and shipped to Atlanta, and 
Charlotte and up the east coast when in fact it should be built 
close to those load centers, all other things equal.
    That causes two problems. It increases the investment in 
transmission and the ultimate cost to consumers. And No. 2, it 
makes the system less reliable because you have these massive 
power flows; the greater the power flow the more bottlenecks 
are created and the more reliability problems are created.
    Mr. Barton. Will the gentleman yield?
    Mr. Boucher. Before I yield, Mr. Chairman, ask you one 
additional question.
    You've really defined well, I think, the problem. But 
what's the answer? I mean, how do we achieve distance-sensitive 
pricing so as to result in generation being built in a way that 
is proximate to where electricity is consumed?
    Mr. Franklin. It actually is pretty simple. It's been done 
in the natural gas industry. If you move gas from the Gulf 
Coast to Atlanta, it cost a whole lot more than moving it just 
10 miles inshore from the Gulf Coast. So FERC is very familiar 
with distance-sensitive pricing.
    There can be lots of debates about the exact method where 
there is zonal. In other words, you have a megawatt mile 
approach, which offends a lot of people, and I'm not sure it's 
a great idea either, or do you say you can move power for a 
price for 100 miles and when you go the second 100 miles 
there's another increment? There are lots of methodologies; I 
think a methodology that can be found that's fair.
    I think the problem is the mentality has been at FERC, and 
our industry too to a degree, that transmission is such a low 
cost in the total cost of electricity compared to generation 
that it doesn't matter; that it doesn't matter if you 
overbuild. It doesn't matter if you build too far from the load 
center. Well, that's changing.
    What we're looking at is tripling our investment in 
transmission. It's only about 10 percent of our total 
investment to date. Transmission is about 10 percent. Within 
the next 5 years it'll go to 20 percent. So investment in 
transmission does matter and making efficient transmission 
decisions is just as important as making efficient generation 
decisions.
    Mr. Boucher. Well, that's excellent food for thought, and I 
thank you.
    I'd be happy to yield to the chairman with the admonition 
that I have one additional question I'd like to ask.
    Mr. Barton. I was just going to ask what he answered if 
there's a way to do distance-sensitive pricing that the 
industry thinks makes sense, that's all.
    Mr. Boucher. Mr. Chairman, let me suggest, if I might, Mr. 
Chairman, that maybe we ask Mr. Franklin and his very excellent 
staff to enlighten us a little bit further with some written 
recommendations.
    Mr. Barton. Could the gentleman suspend just a second?
    Mr. Boucher. I'd be happy to.
    Mr. Norwood. Are we going to have more than one round?
    Mr. Barton. We're going to have a long one round.
    Mr. Norwood. I see. So the light's not nearly as important? 
Okay. No problem.
    Mr. Barton. You'll be on Georgia time when we----
    Mr. Boucher. And, Mr. Franklin, if you could perhaps send 
us some written suggestions in the fairly near timeframe about 
how distance-sensitive pricing might actually work. What kind 
of formulas would make sense to achieve it?
    Mr. Franklin. We will absolutely do that. Thank you.
    Mr. Boucher. That would be helpful.
    Mr. Chairman, the other question I have is this: The 
Supreme Court had arguments last week in the consolidated cases 
arising out of the FERC's Order 888. No sooner had the FERC 
issued Order 888 than it was sued from both directions. 
Marketers filed suit saying the FERC had not gone far enough to 
assert jurisdiction over transmission and the States, on the 
other hand, sued FERC saying that they had done too much and 
that Order 888 asserting authority over unbundled transactions 
in States that were open to competition was more than FERC 
could have done, and that FERC was not empowered to do it. And 
the Supreme Court heard the arguments on both of those 
positions last week.
    This set of arguments, that case, really goes to the 
fundamental issues that we have to address in terms of the 
balance of State and Federal authority over transmission. And 
I'm wondering if anybody here thinks that this subcommittee 
ought to wait until the Supreme Court renders its decision, 
which we could probably expect in the near term, anywhere from 
2 months to 6 months depending on what they get to first, 
before we legislate on this complex and very difficult subject?
    I am agnostic. I'm open to suggestions. I haven't made up 
my mind about whether it makes sense for us to go forward at 
this point and begin to tackle these thorny issues, but I would 
welcome your advise. And so let me offer the opportunity to 
suggest to us whether it's better to wait or whether it's 
better to move.
    Mr. Barton. That will have to be the last question.
    Mr. Bennett. I have an easy answer on that, since the State 
of New York was one of those arguing against the FERC extension 
of jurisdiction, we think it would be wise to wait.
    Mr. Boucher. Okay. Anybody disagree? Did I see a hand over 
here?
    Mr. Esposito?
    Mr. Esposito. I would just say you might think about 
somehow encouraging the Supreme Court to act quickly. I don't 
know what kind of vehicle you have to do that.
    Mr. Boucher. That's above our pay grade, Mr. Esposito.
    Well, maybe if we actually report a bill, that might a 
signal of some sort.
    Well, thank you, Mr. Chairman. And I want to thank these 
panel members for their helpful testimony.
    Mr. Barton. We do encourage all members to put their 
written comments in on this distance-sensitive pricing. We 
understand that Mr. Franklin's position is probably not 
unanimously accepted by the other members of the panel.
    The gentleman from Georgia, Mr. Norwood's recognize for 10 
seconds--5 minutes.
    Mr. Norwood. This is going to be a loud hearing, I can see.
    Thank you, Mr. Chairman. And I do thank the panel members.
    I find it interesting the ranking member and the chairman, 
I believe, got right at the heart of the issue and I want to 
stay on this thing of RTOs just for a little while. And I'm 
particularly interested, Mr. Johnston and Mr. Mr. Franklin, 
hearing from you as all panel members, but I want us to say 
what you said before maybe in maybe some different ways so that 
it sits very well with this committee and we all have an 
understanding of it.
    It's pretty clear, I think, to all of us that FERC has been 
moving rapidly trying to get everybody into RTOs. It seems that 
they like the magic number of four. It seems that they like the 
thought of large RTOs. And I'm interested in hearing again, 
first, is this a possibility? Is it technologically possible? 
Again, how do you feel about that? What if the FERC gets this 
wrong? What will it do to your customers and my constituents? 
Have there been studies done so that we can understand, 
perhaps, if we get it wrong what it might do to our customers?
    What's the consequences of us moving too quickly right now? 
What will it do to your customers and my constituents if we go 
too fast? Are there ways that the FERC can speed the process 
along without mandating to our utilities a certain 
predetermined configuration that you have to sit in stone right 
now or that perhaps we'll try to sit in stone?
    And I'm willing to give up a great deal of time to hear you 
two gentlemen to discuss that.
    Mr. Johnston. We believe that it's a fairly hard sell in a 
low cost State for RTOs generally, even though I'm speaking 
here as LPPC and we support the development of RTOs, but 
reasonable thought out RTOs that we've taken a look at 
operational issues, we've taken a look at natural markets, 
we've taken a look at cost benefits.
    Frankly, I have not seen--I don't believe there is any cost 
benefit, comprehensive cost benefit analysis for the southeast 
United States on the value of RTOs. And I'm not saying that 
there isn't value, I'm saying there has not been comprehensive 
studies done or got out.
    Mr. Norwood. Well, could they be ongoing and we don't know 
about it? Is somebody looking at that?
    Mr. Johnston. Well, maybe they are, but I am not aware of 
them. But they need to be done and we've stressed that they 
need to be done, because it's very difficult for us to go to 
our communities and sell the cost of RTO development, which 
could be hundreds of millions of dollars, and I have seen very 
few people say that you're going to lower transmission costs by 
the creation of RTOs. I think most of us believe you're going 
to raise the transmission costs. So where's the value going to 
come from? It's going to come from the generation side.
    Well, if it comes from the generation side, and you're 
already in a low cost State, that's a difficult cost benefit 
analysis because the chances are what's going to happen to your 
generation is it's going to get exported, you're not going to 
import cheaper generation.
    So, I'm not saying it can't be done. I'm saying it's a very 
tough sell in a low cost State. But it needs to be done or it's 
dead on arrival in my communities when I try to sell the cost 
of developing an RTO.
    So comprehensive cost benefit studies, operational studies. 
As some have said, these systems that we've built over the last 
100 years were never built to be put together, so there has not 
been an operational study on what happens when you do put them 
together. And there will be issues, operational issues that 
come out of that that have not even been studied.
    Mr. Barton. Would the gentleman yield?
    Mr. Norwood. Yes, sir.
    Mr. Barton. And I'll give you as much time as you need.
    Well, I'm a little puzzled. Basically the transmission 
assets already exist and there are already people operating 
them. What is the additional cost of creating an RTO if the 
infrastructure is in place and the personnel's in place, and 
all we're really doing is setting the ground rules and 
requiring that there be, for lack of a better word, cooperation 
and communication? Where is the additional cost in that?
    Mr. Franklin. That's a good question, but there's also a 
very good answer.
    Mr. Barton. Thank you.
    Mr. Franklin. An RTO, the primary cost is setting up one 
very large centralized control system with staff that 
actually--it's not just a coordination in cooperation. It is 
replacing a number of smaller control centers and smaller 
staffs that may be scattered around several States with one 
large control center; lots of electronics, lots of computers, 
lots of screens, lots of telecommunication equipment. The thing 
in California, as I recall, for the power exchange and the ISO 
was like $600 million to set up.
    Now, that is an extreme. A lot of things in California was 
an extreme. It won't cost anywhere near that, but our best 
estimate for the smaller RTO that we were talking about with 
the coops in municipals is probably $100 million.
    Mr. Barton. But over time if you're going from many to 
fewer, you know, and from older to newer in terms of equipment 
it will save money, wouldn't it?
    Mr. Franklin. Well, it's a case if somebody would buy those 
old control centers from you, but you still have the investment 
in those control centers plus you build a new one.
    Now, long term, I think--let me--if I could address maybe 
both questions sort of.
    We haven't done a cost benefit study. We've done a cost 
study, a rough, very rough cost estimate of what the RTO would 
cost. Maybe $100 million, maybe a little more initially to set 
up.
    I've been involved in the industry 30 something years. I've 
been planning transmission for a big part of that. My gut 
feeling is that over time with that kind of investment, the 
size we're talking about, it probably will pay for itself. I 
couldn't prove it today, but I think it probably would. But 
when you talk about a much bigger RTO, it's the typical 
centralization, decentralization question.
    You can prove on paper centralizing every decision in a 
company that the CEO will make it run better, but it doesn't. 
The same is true in trying to centralize the operation of a 
huge transmission system in one place as opposed to having 
maybe 3 or 4 operating centers. Theoretically you get more 
efficiencies, you have fewer control centers, but what you end 
up with is more bureaucracy and decisions being made further 
from consumers and further from the frontlines.
    When you say how centralized should a company be, there is 
no exact answer. How big should an RTO be, there's no exact 
answer. The bigger it is the more bureaucratic it becomes, the 
further reliability decisions are made from where the real 
reliability problems are, but theoretically the more efficient 
it is. And we think the balance is what's being proposed in the 
southeast for the SETRANS model.
    And let add one other point to Mr. Norwood's question. 
Another big issue, Congressman, and I'm very concerned about 
this because we're the most regulated industry in the world and 
we're one of the most regulated companies in the world.
    We're regulated by four State commissions. And if we go 
into a big RTO and it doesn't work, and we don't have our State 
commissions on board, it's going to be a disaster just like 
it's been a disaster in California.
    And I don't mean a disaster from a reliability standpoint, 
I mean a disaster for us. We're going to be punished 
financially just like the companies in California have been 
punished.
    It's critically important for us to get the States 
comfortable and onboard with where we're taking RTOs. I think 
that can be done, but it can't be done with a heavy hammer 
mandate from Washington. It's just not going to work.
    Mr. Barton. Of course, I could say you could help in 
getting the States onboard.
    Mr. Franklin. And I will.
    Mr. Barton. Poor little old struggling southern company 
might have some influence.
    Mr. Norwood. Reclaiming my time.
    Mr. Franklin. I tell you what, if we had had----
    Mr. Barton. It still is Mr. Norwood's time.
    Mr. Franklin. If we had had the influence with the State 
commissions that the chairman gives us credit for, our stock 
would be selling for 50 bucks a share, not 25.
    Mr. Norwood. You've made it clear, I think, to the chairman 
that if we have that RTO there are X amount of new dollars that 
are going to be spent. And then you said well, we think we can 
pay for that. Well, I don't have any doubt you're going to pay 
for that. My question is it's my constituents who are going to 
pay for that, because that's who you have to pass that on to.
    Mr. Franklin. Right.
    Mr. Norwood. And so the question has to be if we're going 
to do this, what is that going to do to rates in Georgia?
    Mr. Franklin. Congressman, I think initially it's going to 
raise rates. I don't think there's any question for two 
reasons. We're going to have an incremental cost of forming the 
RTO, that's new dollars. We're going to have to build a lot of 
new transmission; that could be helped if we had FERC 
transmission pricing right. So I don't think there's any doubt 
near term the rates are going to go up.
    Longer term if these markets operate more efficiently, the 
generation markets; in other words having a larger region, more 
efficient generation markets what you would hope is the lower 
generating costs would offset the higher cost of setting up the 
RTO. Now, that's a gamble, but I think it's a pretty good 
gamble for the RTO our size.
    Now, if it's start costing $200 million or $300 million, 
I'd be hard pressed to make that representation.
    Mr. Norwood. Mr. Chairman, I've only got eight more 
questions, and I'll be brief. But I do have two other little 
quick things.
    And, Mr. Franklin, while we're talking let's finish this.
    Mr. Sawyer. With unanimous consent.
    Mr. Norwood. I didn't notice Mr. Boucher needed it.
    I keep hearing over and over again at these hearings this 
analogy that compares our transmission system to a reservoir. 
And I can visualize that pretty well where you can put 
electrons in anywhere along the system and you can take them 
out anywhere else.
    As someone who is regulated by FERC, I've heard the 
discussion about FERC authority in establishing transmission 
ratemaking standards. Now, I'd like to hear your view on that 
situation.
    Mr. Franklin. Let me talk about the lake analogy first.
    Mr. Norwood. Well, tell me about that reservoir.
    Mr. Franklin. There is no legitimate analogy between a lake 
and a transmission system. It's like comparing an airplane to a 
tugboat. I mean, there is no analogy at all.
    In an electric system you have to be very, very careful 
where you inject power. You can burn the system down if you 
inject it in the wrong place. You have to be very, very careful 
where you add demand. And you have to add transmission based on 
the pattern of growth of generation and demand. So the lake 
analogy is useless. The highway analogy I would also add is 
useless.
    You can't take shortcuts and pretend the electric system is 
a lake or a river, or a highway system. It's not. It's an 
electrical system and it's very much more complicated than 
static systems like highways or lakes. And, again, I think a 
little more thought going into that before the California 
experiment was implemented might have saved a lot of grief.
    Mr. Norwood. How does this relate to transmission 
investment and getting a return on the risk associated with 
that investment? I mean, is this something that FERC has 
sufficient authority over already or is this something that 
Congress needs to act on?
    Mr. Franklin. I think as far as authority to set wholesale 
rates for transmission, FERC has authority. What I would like 
to see FERC do, and they have indicated in the past they would 
but it doesn't seem to be a priority, is to really focus on 
transmission pricing to make sure that transmission investment 
is done efficiently; that is generating plants are located in 
the right place, and that there is some incentives for building 
this huge amount of transmission.
    I am flabbergasted that people, they believe in 
competition, somehow don't believe that incentives work in a 
regulated business. It's just like in a competitive business.
    I'm also flabbergasted that utilities and State commissions 
that offer incentive rates for demand side products to use less 
energy, to use energy differently, they believe incentive rates 
for those kind of products, somehow that won't work for 
transmission investment.
    I think it's a very short-sighted approach to simply 
continue to try to divide up the same amount of transmission 
among more users as opposed to focusing on getting the right 
amount of transmission built, and incentives will help that.
    Mr. Norwood. Mr. Johnston, we probably need to answer 
quickly here. You know, I realize that the municipals and coops 
are not regulated by FERC, however, folks around here are 
talking about changing that. What is your feeling on this and 
the FERC having jurisdictional control over transmission 
associated with bundled services to our communities?
    Mr. Johnston. Well, we would strongly oppose FERC 
jurisdiction over bundled retail service to our communities. 
You know, frankly, it goes back to our obligation to serve and 
our State mandates. If you take away the tools that we use to 
carry out that obligation, how can we be expected to accomplish 
it? Because if you give FERC control over priority and use of 
that facilities, you in effect are tying our hands and our 
ability to carry out that obligation to serve. You know, it's 
kind of a silly statement, but maybe you have to transfer the 
obligation to serve to FERC, but I'm not sure they care to have 
it.
    Mr. Norwood. Well, what happens if we were to do that? I 
mean, I don't understand what happens back home if FERC were to 
have that jurisdictional control.
    Mr. Johnston. Well, in a plain simple example, if I am 
moving electrons across the grid in Georgia in order to deliver 
it to my communities and a constraint occurs in that system and 
FERC is in control of that system or somebody under FERC's 
control is in control of that system and they direct the 
priorities such that they remove my native load to relieve the 
constraint, that's stripping me of my ability to deliver that 
obligation to serve that native load.
    Mr. Barton. We're going to have to discourage the gentleman 
from any further questions.
    Mr. Norwood. I bow to the chairman.
    Mr. Barton. And we want to announce for the other members 
about to ask questions, it is acceptable to ask questions of 
the panel members who are not from the great State of Georgia.
    Mr. Norwood. But not desirable. Mr. Chairman, I apologize 
to the other panel members. It's sort of natural for me to 
ask----
    Mr. Barton. I understand. I understand.
    The gentleman from Ohio is recognized for such time as he 
may consume.
    Mr. Sawyer. Thank you, Mr. Chairman.
    I just have to observe that there are--I can think of at 
least a couple of transportation systems that are distant-
sensitive. I'm not sure that we want to emulate them in this 
case, but one is the Postal Service.
    Mr. Barton. Very good point.
    Mr. Sawyer. And the other may have some distance-sensitive 
pricing, but most of us can't discern it, and that's the 
airlines. There are an awful lot of fees that have no bearing 
on distance and there are an awful lot of people who are 
unhappy with that.
    I would also suggest that centralized command and control 
of the kind that you suggested as a hypothetical seems to have 
been tried in the Soviet Union and fell apart. And my 
submission is that it would not be useful.
    Let me ask one more question of the gentleman from Georgia, 
and anybody else who would like to answer, and that is the end 
of year deadline, it seems to me, creates some enormous 
pressures. Can you tell us your reaction to the feasibility and 
the result if in fact that's adhered to?
    Mr. Franklin. Well, I think the end of your deadline goes 
back to Order 2000.
    Mr. Sawyer. Okay.
    Mr. Franklin. We were on a course along with the people 
from the municipals in Georgia represented by Mr. Johnston and 
others to move in that direction. I think the recent 
developments starting back in May and then concluding or being 
further exacerbated by the FERC order in July have knocked 
these negotiations off track. I think the end of year deadline 
does not seem feasible to me at all anymore.
    Mr. Johnston. Could I add something there?
    Mr. Sawyer. Sure. Sure.
    Mr. Johnston. It's important to also recognize that the 
form of RTO that FERC is leaning toward, which is away from 
what we've been negotiating, essentially will alienate the vast 
majority of public power in the southeast, meaning public power 
is going to walk away from that RTO and has told FERC that. 
It's not just MEAG, it's virtually all the major transmission 
holders, public power transmission holders in the region. 
You're going to have a huge potholed RTO if FERC does what they 
have indicated they're going to do, and it will not work very 
well.
    Mr. Sawyer. The whole struggle for competition in your 
arena for the last 85 years it seems to me, has been a 
competition for capital. That's been where the real competition 
has been, and that's where the price advantages have resulted.
    Mr. Trabandt, you mentioned that a properly structured 
transco will be able to access capital markets adequately. Can 
you give us briefly a sense of what you think is a properly 
structured transco and if the current access to financing is 
continued in the future, what will be the prospects for 
transmission capitalization?
    Mr. Sawyer. Congressman, I appreciate the question because 
I think it's very important for the subcommittee to focus on 
the notion that these are new business operations. The RTO 
responsibilities which have been established by FERC in which 
the various RTOs around the country have been trying to satisfy 
would require this new business entity to be operating in a 
circumstance somewhat different from what had been previously 
contemplated, I think.
    When I talk about properly structured, I'm talking about a 
capitalization that perhaps would be 60 to 70 percent debt with 
the increment of equity that would go with that, perhaps some 
preferred that would be structured in a way such that the 
coverage ratios would ensure that it's investment grade and 
will stay investment grade, which means it has to be credit 
worthy itself and it must have credit worthy counterparties for 
its contracts. That the investment that it's required to make--
in many of these RTOs the negotiations have been along the 
lines of if a new generator--and in fact the chairman's 
proposed bill addresses this interconnections. We actually 
looked at all the proposed interconnections of the companies 
associated with the Alliance RTO. And there are numerous 
proposed power plants around the country, as you know. Perhaps 
the slow in the economic will change that, perhaps the 
uncertainty in regulations as a result of California will 
change that. But nonetheless, there are lots of proposed power 
plants, all of those plants have to be interconnected and all 
of those interconnections are going to have to be paid for. And 
every new interconnection, as you heard from Mr. Johnston and 
also from Mr. Franklin, change the flows on the system. And 
those have to be accommodated as well. And that's going to 
require substantial upgrade of the existing infrastructure to 
be able to support the competitive market. That's the reason, I 
think, that some formulation of an incentive, and as Mr. Vesey 
testified this morning, whether it's a somewhat higher rate of 
return because of the increased risk associated with it or 
whether it's in the form of other features that FERC has 
already adopted in Order 2000, is appropriate to ensure that in 
fact we can get the kind of capital to go in assuming the 
structure, and I described it in my testimony as well.
    Mr. Sawyer. Is the traditional notion of ``just and 
reasonable'' rate as reflected in comparable kinds of risks in 
the marketplace, the same risk profile, will that apply 
effectively in the environment that we're talking about?
    Mr. Trabandt. I'm glad you raised that, because I was 
interested in Congressman Largent's comment about the FERC 
Commissioners being here last year and none of them could 
define ``just and reasonable.''
    The definition of just and reasonable was established by 
the Supreme Court in a famous case some years ago, and there's 
not a whole lot of question about that. And I don't think 
anything that's being discussed in the way of incentives, and I 
read the chairman's proposal to make this clear, is to suggest 
anything that's not just and reasonable. But there is a range 
of reasonableness that's established under the applicable law 
with regards to what rates can be to take into account, for 
example, public policy associated with this very specific 
issue, infrastructure of commitments, to take into account 
greater risk, to take into account circumstances where the 
regulators have concluded that their benefits to the public and 
the consumers from having a different formulation of rate.
    It's interesting to my experience, you all are more 
knowledgeable than I, but the FCC's been doing this for quite 
some time in telecommunications. When I was at FERC we worked 
with them when they adopted an incentive rate formulation which 
you all have long since approved. Most States have incentive 
rates of one kind or another. They've been wildly successful in 
reducing congestion in the United Kingdom where there's an 
incentive that's shared between the customers and between the 
company in terms of formulating new approaches to the business, 
which I think Mr. Vesey's testimony clearly looks at.
    All of that can be built into a business model with a 
structure which I think could be highly successful in 
addressing these issues.
    I think the question before you is FERC, as I understand it 
and all I know is what I've read, has indicated that it doesn't 
believe that with its new approach, it's new policy, that 
incentives will any longer be required. And while I don't 
question for a minute they have the authority, I helped write 
the incentive policy of FERC in 1991 and believe they did then 
and believe they did under Order 2000; I think the question is 
are those going to be available to support these new business 
structures, which you've heard from others are going to be 
very, very challenging businesses.
    Mr. Sawyer. Are there others who would care to comment? Mr. 
Flynn?
    Mr. Flynn. Mr. Sawyer, I think the notion of ``just and 
reasonable'' certainly accommodates a return on rate base, the 
traditional rate making that we've had in the industry in the 
past. And whether the return that FERC sets is just and 
reasonable, the market will tell us by whether or not 
investment is forthcoming to go into assets. But I think the 
notion of just and reasonable can accommodate more than just 
traditional return on rate bases, as Mr. Trabandt alluded to a 
minute ago.
    National Grid has pending before FERC today what I think is 
the first incentive rate for transmission that's been proposed 
in the United States. And it was a joint filing with the New 
England Power Pool which consists of generators, municipal 
utilities, marketers as well as transmission companies. Really 
the cross section of the industry. And the proposal that's 
before FERC, as I recall, had over 90 percent approval and it 
was supported by ISO New England.
    What was it? It was an incentive proposal that said we, 
National Grid, need to do some maintenance on our system. A 
good utility does maintenance on its transmission system. But 
to do maintenance the traditional way of working, at least in 
the northeast, is to take that transmission line out of service 
while you're doing the work. When you take the line out of 
service, that path is no longer available for power to get from 
generation to load. And what you end up doing is adding 
congestion on the rest of the transmission system.
    And we know in New England today congestion costs the 
consumers are paying are more than $100 million a year. And 
doing some studies and working with ISO New England, we did 
forecasts that taking this line out of service was going to 
create the potential for significant congestion that consumers 
would pay.
    Well, the first thing we did is move the time of the outage 
to the fall, so it wasn't during the summer peak. But beyond 
that, we solved the potential of doing this work live, working 
the line live, keeping it in service so the power continue to 
flows to customers while we're doing the required maintenance.
    And it appeared to us from our forecasts, and the work with 
ISO New England, that the savings to customers in terms of 
lower power costs because of the savings in congestion would 
more than offset the additional costs of doing the work live.
    And so this was a proposal we brought to the New England 
Power Pool, and it really was a share the savings type of 
incentive where everybody wins. And the customers who used the 
system, the generators that used the system all looked at this 
and said ``Yes, this is a good idea.'' This is the type of 
thinking we would like to see investor owned transmission 
companies bring to the management of the grid.
    Now, this proposal is pending before the Commission. The 
work is going on. We're doing it live whether or not we get 
incentive from FERC. But nonetheless, it took a fair amount of 
work and study to come up with the idea to do the thinking of 
how you could save consumers money on the system. And we're 
really looking at this as a signal from the Commission will 
this sort of--approval of the incentive will give the signal to 
the industry that, yes, if you come forward with innovative 
ways of creating savings for customers, there'll be something 
in it for shareholders. And I think the concept of just and 
reasonable rates can accommodate that sort of incentive 
ratemaking as well as traditional return on rate base.
    Mr. Barton. If the Chair would interrupt. The gentleman 
from Ohio has had 11, 12, 13 minutes. Now, I said such time as 
you may consumer, because I gave Mr. Norwood 15 minutes, but--
--
    Mr. Sawyer. Or such time as they may consume?
    Mr. Barton. Yes. But if you could wrap it up in the next 2 
minutes, because we need to let Mr. Shimkus and the vice 
chairman of the full committee, Mr. Burr, have some time. Mr. 
English has to leave at 3:30, I believe.
    Mr. Sawyer. I can wrap it up in the next 2 seconds, Mr. 
Chairman. I yield back the balance of my time.
    Mr. Barton. Well, if you have another--okay.
    Mr. Sawyer. Thank you very much. Appreciate your latitude.
    Mr. Barton. And we're going to go to the gentleman from 
Illinois, Mr. Shimkus for such time as he may consume, but 
hopefully shorter road than longer.
    Mr. Shimkus. As you wish, Mr. Chairman. Thank you for the 
time.
    I'll tell you what I'm struggling with, and we've been in 
this debate now for 5 years that I've been a Member of 
Congress. But we do have a new environment today than we had a 
month ago, and I'm going to give you some examples, and I think 
we would be remiss if we did not add into this debate the new 
shift in the world based upon terrorism.
    So some of this debate on how we're going to arrange our 
transmission grid should probably start addressing things like 
security, redundancy, capital available for repair, which I 
don't know if we've discussed very much today, and I missed the 
first panel, and I apologize for that.
    The other thing I learned--I've been struggling with is the 
business model with what we have done, one, as we've addressed 
the airline industry. There was a time when you went to 
business classes on developing small business, what did you 
tell someone who wanted to develop a small business, you'd 
better have the capital to allow you to survive for 3 years 
without turning an actual profit in that business. But as we 
have become leaner and meaner, just in time inventories and 
stretching the price so thin because we all wanted lower prices 
in every good and service, we have diminished our ability for 
the capital reserve to respond to emergencies.
    I'm really struggling with this. I see that that has 
happened in the airline industry and it's costing us a lot of 
dollars, a lot of tax dollars to keep these industries solvent, 
which is important for our whole Nation.
    The other thing that I'm personally struggling with is, and 
it does kind of relate to the industry, the--I was at the 
Verizon headquarters down right across from the World Trade 
Center on the Telecommunications Subcommittee, Mr. Chairman. I 
think it's--and it fits into this whole debate about 
competition. Because here we have a regional Bell company 
that's supposed to be the big, in essence, regional monopoly 
that helps put down the competitive local exchanges, but it was 
big enough to bring a lot of capital to bear to get the 
connections up rapidly, and their story is monumental what they 
did at the switching station to get the economy back forward. 
The little competitors would say, you know, they can't compete 
but would the little competitors combined be able to provide 
the response, the emergency response that a regional monopoly, 
in essence--they don't like that terminology, but in essence 
the regional Bell was able to bring to the table?
    So in this whole debate on addressing the transmission 
grid, my concern is what about this new environment of having 
the capital available to respond in case of tragedies and 
disasters, and the like? And I just want to throw that out. I 
don't want responses yet, but that's what I'm personally 
addressing right now, and I think it needs to be part of the 
debate, Mr. Chairman, especially as we talk about capital 
available, the redundancy issue and the repair issue and how do 
we fund the expansion of the transmission grid.
    So that's an intro, but I want to ask Mr. Flynn, because 
you've had some expertise, can you tell me about the National 
Grid's business operations in Great Britain and are there any 
lessons that we can learn from the restructuring of England's 
power industry and things that we should do or things that we 
should not do?
    Mr. Flynn. I think there are some lessons to be learned. 
Obviously, you cannot go from one system and just map it to the 
United States point for point and say well what worked there 
will work here. But just to set the stage a little bit, back a 
decade ago all of the industry in the U.K. was government 
owned. And 11 years ago the U.K. privatized the system and it 
created an independent transmission company, that is a company 
that was for-profit investor owned, to manage the transmission 
grid that had no interest in the generation of power sales 
business. And that's National Grid. So that's the genesis of 
our company.
    What has occurred in the U.K. over the period of a decade 
is that National Grid has reduced the controllable costs of 
operating the transmission system by about 50 percent. And it 
has reduced congestion costs on the transmission system by 
about 1 billion pounds. Both of those occurred under a system 
of incentive rates that the regulator in the U.K. established.
    In essence, the regulator said ``Look, we want you to 
manage the system as a business and what we're going to do is 
work with you up front to set targets with regard to what we 
think is the right level of costs that a company that's 
prudently operating the system would incur, and then we're 
going to set your rates based on those target revenues. You 
have the incentive and to try to operate the system more 
efficiently. And to the extent that you do, there will be 
sayings that your shareholders get to share in. On the other 
hand, if you're less efficient than we think you should be, 
then there'll be some shareholder pain and your profits will be 
less.'' They also established an incentive with regard to 
congestion costs on the system. And congestion costs are 
essentially costs that customers pay for power because 
generators that bid low, that are low cost, cannot run. They're 
constrained off by the system operator because there isn't 
enough transmission capacity to get the power from the low cost 
generators to the load centers. And because these low cost 
generators are constrained off, higher cost generators have to 
run and the difference is called congestion costs.
    And when the markets opened in the U.K. congestion costs 
increased steadily the first few years, the same thing we've 
seen, quite frankly, when the markets opened in New England. 
And what the regulator said is we want to give you an incentive 
to begin to manage the system to control these congestion 
costs, and to the extent you're able to bring the cost down, 
your shareholders will be able to share in that.
    I think the broad lesson is if you create a rate system 
with the right financial incentives, then the regulated 
transmission company will respond. And if you align incentives 
for shareholders with what's in the interest of customers, then 
you have a happy situation with the management of the 
transmission company is trying to create customer benefits and 
at the same time is adding to shareholder value.
    With the right incentive rate structure, you also have a 
viable business that (a) that's able to raise the capital 
that's necessary to invest in the system. And, indeed, National 
Grid has engaged in considerable investment in the U.K. system, 
most of it not in new transmission lines on virgin right-of-
way. Most of it is upgrading the existing system to improve the 
efficiency of the system, but under a business model a viable 
business is able to go to the capital markets and get that 
capital to make the necessary investment.
    Mr. Shimkus. Thank you. And I know that using that U.K. 
model is difficult comparing it to the United States with the 
size and distance and stuff, but I did want to have that 
answered. And I'm going to finish up with a local general--
Illinois has three RTOs. And I'd like to have Mr. Esposito, he 
talked the seams issue, what are the difficulties you face in a 
State in which there is actually three different RTOs?
    Mr. Esposito. The easy answer, Congressman, is that you 
know for three RTOs you have at least three seams, and you have 
to deal with things like scheduling times, being consistent 
when you go to put your power on the system, and you're going 
to go across these seams, that everything links up.
    You have issues with what they call ramp rates. Some RTOs 
will look at different ramp rates and some might start at the 
beginning of the hour, some might start 15 minutes before the 
hour. These are problems that they've experienced in other 
places, particularly New England, New York, PJM. And you have 
to get some entity to say this is going to be the rule. And in 
the case of natural gas, that became the Gas Industry Standards 
Boards. It looks like we may have the Electric Industry 
Standards Board there to do that.
    Being able to deal with those important issues that are 
day-to-day, hour-to-hour issues is critical.
    Conversely, three isn't all that bad because you have a 
situation where you will develop best practices. Now, one of 
the things we had in the New York/New England PJM area was a 
situation where one of them required you to schedule your power 
an hour and a half ahead and the other allowed you to schedule 
the exact same type of transaction a half hour ahead. So we 
were able to say ``well, they could do it in a half hour, why 
do you take an hour and a half.'' And you develop best 
practices over time.
    So I think looking at resolving seams, we shouldn't jump 
all the way to saying we're going to have a uniform set of 
rules across the country or a uniform market, because that 
could be a uniform mistake.
    Mr. Shimkus. I'll just two bits worth and yield back, Mr. 
Chairman.
    It does tie into my previous comments and the effect, 
although you may eventually get to best practices there may be 
some deficiencies initially in the system by which you may not 
be able to get the return on the investment which addresses the 
repair and the maintenance and the possible development of 
redundancies and the things I think, the new environment--in 
this new environment that we'd better start talking about and 
considering.
    And with that, Mr. Chairman, thank you and I yield back my 
time.
    Mr. Barton. For our last questions, the gentleman from 
North Carolina.
    Mr. Norwood. Could the gentleman respond to that, Mr. 
Esposito?
    Mr. Barton. I didn't think that was a question. I thought 
that was a statement. But, sure if he wants to respond.
    Mr. Esposito. Yes. I would just respond when you go to a 
competitive market, you've got people like us who make money 
finding efficiencies in the system. When people say no, we say 
why not and try to work around. And I think you end up with the 
work arounds by having competitors enter the market. These 
aren't people who make money unless they find a solution.
    Mr. Gerken. Can I answer, add to that? I've got three RTOs.
    One of the things that we've got three RTOs and we don't 
see a real issue of working within those. My issue from a small 
perspective is being able to move my power on an hour-to-hour 
basis.
    Let's say I'm trying to, for layman's terms, I'm moving 
from one IOU, IOU-A to IOU-B, and I'm moving 100 megawatts. 
What happens is during the hour I get a TLR, or transmission 
line relief that says I have no capacity through that 
interface. That's physically impossible, but what happens is 
all the IOUs have reserved all of their native load or all 
their generation to that capacity that says zero. Well, my 
problem is if it was an independent system operator, if I said 
``Okay, I will turn 50 megawatts of peaking generation on in B 
to unload you 50 megawatts, will you allow me 50 megawatts 
in,'' I don't get any justification or satisfaction because 
they control the rules today.
    If an RTO was there independently looking at it, watching 
the flows, I would actually be giving them benefit as well as 
my asset benefit. That's all we see is the trouble area right 
now.
    Mr. Shimkus. I should ask Mr. Norwood, is that fine? Do you 
yield back your time?
    Mr. Norwood. I didn't have to.
    Mr. Barton. All right. Mr. Burr, the last questioner.
    Mr. Burr. I thank the chairman. I've enjoyed listening to 
Mr. Shimkus.
    If I cover ground that you've already plowed before me, I 
apologize.
    Mr. Barton. I would encourage you to plow it quickly.
    Mr. Burr. I will plow it extremely quickly.
    Mr. Barton. We've already had one crop harvested today.
    Mr. Burr. I won't even plant a second one.
    Mr. Franklin, let me ask you, because I think you've 
covered in some detail in your testimony some concerns that you 
have about RTO formation specifically how quickly FERC's trying 
to move. Which speed should they move if they should?
    Mr. Franklin. Congressman, my concern is not so much how 
quickly, it's more a case of how prescriptive FERC apparently 
intends to be on the size and scope of the RTOs.
    I think that, first of all, the RTOs that are formed we're 
going to be stuck with for a long, long time. And whether it 
takes 18 months or 2\1/2\ years in the long term doesn't make 
any difference. I mean, it's much better to get it right.
    At the same time, I think before this latest order coming 
out of FERC, we were getting close to a broad agreement in the 
southeast to form an RTO. Now, once we had the broad agreement 
to form it, it probably takes a year to 18 months to actually 
put it in place and have it working. So I don't think under any 
circumstances we're talking about a long period. The issue is 
more how prescriptive FERC will be as opposed to letting RTOs 
evolve in different regions.
    Mr. Burr. What experience do we have within FERC today and 
RTOs at their ability to evaluate the assets?
    Mr. Franklin. When you say ``evaluate the assets,'' you 
mean----
    Mr. Burr. Value the assets.
    Mr. Franklin. Oh, the value of the assets in an RTO? I 
first of all wouldn't profess to know what expertise is in----
    Mr. Burr. But is the only example that we have up to this 
time what we did in California? Was it FERC that valued the 
assets that went into the----
    Mr. Franklin. No. No. I don't think so.
    Mr. Burr. All right.
    Mr. Franklin. Being from Georgia I'm in a perfect position 
to evaluate and be an expert on California.
    Mr. Burr. That's why I asked you.
    Mr. Franklin. So take what I say with a grain of salt.
    I think the high cost, and I'm going to say this very 
generally because I don't want to overstate what I really know. 
The high cost of forming the power exchange and the ISO in 
California was more a case of the design, how elaborate the 
computer systems were, the time it took to do it, how many 
people were involved. It seemed to me it was sort of a design 
by committee. But it doesn't seem to me that the cost of buying 
those computer systems, putting the software together, hiring 
the staff; it doesn't seem to me that that should be related to 
be the FERC.
    Mr. Burr. You, a southern company, to join an RTO would be 
asked to turn over your transmission grid, correct?
    Mr. Franklin. We'd be asked to turn over the control and 
operation of our transmission grid, not the ownership.
    Mr. Burr. The reimbursement that you might receive for the 
use of that grid would have a significant factor on whether you 
participate in the upgrade of that grid, would be that be 
correct?
    Mr. Franklin. First of all, we have a--it would have a big 
factor in whether we were smiling or frowning when we did it.
    We have some legal obligations to provide services, Mr. 
Johnston said about the municipals. So we have an obligation to 
build transmission. We have an obligation to expand the system 
as demand grows. But it's awfully hard to build transmission. 
You got to get siting, you've got to deal with local 
landowners. It's a very unpopular thing to do locally. And you 
can do it with a whole lot more enthusiasm and a whole lot more 
courage in dealing with local problems if you're getting a 
decent return on that future investment.
    Mr. Burr. Is there anybody that believes that we do not 
need to upgrade our transmission grid in this country?
    Mr. Bennett, let me ask you, is it the position of the 
public utility commissions that FERC has the authority to take 
a closed State and to require them to open up, to participate 
in a----
    Mr. Bennett. I'm sorry, what were the last two words?
    Mr. Burr. Does FERC have the authority in your estimation 
to go into a closed State and require them to join an RTO?
    Mr. Bennett. I think that's part of the litigation before 
the Supreme Court now, I would say it's the position of NARUC 
and the position of New York State that FERC does not have that 
authority.
    Mr. Burr. I was just trying to get you to stay that.
    Mr. Bennett. And they should proceed on a voluntary basis.
    Just a comment. One of the greatest problems, aside from 
the economic part of it, one of the great problems is how do 
you get the transmission lines built from one State to another.
    I happen to live on Long Island, which is known as a load 
pocket. We have a need for 5,000 megawatts and we can produce 
about 5,010 megawatts, so we're right on the line. And we had a 
plan to bring power across the Sound from Connecticut which was 
going very well, and then at the last minute we derailed. Now, 
I'm sure we can work things out with our friends in 
Connecticut, but it is very, very difficult to get these 
transmission lines built even within one's State. And if you're 
going to go from one State to another, the difficulty becomes 
compounded. But I think that it works--we're going to do a lot 
better in that situation working with Connecticut than if 
someone tried to mandate it.
    Mr. Burr. It may have been your testimony, Mr. Franklin, 
and I think we've had it before and I certainly understand it, 
that the ability to site generation might overcome some of the 
bottlenecks in transmission grids. And I would also add to 
that, and I'll be happy for you to comment, that there are many 
places in the country where, for whatever reasons, we won't 
build generation facilities where there's a need for power. And 
the ability to upgrade a transmission grid and put a generation 
facility in the desert, as advantageous as it is, for somebody 
else to put a generation facility right next to a high growth 
area where we can deliver power.
    Under the scenario, shouldn't we as a national interest 
make sure that whatever we do is something that creates the 
type of incentive that does upgrade our transmission grid where 
it's needed?
    Mr. Franklin. Yes, sir. I think there are two points.
    When deciding where to build generation, for example, we 
don't need to let the cost of transmission or the cost of 
generation alone dominate that discussion. We need to look at 
the total cost of both. The real incremental cost; how much 
more is it going to cost to build a generating plant in 
location A versus B, and how much new transmission is going to 
be required. And add the cost up and whichever one is the 
lowest cost, that's where the generation should be built. And 
if we get transmission pricing right, that's exactly, in my 
judgment, that will happen.
    So the first issue is to get the pricing right so 
generation is built where it needs to be built. I think the 
second component you referenced is to be sure it is a 
reasonable financial investment to put money in transmission so 
that the capital is coming into the transmission business.
    If we do those two things, I think the market demand will 
over time make sure we have the right amount of transmission 
and we'll have generation located in the right place.
    Mr. Burr. Is there anybody that would disagree with the 
statement that Wall Street will be a good indicator as whether 
we've found the right balance as to how to write a transmission 
bill? I show that as all yeses.
    Thank you, Mr. Chairman. I yield back.
    Mr. Barton. Thank you, gentlemen.
    I want to thank this panel. This concludes our series of 
hearings on the electricity industry. The next step is to put 
out a second draft after appropriate consideration of the 
comments on the first draft. I would encourage you to look at 
our RTO proposal that I authorized the release of yesterday 
afternoon. Get those comments in writing to us as quickly as 
possible.
    The Senate is attempting to move some sort of energy 
legislation. If and when that occurs, I would like to be able 
to go to markup with an electricity bill so I could have the 
option with Mr. Dingell and Mr. Boucher, and Mr. Tauzin to put 
it into the comprehensive energy conference if that occurs.
    Thank you, gentlemen, for your testimony today.
    This hearing is adjourned.
    [Whereupon, at 3:45 p.m., the subcommittee was adjourned.]
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